NOVACARE EMPLOYEE SERVICES INC, S-1/A, 1997-11-10

NOVACARE EMPLOYEE SERVICES INC
S-1/A, 1997-11-10
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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997.

REGISTRATION NO. 333-35071
================================================================================

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 3

FORM S-1

NOVACARE EMPLOYEE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 7363 23-2866146
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NUMBER)
NUMBER)
</TABLE>

2621 VAN BUREN AVENUE
NORRISTOWN, PENNSYLVANIA 19403
(610) 650-4700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

LOREN J. HULBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NOVACARE EMPLOYEE SERVICES, INC.
2621 VAN BUREN AVENUE
NORRISTOWN, PENNSYLVANIA 19403
(610) 650-4700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

Copies to:

<TABLE>
<S> <C> <C>
ANDREW J. BECK, ESQ. PETER D. BEWLEY, ESQ. FREDERICK W. KANNER, ESQ.
HAYTHE & CURLEY NOVACARE, INC. DEWEY BALLANTINE LLP
237 PARK AVENUE 1016 WEST NINTH AVENUE 1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10017 KING OF PRUSSIA, PENNSYLVANIA 19406 NEW YORK, NEW YORK 10019
(212) 880-6000 (610) 992-7404 (212) 259-8000
</TABLE>

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
======================================================================================================================
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.01 par value)......... 5,175,000 $11.00 $56,925,000.00 $17,250.00
======================================================================================================================
</TABLE>

(1) Includes 675,000 shares that the Underwriters have the option to purchase to
cover any over-allotments.

(2) Estimated solely for the purpose of calculating the registration fee.

(3) The Registrant paid a fee of $20,387.00 upon filing the original
Registration Statement.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997

[NOVACARE EMPLOYEE SERVICES LOGO]

4,500,000 SHARES

COMMON STOCK

ALL OF THE 4,500,000 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD
BY NOVACARE EMPLOYEE SERVICES, INC. (THE "COMPANY"). PRIOR TO THIS OFFERING,
THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $9.00
AND $11.00 PER SHARE. SEE "UNDERWRITING" FOR INFORMATION RELATING TO THE METHOD
OF DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN
APPROVED FOR QUOTATION ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET UNDER THE
SYMBOL "NCES." AFTER THE OFFERING, NOVACARE, INC. (THE "PARENT") WILL OWN 77.2%
OF THE COMPANY'S OUTSTANDING COMMON STOCK.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
---------------------

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

<TABLE>
<CAPTION>
================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- ------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $
================================================================================================
</TABLE>

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

(2) Before deducting expenses of the Offering payable by the Company estimated
at $1,220,000. Of the proceeds, approximately $23,707,000 will be used to
repay a portion of the $28,382,000 loan from the Parent and $1,000,000 will
be paid to an affiliate of the Company who is a former owner of a business
acquired by the Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 675,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
---------------------

The Common Stock is offered by the Underwriters, as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, 555 California Street,
Suite 2600, San Francisco, California 94104 on or about November , 1997.

BANCAMERICA ROBERTSON STEPHENS SMITH BARNEY INC.

The date of this Prospectus is November , 1997

<PAGE> 3
[NOVACARE EMPLOYEE SERVICES PHOTO OF INDIVIDUALS]

CARING FOR AND ABOUT PEOPLE IS OUR BUSINESS

At NovaCare Employee Services, our fundamental goal is to handle all the
administrative details and provide the peace of mind that comes from a company
knowing its human resource needs are being handled by people with knowledge,
experience and a commitment to caring.

A BETTER WAY TO MANAGE HUMAN RESOURCES

NovaCare Employee Services offers small and medium-sized businesses a better way
to handle the management and administration of employee-related tasks. A way
that's better for employers and better for employees.

The idea is simple. NovaCare Employee Services allows small businesses to
outsource time consuming tasks--such as managing employee benefits, payroll, and
government compliance--to an organization with expertise in every facet of human
resources.

NOVACARE EMPLOYEE SERVICES' COMMITMENT TO INDUSTRY LEADERSHIP

NovaCare Employee Services is one of the nation's largest (measured by revenues
and number of worksite employees) professional employer organizations, providing
administration and management services for over 35,000 employees in 45 states,
across a wide array of industries.

Our objective is to be the brand, service and performance leader in the highly
fragmented PEO industry. An industry which currently has approximately $18
billion in annual revenues (according to a NAPEO estimate), a five year
historical growth rate of approximately 30% per year and significant
consolidation opportunities.

[NOVACARE EMPLOYEE SERVICES LOGO]
<PAGE> 4

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

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 8
The Company........................................................................... 15
Use of Proceeds....................................................................... 16
Dividend Policy....................................................................... 16
Dilution.............................................................................. 17
Capitalization........................................................................ 18
Selected Financial and Statistical Data............................................... 19
Pro Forma Combined Statement of Operations............................................ 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 24
Business.............................................................................. 33
Management............................................................................ 49
Principal Shareholders................................................................ 55
Certain Related Party Transactions.................................................... 56
Description of Capital Stock.......................................................... 56
Shares Eligible for Future Sale....................................................... 58
Underwriting.......................................................................... 59
Validity of Common Stock.............................................................. 60
Experts............................................................................... 60
Additional Information................................................................ 61
Index to Financial Statements......................................................... F-1
</TABLE>

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

The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements examined by its independent
public accountants and quarterly reports containing unaudited consolidated
financial statements for each of the first three quarters of each fiscal year.

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

3
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, information in this Prospectus
assumes no exercise of the Underwriters' option to purchase from the Company up
to 675,000 additional shares of the Company's common stock (the "Common Stock")
to cover over-allotments, if any. This Prospectus contains forward-looking
statements that are based on management's estimates, assumptions and
projections. Important factors that could cause results to differ materially
from those expected by management include the inability of the Company to carry
out its growth strategy and the other factors discussed under "Risk Factors."
Prospective investors should carefully consider the information set forth under
"Risk Factors."

THE COMPANY

NovaCare Employee Services, Inc. (the "Company") is one of the largest
(measured by revenues and number of worksite employees) professional employer
organizations ("PEO"s) in the United States. The Company is an employee services
company which provides small to medium-sized businesses with comprehensive,
fully integrated outsourcing solutions to human resource issues, including
payroll management, risk management, benefits administration, unemployment
services and human resource consulting services. The Company believes its
services enable small and medium-sized businesses to cost-effectively manage and
enhance the employment relationship by: (i) controlling the risks and costs
associated with workers' compensation, workplace safety and employee-related
litigation; (ii) providing employees with high quality health care coverage and
related benefits; (iii) managing the increasingly complex legal and regulatory
environment affecting employment; and (iv) achieving scale advantages typically
available to larger organizations. As of June 30, 1997, the Company served 1,742
clients and had 35,028 employees ("worksite employees") at over 3,000 worksites
in 45 states, principally in 10 different industries.

The Company was established in September 1996 by the Parent and began
operations in October 1996 with the acquisition of Resource One, Inc. ("Resource
One"), a PEO. Three additional PEO acquisitions were completed in February 1997.
The Company's total remaining contingent and non-contingent obligations in
connection with these acquisitions, if target levels are met but not exceeded,
are approximately $22.2 million in cash and 466,063 shares of Common Stock. See
Note 3 of Notes to the Company's Consolidated Financial Statements. On July 1,
1997, the Company acquired NovaPro, the rehabilitation temporary staffing
business of the Parent. For the year ended June 30, 1997, the Company had pro
forma revenues of over $878 million. See "Pro Forma Financial Information."

The National Association of Professional Employer Organizations ("NAPEO")
estimates the PEO industry has approximately $18 billion in annual revenues with
an historical growth rate over the last five years of approximately 30% per
year. The Company has had a relatively short operating history and has only
managed the acquired companies for a short period of time. Accordingly, the
Company does not have a meaningful historical growth rate and there can be no
assurance that the Company's growth rate will equal or exceed that of the PEO
industry. According to the U.S. Small Business Administration, there are nearly
six million businesses in the United States with under 100 employees, employing
over 52 million persons and with approximately $1.1 trillion in aggregate annual
payroll. NAPEO estimates that the PEO industry has less than three million
worksite employees. The Company believes, therefore, approximately 49 million of
these employees are currently unserved by the PEO industry.

The PEO industry is highly fragmented. NAPEO data suggest that there are at
least 2,400 PEOs currently in operation and that the ten largest PEOs account
for less than 10% of existing revenues in the industry. The Company believes
that significant consolidation opportunities exist within the PEO industry due
to increasing regulatory complexity and capital requirements associated with
developing larger service delivery infrastructures, more diversified services
and more sophisticated management information systems.

The Company's objective is to be the brand, service and performance leader
in the PEO industry by focusing on caring service, operational excellence and
growth. In addition to emphasizing cost-effectiveness

4
<PAGE> 6

and providing a breadth of services, the Company creates relationships with both
its clients and worksite employees by contractually assuming certain
administrative and financial employer responsibilities with respect to worksite
employees in a "co-employment" relationship. By focusing on employee services,
the Company believes that it helps create a more profitable, more productive and
more satisfying relationship between clients and employees.

After the Offering, the Parent will own approximately 77.2% of the
outstanding Common Stock of the Company. In addition, the Company, under a
five-year evergreen contract, co-employs most of the Parent's employees
(amounting to 15,072 employees at June 30, 1997) for which the Parent pays the
Company fees equaling approximately 117% of the wages of such co-employees.
Under a management services agreement, the Parent provides information systems
and regulatory, legal, accounting and other management services to the Company
at the Parent's cost. Under a loan agreement, the Company has borrowed
approximately $28.4 million from the Parent, of which $23.7 million will be
repaid from the proceeds of the Offering. In addition to its interest in the
Company, the Parent is in the business of providing medical rehabilitation
services.

The Company's operating and growth strategies are intended to leverage the
capabilities and expertise of the Parent. Through its relationship with the
Parent, the Company has access to: a large, stable and growing employee base;
sophisticated infrastructure resulting from investments made by the Parent in
human resource management and information technology; management control
systems; and workers' compensation risk management experience. In addition to
leveraging its relationship with the Parent, the Company plans to grow and
operate its business by: (i) increasing its sales force and marketing efforts;
(ii) implementing its sophisticated business model; (iii) focusing on geographic
expansion; (iv) targeting high potential industries; and (v) acquiring PEOs and
other employee service providers and entering into strategic alliances.

The Company is a Delaware corporation with executive offices at 2621 Van
Buren Avenue, Norristown, PA 19403, and its telephone number at that address is
(610) 650-4700. The Company transacts business directly and through its
subsidiaries. Unless the context otherwise requires, all references in this
Prospectus to the Company include its subsidiaries.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company(1)...................... 4,500,000 shares
Common Stock outstanding after the Offering(1)(2)........... 25,143,187 shares
Use of proceeds............................................. To repay certain indebtedness
Nasdaq National Market symbol............................... NCES
</TABLE>

- ---------------
(1) Does not include up to 675,000 shares of Common Stock that may be sold
pursuant to the Underwriters' over-allotment option.

(2) Based on the 18,630,000 shares of Common Stock outstanding as of June 30,
1997, adjusted for (i) 1,200,000 shares issued to acquire the assets and
liabilities of NovaPro effective July 1, 1997 (see Note 13 of Notes to the
Company's Consolidated Financial Statements); (ii) 4,500,000 shares to be
issued in connection with the Offering; and (iii) the conversion upon the
Offering of 813,187 shares of mandatorily redeemable Common Stock (temporary
equity) to 813,187 shares of Common Stock (permanent equity) (see Note 10 of
Notes to the Company's Consolidated Financial Statements). Does not include
625,000 shares of Common Stock reserved for issuance under the Company's
Stock Option Plan. See "Management -- Executive Compensation -- Stock Option
Plan" and Note 11 of Notes to the Company's Consolidated Financial
Statements.

5
<PAGE> 7

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

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA AS
------------------- ADJUSTED(2)
PERIOD FROM -------------
OCTOBER 1, 1996 YEAR ENDED
TO JUNE 30, 1997(1) JUNE 30, 1997
------------------- -------------
<S> <C> <C>
OPERATING RESULTS:
Revenues(3).............................................. $ 394,193 $ 878,097
Direct Costs:
Salaries, wages and employment taxes of worksite
employees........................................... 357,238 790,769
Health care, workers' compensation, state unemployment
taxes and other..................................... 24,717 62,825
--------- ---------
Gross profit........................................ 12,238 24,503
Selling, general and administrative expenses............. 8,273 21,295
Amortization of excess cost of net assets acquired....... 1,034 2,268
--------- ---------
Income from operations.............................. 2,931 940
Interest expense, net.................................... (697) (327)
--------- ---------
Income before income taxes.......................... 2,234 613
Income taxes............................................. 1,542 1,244
--------- ---------
Net income (loss)................................... $ 692 $ (631)
========= =========
Net (loss) attributable to common stock............. $ (341)
=========
Net (loss) per share..................................... $ (.02)
=========
Pro forma net income (loss) per share.................... $ .03 $ (.03)
========= =========
Weighted average number of shares outstanding............ 20,574 25,074
========= =========
STATISTICAL DATA:
EBITDA (in thousands)(4)................................. $ 4,217 $ 3,927
Number of clients at period end.......................... 1,742 1,742
Worksite employees paid at period end:
Third parties......................................... 18,634 19,956
Related party......................................... 16,394 15,072
--------- ---------
Total............................................ 35,028 35,028
========= =========
Weighted average worksite employees paid during the
period:
Third parties......................................... 11,764 18,123
Related party......................................... 15,879 14,428
Weighted average................................. 18,582 32,551
Gross profit per weighted average worksite employee
(in whole $'s):
Third parties......................................... $ 665 $ 731
Related party......................................... 650 780
Weighted average................................. $ 659 $ 753
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(5)(6)
------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.................................. $39,879 $ 41,669 $ 41,669
Total assets.................................... 95,998 98,330 97,753
Current liabilities(7).......................... 88,721 91,178 49,971
Financing arrangements(7)....................... 1,366 1,366 1,366
Mandatorily redeemable common stock............. 2,731 2,731 --
Shareholders' equity............................ 301 176 43,537
</TABLE>

6
<PAGE> 8

SUMMARY QUARTERLY FINANCIAL AND STATISTICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED(2)
FOR THE QUARTER ENDED
---------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues(3)...................................................... $ 202,285 $219,367 $223,333 $233,112
Direct Costs:
Salaries, wages and employment taxes of worksite employees..... 183,678 199,071 200,951 207,069
Health care, workers' compensation, state unemployment taxes
and other.................................................... 13,813 14,875 15,507 18,630
--------- -------- -------- --------
Gross profit.............................................. 4,794 5,421 6,875 7,413
Selling, general and administrative expenses..................... 4,956 6,088 5,184 5,067
Amortization of excess cost of net assets acquired............... 529 556 616 567
--------- -------- -------- --------
(Loss) income from operations............................. (691) (1,223) 1,075 1,779
Interest (expense) income, net................................... (85) (111) (41) (89)
--------- -------- -------- --------
(Loss) income before income taxes......................... (776) (1,334) 1,034 1,690
Income taxes..................................................... 45 37 298 865
--------- -------- -------- --------
Net (loss) income......................................... $ (821) $ (1,371) $ 736 $ 825
========= ======== ======== ========
Pro forma net (loss) income per share............................ $ (.03) $ (.06) $ .03 $ .03
========= ======== ======== ========
STATISTICAL DATA:
EBITDA (in thousands)(4)......................................... $ (53) $ (418) $ 1,810 $ 2,482
Number of clients at period end.................................. 1,437 1,499 1,531 1,742
Worksite employees paid at period end:
Third parties.................................................. 17,080 17,750 18,088 19,956
Related party.................................................. 13,340 14,049 14,557 15,072
--------- -------- -------- --------
Total..................................................... 30,420 31,799 32,645 35,028
========= ======== ======== ========
Weighted average worksite employees paid during the period:
Third parties.................................................. 16,685 17,415 17,919 19,022
Related party.................................................. 13,562 13,695 14,303 14,815
Weighted average.......................................... 30,247 31,110 32,222 33,837
Gross profit per weighted average worksite employee per quarter
(in whole $'s):
Third parties.................................................. $ 159 $ 164 $ 212 $ 208
Related party.................................................. 158 187 216 234
Weighted average.......................................... $ 159 $ 174 $ 213 $ 219
</TABLE>

(2) Adjusted on a pro forma basis to give effect to the acquisitions of Resource
One, Inc., Employee Services of America, Inc., The TPI Group, Ltd., Prostaff
Human Resources, Inc., NovaPro and the Company's contract with the Parent
(the "NovaCare Contract") (see Note 2 of Notes to the Company's Consolidated
Financial Statements) as if they occurred on July 1, 1996. NovaPro, formerly
a business of the Parent, was acquired from the Parent effective July 1,
1997. The application of a portion of the net proceeds of the Offering is
assumed to pay certain debt which reduces pro forma as adjusted interest
expense. Additionally, the pro forma adjusted worksite employee statistical
data reflect 1,322 worksite employees which became third party employees
upon the consummation of the NovaPro acquisition. The as adjusted pro forma
statement of operations does not purport to represent what the Company's
actual results of operations would have been if such acquisitions, the
NovaCare Contract and the Offering had occurred on July 1, 1996, or to
project the Company's results of operations for any future period. See the
Consolidated Pro Forma Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus. The computation of weighted average numbers of
shares outstanding is consistent with the computation of weighted average
number of shares outstanding for supplemental pro forma net income per share
described in Note 1 of Notes to the Company's Consolidated Financial
Statements.

(3) Revenues include all amounts billed to clients for gross salaries and wages,
related employment taxes and health care and workers' compensation coverage
of worksite employees.

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

(5) Adjusted on a pro forma basis to include the assets and liabilities of
NovaPro as of June 30, 1997. See the Consolidated Pro Forma Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.

(6) Adjusted to give effect to the conversion of mandatorily redeemable Common
Stock into stockholders' equity and the Offering and the application of the
estimated net proceeds therefrom, as if each of the foregoing had occurred
as of June 30, 1997. See "Use of Proceeds" and the Consolidated Pro Forma
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.

(7) The current portion of financing arrangements amounting to $298 is included
in current liabilities.

7
<PAGE> 9

RISK FACTORS

In addition to the other information contained elsewhere in this
Prospectus, prospective investors should consider carefully the factors listed
below before purchasing any of the Common Stock offered hereby. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below as well as those discussed
elsewhere in this Prospectus.

SHORT OPERATING HISTORY; NO ASSURANCE OF PROFITABLE OPERATIONS

The Company commenced operations in October 1996 with the acquisition of
Resource One. Prior to the acquisition of Resource One, the Company conducted no
significant operations. The Company has a limited operating history and is
subject to various uncertainties and risks characteristic of development stage
companies. In addition, there can be no assurance that the Company will be able
to integrate successfully the operations of its recently completed acquisitions.
The Company's success will depend, to a large degree, upon the successful
implementation of its business strategy. There can be no assurance that this
strategy will yield profitable operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 1 of Notes
to the Company's Consolidated Financial Statements.

LIMITS ON ABILITY TO PASS THROUGH CERTAIN COSTS

Health insurance premiums, state unemployment taxes and workers'
compensation rates are in part determined by the Company's claims experience and
comprise a significant portion of the Company's direct costs. The Company
employs risk management procedures in an attempt to control its claims
incidences. However, should the Company experience a large increase in claims
activity, its unemployment taxes, health insurance premiums or workers'
compensation insurance rates may increase. The Company's ability to incorporate
such increases into service fees to clients is constrained by contractual
arrangements with clients and competitive factors. As a result, such increases
could have a material adverse effect on the Company's business, financial
condition, results of operations and liquidity.

SHORT-TERM NATURE OF PEO SERVICES AGREEMENTS; CLIENT ATTRITION

The Company's standard PEO services agreement provides for an initial
one-year term; thereafter, the agreement is renewed periodically. The agreement
is subject to termination without cause by the Company or the client upon 30
days' prior written notice. The Company experiences terminations and
non-renewals every quarter and there can be no assurance that the Company can
replace these clients. A significant number of terminations or non-renewals
could have a material adverse effect on the Company's business, financial
condition, results of operations and liquidity. See "Business -- Employee and
Client Services."

ADEQUACY OF RESERVES FOR WORKERS' COMPENSATION CLAIMS

The maintenance of a workers' compensation insurance plan that covers
worksite employees is a significant part of the Company's business. As part of
its standard PEO services agreement with its clients, the Company assumes the
financial obligations of its clients to pay workers' compensation claims of
worksite employees. Through June 30, 1997, certain of the Company's worksite
employees were covered by large deductible workers' compensation insurance
policies and certain other worksite employees were covered by guaranteed cost or
low deductible workers' compensation insurance policies. Consequently, the
Company is financially liable for substantially all of the workers' compensation
claims of these worksite employees that occurred on or before June 30, 1997 up
to the applicable deductible. The Company maintains reserves for the pre-July 1,
1997 workers' compensation claims based on periodic reviews of open claims as
well as past claims experience. The Company cannot predict with certainty the
ultimate liability associated with open claims, and past claims experience may
not be indicative of future results. Accordingly, if the ultimate liability with
respect to these open claims proves to be greater than estimated reserve
amounts, the Company's business, financial condition, results of operations and
liquidity could be materially adversely affected.

8
<PAGE> 10

Effective July 1, 1997, the Company and the Liberty Mutual Group ("Liberty
Mutual") entered into a workers' compensation deductible program which will
extend through June 30, 2000 containing an aggregate stop-loss that limits the
liability of the Company to a capped percentage of the standard premium or a
fixed aggregate deductible, whichever is greater. There can be no assurance that
upon the expiration of the policies a replacement program will be secured on
competitive terms without causing significant disruption to the Company's
business. See "Business -- Workers' Compensation and Health Care Program" and
Notes 1 and 6 of Notes to the Company's Consolidated Financial Statements.

ADEQUACY OF RESERVES FOR HEALTH CARE CLAIMS

As part of its standard PEO services agreement with its clients, the
Company also assumes the financial obligation to provide health care coverage
for worksite employees. While the Company has purchased certain insurance
coverage to limit this exposure, it has not purchased such insurance for the
worksite employees of the Parent, of which there were 15,072 at June 30, 1997.
As a result, the Company is self-insured with respect to health care coverage
for the Parent's worksite employees and, therefore, is financially liable for
any health care claims of such worksite employees. The Company maintains
reserves for health care claims based on periodic reviews of open claims as well
as past claims experience. However, the Company cannot predict with certainty
the ultimate liability associated with open claims, and past claims experience
may not be indicative of future results. Accordingly, if the ultimate liability
with respect to these open claims proves to be greater than estimated reserve
amounts, the Company's business, financial condition, results of operations and
liquidity could be materially adversely affected. See "Business -- Workers'
Compensation and Health Care Program" and Notes 1 and 6 of Notes to the
Company's Consolidated Financial Statements.

REGULATION OF PEOS

The Company's operations are affected by numerous federal, state and local
laws relating to insurance, tax and employment matters. By entering into a
co-employment relationship with clients, the Company assumes certain employer
obligations and responsibilities under these laws. The Company's business model
and services have been developed based on the premise that the Company is an
employer for certain purposes under common law. However, because many of the
laws related to the employment relationship were enacted prior to the
development of alternative employment arrangements, such as those provided by
PEOs and other staffing businesses, many of those laws do not specifically
address the obligations and responsibilities of non-traditional employers.
Interpretive issues concerning such relationships have arisen and remain
unsettled. Uncertainties arising under the Internal Revenue Code of 1986, as
amended (the "Code"), include, but are not limited to, the qualified tax status
and favorable tax status of certain benefit plans provided by the Company and
other alternative employers. See "Risk of Loss of Qualified Status for Certain
Tax Purposes" below. The unfavorable resolution of these unsettled issues could
have a material adverse effect on the Company's business, financial condition,
results of operations and liquidity.

There can be no assurance that existing laws and regulations which are not
currently applicable to the Company will not be interpreted more broadly in the
future so as to apply to the Company's existing activities, or that new laws and
regulations will not be enacted with respect to the Company's activities, either
of which could have a material adverse effect on the Company's business,
financial condition, results of operations and liquidity.

While many states do not explicitly regulate PEOs, approximately one-third
of the states (including Florida) have adopted licensing or registration
requirements for PEOs, and several additional states (including Pennsylvania)
are considering implementation of such requirements. Such laws vary from state
to state but generally provide for monitoring the fiscal responsibility of PEOs
and specify the employer responsibilities assumed by PEOs. There can be no
assurance that the Company will be able to comply with any licensing or
registration requirements which may be imposed upon it in the future. In
addition, there can be no assurance that states will not pass laws limiting the
ability of PEOs to provide services which, if enacted, may impede the Company's
growth. See "Business -- Regulation."

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<PAGE> 11

RISK OF LOSS OF QUALIFIED STATUS FOR CERTAIN TAX PURPOSES

The Internal Revenue Service (the "IRS") is conducting a market segment
study of the PEO industry (the "Market Segment Study") focusing on selected PEOs
(not including the Company) in order to examine the relationship among PEOs,
their clients, worksite employees and the owners of clients. The IRS has
indicated that the Market Segment Study is expected to be completed in January
1998, although there can be no assurance that it will be completed by such time.
If the IRS concludes that PEOs are not "employers" of certain worksite employees
for purposes of the Code, the tax-qualified status of the Company's 401(k) plans
could be revoked, its cafeteria plans may lose their favorable tax status, and
the Company may no longer be able to assume the client company's federal
employment tax withholding obligations. If the loss of qualified tax status for
the Company's 401(k) plans or cafeteria plans is applied retroactively,
employees' vested account balances would become taxable immediately to the
employees, the Company would lose its tax deduction to the extent the
contributions were not vested, the plans' trusts would become taxable trusts and
penalties could be assessed. In such a case, the Company would face the risk of
client dissatisfaction as well as potential litigation, and its business,
financial condition, results of operations and liquidity could be materially
adversely affected. In addition, if the Company is required to report and pay
employment taxes for the separate accounts of its clients rather than for its
own account as a single employer, the Company could incur increased
administrative burdens. The Company is unable to predict the actual timing or
nature of the findings of the Market Segment Study or the ultimate outcome of
such findings. See "Business -- Regulation."

LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS

A number of legal issues remain unresolved with respect to the
co-employment arrangements among PEOs, their clients and worksite employees,
including questions concerning the ultimate liability for violations of
employment and discrimination laws. The Company's standard PEO services
agreement establishes a contractual division of responsibilities between the
Company and each client for various human resource matters, including compliance
with and liability under various governmental regulations. However, as a result
of the Company's status as a co-employer, the Company may be subject to
liability for violations of these or other laws despite such contractual
provisions even if it does not participate in such violations. Although such PEO
services agreements generally provide that the client is to indemnify the
Company for any liability attributable to the client's failure to comply with
its contractual obligations and the requirements imposed by law, the Company may
not be able to collect on such a contractual indemnification claim and thus may
be responsible for satisfying such liabilities. In addition, worksite employees
may be deemed to be agents of the Company, subjecting the Company to liability
for the actions of such worksite employees. See "Business -- Employee and Client
Services" and "Business -- Regulation."

RISKS OF ACQUISITIONS AND FAILURE TO INTEGRATE ACQUIRED BUSINESSES

One of the Company's principal strategies is to increase its revenues and
the markets it serves through the acquisition of PEOs and other employee
services companies. There can be no assurance that the Company will be able to
identify and acquire attractive acquisition candidates, profitably manage such
acquired companies or successfully integrate such acquired companies into the
Company without substantial costs, delays or other problems. Acquisitions may
involve a number of special risks, including, but not limited to, adverse
short-term effects on the Company's reported financial condition or results of
operations, diversion of management's attention, dependence on retention, hiring
and training of key personnel, risks associated with unanticipated problems or
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Company's business, financial
condition, results of operations or liquidity. In addition, there can be no
assurance that companies acquired in the future will be profitable at the time
of acquisition or that the companies recently acquired or acquired in the future
will achieve sales and profitability justifying the Company's investment therein
or that the Company will recognize the synergies expected from such
acquisitions; the failure to obtain any or all of which could have a material
adverse effect on the Company's business, financial condition, results of
operations and liquidity. See "Business -- Growth Strategy."

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<PAGE> 12

RISKS ASSOCIATED WITH FINANCIAL POSITION OF CLIENTS

In providing its services, the Company enters into a co-employment
relationship with worksite employees and assumes the obligations to pay the
wages and related benefit costs and payroll taxes of such worksite employees.
The Company's standard PEO services agreement with its clients obligates the
client to reimburse the Company for these payments. The Company's obligations
include responsibility for payroll for worksite employees and payment of payroll
withholding taxes, federal and state unemployment taxes, and taxes due under the
Federal Income Contribution Act ("FICA"). The Company assumes such obligations
as a principal, not merely as an agent of the client, and is therefore liable
for such obligations even if the client defaults in its payment to the Company.
Although the Company retains the right to terminate immediately its PEO services
agreement with the client, as well as its relationship with the worksite
employees, due to nonpayment by the client, the Company remains liable to
satisfy payroll obligations for services performed prior to such termination in
the event of a client default. The Company may require the owners of its clients
to guarantee personally the performance of the PEO services agreement. However,
there can be no assurance that such owners would be financially able to satisfy
such guarantee obligations. There can be no assurance that the Company's
ultimate liability for worksite employee payroll and related tax costs will not
have a material adverse effect on its business, financial condition, results of
operations or liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DEPENDENCE ON THE PARENT; POTENTIAL CONFLICTS WITH THE PARENT

The Company was established in September 1996 by the Parent. See "The
Company." Upon consummation of the Offering, the Parent will beneficially own
approximately 77.2% of the Company's Common Stock (75.1% if the Underwriters'
over-allotment option is exercised in full) and will, in effect, have the power
to elect all the directors of the Company and to control the Company's policies.
See "Principal Shareholders."

In February 1997, the Parent and the Company entered into the NovaCare
Contract whereby the Parent's employees are co-employed by the Company for a
five-year term, ending on December 31, 2001. Under the NovaCare Contract, the
Company provides traditional PEO services such as payroll administration,
worksite safety evaluation, employment-related risk management and benefits
consultation for substantially all of the Parent's employees. On a pro forma
basis, the Parent accounted for approximately 67% of the Company's revenues
during the quarter ended June 30, 1997 and approximately 65% of the Company's
revenues for the year ended June 30, 1997. No other client accounted for more
than 10% of the Company's revenues during that period or for calendar 1996 on a
pro forma basis. Any material reduction in the Parent's workforce or adverse
change in or termination of the NovaCare Contract would have a material adverse
effect on the Company's business, financial condition, results of operations and
liquidity. See "Business -- Employee and Client Services,"
"Business -- Relationship with the Parent" and "Certain Related Party
Transactions."

Four directors of the Company are also directors of the Parent. One of
these directors is also Chairman of the Company and two others are officers of
the Parent. These directors may have conflicts of interest with respect to
matters concerning the Company and its relationship with the Parent. The Company
has not adopted any formal procedures regarding potential conflicts of interest
with the Parent. Except as contemplated by this Prospectus, the Company does not
currently intend to enter into material transactions with the Parent, but the
Company may enter into transactions with the Parent which may be more favorable
to the Parent than to the Company. See "Business -- Relationship with the
Parent" and "Certain Related Party Transactions."

The Company has entered into an agreement with the Parent pursuant to which
the Company purchases certain services from the Parent, including information
technology, finance, business development, regulatory and legal services. There
can be no assurance that circumstances will not arise between the Company and
the Parent as a result of which the Company would be required to obtain these
services from other third parties at significantly higher prices or develop
these capabilities internally. The unavailability of these services to the
Company for any reason could have a material adverse effect on the Company's
business, financial condition,

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<PAGE> 13

results of operations and liquidity. See "Business -- Relationship with the
Parent" and "Certain Related Party Transactions."

RISKS ASSOCIATED WITH INTANGIBLE ASSETS

At June 30, 1997, the Company's total assets were approximately $96.0
million, of which approximately $53.7 million, or 56%, represented the excess of
cost over fair market value of net assets acquired relating to the acquisition
of businesses (intangible assets). The intangible assets consist of
approximately $45.9 million in goodwill which is being amortized over 40 years,
$5.2 million assigned to customer lists with an eight-year amortization period
and $2.6 million assigned to noncompete and workforce agreements with a
five-year and an eight-year amortization period, respectively. While the Company
believes the value represented by intangible assets will be realized through the
future contribution of the acquired businesses to earnings and cash flow of the
Company, there can be no assurance that such projected contribution to earnings
and cash flow will be realized. The amortization of such intangible assets,
substantially all of which is not deductible for income tax purposes, will
produce an annual charge to income from operations of approximately $2.2
million, which will adversely impact the Company's earnings. This charge could
be greater in future years as the Company pursues additional acquisitions. The
Company will evaluate on a regular basis whether events and circumstances have
occurred that indicate that the carrying amount of the intangible assets may
warrant revision or may not be recoverable. Any such future determination
requiring the write-off of a significant portion of unamortized intangible
assets could adversely affect the Company's financial position and results of
operations for the period in which any such write-offs occur.

OBLIGATIONS IN CONNECTION WITH ACQUISITIONS

In connection with acquisitions of businesses by the Company, the Company
is obligated to pay additional cash and stock consideration to sellers of
businesses, certain of which are contingent upon achievement of certain
operating objectives. The amount of cash to be paid and the number of shares of
the Company's Common Stock to be issued with respect to the contingent payments
cannot be determined until contingent payment periods terminate and achievement
of certain criteria is established. As of July 1, 1997, if the criteria for the
contingent payments with respect to each of the Company's acquisitions to date
were achieved, but not exceeded, the Company would be obligated to make future
cash payments of $2.5 million and issue 125,000 shares of its Common Stock over
the next three years. A lesser amount of cash would be payable and a lesser
number of shares of Common Stock would be issuable under certain acquisition
agreements if the operating objectives were not met, and a greater amount of
cash would be payable and a greater number of shares of Common Stock would be
issuable under certain acquisition agreements if the operating objectives were
exceeded. In certain of the acquisitions, there is no maximum as to the amount
such sellers may receive. For example, as of July 1, 1997, if the operating
objectives with respect to each of the acquisitions were to be exceeded by 20%,
the Company would be obligated to make cash payments of $2.9 million and issue
150,000 shares of Common Stock over the next three years. If, in each case, the
contingent payment goals were met, the acquired company would have achieved
operating income which the Company believes should generate earnings
significantly in excess of any incremental contingent payment due, although,
there can be no assurance that it will do so. In addition to the contingent
obligations, the Company is obligated in any event to make future cash payments
of $1,797,000 and issue 341,063 shares of its Common Stock over the next three
years as part of the deferred purchase price for certain of the acquisitions.
The Company believes that it will be able to make such cash payments from
internally generated funds and, if necessary, proceeds of future borrowings.
However, there can be no assurance that the Company will generate or be able to
borrow sufficient cash to fund such obligations. The Company expects to continue
to enter into acquisition agreements providing for future contingent earn-out
arrangements primarily based on the achievement of financial criteria. The
Company believes that it will continue to be able to make such cash payments (as
well as any payments to repurchase Common Stock as described below) from cash on
hand and, if necessary, proceeds of future borrowings. However, there can be no
assurance that the Company will generate sufficient cash or obtain debt
financing to fund such payments or that future acquisitions will not adversely
affect cash generated from operations.

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<PAGE> 14

In addition, in connection with certain acquisitions, the Company granted
to the sellers the right to require the Company to repurchase, at prices of up
to $16.00 per share, all shares of the Company's Common Stock received by such
sellers (up to 1,279,250 shares in the aggregate), as consideration for the
acquisitions, including those shares of the Company's Common Stock received
pursuant to contingent payments, in the event that the Company's Common Stock is
not, by specific dates, (i) listed or traded on a national securities exchange,
(ii) listed on the Nasdaq National Market or (iii) traded in the Nasdaq SmallCap
Market. Moreover, in the event that (i) a change in control of the Company
occurs prior to an initial public offering of the Company's Common Stock and
(ii) either (a) the Company has not effected an initial public offering of its
Common Stock by specific dates at certain minimum offering prices, or (b) the
closing price of the Company's Common Stock is less than $16.00 per share as of
December 31, 1998, the Company may be required to repurchase all such shares of
its Common Stock issued in connection with one acquisition (375,000 shares plus
contingent shares) at a price of $16.00 per share. The repurchase of such shares
would have a material adverse effect on the Company's financial condition and
liquidity.

In addition to cash payments, the Company expects that it will continue to
issue shares of Common Stock in connection with future acquisitions both at the
time of closing and as earn-out payments. No predictions can be made as to the
timing or amount of any such future issuances of Common Stock.

In addition to the above payments, the Company is obligated to make
additional cash payments upon the consummation of the Offering to the sellers of
certain of the businesses acquired by the Company. As of July 1, 1997, the
Company is obligated to make cash payments of $17.5 million upon the
consummation of the Offering. See "Use of Proceeds."

UNCERTAINTY OF IMPACT OF HEALTH CARE AND WORKERS' COMPENSATION REFORM

Regulation in the health care and workers' compensation fields continues to
evolve, and the Company is unable to predict what additional government
regulations, if any, that affect its business may be adopted in the future. In
addition, health care reform and/or specific changes in laws or regulations may
affect demand for the Company's services, require the Company to develop new or
modified services to meet the demands of the marketplace, or modify the fees
that the Company may charge for its services. See "Business -- Regulation."

RISKS ASSOCIATED WITH GEOGRAPHIC MARKET CONCENTRATION AND EXPANSION INTO
ADDITIONAL STATES

The Company operates primarily in Florida, Pennsylvania, New York and
California, with such states accounting for approximately 29%, 10%, 9% and 6%,
respectively, of the Company's revenues for fiscal 1997 on a pro forma basis. As
a result, for the foreseeable future, a significant portion of the Company's
revenues will be subject to economic factors specific to those states. No other
state accounted for more than 5% of the Company's revenues for fiscal 1997.
Because the Company's expansion plans target markets in states with high
existing worksite employee populations, growth is likely to increase the
Company's exposure to market-specific economic risks in the near term. Future
growth of the Company's operations depends, in part, on its ability to offer its
services to prospective clients in additional states. Currently, approximately
one-third of the states require the licensing or registration of PEOs. The
Company is licensed in seven states and has begun the licensing process in eight
states. In order to operate effectively in a new state that has licensing
regulations, the Company must obtain all necessary regulatory approvals, achieve
acceptance in the local market, adapt its procedures to that state's regulatory
requirements and local market conditions and establish internal controls that
enable it to conduct operations in several locations. The length of time
required to obtain regulatory approval to begin operations will vary from state
to state. There can be no assurance that the Company will be able to satisfy
licensing requirements or other applicable regulations of any particular state,
that it will be able to provide the full range of services currently offered in
the states where it currently conducts business, or that it will be able to
operate profitably within the regulatory environment of any state in which it
does obtain regulatory approval. The absence of required licenses would require
the Company to restrict the services it offers. See "Business -- Regulation."
Moreover, as the Company expands into additional states, there can be no
assurance that the Company will be able to duplicate in other markets the
revenue growth and operating results experienced in its current markets.

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QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

The Company's quarterly results of operations are subject to a number of
seasonal variations, including seasonal variations in employment levels and
patterns and the effect of employment tax limits, none of which can be predicted
with any degree of certainty.

COMPETITION

The PEO industry is highly fragmented, with at least 2,400 companies
(according to an estimate by NAPEO) providing PEO services. The Company
encounters competition from other national and regional PEOs and single-service
and "fee for service" companies such as payroll processing firms, insurance
companies, workers' compensation safety consultants and human resource
consultants. In addition, the Company may encounter substantial competition from
new national market entrants. Some of the Company's current and future
competitors may be significantly larger, have greater name recognition and have
greater financial, marketing and other resources than the Company. There can be
no assurance that the Company will be able to compete effectively against such
competitors in the future. There are low barriers to entry into the PEO business
in most states where the Company operates and competitive pricing may adversely
affect growth and/or margins. See "Business -- Competition."

DEPENDENCE ON KEY MANAGEMENT

The success of the Company is highly dependent on the services of current
management. The loss of key management personnel or an inability to attract,
retain and motivate sufficiently experienced management could adversely affect
the Company's operations. All executive officers of the Company are considered
by the Company to be key management personnel, but no single individual is
considered by the Company to be critical to the Company's success. All executive
officers except Andrew W. Stith are covered by non-competition agreements. The
Company does not carry key-man life insurance on any individual.

SUBSTANTIAL AND IMMEDIATE DILUTION

Investors in the Offering will experience immediate and substantial
dilution in net tangible book value (deficit) per share of Common Stock. Based
upon an assumed offering price of $10.00 per share, dilution to investors in the
Offering will be $10.40 per share and the net tangible book value (deficit) of
the shares held by all stockholders will be $(.40) per share. See "Dilution."

ABSENCE OF PUBLIC MARKET; VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active trading market will
develop or be sustained upon the completion of the Offering, or that the market
price of the Common Stock will not decline below the initial offering price. The
initial public offering price of the Company's Common Stock offered hereby has
been determined by negotiations between the Company and the Underwriters. The
market price for shares of the Company's Common Stock may be highly volatile
depending on news announcements of the Company related to quarterly operating
results or other matters, general trends in the Company's industry, changes in
general market conditions and other factors. In recent years the stock market
has experienced extreme price and volume fluctuations.

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, there will be outstanding 25,143,187
shares of Common Stock. The 4,500,000 shares sold in the Offering will be freely
tradable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except to the extent acquired by affiliates of the Company.
The Company, its officers and directors and substantially all other holders of
Common Stock and securities convertible into or exercisable or exchangeable for
Common Stock have agreed that for a period of 180 days after the date of this
Prospectus (the "Lockup Period") they will not, without the prior written
consent of BancAmerica Robertson Stephens, offer, sell, contract to sell or
otherwise dispose of any Common Stock or

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<PAGE> 16

any securities convertible into or exercisable or exchangeable for Common Stock
except in certain limited circumstances. Upon expiration of the 180-day period,
at least 19,380,937 shares of Common Stock will be eligible for sale pursuant to
Rule 144 under the Securities Act, subject in some cases to compliance with Rule
144 volume limitations, of which 287,008 shares are held by officers, directors
and affiliates of the Company. Sales of a substantial amount of such shares
could have a significant adverse effect on the market price of the Common Stock.
See "Shares Eligible for Future Sale."

NO DIVIDENDS

The Company intends to retain all of its earnings to finance the expansion
of its business and for general corporate purposes and does not anticipate
paying any cash dividends on its Common Stock for the foreseeable future. See
"Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

THE COMPANY

The Company was established by the Parent in September 1996 to enter the
employee services business. It began operations as of October 1, 1996 with the
acquisition of Resource One, a PEO based in Maitland, Florida. In February 1997,
the Company acquired three additional PEOs -- Employee Services of America,
Inc., The TPI Group, Ltd. and Prostaff Human Resources, Inc. -- and entered into
the NovaCare Contract with the Parent to co-employ the Parent's workforce. On
July 1, 1997, the Company acquired from the Parent the assets of the Parent's
NovaPro rehabilitation temporary staffing business.

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<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 4,500,000 shares of
Common Stock offered hereby, assuming an offering price of $10.00 per share, and
after deducting estimated underwriting discounts and commissions and offering
expenses, are estimated to be $40.6 million ($46.9 million if the Underwriters'
over-allotment option is exercised in full). The Company has paid approximately
$0.6 million of offering expenses as of the date of this Prospectus, which
amount is reflected in the historical June 30, 1997 balance sheet, thereby
resulting in an actual $41.2 million of net proceeds from the Offering ($47.5
million if the Underwriters' overallotment option is exercised in full). See
Notes 3 and 4 of Notes to the Company's Pro Forma Combined Balance Sheet.

The Company intends to use the approximately $41.2 million of net proceeds
from the Offering to retire certain outstanding indebtedness as follows: (i) to
satisfy $17.5 million of deferred purchase price obligations incurred in
connection with the Company's acquisitions and (ii) to repay $23.7 million
borrowed under the Company's line of credit from the Parent, at an interest rate
equal to the EuroDollar rate plus 0.5% to 1.125% depending on certain cash flow
calculations, which was incurred to finance the Company's acquisitions and to
provide the Company with working capital and which is due upon the earlier of
November 28, 1999 or the consummation of the Offering.

DIVIDEND POLICY

The Company has never paid a cash dividend on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The payment of
cash dividends in the future will depend on the Company's earnings, financial
condition and capital needs and on other factors deemed pertinent by the
Company's Board of Directors. It is the current policy of the Company's Board of
Directors to retain earnings to finance the operations and expansion of the
Company's business.

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DILUTION

The Company had a net tangible book value (deficit) of $(53,515,000), or
$(2.70) per share of the Common Stock at June 30, 1997 assuming the acquisition
of NovaPro as if it had occurred at June 30, 1997. Giving effect to the sale of
the Common Stock offered hereby at an assumed public offering price of $10.00
per share and the conversion of the mandatorily redeemable Common Stock, and
after deducting assumed underwriting discounts and commissions and offering
expenses, such net tangible book value (deficit) would have been ($10,154,000),
or $(.40) per common share. This represents an immediate increase in net
tangible book value of $2.17 per common share to existing stockholders
attributable to new investors and $.13 per common share attributable to
conversion of mandatorily redeemable Common Stock, and an immediate dilution of
$10.40 per common share to purchasers of shares in the Offering. The following
table illustrates this dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share of Common Stock(1)........ $ 10.00
Net tangible book value (deficit) per share of Common Stock before
the Offering(2)................................................. $(2.70)
Decrease in net tangible book value (deficit) attributable to the
conversion of mandatorily redeemable Common Stock(3)............ .13
Decrease in net tangible book value (deficit) attributable to new
investors....................................................... 2.17
------
Net tangible book value (deficit) per share of Common Stock after
the Offering.................................................... (.40)
-------
Dilution of net tangible book value per share to new
investors(4).................................................... $(10.40)
=======
</TABLE>

- ---------------
(1) Assumed public offering price before deduction of assumed underwriting
discounts and commissions and estimated offering expenses.

(2) Negative net tangible book value (deficit) per share of Common Stock without
considering the purchase of shares of Common Stock by new investors is
determined by dividing the 19,830,000 shares of Common Stock outstanding
before conversion of the mandatorily redeemable Common Stock into the
tangible net worth (deficit) of the Company (tangible assets less
liabilities). Net tangible book value (deficit) per share of Common Stock
excludes intangibles of $53,691,000, or $2.71 per share.

(3) The effect of the conversion of the 813,187 shares of the mandatorily
redeemable Common Stock upon consummation of this Offering represents a
decrease in negative tangible net worth (deficit) of $2,731,000, or $.13 per
share.

(4) Dilution is determined by subtracting net tangible book value (deficit) per
share of Common Stock after the Offering from the assumed public offering
price paid by new investors for a share of Common Stock.

Based on the same assumptions utilized in the table set forth above, the
following table summarizes, as of June 30, 1997, the difference between existing
stockholders, including conversion of the mandatorily redeemable Common Stock,
and new investors with respect to the number of shares of Common Stock purchased
from the Company, the consideration paid and the average price paid per share.

<TABLE>
<CAPTION>
AVERAGE PRICE
PER SHARE
-------------
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- -----------------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)......... 20,643,187 82.1% $ 7,851,000 14.9% $ .38
New Investors.................... 4,500,000 17.9 45,000,000 85.1% 10.00
---------- ----- ----------- -----
Total............................ 25,143,187 100.0% $52,851,000 100.0%
========== ===== =========== =====
</TABLE>

- ---------------
(1) Includes 1,200,000 shares issued to a subsidiary of the Parent on July 1,
1997 in connection with the acquisition of NovaPro. See "Certain Related
Party Transactions."

17
<PAGE> 19

CAPITALIZATION

The following table sets forth certain current debt obligations and the
capitalization of the Company as of June 30, 1997, the pro forma capitalization
of the Company at June 30, 1997 assuming the acquisition of NovaPro as if it had
occurred at June 30, 1997 and pro forma as adjusted capitalization to reflect
the issuance and sale by the Company of the 4,500,000 shares of Common Stock
offered hereby, the conversion of the mandatorily redeemable Common Stock into
stockholders' equity and the application by the Company of the estimated net
proceeds therefrom as described under "Use of Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1997
(IN THOUSANDS)
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2)
------- ------------ -----------------
<S> <C> <C> <C>
Current note payable, current portion of
financing arrangements and deferred purchase
price obligations(3)(4)........................ $47,585 $ 47,585 $ 6,378
======= ======== =======
Financing arrangements, net of current
portion(3)..................................... $ 1,068 $ 1,068 $ 1,068
Deferred purchase price obligations, net of
current portion(4)............................. 856 856 856
Mandatorily redeemable Common Stock(5)........... 2,731 2,731 --
Shareholders' Equity
Preferred stock, $.01 par value; authorized
1,000,000 shares; no shares issued or
outstanding(6).............................. -- -- --
Common stock, $.01 par value; authorized
60,000,000 shares, issued 19,193,187 actual,
20,393,187 pro forma, and 25,706,374 pro
forma as adjusted(7)........................ 192 204 257
Additional paid-in capital..................... 1,189 1,052 44,360
Retained earnings.............................. -- -- --
------- -------- -------
1,381 1,256 44,617
Less: Common stock in treasury (at cost)
563,000 shares.............................. (1,080) (1,080) (1,080)
------- -------- -------
Total shareholders' equity.................. 301 176 43,537
------- -------- -------
Total capitalization................... $ 4,956 $ 4,831 $45,461
======= ======== =======
</TABLE>

- ---------------
(1) Gives effect to the acquisition of NovaPro as if it had occurred at June 30,
1997. See "Certain Related Party Transactions" and Note 3 of Notes to the
Company's Consolidated Financial Statements.

(2) Gives effect to the conversion of the Common Stock, and adjusted for the
sale of shares of Common Stock offered hereby and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds" based
upon an assumed offering price of $10.00 per share. See "Pro Forma Financial
Information."

(3) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 5 of Notes to the Company's Consolidated Financial
Statements for information concerning the Company's long-term debt.

(4) See Note 3 of Notes to the Company's Consolidated Financial Statements.

(5) See "Description of Capital Stock" and Note 10 of Notes to the Company's
Consolidated Financial Statements concerning the mandatorily redeemable
Common Stock.

(6) See "Description of Capital Stock" and Note 9 of Notes to the Company's
Consolidated Financial Statements for information concerning the Preferred
Stock.

(7) Does not include 625,000 shares reserved for issuance under the Company's
Stock Option Plan. See "Management -- Executive Compensation -- Stock Option
Plan" and Note 11 of Notes to the Company's Consolidated Financial
Statements.

18
<PAGE> 20

SELECTED FINANCIAL AND STATISTICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)

The selected historical financial data presented below has been derived
from the consolidated financial statements of the Company and of its predecessor
company, Resource One, which financial statements are included elsewhere in this
Prospectus. The reports of Price Waterhouse LLP, independent accountants, on the
consolidated financial statements of the Company as of and for the period from
inception to June 30, 1997 and of Brewer, Beemer, Kuehnhackl and Koon, P.A.,
independent accountants, on the consolidated financial statements of Resource
One at December 31, 1994 and 1995 and at September 30, 1996 and the periods then
ended appear elsewhere in this Prospectus.

The selected pro forma financial data have been taken from the pro forma
financial information appearing elsewhere in this Prospectus. Selected
historical financial data of the Company and its predecessor should be read in
conjunction with the Company's consolidated financial statements and related
notes appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY
------------------------------------------ ---------------------------------
HISTORICAL PRO FORMA(2)
FOR THE YEAR ENDED FOR THE NINE -------- ------------
DECEMBER 31, MONTHS ENDED PERIOD FROM YEAR ENDED
-------------------------- SEPTEMBER 30, OCTOBER 1, 1996 TO JUNE 30,
STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996 JUNE 30, 1997(1) 1997
------ ------- ------- ------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues(3).................................... $7,780 $11,987 $18,749 $23,465 $394,193 $878,097
Direct Costs:
Salaries, wages and employment taxes of
worksite employees......................... 5,283 9,427 16,118 21,224 357,238 790,769
Health care, workers' compensation, state
unemployment taxes and other............... 654 555 535 403 24,717 62,825
------ ------- ------- ------- -------- --------
Gross profit............................. 1,843 2,005 2,096 1,838 12,238 24,503
Selling, general and administrative expenses... 1,704 1,683 1,763 1,767 8,273 21,295
Amortization of excess cost of net assets
acquired..................................... -- -- -- -- 1,034 2,268
------ ------- ------- ------- -------- --------
Income from operations................... 139 322 333 71 2,931 940
Interest (expense) income, net................. (2) 1 (5) 6 (697) (1,627)
------ ------- ------- ------- -------- --------
Income (loss) before income taxes........ 137 323 328 77 2,234 (687)
Income taxes................................... -- 94 64 21 1,542 734
------ ------- ------- ------- -------- --------
Net income (loss)........................ $ 137 $ 229 $ 264 $ 56 $ 692 $ (1,421)
====== ======= ======= ======= ======== ========
Net (loss) attributable to common
stock.................................. $ (341)
========
Net (loss) per share........................... $ (.02)
========
Unaudited pro forma net income (loss) per
share........................................ $ .03 $ (.07)
======== ========
Unaudited pro forma weighted average number of
shares outstanding........................... 20,574 20,574
======== ========
</TABLE>

<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR COMPANY -------------------------------------
--------------------------------------
AS OF JUNE 30, 1997
AS OF DECEMBER 31, AS OF -------------------------------------
---------------------- SEPTEMBER 30, PRO FORMA AS
1993 1994 1995 1996 ACTUAL PRO FORMA(4) ADJUSTED(4)(5)
---- ------ ------ ------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................... $573 $ 821 $ 986 $ 1,320 $39,879 $ 41,669 $ 41,669
Total assets..................................... 828 1,006 1,241 1,544 95,998 98,330 97,753
Current liabilities(6)........................... 285 591 748 1,087 88,721 91,178 49,971
Financing arrangements(6)........................ 18 164 101 8 1,366 1,366 1,366
Mandatorily redeemable common stock.............. -- -- -- -- 2,731 2,731 --
Shareholders' equity............................. 530 345 393 449 301 176 43,537
</TABLE>

- ---------------
(1) The Company commenced operations effective October 1, 1996, concurrent with
the acquisition of Resource One, which was accounted for as a purchase. The
computation of historical and unaudited pro forma weighted average number of
shares outstanding is consistent with the computation of weighted average
number of shares outstanding for historical and unaudited pro forma net
income per share described in Note 1 of Notes to the Company's Consolidated
Financial Statements.
(2) Adjusted on a pro forma basis to give effect to the acquisitions of Resource
One, Inc., Employee Services of America, Inc., The TPI Group, Ltd., Prostaff
Human Resources, Inc., NovaPro and the NovaCare Contract (see Note 2 of
Notes to the Company's Consolidated Financial Statements) as if they
occurred on July 1, 1996. NovaPro, formerly a business of the Parent, was
acquired from the Parent effective July 1, 1997. The pro forma statement of
operations does not purport to represent what the Company's actual results
of operations would have been if such acquisitions and the NovaCare Contract
occurred on July 1, 1996, or to project the Company's results of operations
for any future period. See the Consolidated Pro Forma Financial Statements
and the Notes thereto appearing elsewhere in this Prospectus. The
computation of unaudited pro forma weighted average numbers of shares
outstanding is consistent with the computation of unaudited pro forma
weighted average number of shares outstanding for unaudited pro forma net
income per share described in Note 1 of Notes to the Company's Consolidated
Financial Statements.
(3) Revenues include all amounts billed to clients for gross salaries and wages,
related employment taxes and health care and workers' compensation coverage
of worksite employees.
(4) Adjusted on a pro forma basis to include the assets and liabilities of
NovaPro as of June 30, 1997. See the Consolidated Pro Forma Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.
(5) Adjusted to give effect to the conversion of mandatorily redeemable Common
Stock into stockholders' equity and the Offering and the application of the
estimated net proceeds therefrom, as if each of the foregoing had occurred
as of June 30, 1997. See "Use of Proceeds" and the Consolidated Pro Forma
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
(6) The current portion of financing arrangements is included in current
liabilities.

19
<PAGE> 21

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The unaudited pro forma Combined Statement of Operations for the year ended
June 30, 1997 appearing on the following page is based on the historical
consolidated financial statements of NovaCare Employee Services, Inc. (the
"Company") for the period from October 1, 1996 (commencement of operations) to
June 30, 1997, adjusted to give effect to the acquisition of Resource One, Inc.
("Resource One"), the predecessor company, Employee Services of America, Inc.
("ESA"), The TPI Group, Ltd. ("TPI"), Prostaff Human Resources, Inc.
("Prostaff") and NovaPro. Resource One, ESA, TPI and Prostaff were acquired
prior to June 30, 1997 and are included in the historical results of operations
from their respective dates of acquisition. The historical financial information
is also adjusted to give effect to the full year impact of the contract between
the Company and the Parent (the "NovaCare Contract") (further described in Note
2 of Notes to the Company's Consolidated Financial Statements contained
elsewhere in this Prospectus). The Pro Forma Combined Statement of Operations
has been prepared assuming the above acquisitions, the NovaCare Contract and the
Offering occurred as of July 1, 1996. Adjustments related to the NovaPro
acquisition and the Offering are described in the notes thereto.

The financial information is based on certain assumptions and estimates
that the Company believes are reasonable in the circumstances and does not
purport to be indicative of the results which actually would have been attained
had the above transactions occurred as of the dates indicated, or to project the
Company's results of operations or financial position for any future period or
date. This information should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Prospectus.

20
<PAGE> 22

PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED

<TABLE>
<CAPTION>
HISTORICAL
RESULTS OF HISTORICAL
ACQUIRED RESULTS OF PRO FORMA
COMPANIES NOVAPRO FOR RESULTS FOR
HISTORICAL RESULTS FROM THE PERIOD THE PERIOD
FOR THE PERIOD JULY 1, 1996 FROM FROM
OCTOBER 1, 1996 TO THE JULY 1, 1996 JULY 1, 1996
(INCEPTION) TO DATE OF TO JUNE 30, PRO FORMA TO
JUNE 30, 1997 ACQUISITION(1) 1997(2) ADJUSTMENTS JUNE 30, 1997
------------------ ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Related party....................... $255,289 $ -- $ -- $ -- $255,289
Third parties....................... 138,904 149,885 7,624 -- 296,413
-------- --------- ------- ------- --------
Total revenues.................... 394,193 149,885 7,624 -- 551,702
Direct costs:
Related Party:
Salaries, wages and employment
taxes of worksite employees..... 234,182 -- -- -- 234,182
Health care and workers'
compensation, state unemployment
taxes and other................. 15,368 -- -- -- 15,368
Third Parties:
Salaries, wages and employment
taxes of worksite employees..... 123,056 134,921 -- -- 257,977
Health care and workers'
compensation, state unemployment
taxes and other................. 9,349 8,888 6,886 -- 25,123
-------- --------- ------- ------- --------
Gross profit......................... 12,238 6,076 738 -- 19,052
Selling, general and administrative
expenses............................ 8,247 7,827 827 1,212(4) 18,113
Provision for uncollectible
accounts............................ 26 273 35 -- 334
Amortization of excess cost of net
assets acquired..................... 1,034 -- -- 1,234(5) 2,268
-------- --------- ------- ------- --------
Income (loss) from operations........ 2,931 (2,024) (124) (2,446) (1,663)
Investment income.................... 52 20 -- -- 72
Interest expense..................... (56) (774) -- 740(6) (90)
Interest expense -- related party.... (693) -- -- (916)(7) (1,609)
-------- --------- ------- ------- --------
Income (loss) before income taxes.... 2,234 (2,778) (124) (2,622) (3,290)
Income taxes......................... 1,542 (376) -- (1,525)(9) (359)
-------- --------- ------- ------- --------
Net income (loss)................... $ 692 $ (2,402) $ (124) $(1,097) $ (2,931)
======== ========= ======= ======= ========
Net (loss) attributable to common
stock............................. $ (341)
========
Net (loss) per share................ $ (.02)
========
Unaudited pro forma net income
(loss) per share(11).............. $ .03 $ (.14)
======== ========
Unaudited pro forma weighted average
number of shares.................. 20,574 20,574
======== ========

NOVACARE PRO FORMA
CONTRACT COMBINED
FROM JULY RESULTS
1, 1996 TO INCLUDING THE OFFERING PRO FORMA
JANUARY 31, NOVACARE PRO FORMA AS
1997(3) CONTRACT ADJUSTMENTS ADJUSTED
----------- ------------- ----------- ---------
<S> <C<C> <C> <C> <C>
Revenues:
Related party....................... $ 326,395 $ 581,684 $ -- $581,684
Third parties....................... -- 296,413 -- 296,413
--------- --------- ------- --------
Total revenues.................... 326,395 878,097 -- 878,097
Direct costs:
Related Party:
Salaries, wages and employment
taxes of worksite employees..... 298,610 532,792 532,792
Health care and workers'
compensation, state unemployment
taxes and other................. 22,334 37,702 -- 37,702
Third Parties:
Salaries, wages and employment
taxes of worksite employees..... -- 257,977 -- 257,977
Health care and workers'
compensation, state unemployment
taxes and other................. -- 25,123 -- 25,123
--------- --------- ------- --------
Gross profit......................... 5,451 24,503 -- 24,503
Selling, general and administrative
expenses............................ 2,848 20,961 -- 20,961
Provision for uncollectible
accounts............................ -- 334 -- 334
Amortization of excess cost of net
assets acquired..................... -- 2,268 -- 2,268
--------- --------- ------- --------
Income (loss) from operations........ 2,603 940 -- 940
Investment income.................... -- 72 -- 72
Interest expense..................... -- (90) -- (90)
Interest expense -- related party.... -- (1,609) 1,300(8) (309)
--------- --------- ------- --------
Income (loss) before income taxes.... 2,603 (687) 1,300 613
Income taxes......................... 1,093 734 510(10) 1,244
--------- --------- ------- --------
Net income (loss)................... $ 1,510 $ (1,421) $ 790 $ (631)
========= ========= ======= ========
Net (loss) attributable to common
stock.............................

Net (loss) per share................

Unaudited pro forma net income
(loss) per share(11).............. $ (.07) $ (.03)
========= ========
Unaudited pro forma weighted average
number of shares.................. 20,574 25,074 (12)
========= ========
</TABLE>

21
<PAGE> 23

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO THE PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

(1) The Acquired Companies' adjustments represent the historical results of
operations of Resource One, ESA, TPI, and Prostaff (collectively, the
"Acquired Companies") from July 1, 1996 to their respective dates of
acquisition, as noted below. Each of the acquisitions has been accounted
for as a purchase. Accordingly, the results of operations of each of the
Acquired Companies are included in the historical results of operations of
the Company since the date of acquisition.

<TABLE>
<CAPTION>
FOR THE PERIOD FROM JULY 1, 1996 TO THE DATE OF ACQUISITION
------------------------------------------------------------------------
SELLING, GENERAL PROVISION FOR INCOME (LOSS)
DIRECT AND ADMINISTRATIVE UNCOLLECTIBLE BEFORE
COMPANY ACQUIRED AS OF REVENUES COSTS EXPENSES ACCOUNTS INCOME TAXES
- ------------------- ---------------- -------- -------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Resource One....... October 1, 1996 $ 9,068 $ 8,438 $ 587 $ -- $ 43
ESA................ February 1, 1997 87,046 83,131 3,816 -- 67
TPI................ February 1, 1997 51,206 49,772 3,278 273 (2,840)
Prostaff........... February 1, 1997 2,565 2,468 146 -- (48)
-------- -------
Total......... $149,885 $143,809 $7,827 $ 273 $(2,778)
======== =======
</TABLE>

The income tax effect of the Acquired Companies' adjustment is considered
in Note 9 below.

(2) Effective July 1, 1997, the Company acquired the assets and liabilities of
NovaPro in a purchase transaction, as described in Note 13 of Notes to the
Company's Consolidated Financial Statements. The adjustments represent the
historical results of operations of NovaPro from July 1, 1996 to June 30,
1997.

(3) In February 1997, the Parent and the Company entered into the NovaCare
Contract whereby the Parent's employees are co-employed by the Company for
a five-year term with automatic annual renewals. Under the NovaCare
Contract, the Company provides traditional PEO services such as payroll and
benefits administration, worksite safety evaluation, employment-related
risk management and benefits consultations. The Parent pays the Company a
fee for its services currently equal to the salary and federal payroll tax
costs plus 9.7% of gross earnings of covered employees, or approximately
117% of the gross earnings of the employees covered by the NovaCare
Contract. The Parent may not terminate the NovaCare Contract except in the
event of: (i) the breach of any of the Company's agreements, duties or
performance standards under the NovaCare Contract; (ii) the making of false
or misleading representations, warranties, or statements of material fact
in documents submitted by or on behalf of the Company to the Parent; or
(iii) the insolvency, bankruptcy or receivership of the Company.

The NovaCare Contract adjustment for the year ended June 30, 1997 reflects
the pro forma results of operations related to the NovaCare Contract from
July 1, 1996 to January 31, 1997. Results of operations from the NovaCare
Contract for the period from February 1, 1997 to June 30, 1997 are
included in the historical results.

(4) Includes adjustments representing net increases in selling, general and
administrative expenses in support of the combined businesses.

<TABLE>
<CAPTION>
EXPENSE CATEGORY EXPENSE AMOUNT
----------------------------------------------------------- --------------
<S> <C>
Salaries, wages and benefits............................... $ 736
Rental lease agreements.................................... 180
Other...................................................... 296
------
Selling, general and administrative expenses
adjustment.......................................... $1,212
======
</TABLE>

(5) Reflects additional amortization of the excess of the purchase price over
the fair value of net assets acquired. The additional amortization consists
of non-compete agreements, customer lists, assembled workforce and
goodwill, amortized on a straight-line basis over the estimated useful
lives of the assets which range from five to 40 years, as if the businesses
were acquired as of July 1, 1996.

22
<PAGE> 24

(6) Represents the reduction of expense assuming that late payment penalties
and interest due to the Internal Revenue Service for late payment of
federal withholding taxes incurred by a subsidiary would not have been
incurred given the Company's availability of financing from the Parent, as
described in Note 7 below. An additional $53 of interest expense has been
recorded to reflect the borrowing from the Parent for the timely payment of
the federal withholding taxes.

(7) Represents interest due to the Parent (See Note 2 of Notes to the Company's
Consolidated Financial Statements) for money borrowed by the Company to
finance the acquisition of the Acquired Companies. The Company entered into
a loan agreement where the Parent charges interest to the Company at the
EuroDollar rate plus 0.5% to 1.125%. The weighted average interest rate was
6.6%.

(8) Represents the reduction of interest expense resulting from the use of a
portion of the net proceeds to pay certain indebtedness to the Parent (see
Note 2 of Notes to the Company's Consolidated Financial Statements).

(9) Represents an adjustment to income taxes to reflect the state and federal
income tax liability which would have been provided on pro forma adjusted
income before income taxes for the period from July 1, 1996 to June 30,
1997. State taxes were computed on a legal entity basis dependent upon the
income subject to income tax for the same period at an effective rate of 6%
to 8%. Federal income tax (34% rate) was computed on consolidated income
before income taxes adjusting for the non-deductible portion of the
amortization of excess cost of net assets acquired.

(10) Represents an adjustment to state and federal income taxes which would have
been provided on the reduction of interest expense discussed in Note 8
above.

(11) As described in Note 1 of Notes to the Company's Consolidated Financial
Statements -- "Historical, Unaudited Pro Forma and Unaudited Supplemental
Pro Forma Net Income Per Share", unaudited pro forma net income per share
has been computed by dividing net income (loss) by the number of shares of
common stock and common stock equivalents outstanding as of September 5,
1997.

(12) The Company intends to use a portion of the net proceeds from the Offering
to retire certain indebtedness (see Note 13 of Notes to the Company's
Consolidated Financial Statements). Unaudited pro forma net income per
share as adjusted is computed by dividing net income, adjusted for the
elimination of applicable interest expense, net of the related income tax
effect, by total outstanding shares as of September 5, 1997 plus the shares
to be issued in the Offering to retire outstanding debt.

23
<PAGE> 25

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

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. Historical results are
not necessarily indicative of trends in operating results for any future period.

OVERVIEW

NovaCare Employee Services, Inc. (the "Company") is one of the largest
(measured by revenues and number of worksite employees) professional employer
organizations ("PEO"s) in the United States. The Company commenced operations on
October 1, 1996, concurrent with the acquisition of Resource One, Inc.
("Resource One"), a PEO. Results for the quarter ended December 31, 1996
primarily represent the results of operations of Resource One. In February 1997,
the Company acquired three additional PEOs -- Employee Services of America, Inc.
("ESA"); The TPI Group, Ltd. ("TPI"); and Prostaff Human Resources, Inc.
("Prostaff") and signed an agreement with NovaCare, Inc. (the "Parent") to
provide traditional PEO services to principally all of the Parent's worksite
employees (the "NovaCare Contract"). As of June 30, 1997, the Company served
1,742 client organizations with 35,028 employees at over 3,000 worksites in 45
states, principally in 10 different industries. On July 1, 1997, the Company
acquired NovaPro, a rehabilitation temporary staffing business, from the Parent.
The Company is an employee services company which provides small and
medium-sized businesses with comprehensive, fully integrated outsourcing
solutions to human resource issues, including payroll management, risk
management, benefits administration, unemployment services and human resource
consulting services.

The Company was established by the Parent primarily to leverage the
Parent's core competencies and investments in human resource management,
information systems, outsourcing, relationship selling, workers' compensation,
risk management and management of a dispersed workforce. The Company believes
that these competencies are highly correlated with success in the PEO business.
The Parent is a leading provider of medical rehabilitation services. Its
services, delivered in over 2,000 facilities nationwide, include worksite
evaluation, injury prevention and work injury rehabilitation. The Company
believes that the abilities to deliver employment-related services to small,
widely dispersed groups of employees and to manage effectively workers'
compensation risk are central to a PEO.

Revenues

The Company enters into a PEO services agreement with its clients,
establishing a three-party relationship among the Company, the client and the
worksite employees. The agreement generally provides for an initial one-year
term, subject to cancellation without cause on 30 days' notice by either the
Company or the client. Although PEO services agreements have been canceled, no
such cancellation singly, or in the aggregate, has had a material adverse effect
on the Company's financial position or results of operations. The PEO services
agreement also sets forth the service fee payable to the Company. Such service
fee, which constitutes the Company's revenues, is based on the gross earnings of
each employee plus the estimated costs of employment-related taxes, providing
human resource services, performing administrative functions, providing
insurance coverages and benefit plans and performing other services offered by
the Company. This structure yields a comprehensive service fee percentage to be
applied to each employee's gross pay. These fees are invoiced along with each
periodic payroll.

Pursuant to the PEO services agreement, the Company has the obligation to
provide the benefits and services enumerated in that agreement as well as to pay
the direct costs associated with such services, regardless of whether the client
company makes timely payment to the Company of the associated service fee. The
most significant direct costs associated with each PEO services agreement are
the worksite employees' salaries and wages, which generally are disbursed
promptly after the applicable client service fee is received. For a description
of additional costs of services, see "Direct Costs" below.

24
<PAGE> 26

The Company's revenues are dependent on the number of clients enrolled, the
resulting number of employees paid each period, the gross earnings of such
employees and the number of employees enrolled in benefit plans.

Direct Costs

The Company's primary direct costs are: (i) the salaries and wages of
worksite employees (gross earnings), the employer's portion of Social Security,
Medicare premiums and federal unemployment taxes; (ii) employee benefit plan
costs; (iii) workers' compensation costs; and (iv) state unemployment taxes.
Salaries and wages of worksite employees are affected by the inflationary
effects on wage levels and by differences in the local economies of the
Company's markets. Changes in gross earnings have a proportionate impact on the
Company's revenues. The Company can significantly impact its gross profit margin
by actively managing the direct costs described in clauses (ii), (iii) and (iv)
(hereinafter referred to as "controllable direct costs").

Employment-related taxes consist of the employer's portion of payroll taxes
required under FICA, which includes Social Security and Medicare, and federal
and state unemployment taxes. The federal tax rates are defined by the
appropriate federal regulations. State unemployment rates are subject to claims
histories and vary from state to state.

Employee benefit plan costs consist of medical insurance premiums, payments
of and reserves for claims subject to deductibles and the costs of dental care,
vision care, disability, employee assistance and other similar benefit plans.
The Company's health care benefit plans consist of self-insured plans and
guaranteed cost programs. Liabilities for health care self-insured claims are
recorded based on the Company's evaluation of the nature and severity of
individual claims and past claims experience.

Workers' compensation costs include premiums, administrative costs and
claims-related expenses under the Company's workers' compensation program.
Currently, the coverage is provided under a workers' compensation deductible
program with an aggregate stop loss that limits the liability to the Company at
a capped percentage of the standard premium or a fixed aggregate deductible,
whichever is higher. Through June 30, 1997, certain of the Company's worksite
employees were covered by large deductible workers' compensation policies and
certain other worksite employees were covered by guaranteed cost or low
deductible workers' compensation insurance policies. Costs related to these
prior plans include estimates of ultimate claims amounts that are recorded as
accrued workers' compensation claims. Changes in these estimates are reflected
as a component of direct costs in the period of the change.

State unemployment taxes are based on rates which vary from state to state.
Generally they are subject to certain minimum rates, but the aggregate rates
payable by an employer are affected by the employer's claims history. The
Company controls unemployment claims by aggressively contesting unfounded claims
and, when possible, quickly returning employees to work by reassigning them to
other worksites.

Selling, General and Administrative Expenses

The Company's principal selling, general and administrative expenses are
salaries, wages, benefits and other personnel expenses of administrative
employees and sales associates, general and administrative expenses and sales
and marketing expenses.

Income Taxes

The Company's provision for income taxes typically differs from the U.S.
statutory rate of 35% due primarily to state income taxes and non-deductible
goodwill amortization.

Operating Income

The Company's operating income is determined in part by its ability to
manage controllable direct costs and its ability to incorporate such costs into
the service fees charged to clients. The Company attempts to reflect changes in
the controllable direct costs through adjustments in service fees charged to
clients, subject to contractual arrangements.

25
<PAGE> 27

RESULTS OF OPERATIONS

The following table sets forth certain income statement and statistical
data for each of the quarters and in total for the period from the inception of
the Company, October 1, 1996, to June 30, 1997, the Company's fiscal year end.

<TABLE>
<CAPTION>
FOR THE PERIOD FROM
(UNAUDITED, IN THOUSANDS, EXCEPT FOR STATISTICAL DATA):
----------------------------------------------------------
OCTOBER 1,
OCTOBER 1, JANUARY 1, APRIL 1, 1996 TO
TO DECEMBER TO MARCH TO JUNE JUNE 30,
31, 1996 31, 1997 30, 1997 1997
------------ ----------- -------- ----------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues................................................ $ 10,894 $ 151,076 $232,223 $394,193
Direct costs:
Salaries, wages and employment taxes of worksite
employees........................................... 9,082 136,731 211,425 357,238
Health care, workers' compensation, state unemployment
taxes and other..................................... 970 9,617 14,130 24,717
------- -------- -------- --------
Gross profit...................................... 842 4,728 6,668 12,238
Selling, general and administrative expenses............ 661 3,215 4,397 8,273
Amortization of excess cost of net assets acquired...... 27 440 567 1,034
------- -------- -------- --------
Income from operations............................ 154 1,073 1,704 2,931
Interest expense, net................................... (30) (262) (405) (697)
------- -------- -------- --------
Income before income taxes........................ 124 811 1,299 2,234
Income taxes............................................ 63 591 888 1,542
------- -------- -------- --------
Net income........................................ $ 61 $ 220 $ 411 $ 692
======= ======== ======== ========
STATISTICAL DATA:
EBITDA (in thousands)(1)................................ $ 202 $ 1,608 $ 2,407 $ 4,217
Number of clients at period end......................... 128 1,531 1,742 1,742
Worksite employees at period end:
Third parties......................................... 1,958 16,917 18,634 18,634
Related party......................................... -- 15,728 16,394 16,394
------- -------- -------- --------
Total............................................. 1,958 32,645 35,028 35,028
======= ======== ======== ========
Weighted average worksite employees paid during the
period:
Third parties......................................... 1,757 11,860 16,656 11,764
Related party......................................... -- 15,546 16,061 15,879
Weighted average.................................. 1,757 22,285 32,717 18,582
Quarterly and year-to-date gross profit per weighted
average worksite employee (in whole $'s):
Third parties......................................... $ 479 $ 210 $ 190 $ 665
Related party......................................... -- 216 218 650
Weighted average.................................. $ 479 $ 212 $ 204 $ 659
</TABLE>

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

26
<PAGE> 28

The following table sets forth, as a percentage of revenues, certain
statements of operations data for each of the quarters for the period from the
inception of the Company, October 1, 1996, to June 30, 1997, the Company's
fiscal year end.

<TABLE>
<CAPTION>
FOR THE PERIOD FROM:
(UNAUDITED, % OF REVENUES)
-------------------------------------------------
OCTOBER 1, JANUARY 1, APRIL 1, OCTOBER 1,
TO TO TO 1996 TO
DECEMBER 31, MARCH 31, JUNE 30, JUNE 30,
1996 1997 1997 1997
------------ ---------- -------- ----------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues............................................................ 100.0% 100.0% 100.0% 100.0%
Direct costs:
Salaries, wages and employment taxes of worksite employees........ 83.4 90.5 91.0 90.6
Health care, workers' compensation, state unemployment taxes and
other........................................................... 8.9 6.4 6.1 6.3
----- ----- ----- -----
Gross profit.................................................. 7.7 3.1 2.9 3.1
Selling, general and administrative expenses........................ 6.1 2.1 1.9 2.1
Amortization of excess cost of net assets acquired.................. 0.2 0.3 0.2 0.3
----- ----- ----- -----
Income from operations........................................ 1.4 0.7 0.8 0.7
Interest expense, net............................................... (0.3) (0.2) (0.2) (0.2)
----- ----- ----- -----
Income before income taxes.................................... 1.1 0.5 0.6 0.5
Income taxes........................................................ 0.6 0.4 0.4 0.4
----- ----- ----- -----
Net income.................................................... 0.5% 0.1% 0.2% 0.1%
===== ===== ===== =====
</TABLE>

HISTORICAL RESULTS OF OPERATIONS FOR THE PERIOD FROM OCTOBER 1, 1996 TO JUNE 30,
1997

Revenues increased from quarter to quarter, as reflected in the table
above, primarily from an increase in the number of clients and worksite
employees. The number of clients increased from 128 to 1,531 to 1,742 over the
respective quarterly periods and the weighted average number of worksite
employees increased from 1,757 to 22,285 to 32,717 over the same periods,
respectively. These increases were due primarily to: (i) the NovaCare Contract,
with approximately 14,400 employees at the contract date; (ii) the acquisition
of ESA, with 8,037 worksite employees at the acquisition date; (iii) the
acquisition of TPI, with 6,029 worksite employees at the acquisition date; (iv)
the acquisition of Prostaff, with 346 worksite employees at the acquisition
date; and (v) 11.3% internal growth in the number of worksite employees since
the acquisition or contract dates (27% annualized growth rate).

Salaries, wages and employment taxes of worksite employees increased from
$9,082 for the quarter ended December 31, 1996 to $136,731 for the quarter ended
March 31, 1997 to $211,425 for the quarter ended June 30, 1997 as a result of
businesses acquired in February 1997 and the NovaCare Contract. As a percentage
of revenues, salaries, wages and employment taxes of worksite employees
increased from 83.4% to 90.5% to 91.0% for the same periods, respectively. The
primary reason for the increase as a percentage of revenues from the quarter
ended December 31, 1996 to the quarter ended March 31, 1997 is the impact of the
acquired businesses and the NovaCare Contract, both of which have a higher cost
to revenue ratio than that of the predecessor company.

Health care, workers' compensation, state unemployment taxes and other were
$24,717 for the period from inception to June 30, 1997, increasing from $970 for
the quarter ended December 31, 1996 to $9,617 for the quarter ended March 31,
1997 to $14,130 for the quarter ended June 30, 1997 as a result of the acquired
businesses and the NovaCare Contract. As a percentage of revenues, health care,
workers' compensation, state unemployment taxes and other decreased from 8.9% to
6.4% to 6.1% over the respective quarterly periods. The primary reasons for the
decrease as a percentage of revenues are the cost structure of the acquired
companies in successive quarters and the NovaCare Contract.

Gross profit as a percentage of revenues declined from 7.7% during the
quarter ended December 31, 1996 to 3.1% for the quarter ended March 31, 1997 to
2.9% for the quarter ended June 30, 1997. The primary reasons for the decrease
in the gross profit percentage are the increased salaries, wages and employment
taxes

27
<PAGE> 29

per worksite employee, which increased revenues but not gross profit dollars,
and the relative impact of the NovaCare Contract, which has a lower gross profit
percentage (2.2%) due to a more highly compensated employee population. In
addition, state unemployment tax gross profit is typically higher in the first
quarter of a calendar year than in other quarters.

Selling, general and administrative expenses increased from $661 for the
quarter ended December 31, 1996 to $4,397 for the quarter ended June 30, 1997 as
a result of businesses acquired and the NovaCare Contract. As a percentage of
revenues, selling, general and administrative expenses were 6.1%, 2.1% and 1.9%
for the three quarters of fiscal 1997 since commencement of operations. The
decrease from the quarter ended December 31, 1996 to the quarter ended March 31,
1997 is primarily a result of the acquisitions and the NovaCare Contract, all of
which have lower selling, general and administrative cost structures.

Amortization of excess cost of net assets acquired increased from $27 for
the quarter ended December 31, 1996 to $440 for the quarter ended March 31, 1997
to $567 for the quarter ended June 30, 1997 as a result of the acquired
businesses during the period.

Interest expense, net was $697 for the period from October 1, 1996 to June
30, 1997 resulting primarily from interest due to the Parent for amounts loaned
to the Company to finance the acquisition of the four businesses acquired during
the same period. Interest is charged to the Company at the Parent's borrowing
rate (EuroDollar rate plus a range of 0.5% to 1.125%). The weighted average rate
for the period from October 1, 1996 to June 30, 1997 was 6.6%.

Income taxes as a percentage of pretax income were 69.0% for the period
from October 1, 1996 to June 30, 1997. The principal reasons for the effective
rate being higher than the statutory federal rate were nondeductible
amortization of excess cost of net assets acquired and state income taxes.

PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 COMPARED WITH
THE YEAR ENDED JUNE 30, 1996

The following pro forma consolidated results of operations give effect to
each of the acquisitions as well as the NovaCare Contract as if they occurred on
July 1, 1995 or the inception of the business acquired if the inception had been
subsequent to July 1, 1995. In addition, it assumes that the sale of NovaPro
(see Note 13 of Notes to the Company's Consolidated Financial Statements
contained elsewhere in this Prospectus) from the Parent to the Company occurred
as of the inception of NovaPro on July 1, 1996. The following discussion should
be read in conjunction with, and is qualified in its entirety by, the Company's
Combined Pro Forma Financial Statements and the Notes thereto appearing
elsewhere herein.

28
<PAGE> 30

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
(UNAUDITED)
-----------------------------------------
DOLLARS
(IN THOUSANDS, EXCEPT
FOR STATISTICAL DATA) % OF REVENUES
--------------------- ---------------
1996 1997 1996 1997
-------- -------- ----- -----
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues...................................................... $753,311 $878,097 100.0% 100.0%
Direct costs:
Salaries, wages and employment taxes of worksite
employees................................................. 683,772 790,769 90.8 90.0
Health care, workers' compensation, state unemployment taxes
and other................................................. 54,446 62,825 7.2 7.2
-------- -------- ----- -----
Gross profit........................................... 15,093 24,503 2.0 2.8
Selling, general and administrative expenses.................. 16,727 21,295 2.2 2.4
Amortization of excess cost of net assets acquired............ 2,161 2,268 0.3 0.3
-------- -------- ----- -----
(Loss) income from operations.......................... (3,795) 940 (0.5) 0.1
Interest expense, net......................................... (3,304) (1,627) (0.5) (0.2)
-------- -------- ----- -----
(Loss) before income taxes............................. (7,099) (687) (1.0) (0.1)
Income taxes.................................................. 97 734 0.0 0.1
-------- -------- ----- -----
Net (loss)............................................. $ (7,196) $ (1,421) (1.0%) (0.2%)
======== ======== ===== =====
STATISTICAL DATA:
EBITDA (in thousands)......................................... $ (1,087) $ 3,927
Number of clients at period end............................... 1,395 1,742
Worksite employees at period end:
Third parties............................................... 15,589 19,956
Related party............................................... 13,322 15,072
-------- --------
Total.................................................. 28,911 35,028
======== ========
Weighted average worksite employees paid during the period:
Third parties............................................... 13,949 18,123
Related party............................................... 12,429 14,428
Weighted average....................................... 26,611 32,551
Gross profit per weighted average worksite employee (in whole
$'s):
Third parties............................................... $ 704 $ 731
Related party............................................... 424 780
Weighted average....................................... $ 567 $ 753
</TABLE>

Revenues, on a pro forma basis, were $753,311 for the year ended June 30,
1996 compared with $878,097 for the year ended June 30, 1997, representing an
increase of $124,786, or 16.6%. The increase was due primarily to an increased
number of PEO clients and worksite employees. Between June 30, 1996 and June 30,
1997, the number of clients increased 24.9% from 1,395 to 1,742. The average
number of worksite employees increased 22.3% over the same period from 26,611 to
32,551.

Salaries, wages and employment taxes of worksite employees increased 15.6%
from $683,772 for fiscal 1996 to $790,769 for fiscal 1997. As a percentage of
revenues, salaries, wages and employment taxes of worksite employees decreased
from 90.8% for the fiscal year ended June 30, 1996 to 90.0% for the fiscal year
ended June 30, 1997.

Health care, workers' compensation, state unemployment taxes and other
increased from $54,446 for the fiscal year ended June 30, 1996 to $62,825 for
the fiscal year ended June 30, 1997. As a percentage of revenues, health care,
workers' compensation, state unemployment taxes and other remained constant at
7.2% for each of the fiscal years ended June 30, 1996 and 1997.

Gross profit as a percentage of revenues increased from 2.0% to 2.8% for
the fiscal years ended June 30, 1996 and 1997, respectively. Without the
NovaCare Contract, gross profit as a percentage of revenues would have been 4.3%
and 4.5% for the same periods, respectively.

Selling, general and administrative expenses increased 27.3% from $16,727
for the year ended June 30, 1996 to $21,295 for the year ended June 30, 1997 due
to increased administrative staff in support of the Company's growth in worksite
employees and number of clients. Selling, general and administrative expenses as
a percentage of revenues were 2.4% and 2.2% in fiscal 1997 and 1996,
respectively.

Amortization of excess cost of net assets acquired remained approximately
the same for the fiscal years ended June 30, 1996 and June 30, 1997.

29
<PAGE> 31

Interest expense, net decreased 50.8% from $3,304 for fiscal 1996 compared
with $1,627 for fiscal 1997. This decrease was primarily a result of decreased
outstanding indebtedness from fiscal 1996 compared with fiscal 1997 and a
reduction in the weighted average interest rate for the same periods,
respectively.

Income taxes were computed on a legal entity basis using the income subject
to income tax, adjusting for the non-deductible portion of the amortization of
excess costs of net assets acquired for both state and federal income taxes.

PRO FORMA QUARTERLY FINANCIAL RESULTS -- FISCAL 1997

The following table presents certain unaudited pro forma results of
operations data for the interim quarterly periods of the Company since
inception. The Company believes that all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the results of operations in
accordance with generally accepted accounting principles, have been made. The
results of operations for any interim period are not necessarily indicative of
the operating results for a full year or any future period.

<TABLE>
<CAPTION>
FOR THE PERIOD FROM:
(UNAUDITED, IN THOUSANDS, EXCEPT FOR STATISTICAL DATA)
-------------------------------------------------------------
OCTOBER 1,
JULY 1, TO TO
SEPTEMBER 30, DECEMBER 31, JANUARY 1, TO APRIL 1, TO
1996 1996 MARCH 31, 1997 JUNE 30, 1997
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues........................................... $ 202,285 $219,367 $223,333 $ 233,112
Direct costs:
Salaries, wages and employment taxes of worksite
employees...................................... 183,678 199,071 200,951 207,069
Health care, workers' compensation, state
unemployment taxes and other................... 13,813 14,875 15,507 18,630
-------- -------- -------- --------
Gross profit................................ 4,794 5,421 6,875 7,413
Selling, general and administrative expenses....... 4,956 6,088 5,184 5,067
Amortization of excess cost of net assets
acquired......................................... 529 556 616 567
-------- -------- -------- --------
(Loss) income from operations............... (691) (1,223) 1,075 1,779
Interest expense, net.............................. (410) (403) (395) (419)
-------- -------- -------- --------
(Loss) income before income taxes........... (1,101) (1,626) 680 1,360
Income taxes....................................... 42 38 94 560
-------- -------- -------- --------
Net (loss) income........................... $ (1,143) $ (1,664) $ 586 $ 800
======== ======== ======== ========
STATISTICAL DATA:
EBITDA (in thousands).............................. $ 53 $ (418) $ 1,810 $ 2,482
Number of clients at period end.................... 1,437 1,499 1,531 1,742
Worksite employees at period end:
Third parties.................................... 17,080 17,750 18,088 19,956
Related party.................................... 13,340 14,049 14,557 15,072
-------- -------- -------- --------
Total....................................... 30,420 31,799 32,645 35,028
======== ======== ======== ========
Weighted average worksite employees paid during the
period:
Third parties.................................... 16,685 17,415 17,919 19,022
Related party.................................... 13,562 13,695 14,303 14,815
Weighted average............................ 30,247 31,110 32,222 33,837
Quarterly gross profit per weighted average
worksite employee (in whole $'s):
Third parties.................................... $ 159 $ 164 $ 212 $ 208
Related party.................................... 158 187 216 234
Weighted average............................ $ 159 $ 174 $ 213 $ 219
</TABLE>

30
<PAGE> 32

LIQUIDITY AND CAPITAL RESOURCES

The Company periodically evaluates its liquidity requirements, capital
needs and availability of capital resources in view of, among other things,
expansion plans, accrued workers' compensation insurance claims liabilities,
debt service requirements and other operating cash needs. As a result of this
process, the Company has sought and may seek to raise additional capital or take
other steps to increase or manage its liquidity and capital resources.
Historically, these funds have been raised from the Parent. The Company believes
that the proceeds from the Offering and cash flow from operations will be
adequate to meet its liquidity requirements through at least fiscal 1998. As an
additional liquidity source, the Company is presently negotiating a revolving
credit facility with a syndicate of banks. The Company will rely on these
sources, as well as other public and private debt and equity financing, to meet
its long-term liquidity needs.

The Company had $1.8 million in cash and cash equivalents as of June 30,
1997. As of the same date, the Company had negative working capital of $48.8
million, primarily as a result of $28.4 million due to the Parent for amounts
borrowed under the line of credit due at the earlier of an initial public
offering or November 1999 (See Note 2 of Notes to the Company's Consolidated
Financial Statements) and $18.9 million deferred purchase price obligations
incurred in connection with the Company's acquisitions, of which $17.5 million
is due upon the earlier of an initial public offering or December 31, 1997. The
Company's primary short-term liquidity requirements relate to the payment of
accrued payroll and payroll taxes of its internal and worksite employees,
accounts payable and the payment of accrued workers' compensation expense and
health benefit plan premiums.

The Company's cash flows used in operating activities for the period from
October 1, 1996 (inception) to June 30, 1997 were $0.1 million resulting
primarily from: (i) a $4.1 million increase in the accrual for workers'
compensation and health claims; (ii) a $1.3 million depreciation and
amortization non-cash charge; and (iii) a $1.7 million increase in accrued
interest-related party and income taxes payable, offset by a $7.0 million net
cash use for increases in accounts receivable and accrued salaries, wages and
payroll taxes. Accounts receivable and accrued salaries, wages and payroll taxes
are subject to fluctuations depending on the proximity of the financial
reporting cycle to that of the payroll cycle.

Cash expended for investing activities during the same period was $25.0
million, primarily resulting from payments for businesses acquired during the
period. The Company also expended $1.1 million to repurchase shares of the
Company's common stock. These investing activities were financed primarily
through a loan from the Parent (see Note 2 of Notes to the Company's
Consolidated Financial Statements). Although the Company currently has no
significant capital commitments, the Company anticipates investing significant
cash to acquire PEOs and other employee services businesses in strategic markets
during fiscal 1998.

Immediately subsequent to the consummation of the Offering, the Company
intends to enter into a $25.0 million three-year revolving credit agreement with
a group of financial institutions led by PNC Bank, National Association. The
credit agreement, which has been fully negotiated, will provide for interest at
a variable rate, depending on certain financial ratios, equal to (a) the
EuroDollar rate plus a range of 1.375% to 2.50% or (b) the lead bank's prime
rate plus a range of .125% to 1.25%. Loans made under the credit agreement will
be secured by a pledge of all of (i) the Company's interest in the common stock
of its subsidiaries, (ii) the assets of the Company and its subsidiaries and
(iii) the Parent's interest in the Common Stock. The closing with respect to the
credit agreement will be subject to certain conditions, including (i) the
ownership by the Parent following the Offering of at least 65% of all of the
issued and outstanding equity interests of the Company and (ii) the repayment by
the Company of all amounts due to the Parent under the existing line of credit
(which amount is $28.4 million as of the date of this Prospectus). In addition,
(x) the closing by financial institutions which have committed to lend $15
million of the facility is contingent on the receipt by the Company of net
proceeds of at least $40 million in the Offering and (y) the closing by
financial institutions which have committed to lend the remaining $10 million of
the facility is contingent on the receipt by the Company of net proceeds of at
least $45 million in the Offering. There can be no assurance that the conditions
precedent to the credit agreement will be satisfied.

31
<PAGE> 33

INFLATION

A significant portion of the Company's operating expenses and revenues is
subject to inflationary increases, particularly worksite employees' salary
increases. The Company believes the effects of inflation have not had a
significant impact on its results of operations or its financial condition.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125") as amended
by the December 1996 issuance of Statement of Financial Accounting Standards No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125"
("SFAS 127"). SFAS 125, as amended, provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. The Company does not believe the adoption of SFAS 125, as amended,
will have a material effect on the Company's financial position or results of
operations.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
which the Company is required to adopt no later than the second quarter of
fiscal year 1998. SFAS 128 establishes accounting standards for computing and
presenting earnings per share by replacing the presentations of weighted average
shares outstanding, inclusive of common stock equivalents with a dual
presentation of basic earnings per share which excludes dilution ("earnings per
share") and diluted earnings per share ("earnings per share -- assuming
dilution") which includes the dilutive effect of all potentially exercisable or
convertible stock. SFAS 128 requires restatement once adopted of all prior
period earnings per share data.

RECENT DEVELOPMENTS

Set forth below are summary operating data of the Company pertaining to the
quarters ended June 30, 1997 and September 30, 1997. The data for the quarter
ended September 30, 1997 are preliminary and are not necessarily indicative of
what the financial results will be for the fiscal year ending June 30, 1998.

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------
JUNE 30, 1997 SEPTEMBER 30, 1997
------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues............................................... $ 232,223 $266,757
Gross profit........................................... 6,668 8,328
Income from operations................................. 1,704 2,126
Net income............................................. 411 937
Historical net income (loss) per share(1).............. $ (.01) $ --
Pro forma net income per share(1)...................... .02 .05
</TABLE>

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

(1) The computation is consistent with the computation described in Note 1 of
Notes to the Company's Consolidated Financial Statements.

Net revenues for the quarter ended September 30, 1997 of approximately $267
million represented a 15 percent increase from approximately $232 million for
the previous three months ended June 30, 1997. The increase was primarily due to
an increase in the number of worksite employees, an increase in revenue per
worksite employee and the acquisition of NovaPro, a temporary staffing business,
from the Parent, effective July 1, 1997 (see Note 13 of Notes to the Company's
Consolidated Financial Statements). Gross profit for the first quarter of fiscal
1998 was approximately $8.3 million compared with approximately $6.7 million for
the previous three months. The gross profit margin for the first quarter was
approximately three percent of total net revenues, unchanged from the three
months ended June 30, 1997.

At September 30, 1997, the Company had 1,768 clients with approximately
38,000 worksite employees under contract located across 45 states.

32
<PAGE> 34

BUSINESS

GENERAL

The Company is one of the largest (measured by revenues and number of
worksite employees) PEOs in the United States. The Company is an employee
services company which provides small to medium-sized businesses with
comprehensive, fully integrated outsourcing solutions to human resource issues,
including payroll management, workers' compensation risk management, benefits
administration, unemployment services and human resource consulting services.
The Company believes its services enable small and medium-sized businesses to
cost-effectively manage and enhance the employment relationship by: (i)
controlling the risks and costs associated with workers' compensation, workplace
safety and employee-related litigation; (ii) providing employees with high
quality health care coverage and related benefits; (iii) managing the
increasingly complex legal and regulatory environment affecting employment; and
(iv) achieving scale advantages typically available to larger organizations. As
of June 30, 1997, the Company served 1,742 clients with 35,028 employees at over
3,000 worksites in 45 states, primarily in 10 different industries.

The Company was established by its Parent in September 1996 and began
operation in October 1996 with the acquisition of Resource One, a PEO. In
February 1997, the Company acquired three additional PEOs -- ESA, TPI and
Prostaff. On July 1, 1997, the Company acquired NovaPro, the rehabilitation
temporary staffing business of its Parent.

The Company is obligated to make certain additional contingent and/or
non-contingent payments in connection with each PEO acquisition. Total
non-contingent and contingent obligations in connection with acquired companies,
if all contingent obligation targets are met but not exceeded, would amount to
approximately $22.2 million in cash and 466,063 shares of Common Stock. See
"Risk Factors -- Obligations in Connection with Acquisitions." The Company also
entered into employment agreements with certain of the sellers of acquired
businesses. See "Management -- Executive Compensation -- Employment and Other
Arrangements."

PROFESSIONAL EMPLOYER ORGANIZATION INDUSTRY

According to NAPEO, the PEO industry has approximately $18 billion in
annual revenues with an historical growth rate over the last five years of
approximately 30% per year. The Company has had a relatively short operating
history and has only managed the acquired companies for a short period of time.
Accordingly, the Company does not have a meaningful historical growth rate and
there can be no assurance that the Company's growth rate will equal or exceed
that of the PEO industry. According to the U.S. Small Business Administration,
there are nearly six million businesses in the United States with under 100
employees, employing over 52 million persons and with $1.1 trillion in aggregate
annual payroll. NAPEO estimates that the PEO industry has less than three
million worksite employees. The Company believes, therefore, approximately 49
million of these employees are currently unserved by the PEO industry.

The PEO industry is highly fragmented. NAPEO data suggest that there are at
least 2,400 PEOs currently in operation and that the ten largest PEOs account
for less than 10% of existing revenues in the industry. The Company believes
that significant consolidation opportunities exist within the PEO industry due
to increasing industry regulatory complexity and capital requirements associated
with developing larger service delivery infrastructures, more diversified
services and more sophisticated management information systems.

Demand for Services. The PEO industry evolved in the early 1980's in
response to increasing employment and benefit costs, and the complexities of the
legal and regulatory environment for the rapidly expanding small to medium-sized
business sector. The Company believes demand for PEO services will continue to
increase as (i) employment-related governmental regulation grows more complex,
(ii) growth continues within the small to medium-sized business community, (iii)
the need to provide health and retirement benefits in a cost-effective
convenient manner increases and (iv) the business and regulatory communities
accept and recognize the PEO industry. While various service providers, such as
payroll processing firms, benefits and safety consultants and temporary services
firms, are available to assist these

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<PAGE> 35

businesses with specific tasks, such organizations do not typically provide the
more comprehensive range of services generally offered by PEOs. PEOs enter into
agreements with numerous small to medium-sized employers, and can, therefore,
achieve economies of scale as professional employers and offer benefits packages
and human resource services at a level typically available only to larger
corporations which have greater resources to devote to human resources
management. The Company believes PEO services will continue to experience
growing demand because of the growing trend among small to medium-sized
employers to: (i) outsource non-core competencies; (ii) seek to reduce employee
benefit costs; (iii) avoid employee-related risks and regulatory complexities;
and (iv) attract better employees and retain them through improved benefit
plans.

Effectiveness of Services. According to estimates by the U.S. Small
Business Administration, the management of an average small to medium-sized
business devotes from 7% to 25% of its time to employee-related matters, leaving
management with less time to focus on core competencies. A National Federation
of Independent Business survey of small businesses in 1996 showed that six of
the top 13 major problem areas for small business are issues that can be
addressed by PEOs. These include (with their rank in importance according to the
survey) cost of health insurance (1), workers' compensation costs (3), federal
paperwork (7), frequent changes in federal tax laws (9), finding qualified
employees (11) and state/local paperwork (13). Work-related injuries cost
employers over $53 billion in medical expenses and employee productivity each
year according to industry estimates. Employees are typically attracted to small
and medium-sized businesses that provide employees with human resources services
characteristic of large employers. An industry analyst's study indicated that
40% of the clients that outsourced services with a PEO were able to upgrade
their employee benefits offerings and one-fourth of those clients were able to
offer health care and other benefits for the first time.

SERVICES

The Company believes that other PEOs typically take a transaction
processing approach to their services and do not emphasize other benefits such
as the improved workforce performance that can be associated with satisfied
employees. The Company believes that small to medium-sized businesses will
increase their emphasis on cost-effectiveness, service excellence and the
breadth of services provided in selecting PEO providers.

The Company contractually assumes certain administrative and financial
employer responsibilities with respect to worksite employees in a
"co-employment" relationship. The Company believes its clients benefit from the
Company's services by: (i) improving profitability through lowering or
controlling costs associated with workers' compensation, health insurance, other
benefit coverage and regulatory compliance; (ii) improving productivity through
reducing the time and effort expended by business owners and executives to deal
with the complexities of employment management, enabling them to focus on their
business core competencies and growth; and (iii) improving employee satisfaction
and performance. The Company helps employers improve job satisfaction and
performance of their employees by: (i) providing improved health care and
related benefits; (ii) delivering training programs; and (iii) delivering
dependable payroll and benefits administration.

As co-employer of worksite employees, the Company assumes responsibility
for and manages the risks associated with: (i) worksite employee payroll; (ii)
employee-related benefits, such as workers' compensation and health care
insurance coverage; and (iii) compliance with certain employment-related
governmental regulations that can be effectively managed away from the client's
business. See "Risk Factors." The client retains responsibility for supervision
and direction of the worksite employees' services in its business and generally
remains responsible for compliance with other employment-related governmental
regulations that are more closely related to worksite employee supervision. The
service fee charged by the Company to its clients covers the cost of certain
employment-related taxes, workers' compensation insurance coverage,
administrative and field services, wages of worksite employees and the client's
portion of health and retirement benefit plan costs. The Company also provides
other value-added services such as rehabilitation temporary staffing, training
and human resource consulting.

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<PAGE> 36

STRATEGY

The Company's objective is to be the brand, service and performance leader
in the PEO industry by creating a more profitable, more productive and more
satisfying relationship between employers and employees and enabling its clients
to focus on their business core competencies and growth. Supporting this purpose
are the Company's beliefs, respect for the individual, service to the client,
pursuit of excellence and commitment to personal integrity. For this reason, the
Company seeks to create a values-based culture. Relying on these values, the
Company will implement a strategy focusing on growth and operational excellence.

It is the Company's belief that a strong commitment to these values and a
philosophy oriented toward "caring for and about people," will enable the
Company to provide a level of service that will build the businesses of its
clients and itself and enhance the careers of its clients' employees.

GROWTH STRATEGY

The Company intends to grow through: (i) increasing investment in sales and
marketing; (ii) focusing on geographic expansion; (iii) targeting high potential
industries; (iv) acquiring PEOs and other employee service providers and
entering into strategic alliances; and (v) leveraging the growth in the Parent's
employee base. Of these five elements, the Company believes that leveraging the
Parent's growth, increasing investment in sales and marketing and targeting high
potential industries will be the most important in fiscal year 1998, with
leveraging the Parent's growth expected to be the most important contributor to
the Company's near-term growth. Beyond fiscal year 1998, expansion into new
geographic markets and acquisitions are expected to become significant drivers
of growth.

Increasing Investment in Sales and Marketing. The Company's management is
experienced in building businesses utilizing professional sales forces and
focused marketing strategies. The Company believes that it has substantially
improved the productivity of the Company's sales force from that existing at the
time the Company acquired its constituent organizations by replacing 25% of the
existing salespersons with strong professional sales people and sales management
from both inside and outside the PEO industry. A significant part of the
Company's marketing strategy is the development of a brand identity. A
recognized brand name is a valuable marketing tool. By utilizing the nationally
advertised brand name of the Parent, the Company believes it will achieve a
strong brand identity at lower cost. The Company believes that its marketing
efforts will benefit from its brand strategy. The Company's brand promise is to
create a more satisfying and more productive relationship between its worksite
employees and clients by "caring for and about people." By cost effectively and
consistently delivering against this service commitment, the Company believes it
will attain a brand name reputation for service excellence among existing and
potential clients.

In support of its brand strategy, the Company intends to spend
approximately $2.0 million more in fiscal year 1998 on sales and marketing than
it spent in fiscal 1997. Primary investment areas are expected to be additional
sales management, telemarketing, direct mail, collateral material development
and printing, computers and training. Most of this investment commenced early in
fiscal year 1998 and the Company expects that it will continue throughout the
year. In addition, as each new geographic market is entered, the Company intends
to add a market-specific sales team.

Focusing on Geographic Expansion. The Company has identified key
attractive geographic target markets and has established a plan for entering
those markets in a disciplined manner. The target markets are primarily those
markets in which the relationship with the Parent provides existing employee and
potential new client base density. The Company believes that the Parent's
clients and other extensive business-to-business relationships represent
significant opportunities to grow in these target markets. By concentrating on
markets where the Parent has achieved density, the Company will seek to have
scale immediately because it already co-employs the Parent's employees. The
Company believes its market development model will enable it to penetrate new
markets quickly. This market development model consists of a highly structured
sales management control system and efficient selling process. The model
includes market research to identify potential client businesses and a direct
mail campaign staged over a 10-week period to reach those businesses. In the
Company's first target market, approximately 12,000 candidates have been
identified and the direct

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<PAGE> 37

mail program has been commenced. In certain cases, the Company may rely on
platform acquisitions to achieve scale in a market. In either case, the
Company's strategy is to leverage the Parent's customer referral sources and
provider relationships.

Entry priority for specific markets is determined by the level of PEO
competition, the state regulatory environment and access to infrastructure to
support operations. Once a market is selected, the Company's Director of Market
Expansion will execute an entry plan which includes defining benefits plans and
service offerings, recruiting a manager and sales team, site selection, training
and orientation and launching a specific marketing plan to begin the selling
process.

The Company has implemented this process in Atlanta and will use that
experience to refine the model before entering Philadelphia later this fiscal
year. This market model is expected to provide the basis for future growth.

Targeting High Potential Industries. Targeted industries will vary from
market to market depending on economic characteristics and business demographics
of each geographic location. The Company intends to focus on industries with
high gross profit per worksite employee and significant workers' compensation
profit opportunities. High potential industries are those, such as health care
and construction, that the Company believes could benefit most from the
Company's risk management expertise (e.g., traditional high workers'
compensation classifications) and the Company's offering of an extensive
benefits package (e.g., industries facing a shortage of workers). Other
characteristics of high potential industries would include rapid growth or
change. The sales force is expected to utilize the key industry strategy and
become expert in one or more select industries in the markets in which they are
operating. The relationship with the Parent brings a large potential client base
of small to medium-sized long-term care providers and other health care
customers who are currently obtaining outsourced contract rehabilitation from
the Parent or who are referring patients to the Parent. Because of the
compatibility of the Company's information systems related to payroll
processing, the Company believes that the most attractive candidates in this
group in the near term are assisted living facilities and continuing care
retirement communities. After creating the appropriate systems interfaces, the
Company will seek to expand its efforts to the skilled nursing facility market.
The Company regards those businesses as likely candidates for the Company's
sales efforts because of their existing relationships with the Parent.

Acquiring PEOs and Other Employee Service Providers and Entering into
Strategic Alliances. The Company believes that the opportunities for PEO
consolidation are substantial with at least 2,400 PEOs (according to an estimate
by NAPEO) operating in a highly fragmented industry. The Company believes that
industry consolidation will be driven by increasing industry and regulatory
complexity, increasing capital requirements and the significant economies of
scale available to PEOs with a concentration of clients and employees in target
markets. The Company intends to make opportunistic acquisitions where
appropriate to achieve greater density in targeted geographic markets.

The Parent is highly experienced in acquiring service businesses. It has
created and integrated four different nationwide health care service businesses
through acquisitions in the last 12 years. The Company believes it will be able
to benefit from the Parent's experience as a consolidator and integrator in
support of the Company's growth objective for acquisitions. Pursuant to the
Company's management services agreement with the Parent, the Parent has agreed
to make available to the Company financial, legal, business development and
information technology resources. Under the agreement, these resources are
provided at the Parent's cost when reasonably required, consistent with the
Company's and the Parent's business objectives.

The Company is creating strategic alliances with service providers to small
and medium-sized businesses. For example, the Florida Home Builders Association,
an organization that has 17,000 members with 450,000 employees, has endorsed the
Company as the PEO of choice for its members. With the trend toward outsourcing
non-core competencies, small and medium-sized businesses typically have service
relationships with accountants, attorneys, banks, trade associations and other
business advisors. Alliances with these service providers offer a cross-selling
opportunity for the Company's employee services. The Company intends to develop
such referral opportunities as an extension of its sales and marketing
capability.

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<PAGE> 38

Leveraging the Parent's Growth. The Company believes that the Parent is
the PEO industry's largest client. During fiscal year 1997, the Parent's
worksite employee population grew by 23% (16% excluding NovaPro). Growth in the
Parent's worksite employee base directly increases the Company's worksite
employee population and revenue without the need for additional sales and
marketing expenditures or client start-up costs.

OPERATING STRATEGY

The Company has developed an operating strategy designed to control costs
while supporting growth. The operating strategy encompasses leveraging the
Parent's existing infrastructure and implementing a sophisticated business
model.

Leveraging the Parent's Existing Infrastructure. As a national provider of
medical rehabilitation services, the Parent has developed the core competencies
for: (i) managing a dispersed workforce in third-party worksites; (ii)
establishing and maintaining national information systems networks connecting
clients, worksite employees and service providers; (iii) developing and
implementing workplace safety and injury prevention programs; and (iv) managing
regulatory change. This infrastructure is available to the Company pursuant to
its management services agreement with the Parent. The agreement permits the
Company to purchase access to the infrastructure at the Parent's out-of-pocket
cost excluding depreciation and amortization. The relationship with the Parent
also brings: (i) leverage to negotiate advantageous health care, workers'
compensation and other benefit program costs given the Parent's status as a
large employer in many geographic markets in which the Company operates; and
(ii) the availability of health care services for Company employees from the
Parent and other health care providers in the Parent's integrated delivery
systems in the Company's target markets. See "Relationship with the Parent"
below and "Risk Factors -- Dependence on the Parent; Potential Conflicts with
the Parent."

The Company intends to leverage the Parent's experience and business
synergies to reduce costs by utilizing the Parent's integrated delivery system
network of health care providers. Integrated delivery systems comprise health
care providers that are networked as referral sources to facilitate integrated
patient care and to ease administration for payors and providers. The Parent has
established, and continues to develop, networks of rehabilitation providers,
principally outpatient and occupational health providers, in targeted geographic
markets. These networks can be used to provide rehabilitation to the Company's
injured worksite employees, allowing the Company to benefit from the skill and
expertise of the Parent in rehabilitating and returning to work injured
employees.

As a health care provider, the Parent has been an industry leader in
responding to regulatory and legislative change in a highly regulated market.
The Parent's experience in the regulatory environment will be a valuable
resource to the Company as states and the federal government seek to implement
new approaches to regulating the PEO industry. The Parent's regulatory
compliance experience is available to the Company under the management services
agreement between the Company and the Parent.

Implementing a Sophisticated Business Model. The Company's business model
includes a portfolio management system and an efficient operating model.

Portfolio Management System. The Company has implemented a portfolio
management system designed to control and improve its performance in the
selection of new business, meeting its brand promise with respect to existing
customers and analyzing lapsed business. The new business criteria orient
marketing to potential clients in target industries with high gross profit per
worksite employee and acceptable underwriting risk. The criteria include number
of worksite employees, credit rating, three-year workers' compensation loss
ratios, shock losses, workers' compensation insurance premium modification rate,
state unemployment experience, expected administrative fee and predicted gross
profit per employee.

The current business portfolio component of the control system enables
management to monitor new client start-ups, client specific financial and risk
performance and employee and employer satisfaction. By focusing management
attention on key business variables, the system permits day-to-day management to
direct actions consistent with the Company's strategy and business plan. The
business variables measured are

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<PAGE> 39

the same as those used to assess new business, and additionally include accounts
receivable, health claims filed, at risk clients, employer and employee
satisfaction. The Company believes that attention to these variables on a weekly
basis increases gross profit per worksite employee. Lapsed business is analyzed
by reason to facilitate identification of service delivery system issues and to
improve future client retention.

Operating Model. The Company has established an operating model that
delivers services from two different locations. The Company's local service
center places an emphasis on servicing the customer through local front-line
activities. The local service center conducts enrollment and orientation of new
employees and clients and worksite safety evaluation and monitoring. Sales
activity and customer service will also be performed locally. Local activities
relative to risk management promote safety, early intervention of workers'
compensation reported claims and early return to work. Centralized activity
includes nationally directed telemarketing, standard development of marketing
materials, a national accounts sales force, and regional payroll processing,
benefits administration and claims management. The major elements of finance,
procurement and compliance will also be centralized.

Staffing of the local centers and the centralized regional centers is based
on a metric identifying the number of worksite employees or other applicable
customers who can be adequately serviced by each kind of service representative,
including customer care representatives, payroll technicians, benefits
specialists, human resources consultants, workers' compensation specialists,
safety engineers and underwriters. This staffing metric is designed to provide
efficient service at carefully controlled cost.

The Company believes it can achieve its strategic objectives by adopting
the local services model in each of the strategic markets it enters. This model
can be replicated in each key market. It also enables responsiveness to the
client while maximizing administrative support productivity. The operating model
provides the Company with transaction scale advantages while maintaining
customer intimacy through localized service centers that are replicable.

EMPLOYEE AND CLIENT SERVICES

In order to implement its strategy to create a more satisfying and more
productive relationship between employers and employees, the Company provides
six primary categories of employee services: (i) workers' compensation cost
containment and safety management; (ii) unemployment insurance cost containment;
(iii) employee benefits administration; (iv) human resources and compliance
management; (v) payroll management; and (vi) value-added services. By engaging
the Company to provide these services, clients can focus on their core
competencies.

These services are provided under the Company's PEO services agreement
which typically has an initial one year term; thereafter, the agreement is
renewed periodically. The agreement is subject to termination by the Company or
the client upon 30 days' prior written notice. Service revenues, billed to
clients along with each periodic payroll, are based on a pricing model that
takes into account the gross pay of each employee and a mark-up which includes
the estimated costs of employment-related taxes, providing insurance coverage
and benefit plans, performing human resources, payroll, benefits and compliance
management and other services and an administration fee. The specific mark-up
varies by client based principally on the workers' compensation classification
of the worksite employees, their eligibility for health care benefits and the
size of the client. Accordingly, the Company's average mark-up percentage will
fluctuate based on client mix, which cannot be predicted with any degree of
certainty.

Clients are required to pay the Company its total fee concurrent with the
applicable payroll date and receipt of funds is verified prior to the release of
payroll. Although the Company is ultimately liable as employer to pay employees
for work previously performed, it retains the right to terminate the PEO
services agreement as well as the employees upon non-payment by a client. This
right and the periodic nature of payroll, combined with client credit
verifications and the Company's client selection process, are used to control
this exposure. Bad debt expense was $26,000 for the period from October 1, 1996
to June 30, 1997.

Workers' Compensation Cost Containment and Safety Management. Workers'
compensation is a state-mandated, comprehensive insurance program that requires
employers to fund medical expenses, lost wages

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<PAGE> 40

and other costs that result from work-related injuries and illnesses, regardless
of fault and without any co-payment by the employees. See "Regulation" below.
Pursuant to the Company's PEO services agreement, the Company assumes the
obligations of its clients to pay workers' compensation claims. See "Risk
Factors -- Adequacy of Reserves for Workers' Compensation Claims." The Company
seeks to control its workers' compensation costs through comprehensive risk
evaluation of prospective clients, the prevention of workplace injuries, timely
intervention with employee injuries, aggressive management of the medical costs
related to such injuries and the prompt return of employees to work. The Company
seeks to prevent workplace injuries by implementing a wide variety of training
and safety programs. The Company's efforts to return employees to work quickly
involve both rehabilitation services and the placement of employees in
transitional, light-duty positions until they are able to resume their former
positions.

Unemployment Insurance Cost Containment. Pursuant to the Company's PEO
services agreement, the Company also assumes the obligation of its clients to
pay unemployment insurance costs. The Company manages its unemployment insurance
costs by establishing employee termination procedures, timely responding to
unemployment claims, attending unemployment hearings and attempting to reassign
employees to other worksites when a reduction in force occurs at any one
worksite location.

Employee Benefits Administration. Pursuant to the Company's PEO services
agreement, the Company is required to offer employee benefits to the worksite
employees. The Company offers worksite employees a benefits package which
includes several health care options, such as point-of-service ("POS"), HMOs and
indemnity plans. Supplemental benefit programs offer dental care, prescription
drugs, and life and disability insurance options. The Company also offers 401(k)
retirement savings and cafeteria style plans to its eligible employees. The
Company delivers participant benefits to worksite employees and monitors and
reviews claims for loss control purposes. The Company believes that its ability
to provide and administer a wide variety of employee benefits on behalf of its
clients tends to mitigate the competitive disadvantage small and medium-sized
businesses normally face in the areas of employee benefit cost control and
employee recruiting and retention.

Human Resources and Compliance Management. Pursuant to the Company's PEO
services agreement, the Company provides comprehensive human resources services
to its clients. These services reduce the employment-related administrative
burdens faced by its clients, and provide worksite employees with a wide array
of benefits typically offered by large employers. The Company develops and
administers personnel policies and procedures for each of its clients, relating
to, among other things, recruiting, retention programs, performance management,
discipline and terminations. The Company also provides orientation, training and
development, counseling and substance abuse awareness for worksite employees.

By contract, the Company generally assumes responsibility for complying
with many employment-related regulatory requirements. In addition, the Company
assists its clients in understanding and complying with other employment-related
requirements for which the Company does not assume responsibility. Laws and
regulations applicable to employers include state and federal tax laws, state
workers' compensation laws, state unemployment laws, occupational safety laws,
immigration laws, and discrimination, sexual harassment and other civil rights
laws.

Payroll Management and Reporting. Pursuant to the PEO services agreement,
the Company is responsible for payroll processing, check preparation,
distribution and recordkeeping, payroll tax deposits, payroll tax reporting,
employee file maintenance, unemployment claims and monitoring and responding to
changing regulatory requirements. The Company indemnifies the client against the
Company's failure to comply with regulatory requirements. Payroll reports are
prepared for clients for financial and other recordkeeping purposes. The
providing of these services by the Company reduces the client's employment
liabilities and allow clients to focus on their core business.

Other Value-Added Services. Since the acquisition of NovaPro on July 1,
1997, the Company has offered rehabilitation temporary staffing in the long-term
care industry. The rehabilitation temporary staffing service currently can draw
on a pool of over 6,000 rehabilitation clinicians to provide staff to skilled
nursing facility clients, at which over 1,300 worksite employees were performing
services as of July 1, 1997. This business is supported by technology which
provides detailed recruitment and sales productivity information for management
purposes. It also generates billing and utilization reports for clients.

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<PAGE> 41

The Company also plans to offer additional value-added services to clients
and worksite employees. Such services may include such things as employee
recognition programs, travel discount arrangements, vision care, credit union
membership, smart cards, warehouse club memberships and various financial
services. Some of these services may generate fee income or commissions for the
Company.

The Company's standard PEO services agreement also establishes the division
of responsibilities between the Company and the client as co-employers. The
division of responsibilities is generally as follows:

<TABLE>
<CAPTION>
THE COMPANY CLIENT JOINT
- -------------------------------------------- ------------------------------ ------------------------------
<S> <C> <C>
- - Payment of payroll - Supervision of job-specific - Implementation of policies
activities of worksite and practices relating to the
- - Tax reporting and payment (state and employees, including employer-employee
federal withholding, Federal Insurance designation of job relationship
Contributions Act ("FICA"), Federal descriptions and duties and
Unemployment Tax Act ("FUTA"), and state responsibilities - Selection of fringe
unemployment) benefits, including employee
- Assignment to, and ownership leave policies (other than
- - Workers' compensation compliance, of, all intellectual as controlled by the Family
procurement, management, payment and property rights and Medical Leave Act of
reporting 1993 or other laws)
- Product liability
- - Employee benefit procurement, - Compliance with Code
administration and payment - Professional liability or provisions regarding
malpractice benefits discrimination
- - Compliance with Immigration Reform and
Control Act and Consumer Credit Protection - Compliance with OSHA - Hiring, terminating and
Act, as well as monitoring changes in regulations, state and local disciplining worksite
other government regulations governing the government contracting employees
employer-employee relationship and provisions, professional
updating the client when necessary licensing requirements and - Compliance with Title VII of
fidelity bonding the Civil Rights Act of
requirements 1964, the Age Discrimination
in Employment Act, the
- Negligent or tortious Americans with Disabilities
conduct of worksite employees Act, the Fair Labor
acting under the direction Standards Act and similar
and control of the client state or local legislation
- Determination of
compensation of worksite
employees
</TABLE>

RELATIONSHIP WITH THE PARENT

The Parent is the founder of the Company and will beneficially own
approximately 77.2% of the Common Stock after the Offering. The Parent
established the Company and entered into the NovaCare Contract primarily for
four reasons. The Company is intended to enable the Parent to leverage its core
competencies and investments in human resource management, information systems,
relationship selling, workers' compensation risk management, outsourcing and
management of a dispersed workforce. By leveraging the investments already made
in its core competencies, the Parent expects to increase the return to its
shareholders from those investments. The Parent believes its shareholders will
benefit from its relationship with the Company through appreciation in the value
of the Parent's investment in the Company. For that reason, the Parent has
issued a line of credit to the Company and provided services to the Company at
the Parent's cost. See "Certain Related Party Transactions."

The Parent's business, other than that of the Company, is medical
rehabilitation services. The Parent provides (i) rehabilitation therapy and
rehabilitation program consulting and management services on a contract basis to
health care institutions, primarily long-term care facilities, and (ii)
outpatient, orthotic and prosthetic and occupational health rehabilitation
services through a national network of patient care centers.

In its purchase of health care and workers' compensation insurance coverage
for its worksite employees, the Company represents a substantial customer of
health care payors who, in turn, are major customers for the Parent's
rehabilitation services. Accordingly, the Parent believes that its relationship
with the Company will make it more likely for these health care payors to
utilize the Parent's rehabilitation services.

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<PAGE> 42

In addition, the Company allows the Parent to offer a broader array of
services to its existing customers. Through the Company, the Parent can address
all of its customers' human resource needs, rather than limiting its services to
rehabilitation staffing only. Providing a broader array of services can
strengthen the Parent's relationship with its customers.

Finally, the Company is a customer for the Parent's rehabilitation
services. As the Company grows, it will add non-Parent clients and employees who
may become new customers for the Parent's workers' compensation risk management
and rehabilitation services.

As part of its strategy to leverage its employee services expertise, in
February 1997, the Parent transferred to the Company 60 of its employees who
were performing most of the Parent's employee services functions, including
payroll, benefits administration and information systems, as well as the
Parent's employee services center.

In addition, in February 1997, the Parent entered into the NovaCare
Contract, a five-year evergreen contract to provide the Parent with the services
previously carried out for the Parent by the transferred staff. As part of the
NovaCare Contract, as of June 30, 1997, 15,072 of the Parent's employees became
co-employees of the Company. For those employees, the Company provides typical
PEO services, including payroll and benefits administration, worksite safety
evaluation, employment-related risk management and compensation and benefits
consultation. The Parent pays the Company a fee for its services currently equal
to approximately 117% of the gross earnings of the employees covered by the
NovaCare Contract. The Parent may not terminate the NovaCare Contract except in
the event of: (i) the breach of any of the Company's agreements, duties, or
performance standards under the NovaCare Contract; (ii) the making of false or
misleading representations, warranties, or statements of material fact in
documents submitted by or on behalf of the Company to the Parent; or (iii) the
insolvency, bankruptcy, or receivership of the Company. On a pro forma basis,
the Company would have recorded approximately $582 million of aggregate fee
revenue for the 12 months ended June 30, 1997 under the NovaCare Contract.

By benefiting from the scale at which the Company is now operating, the
Company seeks to improve the efficiency of delivery of employee services to the
Parent and reduce the cost of those services. In recognition of these
cost-saving opportunities, the Company has agreed to reduce its fee under the
NovaCare Contract by 0.1% each year during the first five years of the term of
the contract. See "Certain Related Party Transactions."

INFORMATION TECHNOLOGY

The Company intends to leverage the Parent's nationwide information systems
network to connect its local customer service centers, regional processing
centers, worksite employees, clients and service providers. Through this
relationship with the Parent, the Company believes it will benefit from the
technological advances the Parent deploys in its business to provide value, help
reduce costs and provide operating efficiencies. These technologies include, but
are not limited to, a combined Internet/Intranet electronic mail system, client
server based expertise which provides distributed processing and rapid
implementation of business changes, Internet/Intranet access, telecopier to data
technology (which eliminates the need for manual data entry), and a
state-of-the-art nursing home management system. The Company intends to
establish regional processing centers which will utilize the Parent's network to
meet the processing requirements of the Company's clients. The Company has
completed the centralization of its information systems operations into its
first regional processing center in Bradenton, Florida. By utilizing the
Parent's network, the regional processing centers can serve as disaster recovery
backup sites, having the capability to handle the Company's operations for a
short period of time.

The Company currently uses commercially available software to manage
information related to payroll processing, benefits administration, human
resource management and employee enrollment. The Company has also developed the
requirements and key vendor relationships to create a proprietary information
management system to handle the expected growth in worksite employees. The
Company intends to follow the Parent's information technology strategy of
creating relational databases on state-of-the-art client server development
systems.

41
<PAGE> 43

SALES AND MARKETING

The Company's client base as of June 30, 1997 consisted of 1,742 client
companies, representing 35,028 worksite employees. The Parent represented 65% of
the Company's fiscal 1997 revenues, on a pro forma basis. See "Relationship with
the Parent" above, "Certain Related Party Transactions" and "Risk Factors." The
Company's clients, excluding the Parent, have an average of 11 employees. As of
June 30, 1997, the Company's approximate distribution of worksite employees by
major Standard Industrial Classification ("SIC") code industry grouping was:

<TABLE>
<CAPTION>
WITHOUT WITH
THE PARENT THE PARENT
---------- ----------
<S> <C> <C>
Wholesale/Retail Trade....................................... 31% 18%
Construction................................................. 15% 8%
Hospitality.................................................. 15% 8%
Restaurants.................................................. 10% 6%
Transportation............................................... 8% 4%
Manufacturing................................................ 6% 3%
Automotive................................................... 6% 3%
Finance, Insurance and Real Estate........................... 4% 2%
Agriculture.................................................. 4% 2%
Health Care.................................................. 1% 46%
</TABLE>

The Company is focused on serving clients in targeted industries that
generate high gross profit per worksite employee. See "Strategy -- Growth
Strategy" above. All prospective clients are evaluated individually on the basis
of workers' compensation risk, group medical history, unemployment history and
operating stability.

The Company's sales and marketing efforts are focused on the Company's
target markets and industries. The Company markets its services through 40 sales
professionals who specialize in one or more of the Company's target industries.
Thirty-three of these sales representatives are direct employees and seven are
dedicated independent contractors who work exclusively for the Company. Employed
sales representatives are paid a combination of salary and incentive
compensation. The incentive is based on the gross profit projected to be earned
with respect to a customer contract and is paid after the contract has been in
effect for one full calendar month. The incentive is required to be repaid by
the sales representative if the applicable contract is terminated within 120
days after inception. Independent contract sales representatives are paid
monthly on an incentive basis after customer contracts are executed as revenue
is received. The Company's sales materials are client specific and communicate
its broad range of high quality services and the potential benefits to employers
and employees.

The Company will seek to utilize professional marketing tools and
strategies to communicate its brand promise and performance to target audiences.
First, the Company will seek to identify target audiences through market
research. The Company has commissioned an opinion survey to assist in designing
the messages to be delivered to the target audiences. The Company intends to
utilize public relations and advertising to communicate its brand promise and
its performance to the target audiences. Direct mail, referrals from the Parent
and other clients and telemarketing will be used to generate qualified customer
leads. The sales force will then deliver targeted presentations to qualified
prospects using industry- and customer-specific marketing materials. The Company
expects to benefit from joint public relations and advertising with the Parent.
These media are intended to supplement and enhance the effectiveness of the
Company's marketing efforts and reinforce brand loyalty on the part of employees
and clients. Brand loyalty is expected to generate referrals, improve client
retention and thereby improve profitability. The Company plans to survey the
marketplace, its worksite employees and potential clients on a continuous basis
to measure satisfaction and the effectiveness of its marketing efforts.

For its worksite employees, the Company believes its brand promise is
fulfilled by: (i) establishing a respectful and trusting relationship between
the Company and its worksite employees through clearly defined

42
<PAGE> 44

policies and procedures, and competitive health care and related benefits; (ii)
providing a positive work environment by way of risk prevention and safety
programs and recognition programs; (iii) consistently rendering dependable and
responsive employee services, most notably payroll and benefits administration;
and (iv) providing training and placement during cyclical changes in its client
businesses.

For its clients, the Company seeks to: (i) improve employee satisfaction
and thereby improve workforce performance and productivity; (ii) reduce the time
and effort required by business owners and executives to deal with the
complexities of employment and payroll management; (iii) improve client business
performance by enabling management to focus on core competencies, increasing
workforce productivity through training, recognition, risk prevention and safety
programs, and lowering costs associated with workers' compensation, health
insurance, other benefit coverage and regulatory compliance; and (iv) establish
a respectful and trusting relationship between the Company and its clients
through expert, responsive and dependable service and accountability for
performance.

The Company has benefited from a high level of client retention, resulting
in a significant recurring revenue stream. The Company believes its client
attrition is attributable to a variety of factors, including: (i) client
business failure or downsizing; (ii) sale or acquisition of the client company;
(iii) termination by the Company resulting from the client's inability to make
timely payments; and (iv) client nonrenewal due to price or dissatisfaction with
service. The Company believes that only a small percentage of nonrenewing
clients withdrew due to dissatisfaction with service or to retain the services
of a competitor. The Company's portfolio management approach, utilizing a
management control system focused on key operating variables, is designed to
reduce further the incidence of non-renewal.

The Company plans to enter new geographic markets on a regular basis. The
Company believes its market development model, which consists of a structured
sales management control system and selling process, will enable it to penetrate
new markets quickly.

The Company provides at least two weeks of training for each new sales
person to familiarize them with the Company's services, policies and procedures.
The training focuses on the Company's values, business model and target market
approach. The sales force is expected to utilize the key industry strategy and
become expert in one or more select industries in the markets in which they are
operating. The composition of the sales force to be assigned to each target
market will be determined by business objectives related to worksite employees,
profit, client growth and individual sales productivity.

The Company's sales management control system, which monitors activity both
on an individual and a consolidated basis, is designed to ensure an efficient
sales process in support of the Company's objectives. The measurement criteria
used in the sales management process include the tracking of qualified sales
lead generation, proposal presentation, close ratio, profit per worksite
employee and retention trends.

Referrals from existing clients and professionals (such as accountants,
bankers and lawyers) are a primary source of sales leads. Each sales person is
required to visit his or her clients periodically in order to maintain an
ongoing relationship and to benefit from referrals. Referrals are also expected
to result from the Company's brand recognition and the Company's strategic
alliances with other outsourcing service providers to small and medium-sized
businesses, including the Company's relationship with the Parent.

The sales leads result in initial presentations to prospective clients. The
Company's sales executives then gather information about the prospective client,
employees, workers' compensation job classifications and claims history, health
insurance claims history, compatibility with the Company's workplace safety
program philosophy, salary and the desired level of employee benefits and credit
history. These various factors are reviewed in the context of the Company's
pricing model and client selection profile. A client proposal is prepared for
potential clients. This prospective client screening process plays a vital role
in controlling the Company's cost and limiting exposure to liability.

Once a prospective client accepts the Company's proposal, the new client is
incorporated into the Company's system by a new account start-up team. A Company
customer service manager then assumes responsibility for ensuring service
performance for the client and its employees.

43
<PAGE> 45

WORKERS' COMPENSATION AND HEALTH CARE PROGRAM

Historically, the majority of the Company's controllable direct costs
relate to workers' compensation benefits and health care. Consequently, the
Company's ability to manage the workers' compensation and health care costs of
its worksite employees is critical to its success and profitability. To manage
effectively its workers' compensation and health care costs, the Company intends
to utilize: (i) careful underwriting and selection of new clients; (ii) the
Parent's experience in implementing effective workers' compensation injury
prevention, medical management, rehabilitation and return to work techniques;
(iii) the health care services of the Parent and other health care providers in
the Parent's health care networks in key markets; and (iv) effective July 1,
1997, a fixed cost workers' compensation program.

If an injury occurs, the Company's goal is to take control of the claim
within 24 hours after receipt of the injury report, aggressively medically
manage the injury by coordinating with the employer, employee and provider, and
return the employee to work as early as is safe and feasible. This approach
substantially lowers injury-related costs, particularly the most expensive cost
component, lost workdays. Temporarily placing injured employees in light duty
positions until they are able to return to their previous duties is an
opportunity afforded the Company in its dense markets.

The Company's workers' compensation insurance coverage is currently
provided by Liberty Mutual, the largest workers' compensation insurance carrier
in the United States. The coverage is provided under a workers' compensation
deductible program with an aggregate stop loss that limits the liability to the
Company to a capped percentage of the standard premium or a fixed aggregate
deductible, whichever is greater. Under this program, the Company receives the
benefit of reducing actual claims experience below the cap. The Company accrues
workers' compensation expense based on management's evaluation of the nature and
severity of individual claims and past claims experience. Actual claims
experience is then recognized against the amount accrued. The Liberty Mutual
arrangement will extend through June 30, 2000 and provides for: (i) a dedicated
claims processing unit; (ii) intensive training of the Company's safety
consultants and risk assessors; and (iii) favorable rates and payment terms.

The Parent has reduced its workers' compensation costs by 38% as a
percentage of employee earnings over the prior three calendar years. The
Parent's program has proven to be cost-effective in the health care industry.
The Parent's worksite employees will be self-insured by the Company.

When buying health care coverage for its employees, the Company believes it
is in a strong position with insurers, as a result of the participation of the
Parent in local market integrated health care delivery systems as well as the
leverage that the Company's scale provides. Accordingly, the Company believes
that it will be able to achieve favorable health care rates by forming strategic
partnerships with national and regional providers.

COMPETITION

The PEO industry consists of at least 2,400 companies (according to an
estimate by NAPEO), most of which serve a single market or region. The Company
is one of the largest (measured by revenues and number of worksite employees)
PEOs in the United States. The Company considers its primary competition to
include: (i) traditional in-house human resources departments; (ii) other PEOs;
and (iii) providers of unbundled employment related services such as payroll
processing firms, temporary employment firms, commercial insurance brokers,
human resources consultants, workers' compensation insurers, HMOs and other
specialty managed care providers.

Competition in the highly fragmented PEO industry is generally on a local
or regional basis. Management believes that the primary elements of competition
are quality of service, choice and quality of benefits, reputation and price.
The Company believes that brand recognition, regulatory expertise, financial
resources, risk management, information technology capability and economies of
scale can distinguish a large-scale PEO from the rest of the industry. The
Company believes that it competes favorably in these areas.

The Company believes that barriers to entry into the PEO industry are
increasing due to, among others, the following factors: (i) the complexity of
the PEO business and the need for expertise in multiple disciplines; (ii) the
three to five years of experience required to establish experience ratings in
key cost areas of

44
<PAGE> 46

workers' compensation, health insurance and unemployment; and (iii) the need for
sophisticated management information systems to track all aspects of business in
a high growth environment.

REGULATION

The Company is subject to local, state and federal regulations which
include operating, fiscal and licensing requirements. Adding complexity to the
Company's regulatory environment are (i) uncertainties resulting from the
non-traditional employment relationships created by PEOs, (ii) variations in
state regulatory schemes and (iii) the ongoing evolution of regulations
regarding health care and workers' compensation. The Parent is a leader in
regulatory change management. The Company expects to benefit from the Parent's
expertise in this area.

Many of the federal and state laws and regulations relating to tax, benefit
and employment matters applicable to employers were enacted prior to the
development of non-traditional employment relationships and, accordingly, do not
specifically address the obligations and responsibilities of PEOs or the
co-employment relationship. Moreover, the Company's PEO services are regulated
primarily at the state level. Regulatory requirements regarding the Company's
business therefore vary from state to state, and as the Company enters new
states it will be faced with new regulatory and licensing environments. There
can be no assurance that the Company will be able to satisfy the licensing
requirements or other applicable regulations of any particular state, that it
will be able to provide the full range of services currently offered, or that it
will be able to operate profitably within the regulatory environment of any
state in which it does not obtain regulatory approval. The absence of required
licenses would require the Company to restrict the services it offers. New
legislation or new interpretations of current licensing and regulatory
requirements could impose operating or licensing requirements on the Company
which it may not be able to satisfy or which could have a material adverse
effect on the Company's business, financial condition, results of operations and
liquidity. Additionally, interpretation of such legislation or regulation by
regulatory agencies with broad discretionary powers could require the Company to
modify its existing operations materially in order to comply with applicable
regulations.

The application of many laws to the Company's PEO services will depend on
whether the Company is considered an employer under the relevant statutes and
regulations. The IRS is currently examining this issue. See "Employee Benefit
Plans" below. In addition, from time to time there have been proposals to enact
a statutory definition of employer for certain purposes of the Code.

Regulation in the health care and workers' compensation fields continues to
evolve. Numerous reform proposals have been the subject of debate at both the
federal and state government levels. The Company cannot predict what effect any
such proposed reform will have on its business. If new legislation results in
increased health care costs, which comprise a significant portion of the
Company's direct costs, and if the Company is not able to reflect promptly such
increased costs in its service fees, such legislation could have a material
adverse impact on the Company's business, financial condition, results of
operations and liquidity.

PEO Licensing Requirements. A critical aspect of the growth of the PEO
industry has been increasing recognition and acceptance of PEOs by state
authorities. As the concept of PEO services has become more understood by
regulatory authorities, the regulatory environment has begun to shift from one
of hostility and skepticism to one of regulatory recognition of the industry.
During the mid to late 1980s, legitimate industry participants were challenged
to overcome well publicized failures of financially unsound and, in some cases,
unscrupulous operators.

While many states do not explicitly regulate PEOs, approximately one-third
of the states, including Florida, have passed laws that have licensing or
registration requirements for PEOs and several additional states, including
Pennsylvania, are considering such regulation. Such laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.
The Company is licensed in seven states and has begun the licensing program in
eight states. State regulation assists in screening insufficiently capitalized
PEO operations and resolves issues concerning an employee's status for specific
purposes under applicable state law. Because existing regulations are relatively
new, there is limited interpretive or enforcement guidance

45
<PAGE> 47

available. The development of additional regulations and interpretation of
existing regulations can be expected to evolve over time.

In Florida, the Company's PEO operations are licensed under the Florida
Employee Leasing Licensing Act of 1991 (the "Florida Licensing Act"). The
Florida Licensing Act requires PEOs and their controlling persons to be
licensed, mandates reporting requirements and allocates several employer
responsibilities. The Florida Licensing Act also requires licensed PEOs to
submit annual financial statements and maintain a tangible accounting net worth
and positive working capital. The Florida Licensing Act also requires PEOs to,
among other things: (i) reserve the right of direction and control over the
leased employees; (ii) enter into a written agreement with the client company;
(iii) pay wages to the leased employees; (iv) pay and collect payroll taxes; (v)
maintain authority to hire, terminate, discipline and reassign employees; (vi)
reserve a right to direct and control the management of safety, risk and hazard
control at the worksite; (vii) promulgate and administer employment and safety
policies; and (viii) manage workers' compensation claims.

Federal and State Employment Taxes. The Company assumes the responsibility
and liability for the payment of federal and state employment taxes with respect
to wages and salaries paid to its employees, including worksite employees. There
are essentially three types of federal employment tax obligations: (i) income
tax withholding requirements; (ii) social security obligations under FICA; and
(iii) unemployment obligations under FUTA. Under the applicable Code sections,
the employer has the obligation to withhold and remit the employer portion and,
where applicable, the employee portion of these taxes.

To date, the IRS has relied extensively on the common law test of
employment in determining employer status and the resulting liability for
failure to withhold. However, the IRS has formed a Market Segment Study Group
for the stated purpose of examining whether PEOs, such as the Company, are the
employers of the worksite employees under the Code provisions applicable to
federal employment taxes and, consequently, whether they are exclusively
responsible for payment of employment taxes on wages and salaries paid to such
employees. Another stated purpose of the Market Segment Study Group is to
determine whether owners of client companies can be employees of PEOs under the
federal employment tax laws. See "Risk Factors -- Risk of Loss of Qualified
Status for Certain Tax Purposes."

The interpretive uncertainties raised by the Market Segment Study Group may
affect the Company's ability to report employment taxes on its own account
rather than for the accounts of its clients and would increase administrative
burdens on the Company's payroll service function. In addition, while the
Company believes that it can contractually assume the client company's
withholding obligations, in the event the Company fails to meet these
obligations, the client company may be held jointly and severally liable
therefor.

Employee Benefit Plans. The Company offers various employee benefit plans
to its worksite employees, including 401(k) plans (a profit-sharing plan with an
employer contribution feature), cafeteria plans, group health plans, group life
insurance plans, group disability insurance plans and employee assistance
programs. Generally, employee benefit plans are subject to provisions of both
the Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees. Most of these benefit plans are also offered to the
Company's corporate employees.

The Market Segment Study Group established by the IRS is examining whether
PEOs, such as the Company, are the employers of worksite employees under Code
provisions applicable to employee benefit plans and consequently able to offer
to worksite employees benefit plans that qualify for favorable tax treatment.
The Market Segment Study Group is also examining whether client company owners
are employees of PEOs under Code provisions applicable to employee benefit
plans. Although the IRS has indicated that the Market Segment Study is expected
to be completed in January 1998, the Company is unable to predict the actual
timing or nature of the findings of the Market Segment Study Group or the
ultimate outcome of such conclusions or findings. If the IRS study were to
conclude that a PEO is not an employer of its worksite employees for plan
purposes, worksite employees might not be able to continue to make contributions
to the Company's 401(k) plans or cafeteria plans. The Company believes that
although unfavorable to the Company, a prospective application by the IRS of an
adverse conclusion would not have a

46
<PAGE> 48

material adverse effect on its financial position and results of operations. If
such conclusion were applied retroactively, employees' vested account balances
would become taxable immediately, the Company would lose its tax deduction to
the extent the contributions were not vested, the plans' trusts would become
taxable trusts and penalties could be assessed. In such a case, the Company
would face the risk of client dissatisfaction as well as potential litigation. A
retroactive application by the IRS of an adverse conclusion could have a
material adverse effect on the Company's business, financial position, results
of operations and liquidity. While the Company believes that a retroactive
disqualification is unlikely, there can be no assurance as to the ultimate
resolution of these issues. See "Risk Factors -- Risk of Loss of Qualified
Status for Certain Tax Purposes."

In addition to the employer/employee relationship requirement described
above, pension and profit-sharing plans, including the Company's 401(k) plans,
must satisfy certain other requirements under the Code. These other requirements
are generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of, and the benefits, rights and features offered in,
qualified employee benefit plans. The Company applies the nondiscrimination
requirements of the Code at both a consolidated and client company level to
ensure that its 401(k) plans are in compliance with the requirements of the
Code.

Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines the term employer as "any person acting directly as an employer,
or indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term employee as "any individual employed by an
employer." The United States Supreme Court has held that the common law test of
employment must be applied to determine whether an individual is an employee or
an independent contractor under ERISA.

A definitive judicial interpretation of employer in the context of a PEO or
employee leasing arrangement has not been established. If the Company were found
not to be an employer for ERISA purposes, its plans might not comply with ERISA
, the level of services the Company could offer may be materially adversely
affected, and the Company and its plans might not enjoy the preemption of state
laws provided by ERISA and could be subject to varying state laws and
regulations, as well as to claims based upon state common laws.

Workers' Compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries and
illnesses. In exchange for providing workers' compensation coverage for
employees, employers are not subject to litigation by employees for benefits in
excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical costs and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance. Workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials. Workers' compensation laws also regulate
the methods and procedures which the Company may employ in its workers'
compensation managed care programs. For example, workers' compensation laws
prohibit medical co-payment and deductible payment by employees. In addition,
certain states restrict employers' rights to select health care providers and
establish maximum fee levels for treatment of injured workers.

As a creation of state law, workers' compensation is subject to change by
each state's legislature and is influenced by the political processes in each
state. Several states have mandated that employers receive coverage only from
state-operated funds. Florida and other states have adopted legislation
requiring that all workers' compensation injuries be treated through a managed
care program. While such legislation may increase the market for the Company's
workers' compensation managed care services, it may also intensify the
competition faced by the Company for such services. In addition, federal health
care reform proposals include a proposal that may require 24-hour health
coverage, in which the coverage of traditional employer-sponsored health plans
is combined with workers' compensation coverage to provide a single insurance
plan for health problems, whether or not related to work. Incorporating workers'
compensation coverage into conventional health plans may adversely affect the
market for the Company's services and may intensify the competition faced by the
Company from HMOs and other health care providers. Moreover, because workers'
compensa-

47
<PAGE> 49

tion benefits are mandated by law and are subject to extensive regulation,
payors and employers do not have the same flexibility to alter benefits as they
have with other health benefit programs. Finally, because workers' compensation
programs vary from state to state, it is difficult for payors and multi-state
employers to adopt uniform policies to administer, manage and control the costs
of benefits.

Other Employer-Related Requirements. As an employer, the Company is
subject to a wide variety of federal, state and local laws and regulations
governing employer-employee relationships, including the Immigration Reform and
Control Act, the Americans with Disabilities Act, the Family and Medical Leave
Act, the Occupational Safety and Health Act, wage and hour regulations, and
comprehensive local, state and federal civil rights laws and regulations,
including those prohibiting discrimination and sexual harassment. The definition
of employer may be broadly interpreted under these laws.

Responsibility for complying with various state and federal laws and
regulations is allocated by agreement between the Company and its clients, or in
some cases is the joint responsibility of both. See "Employee and Client
Services" above. Because the Company acts as a co-employer with the client
company, it is possible that the Company could incur liability for violations of
laws even though the Company is not contractually or otherwise responsible for
the conduct giving rise to such liability. The Company's standard client
agreement generally provides that the client will indemnify the Company for
liability incurred as a result of an act of negligence of a worksite employee
under the direction and control of the client or to the extent the liability is
attributable to the client's failure to comply with any law or regulation for
which it has specified contractual responsibility. However, there can be no
assurance that the Company will be able to enforce such indemnification and the
Company may therefore be ultimately responsible for satisfying the liability in
question.

EMPLOYEES

At June 30, 1997, the Company had 260 non-worksite employees. Of these, 37
are corporate management and 223 are administrative and clerical. None of the
Company's non-worksite employees is represented by a labor union and the Company
is not aware of any current activity to organize any of its non-worksite
employees. The Company considers relations with its non-worksite employees to be
good. For information with respect to the Company's worksite employees, see
"Employee and Client Services" above.

PROPERTIES

The Company's principal executive offices are located at 2621 Van Buren
Avenue, Norristown, Pennsylvania 19403. In addition, the Company leases other
office space in various cities in the United States. See Notes 4 and 8 of Notes
to the Company's Consolidated Financial Statements for information concerning
the Company's leases for its facilities. The Company does not anticipate that it
will experience any difficulty in renewing any such leases upon their expiration
or obtaining different space on comparable terms if such leases are not renewed.
The Company believes that these facilities are well maintained and are of
adequate size for present needs and planned expansion in the near future.

INSURANCE

The Company believes that it maintains the types and amounts of insurance
customary in the industry, including coverage for general liability and workers'
compensation. The Company considers its insurance coverage to be adequate both
as to risks and amounts.

LEGAL PROCEEDINGS

From time to time, the Company is party to certain claims, suits and
complaints which arise in the ordinary course of business. Currently, there are
no such claims, suits or complaints which, in the opinion of the Company, would
have a material adverse effect on the Company's business, financial condition,
results of operations and liquidity.

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<PAGE> 50

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following sets forth certain information with respect to directors and
executive officers of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- ---- ------------------------------------------------
<S> <C> <C>
E. Martin Gibson(1)(2)..................... 59 Chairman of the Board, Director
Loren J. Hulber............................ 54 President, Chief Executive Officer and Director
Bernard C. Byrd, Jr........................ 35 Senior Vice President of Operations
Thomas D. Schubert......................... 36 Senior Vice President and Chief Financial and
Accounting Officer
Andrew W. Stith............................ 29 Senior Vice President of Sales and Marketing
Lynn A. Cannon............................. 39 Senior Vice President of Temporary Services
Arthur T. Locilento, Jr.................... 53 Senior Vice President of Human Resources
Christina D. Harris, Esquire............... 35 Senior Vice President of Regulatory Affairs and
Compliance
Marie L. Martino, Esquire.................. 37 General Counsel and Secretary
John H. Foster............................. 55 Director
Timothy E. Foster.......................... 45 Director
Harvey V. Fineberg, M.D., Ph.D.(1)(2)...... 51 Director
Stephen E. O'Neil, Esquire(1)(2)........... 63 Director
</TABLE>

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

(2) Member of Audit Committee

The following is a brief summary of the business experience of each of the
directors and executive officers of the Company:

E. Martin Gibson. Mr. Gibson has been the Chairman of the Board of
Directors of the Company since March 3, 1997. He has served as a director of the
Parent since March 1992. Mr. Gibson, who is retired, served as Chairman and
Chief Executive Officer of Corning Lab Services, Inc., a subsidiary of Corning
Incorporated, from 1990 until December 1994. He currently serves as a director
of International Technology Corp., an environmental management company, of
Hardinge Brothers, Inc., a manufacturer of machine tools, and of Sensus Corp., a
private biotechnology company.

Loren J. Hulber. Mr. Hulber has been the President, Chief Executive
Officer and a director of the Company since March 3, 1997. For the previous ten
years, he served in various capacities for American Brands, Inc., most recently
as President and Chief Executive Officer of Day-Timers, Inc., a subsidiary
specializing in time management and personal organization. From 1973 until 1981,
Mr. Hulber was President and Chief Executive Officer of Durand Corporation, an
office products company. Upon Durand Corporation's acquisition by Jostens, Inc.
in 1981 and until 1987, Mr. Hulber was President of that company's Business
Products Group, a provider of business products and services. Mr. Hulber
currently serves as Vice Chairman of the Board of Trustees of Lehigh Valley
Hospital and Health Network.

Bernard C. Byrd, Jr. Mr. Byrd became Senior Vice President of Operations
of the Company on March 3, 1997. In 1992, he founded the Company's initial
acquisition, Resource One, and served as its President and Chief Executive
Officer. Prior to founding Resource One, Mr. Byrd was Vice President of Finance
for Your Staff, Inc., a PEO that was acquired by Kelly Services, Inc., a
provider of temporary employee services. Before joining Your Staff, Inc., he was
the Chief Financial Officer for Staffing Services, Inc., which was a founding
member of NAPEO. Since 1994, Mr. Byrd has been a member of the Florida Board of
Employee Leasing Companies and serves as its immediate past chairman.

49
<PAGE> 51

Thomas D. Schubert. Mr. Schubert has been the Senior Vice President and
Chief Financial and Accounting Officer of the Company since June 4, 1997. Prior
to joining the Company, he served in various capacities with Chemical Leaman
Tank Lines, Inc., a transportation and logistics company, since 1991, most
recently as Vice President of Finance. From 1984 to 1990, he worked in the
accounting/auditing practice with the Philadelphia office of Ernst & Young where
he managed a variety of client engagements in the manufacturing and service
sectors.

Andrew W. Stith. Mr. Stith became Senior Vice President of Sales and
Marketing of the Company on March 3, 1997. In 1994, he joined the Parent as
Assistant to the Chairman of the Parent. In 1995, Mr. Stith assumed the position
of Vice President of Sales for the Contract Rehabilitation Division of the
Parent. Prior to joining the Parent, from 1992 to 1994, Mr. Stith obtained his
M.B.A. from the Amos Tuck School of Management of Dartmouth College. From 1989
to 1992, he was associated with River Capital, Inc. as a venture capital
associate.

Lynn A. Cannon. Mr. Cannon became Senior Vice President of Temporary
Services of the Company on July 1, 1997. Mr. Cannon founded Cannon & Associates,
Inc., a consulting firm which specializes in advising clients in the long-term
care industry on reimbursement, regulatory and service offering opportunities,
in 1988. Mr. Cannon served as President of Cannon & Associates until 1994, when
it was acquired by the Parent. In May 1994, he became Executive Vice President
of Product Development of the Polaris Group, an operating unit of Cannon &
Associates. In May 1996, Mr. Cannon was appointed President and General Manager
of NovaPro, the Temporary Services division of Cannon & Associates.

Arthur T. Locilento, Jr. Mr. Locilento became Senior Vice President of
Human Resources of the Company on March 3, 1997. From September 1996 to March
1997, Mr. Locilento was a director and Vice President of the Company. From 1988
to 1996, he served as Senior Vice President of Human Resources of the Parent.
From 1982 to 1988, Mr. Locilento served as Senior Vice President of Human
Resources at Shearson Lehman Brothers Inc., a financial services company.

Christina D. Harris, Esq. Ms. Harris became Senior Vice President of
Regulatory Affairs and Compliance of the Company on July 18, 1997. Prior to
joining the Company, she was National Vice President of Marketing (Alternative
Staffing) for AIG Risk Management, Inc. ("AIG") from April 1996 to July 1997.
Before joining AIG, she was Vice President for Legal Affairs and General Counsel
for The Vincam Group, Inc., a PEO, from December 1991 to April 1996. Ms. Harris
has served as NAPEO's chief delegate on employment law to its government affairs
committees and as Chairperson of its Legal Advisory Council. She is also the
immediate past president of the Florida Association of Professional Employer
Organizations ("FAPEO").

Marie L. Martino, Esq. Ms. Martino became General Counsel and Secretary of
the Company on March 3, 1997. She also serves as Assistant General Counsel
responsible for litigation and employment law at the Parent, where she has been
employed since 1994. From 1993 to 1994, Ms. Martino was an associate in the
Labor and Employment Law Group at Dechert Price & Rhoads, a Philadelphia law
firm. For the four years prior to that, she practiced in the employment law
group at Bell Atlantic Corp.

John H. Foster. Mr. Foster became a director of the Company on March 3,
1997. He has been Chairman of the Board of the Parent since December 1984. From
December 1984 until May 1997, he was also Chief Executive Officer of the Parent.
Mr. Foster is a director of Corning Incorporated, an international corporation
with business interests in specialty materials, communications, laboratory
services and consumer products. Since March 1991, Mr. Foster also has been
Chairman of the Board and Chief Executive Officer of Apogee, Inc., a national
provider of mental health services. Mr. Foster is founder and Chairman of Foster
Management Company, an investment advisor, and general partner of various
venture capital investment funds.

Timothy E. Foster. Mr. Foster became a director of the Company on March 3,
1997. He has been Chief Executive Officer of the Parent since May 1997. Between
October 1994 and May 1997, he was President and Chief Operating Officer of the
Parent. He has been a director of the Parent since December 1984. Prior to

50
<PAGE> 52

becoming President, he served in a variety of finance and administrative roles
at the Parent, beginning in 1984. Since February 1993, he has also been a
director of Apogee, Inc.

Harvey V. Fineberg, M.D., Ph.D. Dr. Fineberg became a director of the
Company on March 3, 1997. He was named Provost of Harvard University in July of
1997. Until then, he had been Dean of the Harvard School of Public Health since
1984 and a Professor of Health Policy and Management there since 1982. From 1995
to 1996, he served as President of the Association of Schools of Public Health.
He is also a member of the Institute of Medicine. Dr. Fineberg is a director of
Principal Care, Inc., a women's health care company, and Apogee, Inc.

Stephen E. O'Neil, Esq. Mr. O'Neil became a director of the Company on
March 3, 1997. He has been a director of the Parent since December 1984. Mr.
O'Neil has been a principal of The O'Neil Group, a private investment firm,
since 1981. He is a director of Brown Forman Corporation; Castle Convertible
Fund, Inc.; Spectra Fund, Inc.; Alger Fund, Inc.; and Alger American Funds.

BOARD OF DIRECTORS

All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified, or until their death,
resignation or removal.

Committees. The Company's Board of Directors has established a
Compensation Committee and an Audit Committee. The membership of each committee
is indicated by footnotes to the table above. The Compensation Committee
administers the Company's compensation programs, including the Stock Option Plan
(including determining the persons who are to receive options and the number of
shares subject to each option), and performs such other duties as may from time
to time be determined by the Board of Directors. The Audit Committee reviews the
scope and results of the annual audit of the Company's consolidated financial
statements conducted by the Company's independent accountants, the scope of
other services provided by the Company's independent accountants, proposed
changes in the Company's financial and accounting standards and principles, and
the Company's policies and procedures with respect to its internal accounting,
auditing, financial and legal and regulatory compliance controls. The Audit
Committee also makes recommendations to the Board of Directors on the engagement
of the independent accountants, as well as other matters which may come before
it or as directed by the Board of Directors.

Compensation. Non-employee directors of the Company receive reimbursement
of reasonable expenses incurred in serving as a director. In addition, pursuant
to the Company's Stock Option Plan, each director of the Company who is not an
employee of the Company automatically receives on the date such person first
becomes a director a grant of nonqualified options to purchase 20,000 shares of
Common Stock, which will vest one-third on each anniversary of the date of
grant. In addition, following each annual meeting of the Company's stockholders,
each such outside director will receive an annual grant of options to purchase
an additional 10,000 shares of Common Stock, all of which vest one-third on each
anniversary of the date of grant. The exercise price of all such options is the
fair market value at the time the options are granted. Options to purchase a
total of 20,000 shares of Common Stock have been granted under such arrangement
to each of Messrs. Gibson, O'Neil, John H. Foster, Timothy E. Foster and Dr.
Fineberg at an exercise price of $2.80 per share. Mr. Gibson has received an
additional grant of options to purchase 20,000 shares of Common Stock in
consideration of his service as Chairman of the Company at an exercise price of
$2.80 per share. Directors who are employees of the Company or of the Parent
receive no compensation for their services as directors, except the initial
option grants described in this paragraph.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

Prior to the appointment of the current members of the Compensation
Committee, executive compensation decisions for the Company were made by the
Parent. The Company expects to receive in excess of 5% of its gross revenues for
the next fiscal year from the Parent.

51
<PAGE> 53

EXECUTIVE COMPENSATION

The following table sets forth information for the fiscal year ended June
30, 1997 concerning the compensation paid or awarded to the Chief Executive
Officer and the other most highly compensated executive officer whose salary and
bonus exceeded $100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------ ------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER AWARDS COMPENSATION(1)
- ------------------------------------------------ -------- ------- ---- ------ ------------
<S> <C> <C> <C> <C> <C>
Loren J. Hulber................................. $ 69,231 $31,500 0 0 $1,105
President and Chief Executive Officer
Arthur T. Locilento, Jr......................... $131,117 $73,355 0 25,000 $1,795
Senior Vice President of Human Resources
</TABLE>

- ---------------
(1) Consists of contributions made by the Company to the Company's 401(k) Plan
and the Company's Supplemental Deferred Compensation Plan.

The following table sets forth the grants of stock options to the executive
officers named in the Summary Compensation Table that have occurred during the
current fiscal year ended June 30, 1997:

OPTION GRANTS IN FISCAL YEAR 1997

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
% OF OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/SHARE)(1) DATE 5% 10%
- --------------------------- ------ ---------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arthur T. Locilento,
Jr. ..................... 25,000 7% $ 2.80 2/28/07 $114,020 $181,556
</TABLE>

- ---------------
(1) The per share exercise price equals the fair market value of Common Stock on
the date of grant. There was no trading market for the Common Stock during
the fiscal year ended June 30, 1997. Accordingly, fair market value was
determined by the Board of Directors based on an independent appraisal as of
the grant date.

(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. This table does not take into account any
appreciation in the price of the Common Stock to date.

No options were exercised by the executive officers named in the Summary
Compensation Table during the fiscal year ended June 30, 1997. The following
table sets forth for the executive officers named in the Summary Compensation
Table certain information concerning the value of unexercised options at the end
of the fiscal year ended June 30, 1997:

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Arthur T. Locilento, Jr. .................... 0 25,000 $ 0 $ 180,000
</TABLE>

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

(1) Amounts are shown as the positive spread between the exercise price and fair
market value (based on an estimated initial offering price of $10.00 per
share).

52
<PAGE> 54

Employment and Other Arrangements

Mr. Loren J. Hulber entered into a three-year employment agreement with the
Company on January 10, 1997. Under the agreement, Mr. Hulber receives a base
salary of $200,000 per year. Mr. Hulber is eligible to receive an annual bonus
of up to 50% of his base salary, based on achievement of agreed-to objectives
and attainment of financial targets. He is also entitled to receive a separate
one-time payment of $100,000 if the Offering closes on or before December 31,
1997. Pursuant to his employment agreement, Mr. Hulber purchased 375,000 shares
of the Company's Common Stock on January 10, 1997 at a cost of $1.92 per share,
the fair market value of the Common Stock as of that date. There was no trading
market for the Common Stock on the date of sale. Accordingly, fair market value
was determined by the Board of Directors based on an independent appraisal as of
the sale date. Mr. Hulber's rights to the stock vest in equal parts over three
years. Vesting may be accelerated in the event of a change of control of the
Company or upon termination of Mr. Hulber's employment by the Company. Mr.
Hulber will receive severance of up to one year's salary and bonus upon
termination by the Company without cause.

Mr. Bernard C. Byrd, Jr. entered into a five-year employment agreement with
the Company in October 1996, which agreement was amended in April 1997. Under
the agreement, Mr. Byrd receives a base salary of $75,000 per year, subject to
annual merit reviews. Mr. Byrd is also eligible to receive an annual bonus of up
to $25,000, based on achievement of agreed-to productivity and performance
criteria. Mr. Byrd was a stockholder of Resource One, which the Company acquired
in October 1996. In consideration for his capital stock in Resource One, the
Company paid Mr. Byrd $1,000,000 in cash, issued Mr. Byrd a five-year 6%
subordinated promissory note in the amount of $393,500 and issued Mr. Byrd
93,750 shares of the Company's Common Stock at the closing of the acquisition
and agreed to pay Mr. Byrd (i) $1,000,000 upon the consummation of the Offering
and (ii) certain other additional cash payments and shares of the Company's
Common Stock if Resource One achieves certain operating objectives. Subsequent
to the closing of the transaction, the Company removed the contingency from
certain of Mr. Byrd's additional payments and lent Mr. Byrd $83,700,
collateralized by those payments. Mr. Byrd is currently entitled to receive
future non-contingent payments totaling $440,000 and 61,250 shares of the
Company's Common Stock. Mr. Byrd utilized the loan to purchase 30,000 shares of
the Company's Common Stock. Those shares vest over five years and unvested
shares may be repurchased by the Company if Mr. Byrd should leave the Company
prior to the shares becoming vested. Mr. Byrd also received $360,000 and 22,500
shares of the Company's Common Stock subsequent to the closing in satisfaction
of the Company's obligation with respect to the first contingent payment due
under the acquisition agreement. The Company also repurchased from Mr. Byrd
281,250 shares of the Company's Common Stock at a price of $1.92 per share on
January 10, 1997.

Stock Option Plan

On February 28, 1997, the Company's Board of Directors adopted and its
stockholders approved the Company's 1997 Stock Option Plan (the "Stock Option
Plan") under which 625,000 shares of Common Stock are currently reserved for
issuance upon exercise of stock options. The Stock Option Plan provides for the
grant of both incentive stock options intended to qualify as such under Section
422 of the Code ("incentive stock options") and non-qualified options to
directors, officers, key employees, consultants and other individual
contributors of or to the Company, its parent and its subsidiaries, as
determined at the discretion of the Board. Effective March 3, 1997, the Board
delegated authority to make decisions respecting the grant of options under the
Stock Option Plan to the Compensation Committee of the Board. Pursuant to the
terms of the Stock Option Plan, options may not be granted with an exercise
price that is less than 100% of fair market value of the Company's Common Stock
on the date of grant, as reasonably determined by the Compensation Committee.
The Stock Option Plan will terminate on February 28, 2007, unless sooner
terminated by the Board of Directors.

As of November 6, 1997, there were outstanding under the Stock Option Plan
options to purchase an aggregate of 424,000 shares of Common Stock. Options to
purchase 380,000 shares are at an exercise price of $2.80 per share. The
remaining options to purchase 44,000 shares are at an exercise price of $4.50
per share. None of the options is currently exercisable. The Company intends to
file a registration statement under the Securities Act to register shares of
Common Stock reserved for issuance under the Plan. See "Shares Eligible for
Future Sale."

53
<PAGE> 55

On August 8, and September 5, 1997, the Company granted options to purchase
14,000 and 30,000 shares, respectively, of Common Stock at an exercise price of
$4.50 per share. There was no trading market for the Common Stock as of each
respective date. For financial statement purposes, a fair market value for the
Common Stock of $7.70 on August 8, 1997 and $10.00 on September 5, 1997 has been
determined by the Board of Directors based on a straight line increase from
$4.50 at July 1, 1997 to an estimated public offering price of $10.00.

Accordingly, the Company will record deferred compensation expense, based
on the difference between the exercise price and the fair market value of the
Common Stock on the date of grant, in the aggregate amount of $209,800. This
amount, which was recorded as a reduction to shareholders' equity during the
quarter ended September 30, 1997, will be recognized as compensation expense, on
a straight line basis, over the vesting period of five years.

54
<PAGE> 56

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock (i) as of November 6, 1997 and (ii) as
adjusted to reflect the sale of 4,500,000 shares of Common Stock offered by the
Company in the Offering by (a) each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, (b) each director of
the Company who beneficially owns Common Stock, (c) each of the persons named in
the Summary Compensation Table who beneficially owns Common Stock and (d) all
officers and directors of the Company as a group. Each named beneficial owner
has sole voting and investment power with respect to the shares owned.

<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
---------------------
COMMON STOCK BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
NovaCare, Inc............................................. 19,400,000 94.0% 77.2%
1016 West Ninth Avenue
King of Prussia, PA 19406
Loren J. Hulber........................................... 375,000 1.8% 1.5%
All Directors and Officers as a group (13 persons)........ 536,675 2.6% 2.1%
</TABLE>

55
<PAGE> 57

CERTAIN RELATED PARTY TRANSACTIONS

The Company was founded as a subsidiary of the Parent. After the Offering,
the Parent will own approximately 77% of the Common Stock of the Company. The
Parent has loaned the Company approximately $28.4 million, of which $23.7
million will be repaid from a portion of the proceeds of the Offering. See "Use
of Proceeds." In return for its efforts as the founder and its initial
investment of $40,000, the Company issued 16,000,000 shares of the Company's
Common Stock to a subsidiary of the Parent. In consideration of a license to use
certain intellectual property, it subsequently received 2,200,000 shares of the
Company's Common Stock. In consideration for the transfer of the assets of the
Parent's temporary staffing business on July 1, 1997, the Parent received
1,200,000 shares of the Company's Common Stock. John H. Foster and Timothy E.
Foster are each an officer and director, and E. Martin Gibson and Stephen E.
O'Neil are directors, of the Parent.

In February 1997, the Company entered into the NovaCare Contract under
which the Parent's employees are co-employed by the Company for a five-year
term, ending on January 31, 2002. Under the NovaCare Contract, the Company
provides traditional PEO services such as payroll administration, worksite
safety evaluation, employment-related risk management and compensation and
benefits consultation required by the Parent for its employees, with the
exception of 275 employees in the States of Washington and New Mexico. The
annual revenue derived from the NovaCare Contract will vary based on the number
of the Parent's employees covered by the agreement and the nature of the
services provided. As of June 30, 1997, 15,072 of the Parent's employees were
co-employed under the NovaCare Contract. The Company expects that revenue from
the NovaCare Contract during the 12 months ending December 31, 1997 will be
approximately $600 million. Under the NovaCare Contract, the Company currently
receives a fee that equals the salary and federal payroll tax costs plus 9.7% of
gross earnings of covered employees (a formula which generally results in the
payment of approximately 117% of the gross earnings of such employees). See
"Business -- Employee and Client Service," "Business -- Relationship with the
Parent." See the Company's Consolidated Statement of Operations and Note 2 of
Notes to the Company's Consolidated Statement for information regarding the
contribution of the NovaCare Contract to the Company's revenue.

The Parent has subleased office space to the Company on a pass-through
basis in the Parent's offices in Norristown, Pennsylvania pursuant to a
seven-year sublease under which the Company currently pays approximately $9,000
per month, subject to certain escalations. In addition, the Parent and the
Company have entered into a management services agreement pursuant to which the
Company is permitted to purchase access to the Parent's infrastructure at the
Parent's out-of-pocket cost excluding depreciation and amortization. See
"Business -- Operating Strategy -- Leveraging the Parent's Existing
Infrastructure."

The Company believes that the terms of the transactions with affiliated
persons described above are no less favorable to the Company than the Company
could have obtained from non-affiliated parties.

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 60,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), and 1,000,000
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). At
November 6, 1997, there were 20,643,187 shares of Common Stock outstanding. The
Company has not authorized the issuance of any shares of Preferred Stock.

The following description of certain matters relating to the capital stock
of the Company is a summary and is qualified in its entirety by the provisions
of the Company's Certificate of Incorporation and By-Laws, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus
forms a part.

COMMON STOCK

At November 6, 1997, approximately 26 persons were holders of record of the
20,643,187 shares of Common Stock outstanding. Each holder of record of Common
Stock is entitled to one vote for each outstanding share of Common Stock owned
by such holder, and is not entitled to cumulative voting for the

56
<PAGE> 58

election of directors and does not have preemptive rights. The issued and
outstanding shares of Common Stock are, and all shares of Common Stock to be
issued and to be sold in the Offering will be, validly issued, fully paid and
nonassessable. All shares of Common Stock have equal rights and are entitled to
receive ratably such dividends, if any, as the Board of Directors may declare
from time to time out of funds legally available therefor. Upon liquidation of
the Company, after payment or provision for payment of all of the Company's
debts and obligations and payment in full of all amounts, if any, due to holders
of Preferred Stock, the holders of the Common Stock will share ratably in the
net assets, if any, available for distribution to holders of Common Stock upon
liquidation.

PREFERRED STOCK

The Company is authorized to issue Preferred Stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the Preferred Stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company. The
Company has no present intention to issue any shares of its Preferred Stock.

LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY

Article Sixth of the Certificate of Incorporation of the Company provides
that the Company shall indemnify and hold harmless any director, officer,
employee or agent of the Company from and against any and all expenses and
liabilities that may be imposed upon or incurred by him in connection with, or
as a result of, any proceeding in which he may become involved, as a party or
otherwise, by reason of the fact that he is or was such a director, officer,
employee or agent of the Company, whether or not he continues to be such at the
time such expenses and liabilities shall have been imposed or incurred, to the
extent permitted by the laws of the State of Delaware, as they may be amended
from time to time.

Article Eleventh of the Certificate of Incorporation of the Company
contains a provision which eliminates the personal liability of a director of
the Company to the Company or to any of its stockholders for monetary damages
for a breach of his fiduciary duty as director, except in the case in which the
director breaches his duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized a payment of a
dividend or approved a stock repurchase in violation of the Delaware General
Corporation Law, or obtained an improper personal benefit.

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a public 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 a merger, asset sale and other transaction resulting in a
financial benefit to the interested stockholder. 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.

TRANSFER AGENT

The transfer agent for the Common Stock will be The Bank of New York, New
York, New York.

57
<PAGE> 59

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 25,143,187 shares of
Common Stock outstanding, of which 20,643,187 shares (approximately 82% of the
shares to be outstanding) will be held by persons who acquired such shares in
transactions in which such shares were not registered under the Securities Act.
These shares may not be sold unless registered under the Securities Act or sold
pursuant to an applicable exemption from registration, such as Rule 144 under
the Securities Act ("Rule 144"). Rule 144, as currently in effect and subject to
its provisions and other applicable federal and state securities laws, permits a
person (or persons whose shares are aggregated) who has beneficially owned his
or her shares for at least one year to sell within any three month period a
number of shares that does not exceed the greater of 1% of the total number of
outstanding shares of Common Stock or the average weekly trading volume during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information concerning the Company. Rule 144 also
permits, under certain circumstances, such sales of shares without any quantity
limitations or current public information requirements described above by a
person who is not an affiliate of the Company and who has satisfied a two-year
holding period.

At any time after the consummation of the Offering, holders of an aggregate
of 543,750 shares of the Common Stock may require the Company to register the
shares of the Common Stock held by them with the Commission; provided, however,
that no such registration is required if any firm or counsel representing the
Company in connection with such registration shall advise the Company and such
stockholders that in its opinion registration under the Securities Act is not
necessary to permit the sale of such shares in the intended method of
disposition.

The Company, its officers and directors and substantially all other holders
of Common Stock and securities convertible into or exercisable or exchangeable
for Common Stock have agreed that during the Lockup Period, they will not,
without the prior written consent of BancAmerica Robertson Stephens, offer,
sell, contract to sell or otherwise dispose of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock except in
certain limited circumstances. Upon the expiration of the Lockup Period, at
least 19,380,937 of the shares to be outstanding (approximately 76.4% of such
shares) will be eligible for sale under Rule 144, subject to compliance with
Rule 144 volume limitations. Of the shares which will be eligible for sale under
Rule 144 at such date, 287,008 shares are held by officers, directors and
affiliates of the Company. See "Underwriting."

The Company cannot predict the number of shares of Common Stock which may
be sold in the future pursuant to Rule 144 since such sales will depend upon the
market price of the Common Stock, the individual circumstances of holders
thereof and other factors. Any sales of a substantial number of shares of Common
Stock in the public market could have a significant adverse effect on the market
price of the Common Stock.

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the 625,000 shares of Common Stock authorized and
reserved for issuance pursuant to the Stock Option Plan. Upon the filing of such
Form S-8, outstanding shares of Common Stock so registered may be freely sold
without restriction, except for shares held by officers, directors and other
affiliates of the Company. See "Management -- Executive Compensation -- Stock
Option Plan."

58
<PAGE> 60

UNDERWRITING

The underwriters named below (the "Underwriters"), acting through their
representatives, BancAmerica Robertson Stephens and Smith Barney Inc.
(collectively, the "Representatives"), have severally agreed, subject to the
terms and conditions of an underwriting agreement among the Company and the
Underwriters (the "Underwriting Agreement"), to purchase the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all of such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
BancAmerica Robertson Stephens....................................................
Smith Barney Inc..................................................................

---------
Total................................................................... 4,500,000
=========
</TABLE>

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

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 675,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 4,500,000 shares that the Underwriters have agreed to
purchase from the Company. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the 4,500,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 4,500,000 shares are being sold.

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.

Pursuant to the terms of lock-up agreements, the holders of approximately
20,827,411 shares of the Common Stock have agreed with the Representatives that
during the Lockup Period, subject to certain limited exceptions, they will not
sell or otherwise dispose of shares of Common Stock, including shares issuable
under options or warrants exercisable during the Lockup Period, any options or
warrants to purchase shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock owned directly by such holders or
with respect to which they have the power of disposition without the prior
written consent of BancAmerica Robertson Stephens.

The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.

Certain persons participating in this Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the Offering. Such transactions may
be effected on The Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.

59
<PAGE> 61

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company and the Representatives. Among
the factors considered in determining the initial public offering price will be
the history of, and the prospects for, the Company's business and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, its past and present earnings and the trend of such
earnings, the prospects for earnings of the Company, the present state of the
Company's development, the general condition of the securities market at the
time of the Offering and the market prices and earnings of similar securities of
comparable companies at the time of the Offering.

VALIDITY OF COMMON STOCK

The validity of the Common Stock offered hereby will be passed upon for the
Company by Haythe & Curley, 237 Park Avenue, New York, New York 10017, and for
the Underwriters by Dewey Ballantine LLP, 1301 Avenue of the Americas, New York,
New York 10019.

EXPERTS

The consolidated financial statements of the Company as of June 30, 1997
and for the period from October 1, 1996 (date of inception) to June 30, 1997
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

The financial statements of Resource One as of December 31, 1994 and 1995
and September 30, 1996 and for the years ended December 31, 1994 and 1995 and
the nine-month period ended September 30, 1996 included in this Prospectus have
been so included in reliance on the report of Brewer, Beemer, Kuehnhackl & Koon,
P.A., independent accountants, given on the authority of said firm as experts in
auditing and accounting.

The financial statements of ESA as of December 31, 1994, 1995 and 1996 and
January 31, 1997, and for the years ended December 31, 1994, 1995 and 1996 and
the one-month period ended January 31, 1997 included in this Prospectus have
been so included in reliance on the report of Varnadore, Tyler, Hoffner, King,
Hawthorne, Hammer & Stathis, P.A., independent accountants, given on the
authority of said firm as experts in auditing and accounting.

The financial statements of TPI and subsidiaries as of December 31, 1994,
1995 and 1996 and January 31, 1997 and for the years ended December 31, 1994,
1995 and 1996 and the one-month period ended January 31, 1997 included in this
Prospectus have been so included in reliance on the report of Lazar, Levine &
Company LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.

60
<PAGE> 62

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C. (the "Commission"), a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered hereby
(the "Registration Statement"). This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus
concerning the provisions of any documents filed with the Registration Statement
as exhibits are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed as an exhibit to the Registration Statement, although this Prospectus
contains all information material to investors regarding the provisions of such
document. For further information about the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and to the financial
statements, schedules and exhibits filed as a part thereof.

Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports and other
information with the Commission. The Registration Statement, the exhibits and
schedules forming a part thereof and the reports and other information filed by
the Company with the Commission in accordance with the Exchange Act may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at its New York Regional Office located at Seven World Trade
Center, New York, New York 10048 and its Chicago Regional Office located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, copies of such
documents can be obtained from the public reference section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed
rates. In addition, the Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission through the
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The
Registration Statement has been filed electronically through EDGAR and may be
retrieved through the Commission's Web site on the Internet. The statements
contained in this Prospectus concerning any contract or document are not
necessarily complete; where such contract or other document is an exhibit to the
Registration Statement, each such statement is qualified in all respects by the
provisions of such exhibit.

61
<PAGE> 63

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NovaCare Employee Services, Inc. and Subsidiaries
Report of Independent Accountants................................................... F-3
Consolidated Balance Sheet and Pro Forma Unaudited Balance Sheet as of June 30,
1997............................................................................. F-4
Consolidated Statement of Operations for the period October 1, 1996 (inception) to
June 30, 1997.................................................................... F-5
Consolidated Statement of Shareholders' Equity for the period October 1, 1996
(inception) to June 30, 1997..................................................... F-6
Consolidated Statement of Cash Flows for the period October 1, 1996 (inception) to
June 30, 1997.................................................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
Unaudited Pro Forma Combined Financial Information
Pro Forma Combined Financial Information............................................ F-19
Pro Forma Unaudited Combined Statement of Operations for the year ended June 30,
1997............................................................................. F-20
Notes to the Unaudited Pro Forma Combined Statement of Operations................... F-21
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997.................. F-23
Notes to the Unaudited Pro Forma Consolidated Balance Sheet......................... F-24
Resource One, Inc.
Independent Auditors Report......................................................... F-25
Combined Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996..... F-26
Combined Statements of Income for the two years in the period ended December 31,
1995 and the nine months ended September 30, 1996................................ F-27
Combined Statements of Changes in Stockholders' Equity for the two years in the
period ended December 31, 1995 and the nine months ended September 30, 1996...... F-28
Combined Statements of Cash Flows for the two years in the period ended December 31,
1995 and the nine months ended September 30, 1996................................ F-29
Notes to Combined Financial Statements.............................................. F-30
Employee Services of America, Inc. and Subsidiaries
Report of Independent Certified Public Accountants.................................. F-35
Combined Balance Sheet as of January 31, 1997....................................... F-36
Combined Statement of Income for the one month ended January 31, 1997............... F-37
Combined Statement of Shareholders' Equity for the one month ended January 31,
1997............................................................................. F-38
Combined Statement of Cash Flows for the one month ended January 31, 1997........... F-39
Notes to Combined Financial Statements.............................................. F-40
Report of Independent Certified Public Accountants.................................. F-45
Combined Balance Sheets as of December 31, 1994, 1995 and 1996...................... F-46
Combined Statements of Income for the three years in the period ended December 31,
1996............................................................................. F-47
Combined Statements of Shareholders' Equity for the three years in the period ended
December 31, 1996................................................................ F-48
Combined Statements of Cash Flows for the three years in the period ended December
31, 1996......................................................................... F-49
Notes to Combined Financial Statements.............................................. F-50
</TABLE>

F-1
<PAGE> 64

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The TPI Group, Ltd. and Subsidiaries
Independent Auditors' Report........................................................ F-56
Consolidated Balance Sheet as of January 31, 1997................................... F-57
Consolidated Statement of Operations for the one month period ended January 31,
1997............................................................................. F-58
Consolidated Statement of Stockholders' Equity for the one month period ended
January 31, 1997................................................................. F-59
Consolidated Statement of Cash Flows for the one month period ended January 31,
1997............................................................................. F-60
Notes to Consolidated Financial Statements.......................................... F-61
Independent Auditors' Report........................................................ F-68
Consolidated Balance Sheets as of December 31, 1994, 1995 and 1996.................. F-69
Consolidated Statements of Operations for the three years in the period ended
December 31, 1996................................................................ F-70
Consolidated Statements of Stockholders' Equity for the three years in the period
ended December 31, 1996.......................................................... F-71
Consolidated Statements of Cash Flows for the three years in the period ended
December 31, 1996................................................................ F-72
Notes to Consolidated Financial Statements.......................................... F-73
</TABLE>

F-2
<PAGE> 65

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of NovaCare Employee Services, Inc.

In our opinion, the accompanying Consolidated Balance Sheet and the related
Consolidated Statements of Operations, of Cash Flows and of Changes in
Shareholders' Equity present fairly, in all material respects, the financial
position of NovaCare Employee Services, Inc. and its subsidiaries (the
"Company") at June 30, 1997, and the results of their operations and their cash
flows for the period from October 1, 1996 (inception) to June 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Philadelphia, Pennsylvania

July 31, 1997, except for Notes 1 and 13 as to which the date is November 6,
1997

F-3
<PAGE> 66

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30,
1997 1997
-------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 1,782 $ 1,782
Accounts receivable:
Related party (Note 2).......................................... 27,607 27,607
Unbilled........................................................ 7,215 7,215
Third parties, net of allowance for doubtful accounts of $26.... 1,910 1,910
Deferred income taxes.............................................. 296 296
Other current assets............................................... 1,069 1,069
------- -------
Total current assets....................................... 39,879 39,879
Property and equipment, net.......................................... 1,326 1,326
Excess cost of net assets acquired, net.............................. 53,691 53,691
Other assets, net.................................................... 1,102 1,102
------- -------
$ 95,998 $95,998
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangements.......................... $ 298 $ 298
Accounts payable and accrued expenses.............................. 6,172 6,172
Accrued salaries, wages and payroll taxes.......................... 28,159 28,159
Current portion of accrued workers' compensation and health
claims.......................................................... 5,423 5,423
Note payable to related party (Note 2)............................. 28,382 28,382
Current portion of deferred purchase price obligations............. 18,905 18,905
Income taxes payable............................................... 1,382 1,382
------- -------
Total current liabilities.................................. 88,721 88,721
Financing arrangements, net of current portion....................... 1,068 1,068
Accrued workers' compensation and health claims, net of current
portion............................................................ 1,910 1,910
Deferred purchase price obligations, net of current portion.......... 856 856
Other................................................................ 411 411
------- -------
Total liabilities.......................................... 92,966 92,966
------- -------
Commitments and contingencies (Note 12).............................. -- --
Mandatorily redeemable common stock.................................. 2,731 --
Shareholders' equity:
Preferred stock, $.01 par value; authorized 1,000 shares; no shares
issued or outstanding........................................... -- --
Common stock, $.01 par value; authorized 60,000 shares, issued
19,193 shares (20,006 shares pro forma)......................... 192 200
Additional paid-in capital......................................... 1,189 3,912
Retained earnings.................................................. -- --
------- -------
1,381 4,112
Less: Common stock in treasury (at cost), 563 shares............... (1,080) (1,080)
------- -------
Total shareholders' equity................................. 301 3,032
------- -------
$ 95,998 $95,998
======= =======
</TABLE>

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

F-4
<PAGE> 67

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OCTOBER 1, 1996
(INCEPTION) TO
JUNE 30, 1997
---------------
<S> <C>
Revenues:
Related party (Note 2)..................................................... $ 255,289
Third parties.............................................................. 138,904
---------
Total revenues..................................................... 394,193
Direct costs:
Related party (Note 2):
Salaries, wages and employment taxes of worksite employees.............. 234,182
Health care and workers' compensation................................... 14,362
State unemployment taxes and other...................................... 1,006
Third parties:
Salaries, wages and employment taxes of worksite employees.............. 123,056
Health care and workers' compensation................................... 8,199
State unemployment taxes and other...................................... 1,150
---------
Gross profit....................................................... 12,238
Selling, general and administrative expenses................................. 8,247
Provision for uncollectible accounts......................................... 26
Amortization of excess cost of net assets acquired........................... 1,034
---------
Income from operations............................................. 2,931
Investment income............................................................ 52
Interest expense............................................................. (56)
Interest expense -- related party (Note 2)................................... (693)
---------
Income before income taxes......................................... 2,234
Income taxes................................................................. 1,542
---------
Net income......................................................... $ 692
=========
Historical information:
Net (loss) applicable to common stock...................................... $ (341)
=========
Net (loss) per share....................................................... $ (.02)
=========
Weighted average shares outstanding........................................ 20,574
=========
Unaudited pro forma information:
Unaudited pro forma net income............................................. $ 692
=========
Unaudited pro forma net income per share................................... $ .03
=========
Unaudited pro forma weighted average shares outstanding.................... 20,574
=========
Unaudited supplemental pro forma information:
Unaudited supplemental pro forma net income................................ $ 1,025
=========
Unaudited supplemental pro forma net income per share...................... $ .04
=========
Unaudited supplemental weighted average shares outstanding................. 25,074
=========
</TABLE>

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

F-5
<PAGE> 68

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
SHARES ISSUED COMMON ADDITIONAL
----------------- STOCK TREASURY PAID-IN RETAINED
COMMON TREASURY ($.01 PAR VALUE) STOCK CAPITAL EARNINGS
------ -------- ---------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996
(inception)................... -- -- $ -- $ -- $ -- $ --
Common stock issued to related
party (Note 2)................ 6,200 -- 62 -- --
Common stock issued to
employees..................... 430 -- 4 -- 870 --
Common stock split.............. 12,000 -- 120 -- (120) --
Repurchase of common stock...... 563 (563) 6 (1,080) 780 --
Accretion of mandatorily
redeemable common stock....... -- -- -- -- (341) (692)
Net income...................... -- -- -- -- -- 692
------ ---- ---- ------- ------ -----
Balance at June 30, 1997........ 19,193 (563) $192 $(1,080) $1,189 $ --
====== ==== ==== ======= ====== =====
</TABLE>

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

F-6
<PAGE> 69

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
OCTOBER 1, 1996
(INCEPTION) TO
JUNE 30, 1997
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 692
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization.............................................. 1,285
Provision for uncollectible accounts....................................... 26
Deferred income taxes...................................................... 116
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable -- third parties.................................... (2,293)
Accounts receivable -- related party (Note 2)........................... (27,607)
Other current assets.................................................... 114
Accounts payable and accrued expenses................................... (1,309)
Accrued salaries, wages and payroll taxes............................... 22,865
Accrued interest -- related party (Note 2).............................. 693
Accrued workers' compensation and health claims......................... 4,113
Income taxes payable.................................................... 1,037
Other, net.............................................................. 164
-------
Net cash flows used in operating activities........................ (104)
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of cash acquired....................... (24,250)
Additions to property and equipment.......................................... (329)
Other, net................................................................... (387)
-------
Net cash flows used in investing activities........................ (24,966)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing arrangements with related party (Note 2)............. 27,689
Payment of long-term debt and credit arrangements............................ (94)
Proceeds from common stock issued............................................ 914
Purchase of treasury stock................................................... (1,080)
Other, net................................................................... (577)
-------
Net cash flows provided by financing activities.................... 26,852
-------
Net increase in cash and cash equivalents.................................... 1,782
Cash and cash equivalents, beginning of year................................. --
-------
Cash and cash equivalents, end of year....................................... $ 1,782
=======
</TABLE>

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

F-7
<PAGE> 70

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: NovaCare Employee Services, Inc. (the "Company") is
a national professional employer organization ("PEO") that provides businesses
with comprehensive, fully integrated outsourcing solutions to human resource
issues, including payroll management, risk management, benefits administration,
unemployment services, rehabilitation temporary staffing and human resource
consulting services. The Company provides such services to small and
medium-sized companies in a variety of industries. The Company operates
primarily in Florida, Pennsylvania, New York and California with such states
accounting for approximately 29%, 10%, 9%, and 6%, respectively, of the
Company's 1997 revenues.

Employee services are typically provided under a standard PEO services
agreement which provides for an initial one year term; thereafter, the agreement
is renewable periodically. The agreement is subject to termination without cause
by the Company or the client at any time upon 30 days' prior written notice.

The Company was established by NovaCare, Inc. (the "Parent") in September
1996 as a subsidiary and began operation in October 1996 with the acquisition of
Resource One, Inc. ("Resource One"), a PEO based in Florida. In February 1997,
the Company acquired three additional PEOs -- Employee Services of America, Inc.
("ESA") and Prostaff Human Resources, Inc. ("Prostaff") in Florida and The TPI
Group, Ltd. ("TPI") in New York, and entered into a contract with the Parent to
co-employ substantially all of the Parent's workforce (the "NovaCare Contract")
(See Note 2).

The Parent established the Company and entered into the NovaCare Contract
primarily because (i) the Company provides a vehicle for the Parent to leverage
its core competencies and investments in human resource management, information
systems, relationship selling, workers' compensation risk management,
outsourcing and management of a dispersed workforce, and (ii) by leveraging the
investments already made in its core competencies, the Parent can increase the
return to its shareholders from those investments.

Principles of Consolidation: The Consolidated Financial Statements include
the accounts of NovaCare Employee Services, Inc. and all wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.

Revenue Recognition: Revenues and the related costs of wages, salaries,
and employment taxes pertaining to worksite employees are recognized in the
period in which the employee performs the service. Because the Company is at
risk for all of its direct costs, independently of whether payment is received
from its clients, and consistent with industry practice, all amounts billed to
clients for gross salaries and wages, related employment taxes, and health care
and workers' compensation coverage are recognized as revenue by the Company. The
Company establishes an allowance for doubtful accounts for both related and
third party accounts receivable based on prior experience.

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 at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents: The Company considers its holdings of highly
liquid debt and money-market instruments to be cash equivalents if the
securities mature within 90 days from the date of acquisition. These investments
are carried at cost, which approximates fair value.

Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets, which principally range from three to ten years.

F-8
<PAGE> 71

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Assets under capital leases and leasehold improvements are amortized over the
lesser of the lease term or the asset's estimated useful life.

Excess Cost of Net Assets Acquired: Assets and liabilities acquired in
connection with business combinations accounted for under the purchase method
are recorded at their respective fair values. Deferred taxes have been recorded
to the extent of the difference between the fair value and the tax basis of the
assets acquired and liabilities assumed. The excess of the purchase price over
the fair value of net assets acquired, including the recognition of applicable
deferred taxes, consists of non-compete agreements, customer lists, assembled
workforce, and goodwill and is amortized on a straight-line basis over the
estimated useful lives of the assets which range from five to 40 years. The
Company will perform a periodic assessment of the recoverability of goodwill
based on estimated future cash flows.

Workers' Compensation: The Company is contractually obligated to provide
workers' compensation coverage for its employees and co-employees. The Company
accomplishes this through a combination of various commercial insurance policies
and self insurance programs. The Company records estimated accruals for workers'
compensation and health care claims, including estimates for incurred but not
reported claims, based upon review of the claims activity and past experience.
Management believes any differences which may arise between actual settlement of
claims and reserves at June 30, 1997 would not have a material effect on the
Company's financial position.

On July 1, 1997, the Company entered into a three-year contract with a
commercial insurance company for workers' compensation coverage. Under this
program, the Parent's worksite employees will continue to be covered under a
self insurance program. Other worksite employees will be covered under a fixed
cost insurance program, which is subject to certain per incident and aggregate
deductibles.

Income Taxes: The Company records deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.

Historical, Unaudited Pro Forma and Unaudited Supplemental Pro Forma Net
Income Per Share: Net income per share has been computed in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB 83").
SAB 83 requires that common shares issued by the Company in the twelve months
immediately preceding a proposed public offering plus the number of common
equivalent shares which became issuable during the same period pursuant to the
grant of stock options at prices substantially less than the initial public
offering price be included in the calculation of common stock and common stock
equivalent shares, using the treasury stock method, as if they were outstanding
for all periods presented.

Historical net income per share is computed by dividing net income, net of
the accretion of mandatorily redeemable common stock (see Note 10), by the
number of shares of common stock and common stock equivalents outstanding at
September 5, 1997, the last date on which any common stock or common stock
equivalent was issued.

Unaudited pro forma net income per share is computed by dividing net
income, without consideration to the accretion of mandatorily redeemable common
stock, by the number of shares of common stock and common stock equivalents
outstanding as of September 5, 1997.

The Company intends to use a portion of the net proceeds from offering
4,500,000 shares of its common stock to retire certain indebtedness (see Note
13), and therefore has presented unaudited supplemental pro forma net income per
common share in the accompanying financial statements. Unaudited supplemental
net income per share is computed by dividing net income, adjusted for the
elimination of applicable interest expense, net of related income tax effect, by
total outstanding shares as of September 5, 1997 plus estimated additional
shares required to be sold, at the assumed Offering price on November 6, 1997,
to retire outstanding debt.

F-9
<PAGE> 72

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The calculation of historical net income per share applicable to common
stock, pro forma net income per share and supplemental pro forma net income per
share is as follows:

<TABLE>
<CAPTION>
FOR THE PERIOD ENDED JUNE 30, 1997
-----------------------------------------
UNAUDITED UNAUDITED
PRO SUPPLEMENTAL
HISTORICAL FORMA PRO FORMA
---------- --------- ------------
<S> <C> <C> <C>
Net income........................................ $ 692 $ 692 $ 692
ADJUSTMENT TO NET INCOME:
Deduct -- Accretion of mandatorily redeemable
common stock................................. (1,033) -- --
Add -- Elimination of interest, net of tax, upon
assumed payment of debt...................... -- -- 333
------ ------ ------
Net (loss) income attributable to common stock.... $ (341) $ 692 $1,025
====== ====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING(1):
Shares issued during the period................. 18,576 18,576 18,576
Mandatorily redeemable common stock (Note 10)... 662 662 662
Issue of 1,200,000 shares for purchase of
NovaPro (Note 13)............................ 750 750 750
Common equivalent -- guaranteed stock payments
to be issued (Note 3)........................ 301 301 301
Common equivalent -- stock options (Note 11).... 285 285 285
Common equivalent -- debt retired............... -- -- 4,500
------ ------ ------
Weighted average shares outstanding............. 20,574 20,574 25,074
====== ====== ======
Net (loss) income per share..................... $ (.02) $ .03 $ .04
====== ====== ======
</TABLE>

- ---------------
(1) Calculated using the treasury stock method, in accordance with SAB 83.

Recently Issued Accounting Standards: In June 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") as amended by the December 1996
issuance of Statement of Financial Accounting Standards No. 127, "Deferral of
the Effective Date of Certain Provisions of SFAS No. 125" ("SFAS 127"). SFAS
125, as amended, provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
does not believe the adoption of SFAS 125, as amended, will have a material
effect on the Company's financial position or results of operations.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
which the Company is required to adopt no later than the second quarter of
fiscal year 1998. SFAS 128 establishes accounting standards for computing and
presenting earnings per share by replacing the presentations of weighted shares
outstanding, inclusive of common stock equivalents, with a dual presentation of
basic earnings per share which excludes dilution ("earnings per share") and
diluted earnings per share ("earnings per share-assuming dilution") which
includes the dilutive effect of all potentially exercisable or convertible
stock. Once adopted, SFAS 128 requires restatement of all prior period earnings
per share data.

2. RELATED PARTY TRANSACTIONS

In return for its efforts as the founder, its initial investment of $40 and
the use of the Parent's trademark, the Company issued 18,200,000 shares (as
adjusted for the common stock split -- see Note 9) of the common

F-10
<PAGE> 73

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock to the Parent. Given that the transactions were between companies under
common control, the issuance of shares was recorded at the cost basis of the
Parent. The excess of the consideration given to the Parent over the Parent's
cost basis in the assets transferred was recorded as a reduction of additional
paid-in capital, the same account credited upon issuance of the shares.
Therefore, the transaction had no net effect on shareholders' equity.

Effective October 1996, the Company entered into a line of credit agreement
with the Parent which provides for an unspecified availability. Amounts borrowed
are due upon the earlier of the initial public offering of the common stock of
the Company or the termination date of the Parent's revolving credit agreement,
which is currently November 1999. Interest is charged to the Company at the
Parent's borrowing rate which is the EuroDollar rate plus a range of 0.5% to
1.125%. The weighted average borrowing rate over the period from October 1, 1996
to June 30, 1997 was 6.6%. The Parent has established an irrevocable letter of
credit on behalf of the Company in the amount of $1,141 which expires on
December 31, 1997. The letter has been established to meet the security
requirements of the Company's workers' compensation policy held with a
commercial insurance carrier at June 30, 1997. No amount is outstanding at June
30, 1997.

In February 1997, the Parent and the Company entered into the NovaCare
Contract, whereby the Parent's employees are co-employed by the Company in a
five-year term with automatic annual renewals. Under the NovaCare Contract, the
Company provides traditional PEO services such as payroll and benefits
administration, worksite safety evaluation, employment-related risk management
and benefits consultation. The Parent pays the Company a fee for its services
currently equal to the salary and Federal payroll costs plus 9.7% of gross
earnings of employees, or approximately 117% of the gross earnings of the
employees covered by the NovaCare Contract. The Parent may not terminate the
NovaCare Contract except in the event of: (i) the breach of any of the Company's
agreements, duties, or performance standards under the NovaCare Contract; (ii)
the making of false or misleading representations, warranties, or statements of
material fact in documents submitted by or on behalf of the Company to the
Parent; or (iii) the insolvency, bankruptcy, or receivership of the Company.

The Parent has subleased office space to the Company. The sublease is a
month-to-month arrangement, terminable on 30 days' notice by either party, under
which the Company pays the Parent approximately $9 per month which equals the
Parent's cost.

The Parent also provides information systems consulting services and
general administrative and financial services to the Company on an as-needed
basis at the Parent's cost. During fiscal 1997 the Company reimbursed the Parent
for certain expenses, in the amount of $160, based upon estimates of time
incurred by the Parent's personnel on behalf of the Company.

As described in Note 13 -- Subsequent Events, effective July 1, 1997 the
Company acquired the assets and liabilities of NovaPro, a rehabilitation
temporary staffing business of the Parent.

The terms of the aforementioned related party transactions are equivalent
to those that would result from transactions among unrelated parties.

3. ACQUISITIONS

During the period from October 1, 1996 through June 30, 1997, the Company
acquired four professional employer organizations located in the northeastern
and southeastern portions of the United States.

The following unaudited pro forma consolidated results of operations of the
Company give effect to each of the acquisitions as if they occurred on October
1, 1996.

F-11
<PAGE> 74

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FOR THE PERIOD FROM
OCTOBER 1, 1996
(INCEPTION) TO
JUNE 30, 1997
-------------------
<S> <C>
Revenues.................................................. $ 476,929
Net loss.................................................. (2,346)
Pro forma net loss per share.............................. $ (.11)
</TABLE>

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

Information with respect to businesses acquired in purchase transactions
was as follows:

<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
-------------
<S> <C>
Goodwill....................................................... $46,440
Customer lists................................................. 5,488
Other.......................................................... 2,797
-------
Excess cost of net assets acquired........................... 54,725
Less: accumulated amortization............................... 1,034
-------
$53,691
=======
</TABLE>

<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
JUNE 30, 1997
-------------
<S> <C>
Cash paid (net of cash acquired)............................. $24,250
Deferred purchase price obligations.......................... 19,948
Mandatorily redeemable common stock (Note 10)................ 2,452
Notes issued................................................. 1,328
Other consideration.......................................... 1,178
-------
49,156
Liabilities assumed.......................................... 15,199
-------
64,355
Fair value of assets acquired................................ 9,630
-------
Cost in excess of fair value of net assets acquired..... $54,725
=======
</TABLE>

The acquisitions were accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was allocated to net
assets acquired based on their estimated fair values. Net assets acquired
consisted primarily of accounts receivable and property and equipment. The
acquired accounts receivable were recorded at their estimated fair value on the
date of acquisition with a discount from face value of $773 after consideration
of the collectibility of outstanding receivables.

Certain purchase agreements require additional payments if specific
financial targets and non-financial conditions are met. Of the aggregate
contingent amounts of $2,500 cash and 125,000 shares of common stock payable
under these agreements, $400 cash and 25,000 shares of mandatorily redeemable
common stock, valued at $70, have been accrued at June 30, 1997. The remaining
contingent payments have not been included in the cost of businesses acquired
because the amount of such contingent consideration, if any, is not presently
determinable. During the period from October 1, 1996 (inception) through June
30, 1997, the Company paid $1,428 in cash and issued 85,000 shares of
mandatorily redeemable common stock in connection with these agreements, valued
at $238.

F-12
<PAGE> 75

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred purchase obligations at June 30, 1997 of $19,761 represent $19,291
of guaranteed purchase price payments due to former owners and the $470 accrued
for additional contingent payments. Of the $19,291 guaranteed purchase price
payments, $17,500 is due upon the earlier of an initial public offering of the
Company's common stock or December 31, 1997, and $900 in cash and 341,063
shares, valued at $891, is payable within two years of the date of acquisition.
The $470 accrued for additional contingent payments, consisting of $400 in cash
and 25,000 shares, valued at $70, has been accrued based on the expectation that
the acquired company will meet its financial targets. These payments, if earned,
will be due on March 31, 1998. The shares have been included in the computation
of weighted average shares outstanding.

4. PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
-------------
<S> <C>
Land and buildings............................................. $ 70
Property, equipment and furniture.............................. 1,019
Leasehold improvements......................................... 162
Capitalized software........................................... 240
------
1,491
Less: accumulated depreciation and amortization................ 165
------
$ 1,326
======
</TABLE>

Depreciation expense for the period from October 1, 1996 (inception) to
June 30, 1997 was $165.

5. FINANCING ARRANGEMENTS

Financing arrangements consisted of the following:

<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
-------------
<S> <C>
Subordinated promissory notes (6% to 10%), payable through
2002......................................................... $ 1,322
Capitalized lease obligations, payable through 2000............ 44
------
1,366
Less: current portion.......................................... 298
------
$ 1,068
======
</TABLE>

At June 30, 1997, aggregate annual maturities of financing arrangements
were as follows for the next five fiscal years and thereafter:

<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------
<S> <C>
1998........................................................ $ 298
1999........................................................ 306
2000........................................................ 311
2001........................................................ 290
2002........................................................ 136
Thereafter.................................................. 25
------
$1,366
======
</TABLE>

F-13
<PAGE> 76

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Interest paid on debt during the period October 1, 1996 through June 30,
1997 amounted to $49.

6. ACCRUED WORKERS' COMPENSATION AND HEALTH CLAIMS

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

<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
-------------
<S> <C>
Accrued health benefit premiums payable and claims reserves.... $ 3,756
Accrued workers' compensation premiums payable and claims
reserves..................................................... 3,577
-------
7,333
Less: workers' compensation claims expected to be settled in
more than one year........................................... 1,910
-------
$ 5,423
=======
</TABLE>

Under the NovaCare Contract as described in Note 2, the Company is
self-insured for certain health benefits up to $150 per individual per year. The
Company expensed amounts for estimated losses occurring from both asserted and
unasserted claims. The estimate of the liability for unasserted claims arising
from unreported incidents is based on an analysis of historical claims rates.

The Parent has a defined contribution 401(k) plan in which certain of the
Company's employees participate. Company contributions for the period from
October 1, 1996 to June 30, 1997 related to those employees were $19. The
Company established a non-qualified supplemental benefit plan covering certain
key employees. The Company's matching contribution was $25 for the same period.

7. INCOME TAXES

The components of income tax expense were as follows:

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996
(INCEPTION) TO
JUNE 30, 1997
---------------
<S> <C>
Current:
Federal.................................................... $ 937
State...................................................... 470
------
1,407
------
Deferred:
Federal.................................................... 122
State...................................................... 13
------
135
------
$ 1,542
======
</TABLE>

F-14
<PAGE> 77

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of net deferred tax assets as of June 30, 1997 were as
follows:

<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
-------------
<S> <C>
Net operating loss carryforward................................ $ 2,454
Accruals and reserves not currently deductible for tax
purposes..................................................... 363
----
Gross deferred tax assets...................................... 2,817
Valuation reserve.............................................. (2,454)
----
Total deferred tax assets...................................... 363
Expenses capitalized for financial statement purposes.......... (67)
----
Net deferred tax asset.................................... $ 296
====
</TABLE>

In fiscal 1997, the Company acquired net operating loss carryforwards of
approximately $6,000 expiring through 2010. The Internal Revenue Code of 1986,
as amended (the "Code"), places certain restrictions on the use of net operating
loss carryforwards acquired through purchase transactions. Accordingly, the
Company has placed a full valuation allowance against these amounts.

The reconciliation of the expected tax expense (computed by applying the
federal statutory tax rate to income before income taxes) to actual tax expense
was as follows:

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996
(INCEPTION) TO
JUNE 30, 1997
---------------
<S> <C>
Expected Federal income tax expense.......................... $ 782
State income taxes, less Federal benefit..................... 470
Non-deductible amortization of excess cost of net assets
acquired................................................... 349
Tax credits.................................................. (10)
Other, net................................................... (49)
------
$ 1,542
======
</TABLE>

Income taxes paid during the period October 1, 1996 through June 30, 1997
amounted to $178.

8. OPERATING LEASES

The Company rents office space and equipment under non-cancelable operating
leases. Total rent expense charged to operations was $394 for the period from
October 1, 1996 to June 30, 1997.

Future minimum lease commitments for all non-cancelable leases as of June
30, 1997 are as follows:

<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
---------------------------------------------------------- ---------
<S> <C>
1998...................................................... $ 832
1999...................................................... 711
2000...................................................... 555
2001...................................................... 531
2002...................................................... 464
Thereafter................................................ 986
------
Total minimum lease payments.............................. $ 4,079
======
</TABLE>

F-15
<PAGE> 78

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. SHAREHOLDERS' EQUITY

On September 16, 1996, the Board of Directors authorized 1,000,000 shares
of preferred stock with a par value of $.01 per share. No shares are issued and
outstanding as of June 30, 1997, nor were there shares issued and outstanding at
any time during the period from inception to June 30, 1997.

During the period from October 1, 1996 through June 30, 1997, five
employees purchased 430,000 shares of the Company's common stock. The Chief
Executive Officer of the Company purchased 375,000 shares of the Company's
common stock on January 10, 1997 at the fair market value of $1.92 per share.
The other shares were purchased on various dates from February 28, 1997 through
June 10, 1997 at the fair market value of $2.80 per share.

On January 2, 1997, the Board of Directors declared a four-for-one stock
split of the Company's common stock to shareholders of record on January 2,
1997. Accordingly, $126 was transferred from additional paid-in capital to
common stock, representing the par value of additional shares issued.

On January 2, 1997, the Company repurchased 562,500 shares of mandatorily
redeemable common stock from a former owner of an acquired business. Upon
repurchase, the mandatorily redeemable common stock becomes a component of
permanent equity. Accordingly, the 562,500 shares and the related par value and
additional paid-in capital associated with these shares have been reflected in
the accompanying consolidated statement of shareholders' equity.

10. MANDATORILY REDEEMABLE COMMON STOCK

In connection with the acquisitions described in Note 3, 1,375,687 shares
(as adjusted for the stock split -- see Note 9) of common stock were issued
subject to an agreement which provides certain registration rights with respect
to the common stock, as well as the right, two years from the date of
acquisition, to put the shares to the Company at a price of $16.00 per share.
The put option is rendered inoperative if the Company files an initial public
offering of the Company's common stock prior to two years from the date of
acquisition and, in one case, the Company is publicly trading on December 31,
1998.

Of the 1,375,687 shares, 750,000 (as adjusted for the stock split), 375,000
and 154,687 were issued, as of the date of acquisition, to the selling
shareholders of Resource One, ESA and TPI, respectively, at the fair market
value per share of $1.20 (as adjusted for the stock split) for Resource One and
$2.48 for ESA and TPI. Subsequent to the date of acquisition, contingent and
non-contingent payments of 41,250, 43,750, and 11,000 shares were issued with
respect to the Resource One, ESA and Prostaff acquisitions, respectively, at the
fair market value of $2.80 per share.

The mandatorily redeemable common stock was recorded at the fair value at
the date of issuance. The excess of the put price over the carrying value is
being accreted by periodic charges to retained earnings or additional paid-in
capital, as applicable, over a two year period. As of June 30, 1997, 813,187
shares of mandatorily redeemable common stock are outstanding. During the period
from October 1, 1996 to June 30, 1997, the Company recorded $1,033 of accretion
to retained earnings and additional paid-in capital.

11. BENEFIT PLANS

Stock Option Plan:

On February 28, 1997, the Company's Board of Directors adopted and its
shareholders approved the Company's 1997 Stock Option Plan (the "Plan") under
which 625,000 shares of common stock are currently reserved for issuance upon
the exercise of stock options. Under the Plan, substantially all options are
granted for a term of up to 10 years at prices equal to the fair value at the
date of grant. Options granted generally are exerciseable at the rate of 20% per
year, on a cumulative basis, commencing one year after the date of grant. At
June 30, 1997, the weighted average remaining contractual life of the
outstanding options was 9.67 years.

F-16
<PAGE> 79

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summarizes the activity of this stock option plan:

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996
(INCEPTION) TO
JUNE 30, 1997
---------------
<S> <C>
Options:
Granted.................................................... 375,000
Canceled................................................... (4,000)
--------
Outstanding at end of year................................. 371,000
========
Option price per share ranges:
Granted.................................................... $2.80
Outstanding at end of year................................. $2.80
Options exercisable at end of year........................... --
Options available for grant at end of year under the 1997
Stock Option Plan.......................................... 254,000
</TABLE>

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for the plan. The table below sets
forth the pro forma information as if the Company had adopted the compensation
recognition provisions of SFAS 123:

<TABLE>
<CAPTION>
OCTOBER 1, 1996
(INCEPTION) TO
JUNE 30, 1997
---------------
<S> <C>
Increase to:
Net income................................................. $13
Net income per share....................................... --
Assumptions:
Expected life (years)...................................... 4.6 - 6.6
Risk-free interest rate.................................... 6.1% - 6.5%
Volatility................................................. 0%
Dividend yield............................................. N/A
</TABLE>

The compensation recognition was calculated assuming a fair market value
for the Company's common stock equal to the assumed share value as of the date
of the initial public offering. Certain options were grouped together for
purposes of valuation based upon vesting periods and the date of grant. The
weighted average fair value of the stock options, calculated using the
Black-Scholes option pricing model, granted during the period ended June 30,
1997 was $0.82.

12. COMMITMENTS AND CONTINGENCIES

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

The Company's employer and health care operations are subject to numerous
Federal, state and local laws related to employment, taxes and benefit plan
matters. Generally, these regulations affect all companies in the United States.
However, the regulatory environment for professional employer organizations is
an evolving area due to uncertainties resulting from the non-traditional
employment relationships. Many Federal

F-17
<PAGE> 80

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and state laws relating to tax and employment matters were enacted prior to the
development of PEO companies and do not specifically address the obligations and
responsibilities of these co-employer relationships. If the IRS concludes that
PEOs are not "employers" of certain worksite employees for purposes of the Code,
the Company's cafeteria plan may lose its favorable tax status, and the Company
may no longer be able to assume its clients' Federal employment tax withholding
obligations.

13. SUBSEQUENT EVENTS

Effective July 1, 1997, the Company issued 1,200,000 shares of its common
stock, valued at $5,400, to acquire the assets and liabilities of NovaPro,
formerly a business of the Parent (see Note 2), in a transaction accounted for
as a purchase. Given that the transaction is between companies under common
control, the transfer of assets and liabilities will be recorded at the
historical cost basis of the Parent. The excess paid over the historical cost
will be treated as a reduction of additional paid-in capital. The following
unaudited pro forma consolidated results of operations of the Company give
effect to the purchase of NovaPro as if it had occurred as of the inception of
the Company:

<TABLE>
<CAPTION>
FOR THE PERIOD FROM:
------------------------------------------------------
OCTOBER 1, JANUARY 1, APRIL 1,
TO TO TO
DECEMBER 31, 1996 MARCH 31, 1997 JUNE 30, 1997
----------------- -------------- -------------
<S> <C> <C> <C>
Revenue..................... $11,347 $151,727 $ 233,112
Gross profit................ 671 4,979 7,413
Operating (loss) income..... (137) 1,148 2,063
Net (loss) income........... $ (128) $ 263 $ 619
</TABLE>

The Company plans to file a registration statement with the Securities and
Exchange Commission to register the sale of up to 4,500,000 shares of its common
stock. The Company intends to use the net proceeds of the offering to retire
certain outstanding indebtedness as follows: (i) to satisfy $17,500 of deferred
purchase price obligations incurred in connection with the Company's
acquisitions (see Note 3) and (ii) to repay $23,707 borrowed under the Company's
line of credit from the Parent (see Note 2).

14. PRO FORMA BALANCE SHEET (UNAUDITED)

The pro forma balance sheet as of June 30, 1997 represents the pro forma
effect of the conversion of the Company's mandatorily redeemable common stock
into 813,187 shares of common stock as of that date. As disclosed in Note 10,
the mandatorily redeemable common stock is automatically convertible in the
event of an initial public offering of the Company's common stock.

15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

For the period from October 1, 1996 (inception) to June 30, 1997:

<TABLE>
<CAPTION>
OCTOBER 1, 1996 JANUARY 1, 1997 APRIL 1, 1997
TO TO TO
DECEMBER 31, 1996 MARCH 31, 1997 JUNE 30, 1997
----------------- --------------- -------------
<S> <C> <C> <C>
Revenues.................... $10,894 $ 151,076 $ 232,223
Gross profit................ 842 4,728 6,668
Income from operations...... 154 1,073 1,704
Net income.................. $ 61 $ 220 $ 411
</TABLE>

F-18
<PAGE> 81

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The following unaudited pro forma Combined Statement of Operations for the
year ended June 30, 1997 and unaudited pro forma Consolidated Balance Sheet as
of June 30, 1997 are based on the historical consolidated financial statements
of NovaCare Employee Services, Inc. (the "Company") for the period from October
1, 1996 (commencement of operations) to June 30, 1997, adjusted to give effect
to the acquisition of Resource One, Inc. ("Resource One") (the predecessor
company), Employee Services of America, Inc., ("ESA"), The TPI Group, Ltd.
("TPI"), Prostaff Human Resources, Inc. ("Prostaff ") and NovaPro. Resource One,
ESA, TPI and Prostaff were acquired prior to June 30, 1997 and are included in
the historical results of operations from their respective dates of acquisition.
Effective July 1, 1997, the Company issued 1,200 shares of its common stock to
acquire the assets and liabilities of NovaPro, a NovaCare, Inc. (the "Parent")
business (see Note 13 of Notes to the Company's Consolidated Financial
Statements contained elsewhere in this Prospectus). The historical financial
information is also adjusted to give effect to the full year impact of the
contract between the Company and the Parent (the "NovaCare Contract") (further
described in Note 2 of Notes to the Company's Consolidated Financial Statements
contained elsewhere in this Prospectus). The application of a portion of the
proceeds of this Offering is assumed to pay certain debt which reduced pro forma
as adjusted interest expense. The Pro Forma Combined Statement of Operations has
been prepared assuming the above acquisitions, the NovaCare Contract and the
Offering occurred as of July 1, 1996. The Pro Forma Combined Balance Sheet has
been prepared assuming that the NovaPro acquisition and the Offering had
occurred as of June 30, 1997. Adjustments related to the NovaPro acquisition and
the Offering are described in the notes thereto.

The financial information is based on certain assumptions and estimates
that management believes are reasonable in the circumstances and does not
purport to be indicative of the results which actually would have been attained
had the above transactions occurred as of the dates indicated, or to project the
Company's results of operations or financial position for any future period or
date. This information should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Prospectus.

F-19
<PAGE> 82

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
RESULTS HISTORICAL HISTORICAL COMBINED
FOR THE RESULTS OF RESULTS OF RESULTS
PERIOD ACQUIRED NOVAPRO FOR FOR THE
OCTOBER 1, COMPANIES THE PERIOD PERIOD
1996 FROM FROM FROM
(INCEPTION) JULY 1, 1996 JULY 1, 1996 JULY 1,
TO TO TO 1996 TO
JUNE 30, THE DATE OF JUNE 30, PRO FORMA JUNE 30,
1997 ACQUISITION(1) 1997(2) ADJUSTMENTS 1997
----------- -------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Related party....................... $ 255,289 $ -- $ -- $ -- $255,289
Third parties....................... 138,904 149,885 7,624 -- 296,413
--------- -------- ------- ------- --------
Total revenues.................... 394,193 149,885 7,624 -- 551,702
Direct costs:
Related Party:
Salaries, wages and employment
taxes of worksite employees..... 234,182 -- -- -- 234,182
Health care and workers'
compensation, state unemployment
taxes and other................. 15,368 -- -- -- 15,368
Third Parties:
Salaries, wages and employment
taxes of worksite employees..... 123,056 134,921 -- -- 257,977
Health care and workers'
compensation, state unemployment
taxes and other................. 9,349 8,888 6,886 -- 25,123
--------- -------- ------- ------- --------
Gross profit...................... 12,238 6,076 738 -- 19,052
Selling, general and administrative
expenses............................ 8,247 7,827 827 1,212(4) 18,113
Provision for uncollectible
accounts............................ 26 273 35 -- 334
Amortization of excess cost of net
assets acquired..................... 1,034 -- -- 1,234(5) 2,268
--------- -------- ------- ------- --------
Income (loss) from operations..... 2,931 (2,024) (124) (2,446) (1,663)
Investment income.................... 52 20 -- -- 72
Interest expense..................... (56) (774) -- 740(6) (90)
Interest expense-related party....... (693) -- -- (916)(7) (1,609)
--------- -------- ------- ------- --------
Income (loss) before income
taxes........................... 2,234 (2,778) (124) (2,622) (3,290)
Income taxes......................... 1,542 (376) -- (1,525)(9) (359)
--------- -------- ------- ------- --------
Net income (loss)................. $ 692 $ (2,402) $ (124) $(1,097) $ (2,931)
========= ======== ======= ======= ========
Net (loss) attributable to common
stock........................... $ (341)
=========
Net (loss) per share.............. $ (.02)
=========
Unaudited pro forma net income
(loss) per share(11)............ $ .03 $ (.14)
========= ========
Unaudited pro forma weighted
average number of shares........ 20,574 20,574
========= ========

NOVACARE PRO FORMA
CONTRACT COMBINED PRO FORMA PRO FORMA
FROM RESULTS ADJUSTMENTS COMBINED
JULY 1, 1996 TO INCLUDING THE RELATING TO RESULTS
JANUARY 31, NOVACARE THE INCLUDING THE
1997(3) CONTRACT OFFERING OFFERING
---------------- -------------- ----------- -------------
<S> <<C> <C> <C> <C>
Revenues:
Related party....................... $326,395 $581,684 $ -- $ 581,684
Third parties....................... -- 296,413 -- 296,413
-------- -------- ------- ---------
Total revenues.................... 326,395 878,097 -- 878,097
Direct costs:
Related Party:
Salaries, wages and employment
taxes of worksite employees..... 298,610 532,792 -- 532,792
Health care and workers'
compensation, state unemployment
taxes and other................. 22,334 37,702 -- 37,702
Third Parties:
Salaries, wages and employment
taxes of worksite employees..... -- 257,977 -- 257,977
Health care and workers'
compensation, state unemployment
taxes and other................. -- 25,123 -- 25,123
-------- -------- ------- ---------
Gross profit...................... 5,451 24,503 -- 24,503
Selling, general and administrative
expenses............................ 2,848 20,961 -- 20,961
Provision for uncollectible
accounts............................ -- 334 -- 334
Amortization of excess cost of net
assets acquired..................... -- 2,268 -- 2,268
-------- -------- ------- ---------
Income (loss) from operations..... 2,603 940 -- 940
Investment income.................... -- 72 -- 72
Interest expense..................... -- (90) -- (90)
Interest expense-related party....... -- (1,609) 1,300(8) (309)
-------- -------- ------- ---------
Income (loss) before income
taxes........................... 2,603 (687) 1,300 613
Income taxes......................... 1,093 734 510(10) 1,244
-------- -------- ------- ---------
Net income (loss)................. $ 1,510 $ (1,421) $ 790 $ (631)
======== ======== ======= =========
Net (loss) attributable to common
stock...........................

Net (loss) per share..............

Unaudited pro forma net income
(loss) per share(11)............ $ (.07) $ (.03)
======== =========
Unaudited pro forma weighted
average number of shares........ 20,574 25,074(12)
======== =========
</TABLE>

F-20
<PAGE> 83

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO THE PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

(1) The Acquired Companies adjustments represent the historical results of
operations of Resource One, ESA, TPI and Prostaff (collectively, the
"Acquired Companies") from July 1, 1996 to their respective dates of
acquisition, as noted below. Each of the acquisitions has been accounted
for as a purchase. Accordingly, the results of operations of each of the
Acquired Companies are included in the historical results of operations of
the Company since the date of acquisition.

<TABLE>
<CAPTION>
FOR THE PERIOD FROM JULY 1, 1996 TO THE DATE OF ACQUISITION
------------------------------------------------------------------------
SELLING, GENERAL PROVISION FOR INCOME (LOSS)
DIRECT AND ADMINISTRATIVE UNCOLLECTIBLE BEFORE INCOME
COMPANY ACQUIRED AS OF REVENUE COSTS EXPENSES ACCOUNTS TAXES
------------------- ----------------- -------- -------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Resource One....... October 1, 1996 $ 9,068 $ 8,438 $ 587 $ -- $ 43
ESA................ February 1, 1997 87,046 83,131 3,816 -- 67
TPI................ February 1, 1997 51,206 49,772 3,278 273 (2,840)
Prostaff........... February 1, 1997 2,565 2,468 146 -- (48)
-------- -------- ------ ---- -------
Total..... $149,885 $143,809 $7,827 $ 273 $(2,778)
======== ======== ====== ==== =======
</TABLE>

The income tax effect of the Acquired Companies adjustments is considered
in Note 9 below.

(3) In February 1997, the Parent and the Company entered into the NovaCare
Contract whereby the Parent's employees are co-employed by the Company for
a five-year term with automatic annual renewals. Under the NovaCare
Contract, the Company provides traditional PEO services such as payroll and
benefits administration, worksite safety evaluation, employment-related
risk management and benefits consultation. The Parent pays the Company a
fee for its services currently equal to the salary and federal payroll tax
costs plus 9.7% of gross earnings of employees, or approximately 117% of
the gross earnings of the employees covered by the NovaCare Contract. The
Parent may not terminate the NovaCare Contract except in the event of: (i)
the breach of any of the Company's agreements, duties or performance
standards under the NovaCare Contract; (ii) the making of false or
misleading representations, warranties, or statements of material fact in
documents submitted by or on behalf of the Company to the Parent; or (iii)
the insolvency, bankruptcy, or receivership of the Company.

(4) Includes adjustments representing net increases in selling, general, and
administrative expenses in support of the combined businesses.

<TABLE>
<CAPTION>
EXPENSE
EXPENSE CATEGORY AMOUNT
------------------------------------------------------------------------------ ------
<S> <C>
Salaries, wages and benefits.................................................. $ 736
Rental lease agreements....................................................... 180
Other......................................................................... 296
------
Selling, general and administrative expenses adjustment............. $1,212
======
</TABLE>

F-21
<PAGE> 84

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO THE PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

(5) Reflects additional amortization of the excess of the purchase price over
the fair value of net assets acquired. The additional amortization consists
of non-compete agreements, customer lists, assembled workforce, and
goodwill, amortized on a straight-line basis over the estimated useful
lives of the assets which range from five to 40 years, as if the businesses
were acquired as of July 1, 1996.

(10) Represents an adjustment to state and federal income taxes which would have
been provided on the reduction of interest expense discussed in Note 8
above.

(11) As described in Note 1 of Notes to the Company's Consolidated Financial
Statements -- "Historical Unaudited Pro Forma and Unaudited Supplemental
Pro Forma Net Income Per Common Share", unaudited pro forma net income per
share has been computed by dividing net income (loss) by the number of
shares of common stock and common stock equivalents outstanding as of
September 5, 1997.

F-22
<PAGE> 85

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

PRO FORMA COMBINED BALANCE SHEET

(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
-------------
THE PRO FORMA
COMPANY THE COMPANY OFFERING
AS OF PRO FORMA AS OF PRO FORMA PRO FORMA
JUNE 30, 1997 NOVAPRO(1) ADJUSTMENTS(2) JUNE 30, 1997 ADJUSTMENTS AS ADJUSTED
------------- ---------- -------------- --------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 1,782 $ 20 $ -- $ 1,802 $ -- $ 1,802
Accounts receivable:
Related party.............. 27,607 -- -- 27,607 -- 27,607
Unbilled................... 7,215 -- -- 7,215 -- 7,215
Third parties, net of
allowance for doubtful
accounts of $26.......... 1,910 1,626 -- 3,536 -- 3,536
Deferred income taxes........ 296 -- -- 296 -- 296
Other current assets......... 1,069 144 -- 1,213 -- 1,213
------- ------ ------ ------- -------- ---------
Total current assets....... 39,879 1,790 -- 41,669 -- 41,669
Property and equipment, net.... 1,326 449 -- 1,775 -- 1,775
Excess cost of net assets
acquired, net................ 53,691 -- -- 53,691 -- 53,691
Other assets, net.............. 1,102 93 -- 1,195 (577)(3) 618
------- ------ ------ ------- -------- ---------
$95,998 $ 2,332 $ -- $98,330 $ (577) $ 97,753
======= ====== ====== ======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing
arrangements............... $ 298 $ -- $ -- $ 298 $ -- $ 298
Accounts payable and accrued
expenses................... 6,172 2,457 -- 8,629 -- 8,629
Accrued salaries, wages and
payroll taxes.............. 28,159 -- -- 28,159 -- 28,159
Current portion of accrued
workers' compensation and
health claims.............. 5,423 -- -- 5,423 -- 5,423
Note payable to related
party...................... 28,382 -- -- 28,382 (23,707)(4) 4,675
Current portion of deferred
purchase price
obligations................ 18,905 -- -- 18,905 (17,500)(4) 1,405
Income taxes payable......... 1,382 -- -- 1,382 -- 1,382
------- ------ ------ ------- -------- ---------
Total current
liabilities.............. 88,721 2,457 -- 91,178 (41,207) 49,971
Financing arrangements, net of
current portion.............. 1,068 -- -- 1,068 -- 1,068
Accrued workers' compensation
and health claims, net of
current portion.............. 1,910 -- -- 1,910 -- 1,910
Deferred purchase price
obligations, net of current
portion...................... 856 -- -- 856 -- 856
Other.......................... 411 -- -- 411 -- 411
------- ------ ------ ------- -------- ---------
Total liabilities.......... 92,966 2,457 -- 95,423 (41,207) 54,216
------- ------ ------ ------- -------- ---------
Commitments and
contingencies................ -- -- -- -- -- --
Mandatorily redeemable common
stock........................ 2,731 -- -- 2,731 (2,731)(5) --
Shareholders' equity:
Preferred Stock, $.01 par
value; authorized 1,000
shares; no shares issued or
outstanding................ -- -- -- -- -- --
Common stock, $.01 par value;
authorized 60,000 shares,
issued 19,193 shares as of
June 30, 1997 (issued
20,393 shares after effect
of acquisition of NovaPro
and 25,706 shares after
effect of the Offering).... 192 -- 12 204 53(6) 257
Additional paid-in capital... 1,189 -- (137) 1,052 43,308(6) 44,360
Retained earnings............ -- (125) 125 -- -- --
------- ------ ------ ------- -------- ---------
1,381 (125) -- 1,256 43,361 44,617
Less: common stock in
treasury (at cost), 563
shares................... (1,080) -- -- (1,080) -- (1,080)
------- ------ ------ ------- -------- ---------
Total shareholders'
equity................... 301 (125) -- 176 43,361 43,537
------- ------ ------ ------- -------- ---------
$95,998 $ 2,332 $ -- $98,330 $ (577) $ 97,753
======= ====== ====== ======= ======== =========
</TABLE>

F-23
<PAGE> 86

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

NOTES TO THE PRO FORMA COMBINED BALANCE SHEET

(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

(1) Represents the historical balance sheet of NovaPro as of June 30, 1997.
See Note 2 for further information.

(2) As described in Note 13 of Notes to the Company's Consolidated
Financial Statements, the Company issued 1,200 shares of its common
stock to acquire the assets and liabilities of NovaPro, in a
transaction accounted for as a purchase effective July 1, 1997. Given
that the transaction is between companies under common control, the
transfer of net assets has been recorded at the historical cost basis
of the Parent. The excess paid over the historical cost has been
treated as a reduction of additional paid-in capital.

(3) The adjustment to other assets, net represents the reclassification of
certain costs, previously incurred related to the Offering of the
Company's common stock, to additional paid-in capital.

(4) The adjustment to deferred purchase price obligations and the note
payable to shareholder reflects the retirement of certain liabilities
by applying the estimated net proceeds of the Offering in the order
described under "Use of Proceeds," as if the Offering had occurred at
June 30, 1997. The remaining deferred purchase price obligations relate
to guaranteed payments due at specified dates subsequent to the
Offering.

<TABLE>
<S> <C>
Assumed shares to be offered in the Offering
(4,500,000 shares at $10.00 estimated price)..................... $45,000
Less:
Offering costs incurred to date.................................. (577)
Additional costs estimated....................................... (3,793)
-------
Net proceeds............................................. 40,630
Payment of deferred purchase price obligations................... (17,500)
Plus: Offering costs incurred to date............................ 577
-------
Cash used to reduce note payable to shareholder.......... $23,707
=======
</TABLE>

(5) The adjustment to mandatorily redeemable common stock (i.e. temporary
equity) reflects the conversion of the 813 shares of mandatorily
redeemable common stock to permanent equity.

(6) The adjustment to common stock and additional paid-in capital is as
follows:

<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN CAPITAL
------------ ---------------
<S> <C> <C>
Estimated shares issued in the Offering
(as described in Note 4)................ $ 45 $40,585
Conversion of mandatorily redeemable
common stock (as described in Note 5)... 8 2,723
---- -------
Adjustment ............................. $ 53 $43,308
==== =======
</TABLE>

F-24
<PAGE> 87

INDEPENDENT AUDITOR'S REPORT

To the Stockholders of Resource One, Inc.

We have audited the accompanying combined balance sheets of Resource One,
Inc. as of September 30, 1996 and December 31, 1995 and 1994 and the related
combined statements of income, changes in stockholders' equity and cash flows
for the nine months and years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Resource One, Inc.
as of September 30, 1996 and December 31, 1995 and 1994, and the results of its
operations and its cash flows for the nine months and years then ended in
conformity with generally accepted accounting principles.

Brewer, Beemer, Kuehnhackl & Koon, P.A.

Orlando, FL
April 4, 1997

F-25
<PAGE> 88

RESOURCE ONE, INC.

COMBINED BALANCE SHEETS
(SEE NOTE 1)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 281,585 $ 362,106 $ 194,489
Receivables, net:
Trade, net of allowance for doubtful accounts of
$2,586 in 1994................................ 54,375 46,624 86,721
Accrued leased employee revenue receivable...... 353,074 447,552 817,356
Claims administration fees receivable........... 123,725 121,671 147,406
Administration fees receivable.................. -- -- 32,999
Insurance commissions receivable................ 8,320 7,995 15,673
Deferred income taxes.............................. -- -- 2,347
Other current assets............................... -- -- 23,350
---------- ---------- ----------
Total current assets....................... 821,079 985,948 1,320,341
Property and equipment, net.......................... 166,009 148,423 149,469
Other assets......................................... 18,432 107,090 73,956
---------- ---------- ----------
Total assets......................................... $1,005,520 $1,241,461 $ 1,543,766
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable................... $ 94,529 $ 70,233 $ --
Accounts payable and accrued expenses.............. 53,287 13,524 99,607
Accrued leased employee costs and expenses
payable......................................... 404,962 593,570 946,424
Amounts owed to customer........................... -- 47,534 36,410
Income taxes payable............................... 38,525 23,023 4,273
---------- ---------- ----------
Total current liabilities.................. 591,303 747,884 1,086,714
Notes payable, net of current portion.............. 68,848 30,765 7,577
Other liabilities.................................. -- 69,685 --
---------- ---------- ----------
Total liabilities.......................... 660,151 848,334 1,094,291
---------- ---------- ----------
Stockholders' equity:
Common stock, $.01 par value, 1,000,000 shares
authorized, 100,000 shares issued and
outstanding..................................... 1,000 1,000 1,000
Additional paid-in capital......................... 204,280 144,280 144,280
Retained earnings.................................. 140,089 247,847 304,195
---------- ---------- ----------
Total stockholders' equity................. 345,369 393,127 449,475
---------- ---------- ----------
Total liabilities and stockholders' equity........... $1,005,520 $1,241,461 $ 1,543,766
========== ========== ==========
</TABLE>

See accompanying notes to combined financial statements.

F-26
<PAGE> 89

RESOURCE ONE, INC.

COMBINED STATEMENTS OF INCOME
(SEE NOTE 1)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Revenues:
Leased employee revenues......................... $ 9,975,120 $16,897,280 $22,101,897
Claims administration fees....................... 1,694,251 1,479,232 1,089,355
Insurance commissions............................ 201,335 190,189 168,195
Other administration fees........................ 58,484 127,394 60,019
Other revenues................................... 57,550 55,119 45,254
----------- ----------- -----------
11,986,740 18,749,214 23,464,720
----------- ----------- -----------
Costs and expenses:
Leased employee payroll and benefits............. 9,426,636 16,117,676 21,224,300
Selling, general and administrative expenses..... 2,237,827 2,298,799 2,169,671
----------- ----------- -----------
11,664,463 18,416,475 23,393,971
----------- ----------- -----------
Income from operations............................. 322,277 332,739 70,749
----------- ----------- -----------
Other income (expense):
Interest income.................................. 3,478 7,470 5,535
Interest expense................................. (6,152) (13,132) (3,219)
Miscellaneous income............................. 3,992 400 4,357
----------- ----------- -----------
1,318 (5,262) 6,673
----------- ----------- -----------
Income before income taxes......................... 323,595 327,477 77,422
Income tax expense................................. 94,193 63,534 21,074
----------- ----------- -----------
Net income......................................... $ 229,402 $ 263,943 $ 56,348
=========== =========== ===========
</TABLE>

See accompanying notes to combined financial statements.

F-27
<PAGE> 90

RESOURCE ONE, INC.

COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
(SEE NOTE 1)

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................. $1,000 $206,885 $ 322,168 $ 530,053
Purchase and retirement of treasury
stock.................................... -- (2,605) -- (2,605)
Distributions to shareholders.............. -- -- (411,481) (411,481)
Net income................................. -- -- 229,402 229,402
------ -------- --------- ---------
Balance, December 31, 1994................. 1,000 204,280 140,089 345,369
Purchase and retirement of treasury
stock.................................... (60,000) -- (60,000)
Distributions to shareholders.............. -- -- (156,185) (156,185)
Net income................................. -- -- 263,943 263,943
------ -------- --------- ---------
Balance, December 31, 1995................. 1,000 144,280 247,847 393,127
Net income................................. -- -- 56,348 56,348
------ -------- --------- ---------
Balance, September 30, 1996................ $1,000 $144,280 $ 304,195 $ 449,475
====== ======== ========= =========
</TABLE>

See accompanying notes to combined financial statements.

F-28
<PAGE> 91

RESOURCE ONE, INC.

COMBINED STATEMENTS OF CASH FLOWS
(SEE NOTE 1)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
--------------------- -------------
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................ $229,402 $263,943 $ 56,348
Adjustments to reconcile net income to net cash (used
for) provided by operating activities:
Depreciation....................................... 108,182 90,228 52,262
Provision for uncollectible accounts............... 2,586 -- --
Deferred income taxes.............................. -- -- (2,347)
Changes in assets and liabilities:
Increase in accounts receivable.................. (115,258) (84,348) (476,313)
Increase in prepaid expenses..................... -- -- (23,350)
Increase (decrease) in other assets.............. (10,030) (88,658) 33,134
Increase in accounts payable and other
liabilities................................... 34,424 29,922 16,398
Increase in accrued leased employee costs and
expenses payable.............................. 144,348 188,608 352,854
(Increase) decrease in amounts owed to
customer...................................... -- 47,534 (11,124)
(Increase) decrease in income taxes payable...... 38,525 (15,502) (18,750)
--------- --------- ---------
Net cash provided by (used for) operating
activities....................................... 432,179 431,727 (20,888)
--------- --------- ---------

Cash flows from investing activities
Purchases of property and equipment, net of minor
retirements........................................ (28,024) (72,642) (53,308)
--------- --------- ---------
Net cash used for investing activities............. (28,024) (72,642) (53,308)
--------- --------- ---------

Cash flows from financing activities
Distributions to shareholders......................... (411,481) (156,185) --
Purchase of treasury stock............................ (2,605) (60,000) --
Principal borrowings on notes payable................. 178,681 60,000 --
Principal repayments on notes payable................. (33,379) (122,379) (93,421)
--------- --------- ---------
Net cash used for financing activities............. (268,784) (278,564) (93,421)
--------- --------- ---------
Net (increase) decrease in cash....................... 135,371 80,521 (167,617)
Cash and cash equivalents at beginning of period...... 146,214 281,585 362,106
--------- --------- ---------
Cash and cash equivalents at end of period............ $281,585 $362,106 $ 194,489
========= ========= =========
</TABLE>

See accompanying notes to combined financial statements.

F-29
<PAGE> 92

RESOURCE ONE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996

NOTE 1 -- NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:

BUSINESS ACTIVITY AND BASIS OF PRESENTATION

Resource One, Inc. (the "Company") is a Florida corporation with two
wholly-owned subsidiaries -- Human Resource One, Inc. ("HR One"), a Florida
corporation engaged in the business of employee leasing, and Professional
Insurance Planners of Florida, Inc. ("PIP"), a Florida corporation which serves
as a third party administrator for an insurance trust and other commercial
clients which self-insure.

Effective January 1, 1996, the Company, which had no operations prior to
that date, issued 100% of its common shares outstanding in exchange for all of
the outstanding common shares of HR One and PIP. Because the companies are
controlled by a common group of shareholders, the transaction was accounted for
as a combination of interests at historical cost, which is similar to a pooling
of interests.

RX One, Inc. ("RX One") is a Florida corporation engaged in the business of
providing prescription drug cards for the employees of clients of HR One and
PIP. RX One commenced operations during the first quarter of 1996 and has been
included in the combined financial statements because it is affiliated with the
Company through common ownership. Consequently, the accompanying financial
statements reflect the combined financial position and results of operations for
HR One, PIP and RX One for all periods presented.

Any reference made to the Company in the combined financial statements
includes RX One, as well as the Company's wholly-owned subsidiaries.

The Company's customers are businesses operating in a variety of industries
in locations throughout the United States. However, a considerable portion of
the Company's revenues and accounts receivable are related to transactions with
customers located in the State of Florida.

PRINCIPLES OF COMBINATION

The accompanying combined financial statements include the accounts of the
Company, HR One, PIP and RX One after elimination of all material intercompany
balances and transactions.

USE OF ESTIMATES

In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheets and affect revenue and expense
for the periods presented. Actual results could differ significantly from those
estimates.

CASH AND CASH EQUIVALENTS

The Company considers its holdings of highly liquid debt and money market
instruments to be cash equivalents if the securities mature within 90 days from
the date of acquisition or contain an investor put option which can be exercised
at par within 90 days of acquisition. These investments are carried at cost,
which approximates fair value.

F-30
<PAGE> 93

RESOURCE ONE, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost and are depreciated using
straight line and accelerated methods over their estimated useful lives which
range as follows:

<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Computer equipment and software.............................. 3 - 10
Office furniture and equipment............................... 5 - 10
Leasehold improvements....................................... 10
</TABLE>

Expenditures for renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.

INCOME TAXES

The Company uses the liability method of accounting for deferred income
taxes. Consequently, income tax expense consists of Federal and state income
taxes currently payable or refundable, and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities, net of any related valuation allowance. The effective tax expense
rate differs from the combined statutory Federal and state rate primarily due to
Federal income tax credits generated during the years ended December 31, 1994
and 1995 and the nine months ended September 30, 1996.

For the year ended December 31, 1995, HR One elected S corporation status
under the Internal Revenue Code. Consequently, in lieu of corporate income tax
expense for that year, the shareholder of the corporation was taxed on HR One's
taxable income.

F-31
<PAGE> 94

RESOURCE ONE, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- SEPARATE COMPANY FINANCIAL INFORMATION:

Revenues, net income and other changes in stockholders' equity of the
separate companies for the periods presented were as follows:

<TABLE>
<CAPTION>
HR ONE PIP RX ONE COMBINED
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>

For the year ended December 31,
1994:
Revenues......................... $ 9,975,120 $2,011,620 $ -- $11,986,740
Net income..................... 72,076 157,326 -- 229,402
Purchase and retirement of
treasury stock.............. -- 2,605 -- 2,605
Distributions to
shareholders................ -- 411,481 -- 411,481

For the year ended December 31,
1995:
Revenues......................... $16,897,280 $1,851,934 $ -- $18,749,214
Net income..................... 144,649 119,294 -- 263,943
Purchase and retirement of
treasury stock.............. 60,000 -- -- 60,000
Distributions to
shareholders................ 156,185 -- -- 156,185
For the nine months ended
September 30, 1996:
Revenues......................... $22,101,897 $1,361,221 $ 1,602 $23,464,720
Net income (loss).............. 42,528 27,809 (13,989) 56,348
Purchase and retirement of
treasury stock.............. -- -- -- --
Distributions to
shareholders................ -- -- -- --
</TABLE>

NOTE 3 -- PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Computer equipment and software............... $ 532,412 $ 467,021 $ 510,549
Office furniture and equipment................ 158,605 163,668 162,064
Leasehold improvements........................ 10,582 10,582 10,582
-------- -------- --------
701,599 641,271 683,195
Less accumulated depreciation................. (535,590) (492,848) (533,726)
-------- -------- --------
$ 166,009 $ 148,423 $ 149,469
======== ======== ========
</TABLE>

Depreciation expense amounted to $108,182, $90,228 and $52,262 for years
ended December 31, 1994 and 1995, and the nine months ended September 30, 1996,
respectively.

F-32
<PAGE> 95

RESOURCE ONE, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- NOTES PAYABLE:

Notes payable are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Various installment notes payable monthly
through December 1997, interest rates ranging
from 7% to 8.5%, collateralized by stock and
equipment..................................... $163,377 $100,998 $ 7,577
Less amount payable within one year............. 94,529 70,233 --
-------- -------- ------
Amount payable after one year................... $ 68,848 $ 30,765 $ 7,577
======== ======== ======
</TABLE>

Interest paid totaled $6,152, $13,332 and $3,219 for years ended December
31, 1994 and 1995 and the nine months ended September 30, 1996, respectively.

NOTE 5 -- COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Company leases its office space and certain equipment under
noncancelable operating lease agreements. Annual remaining minimum rentals
required by these leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
-------------------------------------------------------- ---------
<S> <C>
1997.................................................... $ 197,596
1998.................................................... 110,163
1999.................................................... 56,367
2000.................................................... 57,931
2001.................................................... 9,655
--------
$ 431,712
========
</TABLE>

Rental expense for years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996 approximated $141,000, $155,000 and $155,000,
respectively.

CONCENTRATION OF CREDIT RISK

The Company extends credit, in the normal course of business, to a variety
of corporate entities located throughout the United States. Although the
Company's trade receivables are typically not collateralized, historically, no
significant credit related losses have been incurred.

As of December 31, 1994, December 31, 1995 and September 30, 1996, the
Company had cash balances on deposit with federally insured financial
institutions which exceeded federally insured limits by approximately $10,000,
$120,000 and $137,000, respectively.

The Company also has an investment account balance with a local bank in
South Miami. As of December 31, 1994 and 1995, and September 30, 1996, the
account balance totaled approximately $240,000, $244,000 and $146,000,
respectively. Such deposits are not covered by Federal depositor insurance;
however, they are secured by U.S. Government securities.

LEGAL MATTERS

The Company is party to litigation arising in the normal course of
business. Management, after consultation with legal counsel, does not believe
that the resolution of any such matters will have a material effect on the
Company's financial position or results of operations.

F-33
<PAGE> 96

RESOURCE ONE, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- INCOME TAXES:

The components of income tax expense included in the accompanying
statements of income consist of the following:

<TABLE>
<CAPTION>
NINE
MONTHS ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
------------------- ------------
1994 1995 1996
------- ------- ------------
<S> <C> <C> <C>
Current expense:
Federal................................................ $80,625 $53,198 $ 19,148
State.................................................. 13,568 10,336 4,273
Deferred benefit......................................... -- -- (2,347)
------- ------- -------
Total income tax expense....................... $94,193 $63,534 $ 21,074
======= ======= =======
</TABLE>

At December 31, 1994 and 1995, there were no deferred tax assets or
liabilities. At September 30, 1996, the Company had gross deferred tax assets
totaling $2,347 and no deferred tax liabilities. Income taxes paid during the
years ended December 31, 1994 and 1995 and the nine months ended September 30,
1996 totaled approximately $92,000, $44,000 and $86,000, respectively.

NOTE 7 -- STOCKHOLDERS' EQUITY:

On August 31, 1994, PIP entered into an agreement with one of its
stockholders to repurchase the 2,500 shares of common stock owned by that
individual. The purchase price paid for the shares totaled $178,680. In
connection with this transaction, PIP issued a note payable for the purchase
price. The note bore interest at 7% with principal and interest payable monthly
until maturity on September 1, 1996. This note was paid off on January 31, 1996.

On January 1, 1995, HR One entered into an agreement with one of its
stockholders to repurchase the 50,000 shares of common stock owned by that
individual. The purchase price paid for the shares totaled $60,000. In
connection with this transaction, HR One issued a note payable for the purchase
price. The note bore interest at 8% payable monthly and was due in a single
payment on December 31, 1997. This note was paid off during 1996.

NOTE 8 -- SALARY SAVINGS PLAN:

The Company has adopted a salary savings plan (401K) which covers
substantially all employees age twenty-one or over who have completed ninety
days of service. Eligible employees may elect to contribute a portion of their
earnings to the plan. Matching contributions are made by the Company to the plan
on a discretionary basis. No contributions were made by the Company to the plan
during the years ended December 31, 1994 or 1995 or during the nine months ended
September 30, 1996.

NOTE 9 -- SUBSEQUENT EVENT:

Effective October 1, 1996, 100% of the Company's outstanding common stock
was purchased by NovaCare Employee Services, Inc., a Delaware corporation.

F-34
<PAGE> 97

REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Employee Services of America, Inc. and Subsidiaries
Bradenton, Florida

We have audited the accompanying combined balance sheet of Employee
Services of America, Inc. and subsidiaries and Employers' Risk Management, Inc.
and Employee Benefits Management, Inc. (collectively referred to as the "Group")
as of January 31, 1997 and the related combined statements of income, changes in
shareholders' equity, and cash flows for the one month ended January 31, 1997.
These financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Employee Services of
America, Inc. and subsidiaries and Employers' Risk Management, Inc. and Employee
Benefits Management, Inc. as of January 31, 1997 and the results of their
operations and their cash flows for the one month ended January 31, 1997 in
conformity with generally accepted accounting principles.

Varnadore, Tyler, Hoffner, King, Hawthorne, Hammer, & Stathis, P.A.

Bradenton, FL
April 17, 1997

F-35
<PAGE> 98

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED BALANCE SHEET
JANUARY 31, 1997

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 552,987
Accounts receivable:
Trade, net of allowance for doubtful accounts of $117,147................. 294,411
Unbilled.................................................................. 2,379,970
Recoverable income taxes..................................................... 106,011
Deferred income taxes........................................................ 420,405
Other assets................................................................. 176,529
----------
Total current assets................................................. 3,930,313
Equipment and leasehold improvements, net.................................... 505,322
Other assets................................................................. 102,334
----------
$4,537,969
==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangement..................................... $ 8,702
Accounts payable and accrued expenses........................................ 1,115,716
Accrued salaries and wages................................................... 2,043,471
Workers' compensation premiums payable....................................... 757,967
Income taxes payable......................................................... 117,533
----------
Total current liabilities............................................ 4,043,389
Financing arrangement, net of current portion.................................. 27,136
Client deposits................................................................ 315,135
Deferred income taxes.......................................................... 8,457
Workers compensation agreement................................................. 300,000
----------
Total liabilities.................................................... 4,694,117
Shareholders' deficiency:
Common stock, $.01 par value, authorized 2,400,000 shares.................... 12,862
Additional paid-in capital................................................... 430,310
Accumulated deficit.......................................................... (599,320)
----------
Total shareholders' deficiency....................................... (156,148)
----------
$4,537,969
==========
</TABLE>

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

F-36
<PAGE> 99

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED STATEMENT OF INCOME
FOR THE ONE MONTH ENDED JANUARY 31, 1997

<TABLE>
<S> <C>
Revenues...................................................................... $12,453,429
Direct costs:
Salaries, wages and employment taxes of worksite employees.................. 11,024,429
Health care and workers' compensation....................................... 745,396
-----------
Total direct costs.................................................. 11,769,825
-----------
Gross profit........................................................ 683,604
Operating expenses:
Administrative personnel.................................................... 268,834
Other general and administrative............................................ 177,454
Sales and marketing......................................................... 106,172
Depreciation and amortization............................................... 12,000
-----------
Total operating expenses............................................ 564,460
-----------
Income (loss) from operations....................................... 119,144
Interest income (expense):.................................................... (662)
-----------
Income (loss) before income taxes................................... 118,482
Provision (benefit) for income taxes.......................................... (59,288)
-----------
Net income (loss)............................................................. $ 177,770
===========
</TABLE>

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

F-37
<PAGE> 100

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE ONE MONTH ENDED JANUARY 31, 1997

<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL RETAINED
SHARES/ ($.01 PAID-IN EARNINGS
COMMON PAR VALUE) CAPITAL (DEFICIT)
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997.................. 1,286,200 $ 12,862 $430,310 $(777,090)
Net income................................ -- -- -- 177,770
--------- ------- -------- ---------
Balance at January 31, 1997................. 1,286,200 $ 12,862 $430,310 $(599,320)
========= ======= ======== =========
</TABLE>

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

F-38
<PAGE> 101

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED STATEMENT OF CASH FLOWS
FOR THE ONE MONTH ENDED JANUARY 31, 1997

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 177,770
Adjustments to reconcile net income to net cash flows provided by operating
activities
Depreciation and amortization............................................... 12,000
Provision for uncollectible accounts........................................ 6,000
Deferred tax asset.......................................................... (107,276)
Changes in assets and liabilities:
Accounts receivable...................................................... (129,869)
Recoverable income taxes................................................. (19,511)
Other assets............................................................. 811,132
Accounts payable and accrued expenses.................................... (258,796)
Payroll taxes and other deductions payable............................... 254,556
Accrued salaries and wages............................................... (751,463)
Income taxes payable..................................................... 70,553
Workers' compensation premiums payable................................... 423,975
Client deposits.......................................................... (6,681)
---------
Net cash flows provided by operating activities..................... 482,390
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................ (11,301)
---------
Net cash flows used in investing activities......................... (11,301)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations............................... (800)
---------
Net cash flows used in financing activities......................... (800)
Net increase (decrease) in cash............................................... 470,289
Cash and cash equivalents at beginning of period.............................. 82,698
---------
Cash and cash equivalents at end of period.................................... $ 552,987
=========
</TABLE>

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

F-39
<PAGE> 102

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: Employee Services of Florida, Inc., Easy Staff, DAT
Sales and Consulting, Inc. and Boyd's Employee Services are licensed as
professional employer organizations (PEO) engaged in providing human resource
management and personnel administration services to a variety of small to medium
sized companies located primarily in Florida. The client companies include
retail and service industries. The PEO's do not have a concentration of
customers in any one industry. They assign their employees to clients and
allocate the direction of and control over the leased employees between the
clients and the PEO's. Employee leasing companies are regulated in the State of
Florida and are required to satisfy certain licensing requirements. Managers'
Resource provides payroll processing services to companies outside of the Group.

Employers' Risk Management, Inc. provides workers' compensation management
services to America.

Employee Benefits Management, Inc. provides the management of all insurance
products for all of the profits and commissions therefrom.

Principles of Combination: The accompanying combined financial statements
include the accounts of Employee Services of America, Inc. (America) and its
subsidiaries, combined with Employers' Risk Management, Inc. (Risk) and Employee
Benefits Management, Inc. (Benefits) (on a combined basis "the Group"). The
wholly owned subsidiaries of America include Employee Services of Florida, Inc.,
Easy Staff, Inc., DAT Sales and Consulting, Inc., Employee Services, Inc. of
North Carolina, Boyd's Employee Services, Inc. and Managers' Resource, Inc. All
significant intercompany balances and transactions are eliminated in the
combination. America, Risk and Benefits are related through common ownership and
common management.

America acquired all of the outstanding common stock of the above named
subsidiaries in May 1996. Because the subsidiaries are controlled by a common
group of shareholders, the transaction was accounted for as a combination of
interests, at historical costs, which is similar to a pooling of interests.

Use of Estimates in the Preparation of Financial Statements: 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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash and Cash Equivalents: The Group considers investments with an
original maturity of three months or less and money market investments to be
cash equivalents.

Revenues: Revenues and the related cost of wages, salaries, and employment
taxes from professional employer services related to worksite employees are
recognized in the period in which the employee performs the service. Because the
Group is at risk for all of its direct costs, independently of whether payment
is received from its clients, and consistent with industry practice, all amounts
billed to clients for gross salaries and wages, related employment taxes, and
health care and workers' compensation coverage are recognized as revenue by the
Group. Reserves for doubtful accounts are established when the Group determines
that collection from a client is unlikely. Leasing revenue earned but not billed
is reported as accrued (unbilled) revenue and direct costs performed related to
those revenues are reported as accrued salaries and wages.

Concentration of Credit Risk: The Group maintains cash balances at various
times during the year in excess of the $100,000 guaranteed by the Federal
Deposit Insurance Corporation. Concentration of credit risk for trade accounts
receivable is minimized since the majority of accounts receivable are due from
small businesses located throughout Florida. A deposit is collected from certain
clients depending on their credit history and method of paying for leasing
services. If there is an outstanding balance when services are terminated, the
client deposit is applied.

F-40
<PAGE> 103

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Equipment and Leasehold Improvements: Equipment and leasehold improvements
are stated at cost. Depreciation is provided using the straight-line basis over
the estimated useful lives of the assets.

Income Taxes: The Group records income tax expense using the liability
method of accounting for deferred income taxes. Under the liability method,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement and income
tax bases of the Group's assets and liabilities. A valuation allowance is
recorded when it is more likely than not that any or all of a deferred tax asset
will not be realized. The provision for income taxes includes taxes currently
payable plus the net change during the year in deferred tax assets and
liabilities recorded by the Group.

Recently issued Accounting Pronouncements: In October 1995, the Financial
Accounting Standards Board issued "Statement of Financial Accounting Standards
No. 123," Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 defines
a fair value based method of accounting for employee stock options and similar
instruments and must be adopted or the proforma income statement effects must be
disclosed in notes to the financial statements no later than the first quarter
of fiscal year 1997. The Group intends to elect disclosure of the proforma
income statement effects of SFAS 123, therefore the new Statement will not
affect the Group's financial position or results of operations.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of " ("SFAS 121"),
which the Group is required to adopt no later than the first quarter of fiscal
year 1997. SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
intangibles to be disposed of. Management does not believe the adoption of SFAS
121 will have a material effect on the Group's financial position or results of
operations.

2. EQUIPMENT AND LEASEHOLD IMPROVEMENT

Property and equipment consist of the following at January 31:

<TABLE>
<CAPTION>
1997
--------
<S> <C>
Furniture and fixtures............................................ $124,240
Machinery and equipment........................................... 330,474
Leasehold improvements............................................ 21,114
Vehicles.......................................................... 40,994
--------
516,822
Less: accumulated depreciation.................................... 11,500
--------
Total equipment and leasehold improvement.................... $505,322
========
</TABLE>

F-41
<PAGE> 104

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

3. CAPITAL LEASE OBLIGATIONS

The Group leases a phone system and a vehicle under agreements which are
classified as capital leases. The future minimum lease payments required under
the capital leases at January 31, 1997 are as follows:

<TABLE>
<S> <C>
1997............................................................... $ 8,702
1998............................................................... 12,104
1999............................................................... 12,104
2000............................................................... 11,096
-------
Total future minimum lease payments................................ 44,006
Amounts representing interest...................................... 8,168
-------
Present value of net minimum lease payments........................ 35,838
Less current portion............................................... 8,702
-------
Long term portion.................................................. $27,136
=======
</TABLE>

4. WORKERS' COMPENSATION CLAIMS RESERVE

5. PROVISION FOR INCOME TAXES

Income taxes are provided for tax effects of transactions reported in the
financial statements and consist of taxes currently payable for the period, plus
or minus the net change in deferred tax assets and liabilities. Deferred income
tax assets and liabilities are computed for differences that have future tax
consequences using the currently enacted tax laws and rates that apply to the
periods in which they are expected to affect taxable income. A valuation
allowance was established to reduce the deferred tax assets to the amount that
will more likely be realized. The provision for income taxes includes the
following:

<TABLE>
<S> <C>
Current Provision
Federal................................................ $ 40,750
State.................................................. 4,650
---------
45,400
---------
Deferred Provision
Federal................................................ (93,950)
State.................................................. (10,738)
---------
(104,688)
---------
Provision for income taxes (benefit)........... $ (59,288)
=========
</TABLE>

F-42
<PAGE> 105

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<S> <C>
Net deferred tax assets consist of the following:
Current deferred tax assets:
Workers' compensation payable................................... $293,000
Net operating loss carryforward................................. 130,199
Change in cash to accrued tax accounting........................ 21,000
Tips tax credit and other....................................... 11,206
Valuation allowance............................................. (35,000)
-------
420,405
Current deferred tax liabilities:
Workers' compensation participation receivable.................. --
-------
Net current deferred tax assets................................. $420,405
=======
Long-term deferred tax assets:
Workers' compensation payable................................... $120,000
Valuation allowance............................................. (59,000)
-------
61,000
-------
Long-term deferred tax liabilities:
Depreciation.................................................... 69,457
Change in cash to accrued tax accounting........................ --
-------
69,457
-------
Net long-term deferred tax asset (liability)............ $ (8,457)
=======
</TABLE>

The tips tax credit carryforward is available to offset future income taxes
and will expire in the year ending December 31, 2110.

6. COMMON STOCK AND STOCK OPTIONS

At January 31, 1997, America, Risk and Benefits were each authorized to
issue 800,000 shares of $.01 par value common stock and America was authorized
to issue 500,000 shares of preferred stock. At January 31, 1997, America, Risk
and Benefits had each issued and outstanding 428,746 shares of common stock. No
preferred stock was issued and outstanding.

At January 31, 1997, two shareholders of the Group held options to purchase
shares of the Group's common stock. The options offer the right to purchase a
total of 82,500 shares of common stock of each company in the Group at $1 per
share at any time through March 19, 1998.

At January 31, 1997, three shareholders of the Group held options to
purchase 64,311 shares of Employee Services of America, Inc. at $3 per share.

7. 401(k) RETIREMENT PLANS

In 1995, the Group adopted a 401(k) Matching Retirement Plan (the Plan)
which covers all non-leased employees that have completed one hour of service.
The Group provides a 50% matching contribution based on the amount of elective
contributions made to the Plan by employees -- not to exceed 5% of the
employee's compensation for the plan year. The matching percentage is subject to
the discretion of the Board of Directors. The Group also maintains matched and
unmatched plans for leased employees.

F-43
<PAGE> 106

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

8. RELATED PARTY TRANSACTIONS

In 1995, a stockholder was loaned $39,886, bearing interest at 7.5% per
annum, payable on demand. In addition, $30,225 was advanced to a stockholder and
a total of $4,320 plus accrued interest of $11,994 is due from various
stockholders which is not evidenced by formal note agreements and bears no
interest.

An insurance agency, that is partially owned by one stockholder, is the
agent of record for the Group's liability and workers' compensation insurance
policies. As such, the insurance agency receives a commission from insurance
companies. The Group also entered into an agreement with the insurance agency
which provides compensation when specific loss ratios are attained.

The Group purchases various products and services from certain clients in
the ordinary course of business. The Group also provides employee leasing
services to certain clients that are solely and partially owned by the
stockholders of the Group.

9. COMMITMENTS AND CONTINGENCIES

Operating Leases: The Group conducts its operations in nine leased
facilities and also leases certain equipment under noncancellable operating
leases. The total future minimum rental payments are $251,341 and $11,928 in
1997 and 1998, respectively. The minimum rental payments of certain leased
facilities are subject to inflationary increases based upon the Consumer Price
Index which cannot be reasonably calculated in advance.

Commitment: The Group entered in an agreement with an insurance agency,
that is partially owned by one stockholder, to provide consulting services
during a three year period commencing January 1, 1995. Management estimates the
total commitment under this agreement was approximately $174,000.

Litigation: The Group is engaged in legal actions arising in the ordinary
course of business. The management of the Group and legal counsel believe that
the outcome will not have a material effect on the financial statements.

10. SUBSEQUENT EVENTS

In February 1997, America and its subsidiaries, Benefits and Risk, were
sold to NovaCare Employee Services, Inc. (a subsidiary of NovaCare, Inc.)

F-44
<PAGE> 107

REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Employee Services of America, Inc. and Subsidiaries
Bradenton, Florida

We have audited the accompanying combined balance sheets of Employee
Services of America, Inc. and subsidiaries and Employers' Risk Management, Inc.
and Employee Benefits Management, Inc. (collectively referred to as the "Group")
as of December 31, 1996, 1995, and 1994, and the related combined statements of
income, changes in shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Employee Services of
America, Inc. and subsidiaries and Employers' Risk Management, Inc. and Employee
Benefits Management, Inc. as of December 31, 1996, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

Varnadore, Tyler, Hoffner, King, Hawthorne, Hammer, & Stathis, P.A.

Bradenton, FL
March 8, 1997

F-45
<PAGE> 108

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED BALANCE SHEETS
DECEMBER 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 85,781 $ 34,488 $ 82,698
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$60,000 and $116,514, respectively............ 739,053 364,950 170,542
Unbilled........................................ 1,256,739 2,001,236 3,186,604
Recoverable income taxes........................... -- -- 86,500
Deferred income taxes.............................. 10,000 55,755 311,323
Other assets....................................... 334,971 233,422 180,927
---------- ----------- -----------
Total current assets....................... 2,426,550 2,689,851 4,018,594
Equipment and leasehold improvements, net.......... 244,502 445,617 505,521
Deferred income taxes.............................. -- 57,745 --
Other assets....................................... 93,625 131,730 102,934
---------- ----------- -----------
$ 2,764,671 $ 3,324,943 $4,627,049
========== =========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of financing arrangement........... $ -- $ 9,050 $ 6,742
Accounts payable and accrued expenses.............. 1,707,227 1,152,300 1,119,956
Accrued salaries and wages......................... 1,067,626 1,678,241 2,794,934
Workers' compensation premiums payable and claims
reserve......................................... 354,412 163,543 326,197
Income taxes payable............................... -- 110,512 46,980
---------- ----------- -----------
Total current liabilities.................. 3,129,265 3,113,646 4,294,809
Financing arrangement, net of current portion........ -- 36,609 29,896
Client deposits...................................... 421,006 399,686 321,816
Deferred income taxes................................ -- -- 6,651
Workers compensation agreement....................... 659,409 497,255 307,795
---------- ----------- -----------
Total liabilities.......................... 4,209,680 4,047,196 4,960,967
Shareholders' deficiency:
Common stock, $.01 par value, authorized 2,400,000
shares.......................................... 59,883 12,959 12,862
Additional paid-in capital......................... 378,884 423,092 430,310
Accumulated deficit................................ (1,883,776) (1,154,850) (777,090)
Treasury stock..................................... -- (3,454) --
---------- ----------- -----------
Total shareholders' deficiency............. (1,445,009) (722,253) (333,918)
---------- ----------- -----------
$ 2,764,671 $ 3,324,943 $4,627,049
========== =========== ===========
</TABLE>

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

F-46
<PAGE> 109

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Revenues.......................................... $76,675,792 $104,352,905 $139,196,718
Direct costs:
Salaries, wages and employment taxes of worksite
employees.................................... 68,313,065 92,183,659 124,213,841
Health care and workers' compensation........... 4,969,562 6,389,198 8,690,547
Other direct costs.............................. 25,803 122,960 70,521
----------- ------------ ------------
Total direct costs...................... 73,308,430 98,695,817 132,974,909
----------- ------------ ------------
Gross profit............................ 3,367,362 5,657,088 6,221,809
Operating expenses:
Administrative personnel........................ 1,744,894 2,704,837 3,200,486
Other general and administrative................ 1,063,954 1,393,516 1,527,054
Sales and marketing............................. 555,378 735,758 988,918
Depreciation and amortization................... 60,420 87,578 117,011
----------- ------------ ------------
Total operating expenses................ 3,424,646 4,921,689 5,833,469
----------- ------------ ------------
Loss (income) from operations........... (57,284) 735,399 388,340
Interest expense (income):........................ -- -- (55,555)
----------- ------------ ------------
Loss (income) before income taxes....... (57,284) 735,399 332,785
Benefit (provision) for income taxes.............. (679) 6,473 (50,881)
----------- ------------ ------------
Net loss (income)................................. $ (56,605) $ 728,926 $ 383,666
=========== ============ ============
</TABLE>

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

F-47
<PAGE> 110

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL RETAINED
SHARES/ ($.01 PAID-IN EARNINGS TREASURY
COMMON PAR VALUE) CAPITAL (DEFICIT) STOCK
--------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.............. 984,700 $ 59,883 $226,424 $(1,827,171) $ --
Net loss.............................. -- -- -- (56,605) --
Contributed capital................... -- -- 152,460 -- --
--------- -------- -------- ----------- -------
Balance at December 31, 1994............ 984,700 59,883 378,884 (1,883,776) --
Net income............................ -- -- -- 728,926 --
Recapitalization -- change in par
value.............................. -- (50,036) 50,036 -- --
Common stock issued................... 311,200 3,112 -- -- --
Treasury stock acquired............... -- -- -- -- (3,454)
Distribution.......................... -- -- (5,828) -- --
--------- -------- -------- ----------- -------
Balance at December 31, 1995............ 1,295,900 12,959 423,092 (1,154,850) (3,454)
Net income............................ -- -- -- 383,666 --
Capital contributed................... -- -- 7,218 -- --
Treasury stock canceled............... (9,700) (97) -- (5,906) 3,454
--------- -------- -------- ----------- -------
Balance at December 31, 1996............ 1,286,200 $ 12,862 $430,310 $ (777,090) $ --
========= ======== ======== =========== =======
</TABLE>

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

F-48
<PAGE> 111

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income...................................... $ (56,605) $ 728,926 $ 383,666
Adjustments to reconcile net (loss) income to net cash
flows provided by operating activities
Depreciation and amortization................... 60,420 87,576 117,021
Provision for uncollectible accounts............ 2,723 102,932 70,521
Loss on disposal of fixed assets................ -- -- 33,832
Deferred tax asset.............................. -- (103,494) (191,172)
Changes in assets and liabilities:
Accounts receivable.......................... (832,025) (475,355) (1,061,481)
Recoverable income taxes..................... -- -- (86,500)
Other assets................................. (5,425) (237,346) 79,685
Accounts payable and accrued expenses........ 68,288 268,014 65,702
Payroll taxes and other deductions payable... 150,661 (37,522) (36,044)
Accrued salaries and wages................... 373,910 610,615 1,116,693
Income taxes payable......................... -- 110,512 (63,532)
Benefit premiums payable..................... 803,043 (806,367) (63,002)
Workers' compensation premiums payable....... (855,880) (40,932) (26,806)
Client deposits.............................. 2,183 (21,320) (77,870)
--------- --------- -----------
Net cash flows (used in) provided by
operating activities.................... (288,707) 186,239 260,713
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................... (115,973) (218,630) (189,336)
Purchase of intangible assets.......................... (7,949) (16,821) (18,815)
--------- --------- -----------
Net cash flows used in investing
activities.............................. (123,922) (235,451) (208,151)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations........ -- (2,081) (9,021)
Proceeds from issuance of common stock and additional
paid-in capital...................................... 50,000 -- 4,669
--------- --------- -----------
Net cash flows provided by (used in)
financing activities.................... 50,000 (2,081) (4,352)
--------- --------- -----------
Net (decrease) increase in cash........................ (362,629) (51,293) 48,210
Cash and cash equivalents at beginning of year......... 448,410 85,781 34,488
--------- --------- -----------
Cash and cash equivalents at end of year............... $ 85,781 $ 34,488 $ 82,698
========= ========= ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid........................................ $ -- $ -- $ 55,555
========= ========= ===========
Income taxes paid.................................... $ -- $ -- $ 174,200
========= ========= ===========
</TABLE>

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

F-49
<PAGE> 112

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: Employee Services of Florida, Inc., Easy Staff, DAT
and Boyd's Employee Services are licensed as professional employer organizations
(PEO) engaged in providing human resource management and personnel
administration services to a variety of small to medium sized companies located
primarily in Florida. The client companies include retail and service
industries. The PEO's do not have a concentration of customers in any one
industry. They assign their employees to clients and allocate the direction of
and control over the leased employees between the clients and the PEO's.
Employee leasing companies are regulated in the State of Florida and are
required to satisfy certain licensing requirements. Employee Services, Inc. of
North Carolina has been inactive during the entire three year period ended
December 31, 1996. Managers' Resource provides payroll processing services to
companies outside of the Group.

Employers' Risk Management, Inc. provides workers' compensation management
services to America.

Employee Benefits Management, Inc. provides the management of all insurance
products for all of the profits and commissions therefrom.

Cash and Cash Equivalents: The Group considers investments with an
original maturity of three months or less and money market investments to be
cash equivalents.

Concentration of Credit Risk: The Group maintains cash balances at various
times during the year in excess of the $100,000 guaranteed by the Federal
Deposit Insurance Corporation. At December 31, 1996 there was approximately
$619,000 in a bank which was in excess of the federally insured limits.
Concentration of credit risk for trade accounts receivable is minimized since
the majority of accounts receivable are due from small businesses located
throughout Florida. A deposit is collected from certain clients depending on
their

F-50
<PAGE> 113

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

credit history and method of paying for leasing services. If there is an
outstanding balance when services are terminated, the client deposit is applied.

Equipment and Leasehold Improvements: Equipment and leasehold improvements
are stated at cost. Depreciation is provided using the straight-line basis over
the estimated useful lives of the assets.

Effective January 1, 1995, Easy Staff, DAT, Risk and Benefits changed their
tax status from an S corporation to a C corporation under the provisions of the
Internal Revenue Code. Employee Services of Florida, Employee Services, Inc. of
North Carolina and Managers' Resource, Inc. were originally formed and organized
as C corporations. As a C corporation, each company is liable for income taxes
on their income.

Recently issued Accounting Pronouncements: In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
defines a fair value based method of accounting for employee stock options and
similar instruments and must be adopted or the proforma income statement effects
must be disclosed in notes to the financial statements no later than the first
quarter of fiscal year 1997. The Group intends to elect disclosure of the
proforma income statement effects of SFAS 123, therefore the new Statement will
not affect the Group's financial position or results of operations.

Reclassifications: Certain reclassifications have been made in the 1994
and 1995 financial statements to conform to the 1996 presentation.

2. WORKERS' COMPENSATION PARTICIPATION RECEIVABLE

The Group had a guaranteed rate agreement with a workers' compensation
carrier which provides compensation if certain loss ratios are not exceeded.
Under the provisions of the agreement, $737,241 was payable to the Group at
December 31, 1995. During 1996, $369,000 of this amount was collected. The
remaining balance was reduced by a settlement with the carrier upon termination
of the contract.

F-51
<PAGE> 114

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

3. EQUIPMENT AND LEASEHOLD IMPROVEMENT

Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- ---------
<S> <C> <C> <C>
Furniture and fixtures................... $ 126,039 $155,813 $ 162,374
Machinery and equipment.................. 169,202 298,276 437,903
Leasehold improvements................... 36,699 17,033 22,295
Vehicles................................. 77,043 53,371 50,546
--------- -------- ---------
408,983 524,493 673,118
Less: accumulated depreciation........... (164,481) (78,876) (167,597)
--------- -------- ---------
Total equipment and leasehold
improvement............................ $ 244,502 $445,617 $ 505,521
========= ======== =========
</TABLE>

4. CAPITAL LEASE OBLIGATIONS

The Group leases a phone system and a vehicle under agreements which are
classified as capital leases. The future minimum lease payments required under
the capital leases at December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997....................................................... $14,314
1998....................................................... 12,104
1999....................................................... 12,104
2000....................................................... 11,096
-------
Total future minimum lease payments........................ 49,618
Amounts representing interest.............................. 12,980
-------
Present value of net minimum lease payments................ 36,638
Less current portion....................................... 6,742
-------
Long term portion.......................................... $29,896
=======
</TABLE>

5. WORKERS' COMPENSATION CLAIMS RESERVE

The Group maintains a workers' compensation policy which provides coverage
to all leased employees for work-related injuries. The Group is liable for
losses on claims up to certain deductible amounts. During 1996, the policy had a
maximum premium cap. The Group estimates that total premiums and deductible will
exceed the cap and the maximum liabilities have been recorded. During 1995, the
policy maximum premium cap was substantially higher than 1996 and was not met
and workers' compensation claims reserves of $465,893 were accrued based upon
claims reported as of December 31, 1995 as well as an estimated liability for
claims incurred but not reported. At December 31, 1996 the majority of these
claims have been settled and the claims reserves remaining are not material.

6. PROVISION FOR INCOME TAXES

F-52
<PAGE> 115

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

taxable income. A valuation allowance was established to reduce the deferred tax
assets to the amount that will more likely be realized. The provision for income
taxes includes the following:

<TABLE>
<CAPTION>
1994 1995 1996
----- --------- ---------
<S> <C> <C> <C>
Current Provision
Federal................................... $(679) $ 101,987 $ 122,241
State..................................... -- 14,998 31,148
----- --------- ---------
(679) 116,985 153,389
----- --------- ---------
Deferred Provision
Federal................................... -- (96,344) (178,081)
State..................................... -- (14,168) (26,189)
----- --------- ---------
-- (110,512) (204,270)
----- --------- ---------
Provision for income taxes........ $(679) $ 6,473 $ (50,881)
===== ========= =========
</TABLE>

Net deferred tax assets consist of the following:

<TABLE>
<CAPTION>
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
Current deferred tax assets:
Workers' compensation payable............ $ -- $ 352,822 $166,771
Net operating loss carryforward.......... 10,006 -- 113,644
Change in cash to accrued tax
accounting............................ -- 22,855 20,973
Tips tax credit and other................ -- 46,944 94,247
Valuation allowance...................... -- (71,421) (84,312)
-------- --------- -------
10,006 351,200 311,323
Current deferred tax liabilities:
Workers' compensation participation
receivable............................ -- (295,445) --
-------- --------- -------
Net current deferred tax assets.......... $10,006 $ 55,755 $311,323
======== ========= =======
Long-term deferred tax assets:
Workers' compensation payable............ $ -- $ 193,929 $ 61,000
Net operating loss carryforward.......... -- 6,447 --
Change in cash to accrued tax
accounting............................ -- 43,316 --
Tips tax credit.......................... -- 24,007 --
Other.................................... -- 1,040 --
Valuation allowance...................... -- (193,929) --
-------- --------- -------
-- 74,810 61,000
-------- --------- -------
Long-term deferred tax liabilities:
Depreciation............................. -- 11,418 67,651
Change in cash to accrued tax
accounting............................ -- 5,647 --
-------- --------- -------
-- 17,065 67,651
-------- --------- -------
Net long-term deferred tax asset
(liability).................... $ -- $ 57,745 $ (6,651)
======== ========= =======
</TABLE>

The tips tax credit carryforward is available to offset future income taxes
and will expire in the year ending December 31, 2110.

F-53
<PAGE> 116

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMON STOCK AND STOCK OPTIONS

At December 31, 1995 and 1996, America, Risk and Benefits were each
authorized to issue 800,000 shares of $.01 par value common stock and America
was authorized to issue 500,000 shares of preferred stock. At December 31, 1995,
America, Risk and Benefits had each issued and outstanding 428,746 shares of
common stock, net of 4,836 shares held as treasury stock. During 1996, the
treasury stock was canceled and America, Risk and Benefits each had issued and
outstanding 428,746 shares of common stock at December 31, 1996. No preferred
stock was issued and outstanding.

At December 31, 1995, two shareholders of the Group held options to
purchase shares of the Group's common stock. The options offer the right to
purchase a total of 82,500 shares of common stock of each company in the Group
at $1 per share at any time through March 19, 1998.

At December 31, 1996, three shareholders of the Group held options to
purchase 64,311 shares of Employee Services of America, Inc. at $3 per share.

8. 401(k) RETIREMENT PLANS

In 1995, the Group adopted a 401(k) Matching Retirement Plan (the Plan)
which covers all non-leased employees that have completed one hour of service.
The Group provides a 50% matching contribution based on the amount of elective
contributions made to the Plan by employees -- not to exceed 5% of the
employee's compensation for the plan year. The matching percentage is subject to
the discretion of the Board of Directors. The Group paid matching contributions
of $39,089 and $37,830 for the periods ended December 31, 1995 and 1996,
respectively. The Group also maintains matched and unmatched plans for leased
employees.

9. RELATED PARTY TRANSACTIONS

10. COMMITMENTS AND CONTINGENCIES

Operating Leases: The Group conducts its operations in nine leased
facilities and also leases certain equipment under noncancellable operating
leases. The total future minimum rental payments are $281,536, $251,341 and
$11,928 in 1996, 1997 and 1998, respectively. The minimum rental payments of
certain leased facilities are subject to inflationary increases based upon the
Consumer Price Index which cannot be reasonably calculated in advance.

F-54
<PAGE> 117

EMPLOYEE SERVICES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

11. SUBSEQUENT EVENTS

In February 1997, America and its subsidiaries, Benefits and Risk were sold
to NovaCare Employee Services, Inc. (a subsidiary of NovaCare, Inc.)

F-55
<PAGE> 118

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
The TPI Group, Ltd.
Queensbury, New York

We have audited the accompanying consolidated balance sheet of The TPI
Group, Ltd. and subsidiaries as of January 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the one month
period then ended. These consolidated financial statements are the
responsibility of the management of The TPI Group, Ltd. Our responsibility is to
express an opinion on the consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the financial position of The TPI
Group, Ltd. and subsidiaries as of January 31, 1997 and the results of their
operations and their cash flows for the one month period then ended, in
conformity with generally accepted accounting principles.

LAZAR, LEVINE & COMPANY LLP

New York, New York
April 11, 1997

F-56
<PAGE> 119

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
AS OF JANUARY 31, 1997

<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 2,634
Cash -- restricted........................................................... 290,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts of $362,097................. 817,076
Unbilled.................................................................. 1,833,930
Due from former shareholders................................................. 74,938
Miscellaneous receivables and deposits....................................... 176,398
Prepaid expenses and other current assets.................................... 364,846
------------
Total Current Assets........................................................... 3,559,822
Property and Equipment, Net.................................................... 593,568
Other Assets, Net.............................................................. 9,909
------------
$ 4,163,299
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft............................................................... $ 522,270
Current portion of financing arrangements.................................... 624,818
Accounts payable and accrued expenses........................................ 4,269,368
Payroll taxes payable........................................................ 2,702,957
Current portion of reserve for workers' compensation claims.................. 628,181
Income taxes payable......................................................... 22,228
Other current liabilities.................................................... 109,290
------------
Total Current Liabilities...................................................... 8,879,112
Long-Term Liabilities:
Financing arrangements, net of current portion............................... 43,764
Reserve for workers' compensation claims -- net of current portion........... 429,482
------------
Total Liabilities.............................................................. 9,352,358
------------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock -- 9% cumulative convertible $.01 par value -- 4,850 shares
authorized, issued and outstanding........................................ 49
Common stock -- $.01 par value, 11,111 shares authorized, 6,261 shares issued
and outstanding........................................................... 63
Additional paid-in capital................................................... 4,934,989
Accumulated deficit.......................................................... (10,124,160)
------------
Total Stockholders' Equity (Deficit)........................................... (5,189,059)
------------
$ 4,163,299
============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-57
<PAGE> 120

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1997

<TABLE>
<S> <C>
Revenues......................................................................... $7,823,722
Payroll and Payroll Related Costs................................................ 7,514,248
----------
Gross Profit..................................................................... 309,474
----------
Operating Expenses:
Administrative personnel and payroll related costs............................. 169,515
General and administrative expenses............................................ 98,698
Sales and marketing expenses................................................... 98,584
Depreciation and amortization.................................................. 9,176
----------
Total Operating Expenses......................................................... 375,973
----------
(Loss) From Operations........................................................... (66,499)
----------
Other Expenses:
Interest and penalties......................................................... 273,229
Loss on disposal of fixed assets............................................... 12,000
----------
Total Other Expenses............................................................. 285,229
----------
(Loss) Before Provision for Income Taxes......................................... (351,728)
Provision for income taxes..................................................... 13,848
----------
Net (Loss)....................................................................... $ (365,576)
==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-58
<PAGE> 121

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1997

<TABLE>
<CAPTION>
SHARES ADDITIONAL
------------------ PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
PREFERRED COMMON ($.01 PAR VALUE) ($.01 PAR VALUE) CAPITAL DEFICIT
--------- ------ ---------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1996.......... -- 6,261 $ -- $ 63 $ 85,038 $ (9,758,584)
Conversion of note
to preferred
stock............. 4,850 -- 49 -- 4,849,951 --
Net loss............ -- -- -- -- -- (365,576)
----- ----- --- --- ---------- ------------
Balance at January
31, 1997.......... 4,850 6,261 $ 49 $ 63 $4,934,989 $(10,124,160)
===== ===== === === ========== ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-59
<PAGE> 122

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1997

<TABLE>
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows From Operating Activities:
Net loss....................................................................... $(365,576)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation and amortization............................................... 9,176
Loss on disposition of assets............................................... 12,000
Changes in assets and liabilities:
(Increase) in receivables................................................... (750,746)
(Increase) in prepaid expenses and other current assets..................... (48,343)
Increase in accounts payable and accrued expenses........................... 289,888
Increase in payroll taxes payable........................................... 740,860
Increase in other current liabilities....................................... 11,747
---------
Net cash (used in) operating activities................................ (100,994)
---------
Cash Flows From Investing Activities:
Additions to property and equipment............................................ (16,857)
Increase in other assets....................................................... (2,416)
---------
Net cash (used in) investing activities................................ (19,273)
---------
Cash Flows From Financing Activities:
Payments of financing arrangements............................................. (3,682)
Increase in former shareholders loans receivable............................... (62,138)
Increase in bank overdrafts.................................................... 187,921
---------
Net cash provided by financing activities.............................. 122,101
---------
Net Increase in Cash and Cash Equivalents........................................ 1,834
Cash and cash equivalents, beginning of period................................. 800
---------
Cash and Cash Equivalents, End of Period......................................... $ 2,634
=========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest.................................................................... $ 7,600
Income taxes................................................................ --
Non-Cash Items:
On January 31, 1997, approximately $4,850,000 of debt was converted to
preferred stock.
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-60
<PAGE> 123

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1997

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a) NATURE OF OPERATIONS:

The TPI Group, Ltd., "the Company," is a holding company which owns 100% of
the capital stock (see Principles of Consolidation below) of the following
corporations:

TPI Staffing, Inc., Queensbury, New York
Temporary Payroll Incentives, Inc., Queensbury, New York
TPI Payroll Processing Services, Inc., Queensbury, New York
Staffing Technologies, Inc., Queensbury, New York
Herotech, Inc., Queensbury, New York
Trans-Partnering Innovations, Inc., Boston, Massachusetts

The Company and its subsidiaries are primarily involved in providing
professional staffing, payroll and insurance benefit services to small and
medium sized companies in a variety of industries, including manufacturing,
retail and hospitality. The main office is located in Queensbury, New York with
satellite offices in several Atlantic Coast States.

The Company does not have a concentration of customers in any one industry;
however, during January 1997 a significant portion of the Company's revenues
were generated in New York.

(b) PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of The TPI
Group, Ltd. and its subsidiaries, TPI Staffing, Inc., Temporary Payroll
Incentives, Inc., TPI Payroll Processing Services, Inc., Staffing Technologies,
Inc., Herotech, Inc. and Trans-Partnering Innovations, Inc. All material
intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.

(d) CONCENTRATION OF CREDIT RISK:

The Company maintains the majority of its cash accounts in one commercial
bank. The total cash balances are secured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000.

(e) PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost. Depreciation is provided on
straight-line or accelerated methods at rates based on the estimated useful
lives. Depreciation expense for the month ended January 31, 1997 was $9,036.

Expenditures for major renewals and betterments that extend the useful
lives of fixed assets are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.

F-61
<PAGE> 124

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

using the straight-line or accelerated methods. Expenses associated with all
other leases (operating leases) are charged to expense as incurred.

(f) AMORTIZATION:

Organization costs are being amortized over a 60 month period. Amortization
expense for the month ended January 31, 1997 was $140.

(g) INCOME TAXES:

Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of certain assets and
liabilities for financial and tax reporting. The deferred taxes represent the
future tax return consequences of those differences, which will either be
taxable when the assets and liabilities are recovered or settled.

(h) CASH AND CASH EQUIVALENTS:

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.

(i) RESERVE FOR CLAIMS:

The Company's workers' compensation benefits and certain of its health care
benefits are provided under large deductible insured plans. The Company records
reserves for workers' compensation and health care claims costs based on
actuarial calculations using the Company's loss history of workers' compensation
and health care claims. In all cases regarding workers' compensation and health
care claims, reserves are established at the time a participant files a claim.
Furthermore, the Company, in determining its reserves, includes reserves for
estimated claims incurred but not reported.

At January 31, 1997, the Company has classified as current the estimated
amounts of reserves established for claims expected to be paid within one year.

The Company's estimates of its claims reserves, including its estimate of
incurred but not reported claims, are based primarily on its loss history. The
ultimate cost of heath care and workers' compensation claims will depend on
actual costs incurred in settling the claims and may differ from the amounts
reserved by the Company for those claims.

NOTE 2 -- CASH -- RESTRICTED:

Beginning in 1995, the Company placed $250,000 on deposit with a bank as
collateral for a letter of credit in favor of its workers' compensation
insurance carrier relating to the issuance of a workers' compensation insurance
policy.

During 1996, the Company placed $40,000 on deposit with a bank as
collateral for a letter of credit required on a general insurance bond.

NOTE 3 -- MISCELLANEOUS RECEIVABLES AND DEPOSITS:

At January 31, 1997, miscellaneous receivables and deposits consisted of
the following:

<TABLE>
<S> <C>
Deposits with insurance company required to fund possible
workers' compensation claims of prior years............. $152,396
Other miscellaneous receivables........................... 24,002
--------
$176,398
========
</TABLE>

F-62
<PAGE> 125

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- FIXED ASSETS:

Fixed assets consist of the following:

<TABLE>
<S> <C>
Leasehold improvements................................... $ 291,735
Furniture and equipment.................................. 503,845
Vehicles................................................. 71,942
Assets held under capital leases......................... 71,138
--------
938,660
Less: accumulated depreciation and amortization.......... (345,092)
--------
$ 593,568
========
</TABLE>

At January 31, 1997, land with an appraised value of $50,000 was
transferred to certain former shareholders in payment of compensation due them
at December 31, 1996.

NOTE 5 -- ACCRUED EXPENSES:

Included in accrued expenses as of January 31, 1997 is an accrual for
approximately $1,080,500 representing late payment penalties and interest due to
taxing authorities for late payment of withholding and unemployment taxes for
the fourth quarter of 1995, all four quarters of 1996 and the month of January
1997. These amounts, together with the corresponding tax liabilities have been
or are expected to be paid in 1997.

NOTE 6 -- FINANCING ARRANGEMENTS:

(a) NOTE PAYABLE -- DEMAND:

At January 31, 1997, the Company had a $600,000 demand note, payable to a
bank, at an interest rate of prime plus 1% per annum (9 1/4% at January 31,
1997). This note which was collateralized by letters of credit supplied to the
bank by certain former shareholders of the Company, was repaid in February 1997.

(b) OTHER NOTES PAYABLE:

<TABLE>
<S> <C>
Various notes, payable monthly, with interest rates ranging
from 6.99% to 10%, collateralized by certain equipment... $10,864
Note payable to a related party, payable with interest only
at rates from 9.5% to 10%, collateralized by a
mortgage................................................. 40,000
-------
Totals................................................... 50,864
Less: current portion.................................... 10,864
-------
Long-term portion........................................ $40,000
=======
</TABLE>

Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------- -------
<S> <C>
1997....................................................... $10,864
1998....................................................... --
1999....................................................... --
2000....................................................... --
Beyond..................................................... 40,000
-------
Total...................................................... $50,864
=======
</TABLE>

F-63
<PAGE> 126

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Capitalized lease obligations at January 31, 1997 consisted of the
following:

<TABLE>
<S> <C>
Leases collateralized by computer equipment with monthly payments
totaling $1,370 including interest at rates from 10.5% to
23.7%........................................................... $ 17,718
========
</TABLE>

Capitalized leased equipment consisted of the following:

<TABLE>
<S> <C>
Computer equipment................................................ $ 71,138
Less: accumulated depreciation.................................... (34,579)
--------
Total Book Value............................................. $ 36,559
========
</TABLE>

The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of January 31, 1997.

<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
1997............................................................... $14,205
1998............................................................... 5,409
-------
Total minimum payments........................................ $19,614
=======
Total minimum payments............................................. $19,614
Less: amounts representing interest................................ 1,896
-------
Present value of net minimum lease payments........................ 17,718
Less: current portion.............................................. 13,954
-------
Long-term portion............................................. $ 3,764
=======
</TABLE>

NOTE 7 -- PROVISION FOR INCOME TAXES:

<TABLE>
<S> <C>
Current:
Federal.................................................. $ --
States................................................... 13,848
-------
Total Current Taxes........................................ 13,848
-------
Net Operating Loss (NOL)
Carryforwards:
Federal.................................................. --
States................................................... --
-------
Total Tax Benefits......................................... --
-------
SubTotal................................................... 13,848
-------
Deferred:
Federal.................................................. --
States................................................... --
-------
Total Deferred Taxes....................................... --
-------
Total Income Tax........................................... $13,848
=======
</TABLE>

F-64
<PAGE> 127

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of the temporary differences that give rise to deferred tax
assets, as of January 31, 1997, are as follows:

<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net Operating Loss Carryforwards........................ $ 2,320,000
Less: valuation allowance............................... (2,320,000)
-----------
Net deferred tax assets................................. $ --
==========
</TABLE>

The Company has available at January 31, 1997, unused operating loss
carryforwards of approximately $5,800,000 which may be applied against future
taxable income expiring in various years beginning in 2005 through 2011. At an
assumed tax rate of 40%, these carryforwards may result in deferred tax assets
of approximately $2,320,000. Since there is no assurance that the Company will
generate future taxable income to utilize this asset, a 100% valuation allowance
has been provided as of January 31, 1997.

Effective January 31, 1997, a corporation purchased 100% of the outstanding
capital stock of the Company (see Note 12). According to I.R.C. Section 382, if
an ownership change of more than 50% of a loss corporation occurs, the taxable
income of that loss corporation for any post-change tax year can be offset by
existing net operating loss carryforwards only to the extent of the fair market
value of the old loss corporation's capital stock multiplied by the long-term
tax-exempt bond rate. On the date of the change in ownership the estimated
amount of net operating loss carryforwards that still exists is still to be
determined.

NOTE 8 -- LEASES:

The Company leases vehicles for two and three year terms under operating
leases. The Company also leases other equipment on an as-needed basis. Vehicle
and other equipment rental expense was $3,642 for the one month period ended
January 31, 1997.

The following is a schedule of future minimum rental payments required
under the above operating leases as of January 31, 1997.

The Company leases office space in various locations other than its main
office in Queensbury, New York (see Note 9c). Annual rentals aggregate
approximately $85,000.

NOTE 9 -- RELATED PARTY TRANSACTIONS:

(a) The following balances existed at January 31, 1997, as a result of
related party transactions between the Company, its former shareholders and
individuals related to the former shareholders of the Company:

<TABLE>
<CAPTION>
DESCRIPTION
----------------------------------------------------------
<S> <C>
Due from former shareholders.............................. $74,938
Long-term debt............................................ 40,000
Interest expense.......................................... 325
Rent expense.............................................. 2,866
</TABLE>

F-65
<PAGE> 128

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All the material details related to the balances and terms of the above
transactions are contained in other disclosures herein.

(b) The Company has guaranteed loans made by a financial institution
to four of its shareholders and an employee of the Company as detailed
below:

Two separate loans to four of its former shareholders which mature on
July 1, 2001 and June 1, 2008 and have a balance at January 31, 1997 of
$36,317 and $158,622, respectively.

A loan made to one of the Company's employees maturing November 15,
2000 with a balance of $13,449 at January 31, 1997.

(c) In July 1993, the Company entered into a five year lease
agreement, aggregating approximately $35,000 per year, for office space in
Queensbury, New York in a building owned by the Company's former
shareholders. Prior to entering this agreement the Company leased the
office space on a month-to-month basis. Total rent expense paid for the
Queensbury office for the month ended January 31, 1997 was $2,866.

NOTE 10 -- PREFERRED STOCK:

On April 12, 1996, the Company received a loan from an investment
group/shareholder of $4,850,000. This note which bears interest at 10% per
annum, had a maturity date of April 12, 1997. As part of the note agreement, the
investment group had an option to convert the entire note balance including
interest into 4,850 shares of senior convertible cumulative 9% preferred stock,
at $.01 par value on or prior to December 31, 1996. The date of conversion of
the note was extended to the date of the sale of the Company (see Note 12) at
which point, the investment group exercised its option to convert its entire
note balance to preferred stock and waived any and all interest associated with
the note.

NOTE 11 -- CONTINGENCY:

The Company is a defendant in a lawsuit related to unlawful discharge from
employment and for intentional infliction of emotional distress. The plaintiff
seeks the sum of $10,000,000 for compensation and punitive damages. The
plaintiff is a former employee of a client of the Company who believes her
termination from employment was a violation of the "FMLA" Family and Medical
Leave Act. This case is in the preliminary stages of investigation, but
management believes that the lawsuit has no merit and it intends to vigorously
defend its position.

The Company is also involved in various other legal proceedings arising in
the ordinary course of business. It is the opinion of the Company's counsel that
the outcome of these actions is not expected to have a material adverse effect
on the Company's financial position or results of operations.

NOTE 12 -- SALE OF THE COMPANY:

On January 31, 1997, the shareholders of the Company sold all the
outstanding shares of capital stock of the Company to NovaCare Employee
Services, Inc., a subsidiary of NovaCare, Inc., a New York Stock Exchange
Company.

NOTE 13 -- EMPLOYMENT AGREEMENTS:

Effective as of January 31, 1997, the Company entered into employment
agreements with six key employees. The aggregate annual salaries of these six
employees is $535,000. These agreements have no specific expiration dates. As of
March 1, 1997, all six of the above employees have agreed to a 20% reduction in
their base salaries.

F-66
<PAGE> 129

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 -- JOINT VENTURE ARRANGEMENT:

A joint venture arrangement was established for the Connecticut and White
Plains offices. Effective November 1, 1995, the joint venture arrangement was
amended whereby the Company receives an amount equal to 2.5% of gross billings
of the two aforementioned offices. Management of these offices receives the
gross profit generated by these offices, reduced by the Company's above fee,
from which all overhead expenses will be paid. The amounts generated from this
joint venture for January 1997 were immaterial.

F-67
<PAGE> 130

INDEPENDENT AUDITORS' REPORT

To The Board of Directors
The TPI Group, Ltd.
Queensbury, New York

We have audited the accompanying consolidated balance sheets of The TPI
Group, Ltd. and subsidiaries as of December 31, 1996, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the management of The TPI Group, Ltd. Our responsibility is to
express an opinion on the consolidated 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 audits to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects the financial position of The TPI
Group, Ltd. and subsidiaries as of December 31, 1996, 1995 and 1994 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.

LAZAR, LEVINE & COMPANY LLP

New York, New York
March 7, 1997

F-68
<PAGE> 131

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 4,164 $ 2,534 $ 800
Cash -- restricted................................ -- 340,000 290,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts
of $8,606, $58,614 and $362,097,
respectively................................. 161,591 151,354 234,780
Unbilled....................................... 971,853 1,769,019 1,675,011
Factored....................................... -- 535,624 --
Due from shareholders............................. -- -- 12,800
Miscellaneous receivables and deposits............ 567,258 422,880 167,866
Prepaid expenses and other current assets......... 28,460 262,276 316,503
---------- ---------- ----------
Total Current Assets................................ 1,733,326 3,483,687 2,697,760
Property and Equipment, Net......................... 499,974 680,926 646,747
Other Assets, Net................................... 16,128 157,364 7,633
---------- ---------- ----------
Total Assets........................................ $ 2,249,428 $ 4,321,977 $ 3,352,140
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft.................................... $ 265,265 $ 255,125 $ 334,349
Current portion of financing arrangements......... 438,867 1,732,892 627,182
Loans payable -- shareholders..................... 25,508 14,016 --
Accounts payable and accrued expenses............. 1,990,134 2,867,944 4,029,479
Payroll taxes payable............................. 1,437,798 3,553,657 1,962,097
Current portion of reserve for workers'
compensation claims............................ -- 202,333 628,181
Income taxes payable.............................. 4,399 4,560 8,380
Other current liabilities......................... 105,927 198,968 111,391
---------- ---------- ----------
Total Current Liabilities........................... 4,267,898 8,829,495 7,701,059
Long-Term Liabilities:
Financing arrangements -- net of current
portion........................................ 86,256 64,750 4,895,082
Reserve for workers' compensation claims -- net of
current portion................................ -- 294,806 429,482
---------- ---------- ----------
Total Liabilities................................... 4,354,154 9,189,051 13,025,623
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock -- $0.01 par value, 11,111 shares
authorized, 6,261 shares issued and outstanding
for 1996, 200 shares no par value authorized,
100 shares issued and outstanding for 1994 and
1995........................................... 85,101 85,101 63
Additional paid-in capital........................ -- -- 85,038
Accumulated deficit............................... (2,189,827) (4,952,175) (9,758,584)
---------- ---------- ----------
Total Stockholders' Equity (Deficit)................ (2,104,726) (4,867,074) (9,673,483)
---------- ---------- ----------
Total Liabilities and Stockholders' Equity
(Deficit)......................................... $ 2,249,428 $ 4,321,977 $ 3,352,140
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-69
<PAGE> 132

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $49,659,775 $72,067,276 $83,433,759
Payroll and Payroll Related Costs................... 48,720,337 70,355,295 81,812,101
----------- ----------- -----------
Gross Profit........................................ 939,438 1,711,981 1,621,658
----------- ----------- -----------
Operating Expenses:
Administrative personnel and payroll related
costs.......................................... 488,125 858,659 1,658,987
General and administrative expenses............... 1,119,425 1,467,824 1,777,698
Sales and marketing expenses...................... 475,629 674,233 866,526
Provision for doubtful accounts................... 38,833 71,755 487,121
Depreciation and amortization..................... 105,306 179,364 618,309
----------- ----------- -----------
Total Operating Expenses............................ 2,227,318 3,251,835 5,408,641
----------- ----------- -----------
(Loss) From Operations.............................. (1,287,880) (1,539,854) (3,786,983)
----------- ----------- -----------
Other Expenses:
Interest and penalties............................ 128,700 1,164,046 965,035
Other expenses, net............................... -- 54,721 40,543
----------- ----------- -----------
Total Other Expenses................................ 128,700 1,218,767 1,005,578
----------- ----------- -----------
(Loss) Before Provision for Income Taxes............ (1,416,580) (2,758,621) (4,792,561)
Provision for income taxes........................ 22,764 3,727 13,848
----------- ----------- -----------
Net (Loss).......................................... $(1,439,344) $(2,762,348) $(4,806,409)
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-70
<PAGE> 133

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
ADDITIONAL
SHARES/ COMMON PAID-IN ACCUMULATED
COMMON STOCK CAPITAL DEFICIT
------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994................... 100 $ 85,101 $ -- $ (750,483)
Net loss................................... -- -- -- (1,439,344)
------ ------- ------- -----------
Balance at December 31, 1994................. 100 85,101 -- (2,189,827)
Net loss................................... -- -- -- (2,762,348)
------ ------- ------- -----------
Balance at December 31, 1995................. 100 85,101 -- (4,952,175)
Amendment of par value and exchange of
stock................................... 6,161 (85,038) 85,038 --
Net loss................................... -- -- -- (4,806,409)
------ ------- ------- -----------
Balance at December 31, 1996................. 6,261 $ 63 $ 85,038 $(9,758,584)
====== ======= ======= ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-71
<PAGE> 134

THE TPI GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows From Operating Activities:
Net loss.......................................... $(1,439,344) $(2,762,348) $(4,806,409)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization.................. 105,306 179,364 618,309
Provision for doubtful accounts................ 4,042 71,755 487,121
Deferred tax benefits.......................... 22,985 -- --
Cost of reserve for workers' compensation
claims....................................... -- 497,139 560,524
Loss on disposal of fixed assets............... -- -- 8,710
Changes in assets and liabilities:
(Increase) decrease in cash -- restricted...... -- (340,000) 50,000
(Increase) decrease in receivables............. (915,222) (1,394,308) 318,384
Decrease (increase) in prepaid expenses and
other current assets......................... 116,281 (233,816) (58,512)
Increase in accounts payable and accrued
expenses..................................... 788,498 877,810 1,161,535
Increase (decrease) in payroll taxes payable... 717,882 2,115,859 (1,591,560)
Increase (decrease) in other current
liabilities.................................. 36,201 93,202 (83,757)
----------- ----------- -----------
Net cash (used in) operating activities... (563,371) (895,343) (3,335,655)
----------- ----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment............... (63,389) (275,227) (95,688)
Increase in other assets, net..................... (11,291) (70,798) (336,289)
----------- ----------- -----------
Net cash (used in) investing activities... (74,680) (346,025) (431,977)
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from financing arrangements.............. 469,000 1,619,370 5,450,000
Payments of financing arrangements................ (124,906) (358,000) (1,736,510)
Increase in shareholders loans receivable......... -- -- (12,800)
Increase (decrease) in shareholders' loans
payable........................................ 15,991 (11,492) (14,016)
Increase (decrease) in bank overdrafts............ 256,606 (10,140) 79,224
----------- ----------- -----------
Net cash provided by financing
activities.............................. 616,691 1,239,738 3,765,898
----------- ----------- -----------
Net (Decrease) in Cash and Cash Equivalents......... (21,360) (1,630) (1,734)
Cash and cash equivalents, beginning of year...... 25,524 4,164 2,534
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.............. $ 4,164 $ 2,534 $ 800
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest.................................. $ 39,776 $ 293,821 $ 403,415
Income taxes.............................. 3,433 892 10,029
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-72
<PAGE> 135

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a) NATURE OF OPERATIONS:

The TPI Group, Ltd., "the Company," is a holding company which owns 100% of
the capital stock (see Principles of Consolidation below) of the following
corporations:

TPI Staffing, Inc., Queensberry, New York
Temporary Payroll Incentives, Inc., Queensbury, New York
TPI Payroll Processing Services, Inc., Queensbury, New York
Staffing Technologies, Inc., Queensbury, New York
Herotech, Inc., Queensbury, New York
Trans-Partnering Innovations, Inc., Boston, Massachusetts

The Company does not have a concentration of customers in any one industry;
however, during 1994, 1995 and 1996 a significant portion of the Company's
revenues were generated in New York.

(b) PRINCIPLES OF CONSOLIDATION:

At all times since inception, there has been common ownership of the above
corporations amongst the existing shareholders of The TPI Group, Ltd. At January
1, 1995, the shareholders entered into an agreement whereby the individual
owners of the companies agreed to exchange their respective shares of capital
stock in these corporations for capital stock in The TPI Group, Ltd. As a result
of this agreement, The TPI Group, Ltd. became the sole stockholder and parent in
these corporations. Because the companies are controlled by a common group of
shareholders, the transaction was accounted for as a combination of interests,
at historical cost, similar to a pooling of interests. This transaction has been
retroactively reflected as if it had taken place at the beginning of 1993 and
accordingly, consolidated financial statements have been prepared for each year.

Prior years' financial statements have been reclassified to conform with
current year's presentation.

F-73
<PAGE> 136

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(d) CONCENTRATION OF CREDIT RISK:

The Company maintains the majority of its cash accounts in one commercial
bank. The total cash balances are secured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000.

(e) PROPERTY AND EQUIPMENT:

Expenditures for major renewals and betterments that extend the useful
lives of fixed assets are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.

Equipment operated under leases which transfer to the Company substantially
all benefits and risks associated with the assets are capitalized and an asset
and liability are recorded at the present value, or fair value if appropriate,
of minimum payments over the term of the lease. Amortization of the asset is
determined using the straight-line or accelerated methods. Expenses associated
with all other leases (operating leases) are charged to expense as incurred.

(f) AMORTIZATION:

Costs associated with the acquisition of a customer list have been
capitalized and are being amortized over a five year period on a straight-line
basis. At December 31, 1996 these costs were fully amortized.

Costs associated with the acquisition of a loan factoring agreement have
been capitalized and are being amortized on a straight-line basis over the life
of the agreement. The agreement was terminated on April 12, 1996 and all
remaining costs associated with the agreement were expensed (see Note 6).

The total amortization expenses for the years ended December 31, 1994, 1995
and 1996 were $13,286, $73,940 and $486,020, respectively.

(g) INCOME TAXES:

(h) CASH AND CASH EQUIVALENTS:

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.

(i) RESERVE FOR CLAIMS:

F-74
<PAGE> 137

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1995 and 1996, the Company has classified as current the
estimated amounts of reserves established for claims expected to be paid within
one year.

NOTE 2 -- CASH -- RESTRICTED:

During 1996, the Company placed $40,000 on deposit with a bank as
collateral for a letter of credit required on a general insurance bond.

During 1995, the Company had an agreement with one of its clients whereby
the client kept $90,000 in a separate bank account, in the Company's name, as
collateral against its outstanding receivable. The Company reflected this amount
on its balance sheet as restricted cash and as a corresponding escrow liability.
During 1996, the $90,000 was no longer required to be maintained in a separate
account.

NOTE 3 -- MISCELLANEOUS RECEIVABLES AND DEPOSITS:

At December 31, 1996, miscellaneous receivables and deposits consisted of
the following:

<TABLE>
<CAPTION>
1996
--------
<S> <C>
Deposits with insurance company required to fund possible workers'
compensation claims of prior years.............................. $152,396
Other miscellaneous receivables................................... 15,470
--------
$167,866
========
</TABLE>

NOTE 4 -- FIXED ASSETS:

Fixed assets consist of the following:

<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Land.................................... $ 61,000 $ 61,000 $ 61,000
Leasehold improvements.................. 236,338 291,735 291,735
Furniture and equipment................. 158,513 391,360 486,988
Vehicles................................ 121,377 103,216 71,942
Assets held under capital leases........ 35,375 46,523 71,138
--------- --------- ---------
612,603 893,834 982,803
Less: accumulated depreciation and
amortization.......................... (112,629) (212,908) (336,056)
--------- --------- ---------
$ 499,974 $ 680,926 $ 646,747
========= ========= =========
</TABLE>

F-75
<PAGE> 138

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- ACCRUED EXPENSES:

Included in accrued expenses as of December 31, 1995 is an accrual for
$584,254 representing late payment penalties and interest due to the Internal
Revenue Service for late payment of federal withholding taxes for the quarters
ended September 30, and December 31, 1995.

Included in accrued expenses as of December 31, 1996 is an accrual for
$815,000 representing late payment penalties and interest due to the Internal
Revenue Service for late payment of federal withholding and unemployment taxes
for the fourth quarter of 1995 and all four quarters of 1996. These amounts,
together with the corresponding tax liabilities, have been or are expected to be
paid in 1997.

NOTE 6 -- FINANCING ARRANGEMENTS:

(a) NOTE PAYABLE -- DEMAND:

At December 31, 1994, the Company had a $100,000 demand note payable to a
bank, with an interest rate of 10.5% per annum. The note which was
collateralized by accounts receivable and contract rights, was repaid in
February 1995.

At December 31, 1996, the Company had a $600,000 demand note, payable to a
bank, at an interest rate of prime plus 1% per annum (9 1/4% at December 31,
1996). This note which was collateralized by letters of credit supplied to the
bank by certain shareholders of the Company, was repaid in February 1997.

(b) NOTE PAYABLE -- FACTORING AGREEMENT:

On October 4, 1995, the Company entered into a factoring agreement with
Reservoir Capital Corporation (RCC), whereby the Company sold to RCC selected
accounts receivable. RCC purchased from the Company 75% of the balance of the
selected receivables up to a maximum outstanding balance of $2,250,000. All cash
collected on these receivables was deposited daily into a bank account of RCC.
With the cash deposited into their account, RCC first reduced that portion of
the receivable which they purchased, next paid to itself a processing fee of 1%
of the total receivable plus interest at an annual rate of Wall Street prime
plus 5% of the outstanding receivable balance, and finally returned to the
Company the remaining portion of cash collected. This note was collateralized by
the accounts receivable of the Company.

At December 31, 1995, the outstanding balance of the RCC factoring
agreement was $1,630,519, and the related factored receivables were $2,174,025.
On April 12, 1996, the agreement with RCC was terminated and the loan was paid
in full.

<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Various notes payable monthly with interest rates
ranging from 6.99% to 10%, collateralized by
certain equipment................................. $ 80,475 $ 46,160 $12,590
Note payable to a related party, payable with
interest only at rates from 9.5% to 10%,
collateralized by a mortgage...................... 40,000 40,000 40,000
Note payable -- bank, guaranteed by a related party,
payable in monthly principal installments of
$20,000 plus interest at the prime rate published
by the Wall Street Journal plus 2% per annum
maturing February, 1996........................... 274,729 69,000 --
------- -------- --------
Totals............................................ 395,204 155,160 52,590
Less: current portion............................. 308,948 95,655 12,590
------- -------- --------
Long-term portion................................. $ 86,256 $ 59,505 $40,000
======= ======== ========
</TABLE>

F-76
<PAGE> 139

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------- -------
<S> <C>
1997....................................................... $12,590
1998....................................................... --
1999....................................................... --
2000....................................................... --
Beyond..................................................... 40,000
-------
Total................................................. $52,590
=======
</TABLE>

(d) CAPITALIZED LEASE OBLIGATIONS:

Capitalized lease obligations at December 31, 1994, 1995 and 1996 consisted
of the following:

<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Leases collateralized by computer equipment with monthly
payments totaling $1,370 including interest at rates of
10.5% to 23.7%. The leases began to expire in November
1995...................................................... $29,919 $ 11,963 $ 19,674
======== ======== ========
Capitalized leased equipment consisted of the following:
Computer equipment.......................................... $35,375 $ 46,523 $ 71,138
Less: accumulated depreciation.............................. (9,905) (20,625) (33,651)
-------- -------- --------
Total Book Value.................................. $25,470 $ 25,898 $ 37,487
======== ======== ========
</TABLE>

The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of December 31, 1996.

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
--------------------------------------------------------------------------- -------
<S> <C>
1997....................................................................... $16,191
1998....................................................................... 5,409
-------
Total minimum payments........................................... $21,600
=======
Total minimum payments..................................................... $21,600
Less: amounts representing interest........................................ 1,926
-------
Present value of net minimum lease payments................................ 19,674
Less: current portion...................................................... 14,592
-------
Long-term portion................................................ $ 5,082
=======
</TABLE>

(e) NOTE PAYABLE -- INVESTMENT GROUP/SHAREHOLDER:

On April 12, 1996, the Company received a loan from an investment
group/shareholder of $4,850,000. This note bears interest at 10% per annum, and
matures on April 12, 1997. As part of the note agreement, the investment group
could convert the entire note balance including interest into 4,850 shares of
senior convertible cumulative 9% preferred stock, at $.01 par value on or prior
to December 31, 1996. (Extended to the date of sale of the Company -- see Note
13b).

F-77
<PAGE> 140

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- PROVISION FOR INCOME TAXES:

<TABLE>
<CAPTION>
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Current:
Federal...................................... $ -- $ -- $ --
States....................................... 4,135 3,727 13,848
------- ------ -------
Total Current Taxes............................ 4,135 3,727 13,848
------- ------ -------
Net Operating Loss (NOL) Carryforwards:
Federal...................................... (2,839) -- --
States....................................... (1,507) -- --
------- ------ -------
Total Tax Benefits............................. (4,346) -- --
------- ------ -------
SubTotal....................................... (211) 3,727 13,848
------- ------ -------
Deferred:
Federal...................................... 15,014 -- --
States....................................... 7,961 -- --
------- ------ -------
Total Deferred Taxes........................... 22,975 -- --
------- ------ -------
Total Income Tax............................... $22,764 $3,727 $13,848
======= ====== =======
</TABLE>

The tax effects of the temporary differences that give rise to deferred tax
assets, as of December 31, 1994, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Net Operating Loss Carryforwards..... $ 310,000 $ 1,244,000 $ 2,290,000
Less: valuation allowance............ (310,000) (1,244,000) (2,290,000)
---------- ------------ ------------
Net deferred tax assets.............. $ -- $ -- $ --
========== ============ ============
</TABLE>

The Company has available at December 31, 1994, 1995 and 1996 unused
operating loss carryforwards of approximately $777,000, $3,111,000 and
$5,725,000, respectively, which may be applied against future taxable income
expiring in various years beginning in 2005 through 2011. At an assumed tax rate
of 40%, these carryforwards may result in deferred tax assets of approximately
$310,000, $1,244,000 and $2,290,000, respectively. Since there is no assurance
that the Company will generate future taxable income to utilize this asset, a
100% valuation allowance has been provided as of December 31, 1994, 1995 and
1996.

Subsequent to the balance sheet date, a corporation purchased 100% of the
outstanding stock of the Company (see Note 13). According to I.R.C. Section 382,
if an ownership change of more than 50% of a loss corporation occurs, the
taxable income of that loss corporation for any post-change tax year can be
offset by existing net operating loss carryforwards only to the extent of the
fair market value of the old loss corporation's capital stock multiplied by the
long-term tax exempt bond rate. On the date of the change in ownership the
estimated amount of net operating loss carryforwards that still exists is still
to be determined.

NOTE 8 -- LEASES:

Beginning in 1994, the Company leased several vehicles for two and three
year terms under operating leases. The Company also leases other equipment on an
as-needed basis. Vehicle and other equipment rental expense was $14,288, $55,338
and $71,864 for the years ended December 31, 1994, 1995 and 1996, respectively.

F-78
<PAGE> 141

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a schedule of future minimum rental payments required
under the above operating leases as of December 31, 1996.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C>
1997...................................................... $ 58,356
1998...................................................... 31,410
1999...................................................... 11,748
2000...................................................... 11,748
2001...................................................... 1,124
--------
$114,386
========
</TABLE>

The Company leases office space in various locations other than its main
office in Queensbury, New York (see Note 10c). Annual rentals aggregate
approximately $85,000.

NOTE 9 -- JOINT VENTURE ARRANGEMENT:

A joint venture arrangement has been established for the Connecticut and
White Plains offices. Management personnel of these offices agreed to reimburse
the Company for the excess of expenses over revenue from the date that those
offices were opened in 1994 through December 31, 1995. The total expense
reimbursement for 1995 was $66,128 which was reflected in other receivables.

Effective November 1, 1995 and throughout 1996, this joint venture
arrangement has been amended whereby the Company is to receive an amount equal
to 2.5% of gross billings of the two aforementioned offices. Management of these
offices is to receive the gross profit generated by these offices, reduced by
the Company's above fee, from which all overhead expenses will be paid.

NOTE 10 -- RELATED PARTY TRANSACTIONS:

(a) The following balances existed at December 31, 1994, 1995 and
1996, as a result of related party transactions between the Company, its
shareholders and individuals related to the shareholders of the Company:

<TABLE>
<CAPTION>
DESCRIPTION 1994 1995 1996
-------------------------------------------- ------- ------- ----------
<S> <C> <C> <C>
Due from shareholders....................... $ -- $ -- $ 12,800
Loans payable, shareholders................. 25,508 14,016 4,850,000
Long-term debt.............................. 40,000 40,000 40,000
Interest expense............................ 3,900 3,900 4,665
Rent expense................................ 36,755 33,427 35,061
</TABLE>

All the material details related to the balances and terms of the above
transactions are contained in other disclosures herein.

(b) The Company has guaranteed loans made by a financial institution
to four of its shareholders and an employee of the Company as detailed
below:

Two separate loans to four of its shareholders which mature on July 1, 2001
and June 1, 2008 and have a balance as of December 31, 1996 of $36,317 and
$158,622, respectively.

A loan made to one of the Company's employees maturing November 15, 2000
with a balance of $13,692 at December 31, 1996.

(c) In July 1993, the Company entered into a five year lease
agreement, aggregating approximately $35,000 per year, for office space in
Queensbury, New York, in a building owned by the Company's

F-79
<PAGE> 142

THE TPI GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shareholders. Prior to entering this agreement the Company leased the
office space on a month-to-month basis. Total rent expense paid for the
Queensbury office for the years ended December 31, 1994, 1995 and 1996 was
$36,755, $33,427 and $35,061, respectively.

NOTE 11 -- CAPITAL STOCK:

In April 1996, the Company amended its Certificate of Incorporation to
increase the authorized shares of capital stock from 200 shares of common stock
without par value to (i) 11,111 shares of common stock at $.01 par value and
(ii) 4,850 shares of senior convertible cumulative 9% preferred stock at $.01
par value.

The Company also issued 6,261 shares of its $.01 par value common stock in
exchange for the 200 shares of no par value stock outstanding.

None of the shares of preferred stock are issued and outstanding as of
December 31, 1996 (see Note 13b).

NOTE 12 -- CONTINGENCY:

NOTE 13 -- SUBSEQUENT EVENTS:

(a) SALE OF THE COMPANY:

(b) NOTE PAYABLE/PREFERRED STOCK:

In conjunction with the above mentioned sale, the investment group (see
Note 6e) exercised its option to convert its entire note balance to preferred
stock and waived any and all interest associated with the note.

(c) Effective as of January 31, 1997, the Company entered into employment
agreements with six key employees. The aggregate annual salaries of these six
employees is $535,000. These agreements have no specific expiration dates. As of
March 1, 1997, all six of the above employees have agreed to a 20% reduction in
their base salaries.

F-80
<PAGE> 143
NOVACARE EMPLOYEE SERVICES VALUES

We believe that the most important and differentiating quality of outstanding
organizations is a set of values that inspires, unites and sustains them. Values
are constant and enduring and precede business plans, policies, procedures,
practices, performance and outcomes. The Company's values are:

CREDO: Helping Make Life a Little Better

PURPOSE: To be the brand, service and performance leader in the PEO
industry by effectively creating a more satisfying, more
productive relationship between employers and employees

BELIEFS: Respect for the Individual
Service to the Customer
Pursuit of Excellence
Commitment to Personal Integrity

Our values are the basis on which we build our business, our careers and our
reputation. It is our belief that a strong commitment to these values and a
philosophy of "caring for and about people" will enable us to provide a level
of service that will build the businesses of our clients and enhance the
careers of our employees.

[NOVACARE EMPLOYEE SERVICES PHOTO OF INDIVIDUALS]

[NOVACARE EMPLOYEE SERVICES LOGO]
<PAGE> 144

[NOVACARE EMPLOYEE SERVICES LOGO]
<PAGE> 145

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following are the estimated expenses in connection with the
distribution of the securities being registered hereunder, other than
underwriting discounts and commissions.

<TABLE>
<S> <C>
S.E.C. registration fee*......................................... $ 20,387
NASD filing fee*................................................. 7,228
NASDAQ -- NMS application fee*................................... 50,000
Accounting fees and expenses..................................... 400,000
Legal fees and expenses.......................................... 300,000
Printing and engraving expenses.................................. 225,000
Blue sky fees and expenses....................................... 10,000
Transfer agent fees.............................................. 10,000
Miscellaneous expenses........................................... 197,385
----------
Total.................................................. $ 1,220,000
==========
</TABLE>

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

* Actual fee

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article Eleventh of the Certificate of Incorporation of the Company
contains a provision which eliminates the personal liability of a director of
the Company to the Company or to any of its stockholders for monetary damages
for a breach of his fiduciary duty as a director, except in the case in which
the director breached his duty of loyalty, failed to act in good faith, engaged
in intentional misconduct or knowingly violated a law, authorized the payment of
a dividend or approved a stock repurchase in violation of the Delaware General
Corporation Law, or obtained an improper personal benefit.

The Underwriting Agreement provides for reciprocal indemnification between
the Company and its controlling persons on the one hand and the Underwriters and
their respective controlling persons on the other hand against certain
liabilities in connection with this Offering, including liabilities under the
Securities Act of 1933, as amended.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Information concerning the sale of the Company's securities is set forth
below:

On September 18, 1996, in connection with the Company's initial
capitalization, a subsidiary of the Parent purchased 4,000,000 shares of Common
Stock for $40,000.

Effective January 10, 1997, Loren J. Hulber, President and Chief Executive
Officer of the Company, purchased 375,000 shares of Common Stock for $720,000.

II-1
<PAGE> 146

On February 28, 1997, Bernard C. Byrd, Jr., Senior Vice President of
Operations of the Company, purchased 30,000 shares of Common Stock for $84,000.

On May 1, 1997, Andrew W. Stith, Senior Vice President of Sales and
Marketing of the Company, purchased 5,000 shares of Common Stock for $14,000.

On May 1, 1997, James W. McLane, President of the Parent, purchased 10,000
shares of Common Stock for $28,000.

On June 10, 1997, Thomas D. Schubert, Senior Vice President and Chief
Financial Officer of the Company, purchased 10,000 shares of Common Stock for
$28,000.

Information concerning the sale or issuance of the Company's securities in
connection with acquisitions is set forth below (all securities set forth
represent mandatorily redeemable common stock except for the issuances effective
February 28, 1997 and July 1, 1997):

Effective October 8, 1996, the Company sold 93,750 shares of Common Stock
to Bernard C. Byrd, Jr. and 93,750 shares of Common Stock to William E. Mayville
in connection with the acquisition of Resource One.

Effective February 1, 1997, the Company sold 10,319 shares of Common Stock
to Deborah M. Skinner, 9,268 shares of Common Stock to John Skinner, III, 297
shares of Common Stock to Jerry DeLong, 9,803 shares of Common Stock to Malvern
and Carolyn Tippett, and 125,000 shares of Common Stock to Quansoo-TPI L.L.C. in
connection with the acquisition of TPI.

Effective February 1, 1997, the Company sold 9,485 shares of Common Stock
to Edward A. Chiles and Anne H. Chiles, 13,213 shares of Common Stock to James
E. Boyd, 4,793 shares of Common Stock to James E. Boyd and Sandra Boyd, 13,780
shares of Common Stock to Lawton Chiles, 6,483 shares of Common Stock to Milton
S. May and Brenda B. May, 77,105 shares of Common Stock to Suzan F. Boyd, 13,780
shares of Common Stock to Rhea G. Chiles, 53,842 shares of Common Stock to
Valerie Boyd, 141,041 shares of Common Stock to Valerie Boyd, as Trustee of the
Fay T. Boyd 5-year Grantor Retained Annuity Trust, 28,265 shares of Common Stock
to Valerie Boyd as Trustee of the Wilbur H. Boyd 2-year Grantor Retained Annuity
Trust and 13,213 shares of Common Stock to Wayne R. Lynn in connection with the
acquisition of ESA.

Effective February 28, 1997, 2,200,000 shares of Common Stock were issued
to a subsidiary of the Parent in consideration for the Company's licensing of
the Parent's trademarks.

Effective April 21, 1997, the Company issued 1,107 shares of Common Stock
to Edward G. Chiles and Anne H. Chiles, 1,541 shares of Common Stock to James E.
Boyd, 559 shares of Common Stock to James E. Boyd and Sandra Boyd, 1,608 shares
of Common Stock to Lawton Chiles, 757 shares of Common Stock to Milton S. May
and Brenda B. May, 1,608 shares of Common Stock to Rhea G. Chiles, 8,995 shares
of Common Stock to Suzan F. Boyd, 6,281 shares of Common Stock to Valerie Boyd,
3,298 shares of Common Stock to Valerie Boyd, as Trustee of the Wilbur H. Boyd
2-year Grantor Retained Annuity Trust, 16,455 shares of Common Stock to Valerie
Boyd, as Trustee of the Fay T. Boyd 5-year Grantor Retained Annuity Trust and
1,541 shares of Common Stock to Wayne R. Lynn in connection with a contingent
payment made in connection with the acquisition of ESA.

Effective May 15, 1997, 22,500 shares of Common Stock were issued to
Bernard C. Byrd, Jr. and 18,750 shares of Common Stock were issued to William E.
Mayville in connection with a contingent payment made in connection with the
acquisition of Resource One.

Effective May 15, 1997, 11,000 shares of Common Stock were issued to
Prostaff Human Resources, Inc. in connection with a contingent payment made in
connection with the acquisition of certain assets of Prostaff.

Effective July 1, 1997, 1,200,000 shares of Common Stock were issued to a
subsidiary of the Parent in connection with the Company's acquisition of certain
assets of NovaPro.

II-2
<PAGE> 147

Registration under the Securities Act of the securities issued in the
transactions described herein was not required because such securities were
issued in transactions not involving any "public offering" within the meaning of
Section 4(2) of said Act, in reliance on Rule 506 under said Act. In connection
therewith, the Company has obtained representations from all such acquirors to
the effect that they are "accredited investors" as defined in Rule 501(a) under
said Act. In addition, there was no general solicitation or general advertising
in connection with such issuances.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

The Exhibits required to be filed as part of this Registration Statement
are listed in the attached Index to Exhibits.

(b) Financial Statement Schedules:

The Financial Statement Schedule (VIII -- Valuation and Qualifying
Accounts) required to be filed as part of this Registration Statement is
included as page S-1. All other schedules have been omitted because they are
inapplicable or the information is provided in the Financial Statements,
including the Notes thereto, included in the Prospectus.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes with respect to shares allocated to cover
over-allotments by the Underwriters to deregister any shares remaining unsold
upon the completion of the Offering by means of a post-effective amendment to
the Registration Statement.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of its
Certificate of Incorporation or By-laws or the laws of the State of Delaware, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-3
<PAGE> 148

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Norristown,
Commonwealth of Pennsylvania on the 10th day of November, 1997.

NOVACARE EMPLOYEE SERVICES, INC.

By /s/ LOREN J. HULBER
------------------------------------
(Loren J. Hulber,
President and Chief Executive
Officer)

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------------------- -----------------
<C> <S> <C>

/s/ LOREN J. HULBER President and Chief Executive Officer November 10, 1997
- ----------------------------------- and Director
(Loren J. Hulber)

/s/ THOMAS D. SCHUBERT* Senior Vice President, Chief Financial November 10, 1997
- ----------------------------------- Officer and Principal Accounting
(Thomas D. Schubert) Officer

/s/ E. MARTIN GIBSON* Director November 10, 1997
- -----------------------------------
(E. Martin Gibson)

/s/ HARVEY V. FINEBERG, M.D.* Director November 10, 1997
- -----------------------------------
(Harvey V. Fineberg, M.D.)

/s/ JOHN H. FOSTER* Director November 10, 1997
- -----------------------------------
(John H. Foster)

/s/ TIMOTHY E. FOSTER* Director November 10, 1997
- -----------------------------------
(Timothy E. Foster)

/s/ STEPHEN E. O'NEIL* Director November 10, 1997
- -----------------------------------
(Stephen E. O'Neil)

*By: /s/ LOREN J. HULBER
- -----------------------------------
(Loren J. Hulber
Attorney in Fact)
</TABLE>

II-4
<PAGE> 149

SCHEDULE VIII

NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES VALUATION
AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM OCTOBER 1, 1996 TO JUNE 30, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
- ------------------------------------------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for uncollectible accounts..... $ -- $ 26 $ -- $ -- $26
</TABLE>

S-1
<PAGE> 150

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ------- ---------------------------------------------------------------------------- ------
<S> <C> <C>
1 Form of Underwriting Agreement.............................................. ***
2(a) Stock Purchase Agreement dated September 16, 1996 by and among Resource One,
Inc., Professional Insurance Planners of Florida, Inc., Human Resource One,
Inc., Rx One, Inc., William E. Mayville, Bernard Clinton Byrd, Jr. and
NovaResource, Inc........................................................... **
2(b) Amendment dated April 8, 1997 to the stock purchase agreement dated as of
September 16, 1996 by and among Resource One, Inc., Professional Insurance
Planners of Florida, Inc., Human Resource One, Inc., Rx One, Inc., William
E. Mayville, Bernard Clinton Byrd, Jr. and NovaSource, Inc.................. **
2(c) Stock Purchase Agreement dated January 24, 1997 by and among Employee
Services of America, Inc., Employee Services of Florida, Inc., Employers
Risk Management, Inc., Employee Benefits Management, Inc., Employers
Diversified Services, Inc., and Nova Resource, Inc.......................... **
2(d) Stock Purchase Agreement dated January 31, 1997 by and among The TPI Group,
LTD., Deborah M. Skinner, John Skinner III, Malvern Tippett, Carolyn
Tippett, Terry DeLong, Quansoo-TPI L.L.C. and NovaSource, Inc............... **
3(a) Certificate of Incorporation of the Company................................. **
3(b) By-laws of the Company, as amended to date.................................. **
4(a) Stock Option Plan........................................................... **
5 Opinion and Consent of Haythe & Curley, counsel to the Company, as to the
legality securities being registered........................................ ***
10(a) Employment Agreement dated as of January 27, 1997 between the Company and
Loren J. Hulber............................................................. **
10(b) Stock Purchase Agreement dated as of February 10, 1997 between the Company
and Loren J. Hulber......................................................... **
10(c) Employment Agreement dated as of May 7, 1997 between the Company and Thomas
D. Schubert................................................................. **
10(d) Stock Purchase Agreement dated as of June 10, 1997 between the Company and
Thomas D. Schubert.......................................................... **
10(e) Employment Agreement dated as of October 8, 1996 between the Company and
Bernard C. Byrd, Jr......................................................... **
10(f) Amendment dated as of April 8, 1997 to the employment agreement dated
October 8, 1996 between the Company and Bernard C. Byrd, Jr................. **
10(g) Stock Purchase Agreement dated as of February 28, 1997 between the Company
and Bernard C. Byrd, Jr..................................................... **
10(h) Employment Agreement dated as of April 23, 1997 between the Company and
Andrew Stith................................................................ **
10(i) Stock Purchase Agreement dated as of April 23, 1997 between the Company and
Andrew Stith................................................................ **
10(j) Employment Agreement dated as of February 6, 1997 between the Company and
Deborah M. Skinner.......................................................... **
10(k) Employment Agreement dated as of February 27, 1997 between the Company and
James Boyd.................................................................. **
10(l) Employment Agreement dated as of June 18, 1997 between the Company and
Christina Harris............................................................ **
10(m) Agreement dated as of January 25, 1997 between NovaCare, Inc. and NovaCare
Employee Services, Inc...................................................... **
10(n) Agreement dated as of January 25, 1997 between NovaCare, Inc. and NovaCare
Employee Services, Inc...................................................... **
10(o) Trademark Agreement dated as of February 28, 1997 between the Company and
NovaMark, Inc............................................................... **
10(p) Loan Agreement dated as of September 18, 1996 between the Company and
NovaCare, Inc............................................................... **
</TABLE>

<PAGE> 151

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ------- ---------------------------------------------------------------------------- ------
<S> <C> <C>
10(q) Sublease Agreement dated as of June 4, 1997 between the Company and
NovaCare, Inc............................................................... **
10(r) Supplemental Benefits Plan.................................................. **
11 Statement re computation of unaudited pro forma and unaudited supplemental
pro forma information....................................................... **
21 Subsidiaries of the Company................................................. **
23(a) Consent of Price Waterhouse LLP, independent accountants to NovaCare
Employee Services, Inc...................................................... ***
23(b) Consent of Haythe & Curley (included in Exhibit 5).......................... ***
23(c) Consent of Brewer, Beemer, Kuehnhackl & Koon, P.A., independent accountants
to Resource One, Inc........................................................ ***
23(d) Consent of Varnadore, Tyler, Hoffner, King, Hawthorne, Hammer, & Stathis,
P.A., independent accountants to Employee Services of America, Inc. and
subsidiaries and Employers' Risk Management, Inc. and Employee Benefits
Management, Inc............................................................. ***
23(e) Consent of Lazar, Levine & Company LLP, independent accountants to The TPI
Group, Ltd.................................................................. ***
24 Power of Attorney (included on the Signature Page of the Registration
Statement).................................................................. **
27 Financial Data Schedule..................................................... **
</TABLE>

** Previously filed

*** Filed herewith.

<PAGE> 1
Exhibit 1

Draft of October 29, 1997

4,500,000 Shares

NOVACARE EMPLOYEE SERVICES, INC.

Common Stock

UNDERWRITING AGREEMENT

November , 1997

BANCAMERICA ROBERTSON STEPHENS
SMITH BARNEY INC.
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104

Ladies/Gentlemen:

NovaCare Employee Services, Inc., a Delaware corporation (the
"Company"), and NovaCare, Inc., a Delaware corporation ("NovaCare"), address you
as the Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (collectively, the "Underwriters") and hereby confirm their
respective agreements with the several Underwriters as follows:

1. Description of Shares. The Company proposes to issue and sell
4,500,000 shares of its authorized and unissued Common Stock, $.01 par
value (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 675,000
additional shares of the Company's Common Stock, $.01 par value (the
"Option Shares"), as provided in Section hereof. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. All shares of Common Stock, $.01 par value, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including
the Shares, are hereinafter referred to as "Common Stock."

2. Representations, Warranties and Agreements of the Company and NovaCare. Each
of the Company and NovaCare represents and warrants to, and agrees with, each
Underwriter that:
<PAGE> 2
(a) A registration statement on Form S-1 (File No. 333-35071) with respect
to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules
and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Act and has been filed
with the Commission; such amendments to such registration statement, such
amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and
Regulations as may have been required prior to the date hereof have been
similarly prepared and filed with the Commission; and the Company will file
such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration
statements as may hereafter be required. Copies of such registration
statement and amendments thereto, of each related prospectus subject to
completion (the "Preliminary Prospectuses"), including all documents
incorporated by reference therein, and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you.

(b) If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the
registration statement pursuant to Rule 430A(a) or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or
(c), as applicable, of the Rules and Regulations pursuant to subparagraph
(1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a
post-effective amendment to the registration statement (including a final
form of prospectus). If the registration statement relating to the Shares
has not been declared effective under the Act by the Commission, the
Company will prepare and promptly file an amendment to the registration
statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or
(c), as applicable, of the Rules and Regulations. The term "Registration
Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in the
form in which it became or becomes, as the case may be, effective
(including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule
434 of the Rules and Regulations, the information deemed to be a part of
the registration statement at the time it became effective pursuant to Rule
430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of
any amendment thereto or the filing of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations relating
thereto after the effective date of such registration statement, shall also
mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The
term "Prospectus" as used in this Agreement shall mean the prospectus
<PAGE> 3
relating to the Shares as included in such Registration Statement at the
time it becomes effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the
Rules and Regulations); provided, however, that if in reliance on Rule 434
of the Rules and Regulations and with the consent of BancAmerica Robertson
Stephens, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c),
as applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean
the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by the Company and
circulated by the Underwriters to all prospective purchasers of the Shares
(including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the
Rules and Regulations). Notwithstanding the foregoing, if any revised
prospectus shall be provided to the Underwriters by the Company for use in
connection with the offering of the Shares that differs from the prospectus
referred to in the immediately preceding sentence (whether or not such
revised prospectus is required to be filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall
refer to such revised prospectus from and after the time it is first
provided to the Underwriters for such use. If in reliance on Rule 434 of
the Rules and Regulations and with the consent of BancAmerica Robertson
Stephens, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c),
as applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet,
together, will not be materially different from the prospectus in the
Registration Statement.

(c) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and,
as of its date, has not included any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; and at the time the Registration Statement became or becomes,
as the case may be, effective and at all times subsequent thereto up to and
on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act
and the Rules and Regulations and will in all material respects conform to
the requirements of the Act and the Rules and Regulations, (ii) the
Registration Statement, and any amendments or supplements thereto, did not
and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
<PAGE> 4
they were made, not misleading; provided, however, that none of the
representations and warranties contained in this subparagraph shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof.

(d) Each of the Company and its subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full corporate power and authority to
own, lease and operate its properties and conduct its business as described in
the Prospectus; the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, except as set forth in the Registration Statement
and the Prospectus; each of the Company and its subsidiaries is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise; no
proceeding has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority or
qualification; each of the Company and its subsidiaries is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect; neither the Company nor any of its
subsidiaries is in violation of its respective charter or bylaws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective properties may be bound, except for any such
violations and defaults which individually or in the aggregate would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; and neither the Company nor any of its
subsidiaries is in material violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or NovaCare or over any of their respective properties of which it
has knowledge. The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than those listed on Schedule B
to this Agreement.

(e) Each of the Company and NovaCare has full legal right, power and authority
to enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and
<PAGE> 5
delivered by each of the Company and NovaCare and is a valid and binding
agreement on the part of the Company and NovaCare, enforceable against each of
the Company and NovaCare in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; the performance
of this Agreement and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms and provisions of,
or constitute a default under, (i) any bond, debenture, note or other evidence
of indebtedness, or under any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its subsidiaries or NovaCare is a party or by which the
Company or any of its subsidiaries, NovaCare, or any of their respective
properties may be bound, (ii) the charter or bylaws of the Company or any of its
subsidiaries or NovaCare, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or NovaCare or over any of their respective properties, except for
any breaches, violations and defaults which individually or in the aggregate
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or NovaCare or any of their subsidiaries or over any of their respective
properties is required for the execution and delivery of this Agreement and the
consummation by the Company or NovaCare or any of their subsidiaries of the
transactions herein contemplated, except such as may be required under the Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or under
state or other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.

(f) There is not any pending or, to the best of the Company's or NovaCare's
knowledge, overtly threatened action, suit, claim or proceeding against the
Company, NovaCare, any of their subsidiaries or any of their respective officers
or any of their respective properties, assets or rights before any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company, NovaCare or any of their subsidiaries or over any
of their respective officers or properties or otherwise which, if adversely
decided, (i) is reasonably likely to result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) is reasonably likely to prevent consummation of the transactions
contemplated hereby or (iii) is required to be disclosed in the Registration
Statement or Prospectus and is not so disclosed; and there are no agreements,
contracts, leases or documents of the Company or any of its subsidiaries of a
character required to be described or referred to in the Registration Statement
or Prospectus or to be filed as an exhibit to the Registration Statement by the
Act or the Rules and Regulations or by the Exchange Act or the rules and
<PAGE> 6
regulations of the Commission thereunder which have not been accurately
described in all material respects in the Registration Statement or Prospectus
or filed as exhibits to the Registration Statement.

(g) All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption "Capitalization"
and conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company); the Firm Shares and the Option Shares have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right,
co-sale right, registration right, right of first refusal or other similar right
of shareholders exists with respect to any of the Firm Shares or Option Shares
or the issuance and sale thereof other than those that have been expressly
waived prior to the date hereof and those that will automatically expire upon
and will not apply to the consummation of the transactions contemplated on the
Closing Date. No further approval or authorization of any shareholder, the Board
of Directors of the Company or others is required for the issuance and sale or
transfer of the Shares except as may be required under the Act, the Exchange Act
or under state or other securities or Blue Sky laws. All issued and outstanding
shares of capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and were not
issued in violation of or subject to any preemptive right, or other rights to
subscribe for or purchase shares and are owned by the Company free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest,
except as disclosed in the Registration Statement and the Prospectus. Except as
disclosed in the Prospectus and the financial statements of the Company, and the
related notes thereto, included in the Prospectus, neither the Company nor any
subsidiary has outstanding any options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights.

(h) Each of Price Waterhouse LLP, Brewer, Beemer, Kuehnhackl & Koon, P.A.,
Varnadore, Tyler, Hoffner, King, Hawthorne, Hammer & Stathis, P.A. and Lazar,
Levine & Company LLP, which has examined the consolidated financial statements
of the Company, Resource One, Inc., Employee Services of America, Inc. and The
TPI Group, Ltd., respectively, together with the
<PAGE> 7
related schedules and notes thereto filed with the Commission as a part of the
Registration Statement, which are in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the audited
consolidated financial statements of the Company, Resource One, Inc., Employee
Services of America, Inc. and The TPI Group, Ltd., respectively, together with
the related schedules and notes, and the unaudited consolidated financial
information, forming part of the Registration Statement and Prospectus, fairly
present in all material respects the financial position and the results of
operations of the Company, Resource One, Inc., Employee Services of America,
Inc. and The TPI Group, Ltd., respectively, and their respective subsidiaries at
the respective dates and for the respective periods to which they apply; all
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, filed with the Commission as part of the Registration Statement,
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein; and the pro forma financial information included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) has been prepared in accordance with the applicable published rules and
regulations of the Commission with respect to pro forma financial information
and the assumptions used in preparing such information are reasonable. The
selected and summary financial and statistical data included in the Registration
Statement present fairly in all material respects the information shown therein
and, to the extent applicable, have been compiled on a basis consistent with the
audited financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.

(i) Subsequent to the respective dates as of which information is given in the
Registration Statement and Prospectus, there has not been (i) any material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise, (ii) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered into in
the ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.

(j) Except as set forth in the Registration Statement and Prospectus, (i) each
of the Company and its subsidiaries has good and marketable title to all
properties and assets described in the Registration Statement and
<PAGE> 8
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) the agreements to which the
Company or any of its subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company and
its subsidiaries (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company and
its subsidiaries has valid and enforceable leases for all properties described
in the Registration Statement and Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and Prospectus, the Company owns or leases
all such properties as are necessary to its operations as now conducted or as
proposed to be conducted as described in the Registration Statement and the
Prospectus.

(k) The Company and its subsidiaries have timely filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes shown
thereon as due, and there is no tax deficiency that has been or, to the best of
the Company's knowledge, might reasonably be asserted against the Company or any
of its subsidiaries that, if adversely decided, would be reasonably likely to
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise; and all tax liabilities are
adequately provided for on the books of the Company and its subsidiaries.

(l) The Company and its subsidiaries maintain insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering workers compensation liability, health care
benefits, real and personal property owned or leased by the Company or its
subsidiaries against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.

(m) To the best of Company's and NovaCare's knowledge, no labor
<PAGE> 9
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and neither the Company nor NovaCare is aware of any existing or
imminent labor disturbance by the employees of any of the principal suppliers of
the Company and its subsidiaries, that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise. No collective bargaining agreement exists with any of the
non-worksite employees of the Company and its subsidiaries and, to the best of
the Company's knowledge, no such agreement is imminent.

(n) Each of the Company and its subsidiaries owns or possesses adequate rights
to use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus, except where the failure to have any such patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names and
copyrights would not, individually or in the aggregate, have a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise; neither the Company nor NovaCare has received any notice of, and
has no knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights; and
neither the Company nor NovaCare has received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.

(o) The Common Stock has been approved for quotation on The Nasdaq National
Market, subject to official notice of issuance.

(p) The Company has been advised concerning the Investment Company Act of 1940,
as amended (the "1940 Act"), and the rules and regulations thereunder, and has
in the past conducted, and intends in the future to conduct, its affairs in such
a manner as to ensure that it will not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.

(q) Neither the Company nor NovaCare has distributed and neither of them will
distribute prior to the later of (i) the Closing Date, or any date on which
Option Shares are to be purchased, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any
<PAGE> 10
Preliminary Prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.

(r) The Company and each of its subsidiaries has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("Permits") as are necessary to own its respective properties and to conduct its
business in the manner described in the Prospectus, including, without
limitation, all Permits required under federal and state licensure, labor,
health care and insurance laws and regulations applicable to the Company and its
subsidiaries and their respective operations, except where the failure to have
any such Permit has not and will not, individually or in the aggregate, have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, the Company and each of its subsidiaries has
fulfilled and performed all its material obligations with respect to such
Permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such Permit, subject in each case
to such qualification as may be set forth in the Prospectus; and, except as
described in the Prospectus, none of such Permits contains any restriction that
is materially burdensome to the Company or any of the subsidiaries. The Company
has complied and complies with the requirements of the Americans with
Disabilities Act of 1990, the Family Medical Leave Act of 1993, the Civil Rights
Act of 1964 (Title VII) as amended, the Age Discrimination in Employment Act and
other applicable federal and state employment and labor laws, and the various
other federal and state employment regulations to which the Company and its
subsidiaries are subject (including, without limitation, the laws and
regulations referenced in the Prospectus regarding insurance, the provision of
managed care services and regulation of professional employer organizations),
except where lack of any such compliance has not had and will not have,
individually or in the aggregate, a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.

(s) The Company and its subsidiaries are in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company or any of its subsidiaries would have any liability; neither
the Company or any of the Subsidiaries has incurred and does not expect to incur
liability under (i) Title IV of ERISA with respect to the termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company or any of the subsidiaries would have any liability that is intended to
be qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act, which
would cause the loss of such qualification.
<PAGE> 11
(t) Neither the Company nor any of its subsidiaries has at any time during the
last five (5) years (i) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in violation of law,
or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.

(u) Neither the Company nor NovaCare has taken nor will either the Company or
NovaCare take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.

(v) Each officer and director of the Company and each beneficial owner of Common
Stock has agreed in writing that such person will not, for a period of 180 days
from the date that the Registration Statement is declared effective by the
Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of BancAmerica Robertson Stephens; provided, however, that such
agreements need not be obtained from persons holding solely employee stock
options to purchase less than 5,000 shares of Common Stock. The foregoing
restriction has been expressly agreed to preclude the holder of the Securities
from engaging in any hedging or other transaction which is designed to or
reasonably expected to lead to or result in a Disposition of Securities during
the Lock-up Period, even if such Securities would be disposed of by someone
other than such holder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person has also agreed and consented to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the Securities held by
such person except in compliance with this restriction. The Company has provided
to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the agreements pursuant to which
its officers, directors and shareholders have agreed to such or similar
restrictions (the "Lock-up Agreements") presently in effect or effected hereby.
The Company hereby represents and warrants that it
<PAGE> 12
will not release any of its officers, directors or other shareholders from any
Lock-up Agreements currently existing or hereafter effected and to which the
Company is a party without the prior written consent of BancAmerica Robertson
Stephens.

(w) Except as set forth in the Registration Statement, the properties, assets
and operations of the Company and its subsidiaries are in compliance with all
applicable federal, state, local and foreign laws (including, without
limitation, common law), rules and regulations, orders, decrees, judgments,
permits and licenses relating to worker health and safety, and to the protection
and clean-up of the natural environment and to the protection or preservation of
natural resources, including, without limitation, those relating to the
processing, manufacturing, generation, handling, disposal, transportation or
release of hazardous materials (collectively, "Environmental Laws"), except
where the failure to comply has not and will not, individually or in the
aggregate, have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise. With respect to such
properties, assets and operations, there are no events, conditions,
circumstances, activities, practices, incidents, actions or plans of the
Company, or its subsidiaries of which the Company or NovaCare is aware that may
interfere with or prevent compliance or continued compliance in all material
respects with applicable Environmental Laws or otherwise result in liability to
the Company or its subsidiaries pursuant to applicable Environmental Law. Except
as set forth in the Registration Statement, (A) to the Company's and NovaCare's
knowledge, none of the Company or its subsidiaries is the subject of any
federal, state, local or foreign investigation pursuant to Environmental Laws,
(B) none of the Company or any of its subsidiaries has received any written
notice or claim pursuant to Environmental Laws and (C) there are no pending, or,
to the knowledge of the Company or NovaCare, overtly threatened actions, suits
or proceedings against the Company or any of its subsidiaries or their
properties, assets or operations, in connection with any Environmental Laws. The
term "hazardous materials" shall mean those substances that are regulated by or
pursuant to any applicable Environmental Laws.

(x) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

(y) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company or NovaCare or any of their respective subsidiaries
to or for the benefit of any of the officers or directors of the Company or any
of the members of the families of any of them, except as disclosed in the
Registration Statement and the Prospectus.
<PAGE> 13
3. Purchase, Sale and Delivery of Shares. On the basis of the representations,
warranties and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriters, and
each Underwriter agrees, severally and not jointly, to purchase from the
Company, at a purchase price of $ per share, the respective number of Firm
Shares as hereinafter set forth. The obligation of each Underwriter to the
Company shall be to purchase from the Company that number of Firm Shares which
is set forth opposite the name of such Underwriter in Schedule A hereto (subject
to adjustment as provided in Section 10).

Delivery of the Firm Shares to be purchased by the Underwriters
pursuant to this Section 3 shall be made by credit through full FAST transfer to
the accounts at The Depository Trust Company designated by the Representatives
against payment of the purchase price therefor by the several Underwriters by
wire transfer of immediately available funds to the Company. Such delivery and
payment shall take place at the offices of Dewey Ballantine LLP, 1301 Avenue of
the Americas, New York, New York (or at such other place as may be agreed upon
among the Representatives and the Company) at 7:00 A.M., San Francisco time (a)
on the third (3rd) full business day following the first day that Shares are
traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San
Francisco time, the fourth (4th) full business day following the day that this
Agreement is executed and delivered or (c) at such other time and date not later
than seven (7) full business days following the first day that Shares are traded
as the Representatives and the Company may determine (or at such time and date
to which payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"Closing Date;" provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representatives. The certificates for the
Firm Shares to be so delivered will be made available to you at such office or
such other location including, without limitation, in New York City, as you may
reasonably request for verification at least one (1) full business day prior to
the Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date.

It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose payment for firm shares shall not have been received by you prior to the
Closing Date for the Firm Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.

After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public
<PAGE> 14
offering price of $ per share. After the initial public offering, the
several Underwriters may, in their discretion, vary the public offering
price.

The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on page 3
concerning stabilization and over-allotment by the Underwriters, and under the
second, sixth and seventh paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement and you, on behalf of
the respective Underwriters, represent and warrant to the Company that the
statements made therein do not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.

4. Further Agreements of the Company and NovaCare. Each of the Company
and NovaCare agrees with the several Underwriters that:

(a) The Company will use its best efforts to cause the Registration Statement
and any amendment thereof, if not effective at the time and date that this
Agreement is executed and delivered by the parties hereto, to become effective
as promptly as possible; the Company will use its best efforts to cause any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations as may be required subsequent to the date the Registration Statement
is declared effective to become effective as promptly as possible; the Company
will notify you, promptly after it shall receive notice thereof, of the time
when the Registration Statement, any subsequent amendment to the Registration
Statement or any abbreviated registration statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules
and Regulations, the Company will provide evidence reasonably satisfactory to
you that the Prospectus and term sheet meeting the requirements of Rule 434(b)
or (c), as applicable, of the Rules and Regulations, have been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (7) of Rule
424(b) of the Rules and Regulations; if for any reason the filing of the final
form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence reasonably satisfactory to you that the
Prospectus contains such information and has been filed with the Commission
within the time period prescribed; it will notify you promptly of any request by
the Commission for the amending or supplementing of the Registration Statement
or the Prospectus or for additional information; promptly upon your request, it
will prepare and file with the Commission any amendments or
<PAGE> 15
supplements to the Registration Statement or Prospectus which, in the reasonable
opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may
be necessary or advisable in connection with the distribution of the Shares by
the Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; in
case any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations, the Exchange
Act and the rules and regulations of the Commission thereunder and the
provisions of this Agreement.

(b) The Company will advise you, promptly after it shall receive notice or
obtain knowledge, of the issuance of any stop order by the Commission suspending
the effectiveness of the Registration Statement or of the initiation or threat
of any proceeding for that purpose; and it will promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal at the
earliest possible moment if such stop order should be issued.

(c) The Company will use its best efforts to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as you may designate and to
continue such qualifications in effect for so long as may be required for
purposes of the distribution of the Shares, except that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process in any
jurisdiction in which it is not otherwise required to be so qualified or to so
execute a general consent to service of process. In each jurisdiction in which
the Shares shall have been qualified as above provided, the Company will make
and file such statements and reports in each year as are or may be required by
the laws of such jurisdiction.

(d) The Company will furnish to you, as soon as available, and, in the case of
the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in
no event later than the first (1st) full business day following the first day
that Shares are traded, copies of the Registration Statement (three of which
will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments
<PAGE> 16
or supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request. Notwithstanding the foregoing, if
BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall
agree to the utilization of Rule 434 of the Rules and Regulations, the Company
shall provide to you copies of a Preliminary Prospectus updated in all respects
through the date specified by you in such quantities as you may from time to
time reasonably request.

(e) The Company will make generally available to its securityholders as soon as
practicable, but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.

(f) During a period of five (5) years after the date hereof, the Company will
furnish to its shareholders as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of shareholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to shareholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v)
every material press release and every material news item or article in respect
of the Company or its affairs which was generally released to shareholders by
the Company, and (vi) any additional information of a public nature concerning
the Company or its subsidiaries, or its business which you may reasonably
request. During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.

(g) The Company will apply the net proceeds from the sale of the Shares being
sold by it in all material respects in the manner set forth under the caption
"Use of Proceeds" in the Prospectus.

(h) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for its Common Stock.
<PAGE> 17
(i) If the transactions contemplated hereby are not consummated by reason of any
failure, refusal or inability on the part of the Company or NovaCare to perform
any agreement on its part to be performed hereunder or to fulfill any condition
of the Underwriters' obligations hereunder, or if the Company shall terminate
this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall
terminate this Agreement pursuant to Section 11(b), the Company will reimburse
the several Underwriters for all out-of-pocket expenses (including reasonable
fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in
investigating or preparing to market or marketing the Shares.

(j) If at any time during the ninety (90) day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.

(k) During the Lock-up Period, the Company will not, without the prior written
consent of BancAmerica Robertson Stephens, effect the Disposition of, directly
or indirectly, any Securities other than the sale of the Firm Shares and the
Option Shares hereunder, the Company's issuance of options or Common Stock under
the Company's presently authorized Stock Option Plan (the "Option Plan") and the
issuance of Securities on a private placement basis in connection with the
acquisition of professional employer organizations and other human resource
related businesses (both previously consummated and consummated after the date
hereof).

(l) During a period of ninety (90) days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering shares under the Option Plan or other employee benefit plan.

5. Expenses.

(a) Each of the Company and NovaCare agrees with each Underwriter that:

(i) The Company will pay and bear all costs and expenses in connection with the
preparation, printing and filing of the Registration Statement (including
financial statements, schedules and exhibits), Preliminary Prospectuses and the
Prospectus and any amendments or supplements thereto; the printing of this
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the
<PAGE> 18
Company's independent certified public accountants; the cost of furnishing to
the several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus and any
amendments or supplements to any of the foregoing; NASD filing fees and the cost
of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and reasonable fees and disbursements of
Underwriters' Counsel in connection with such NASD filings and Blue Sky
qualifications); and all other expenses directly incurred by the Company in
connection with the performance of its obligations hereunder; provided, however,
that the Underwriters shall reimburse NovaCare for the reasonable value of the
use of NovaCare's corporate jet in connection with the roadshow and the
Underwriters shall pay all reasonable expenses relating to the meals and lodging
of management of the Company in connection with the roadshow.

(ii) In addition to their other obligations under Section 8(a) hereof, each of
the Company and NovaCare agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the obligation of the Company or NovaCare, as the case may be,
to reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Company or NovaCare, as the case may be, together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.

(b) In addition to their other obligations under Section hereof, the
Underwriters severally and not jointly agree that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
described in Section hereof, they will reimburse the Company on a monthly basis
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company shall promptly return such payment to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
within thirty (30) days of a request for reimbursement shall bear interest at
the
<PAGE> 19
Prime Rate from the date of such request.

(c) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in Sections and hereof, including
the amounts of any requested reimbursement payments, the method of determining
such amounts and the basis on which such amounts shall be apportioned among the
reimbursing parties, shall be settled by arbitration conducted by JAMS/ENDISPUTE
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or a written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections and hereof and will
not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses which is created by the provisions of Sections and hereof
or the obligation to contribute to expenses which is created by the provisions
of Section hereof.

6. Conditions of Underwriters' Obligations. The obligations of the several
Underwriters to purchase and pay for the Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and NovaCare herein, to the
performance by the Company and NovaCare in all material respects of their
respective obligations hereunder and to the following additional conditions:

(a) The Registration Statement shall have become effective not later than 2:00
P.M., San Francisco time, on the date following the date of this Agreement, or
such later date as shall be consented to in writing by you; and no stop order
suspending the effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been initiated or, to the knowledge of the Company,
NovaCare or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel.

(b) All corporate proceedings and other legal matters in connection with this
Agreement, the form of Registration Statement and the Prospectus, and the
registration, authorization, issue, sale and delivery of the Shares, shall have
been reasonably satisfactory to Underwriters' Counsel, and such counsel shall
have been furnished with such papers and information as they may reasonably have
requested to enable them to pass upon the matters referred to in this Section.

(c) Subsequent to the execution and delivery of this Agreement and prior to the
Closing Date, or any later date on which Option Shares are to be purchased, as
the case may be, there shall not have been any change in the
<PAGE> 20
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.

(d) You shall have received on the Closing Date and on any later date on which
Option Shares are to be purchased, as the case may be, the following opinion of
counsel for the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters,
to the effect that:

(i) The Company and each subsidiary of the Company that is a significant
subsidiary as that term is defined in Regulation S-X of the Act (a "Significant
Subsidiary") has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation;

(ii) The Company and each Significant Subsidiary has the corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus;

(iii) The Company and each Significant Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction,
if any, in which the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed on
Schedule B hereto;

(iv) The authorized, and, based solely upon a review of the corporate minute
books and the corporate stock ledger of the Company, issued and outstanding
capital stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company have been duly and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, will not have
been issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;

(v) All issued and outstanding shares of capital stock of each Significant
Subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right and are owned
by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, except as set forth in the
Registration Statement and the Prospectus;
<PAGE> 21
(vi) The Firm Shares or the Option Shares, as the case may be, to be issued by
the Company pursuant to the terms of this Agreement have been duly authorized
and, upon issuance and delivery against payment therefor in accordance with the
terms hereof, will be duly and validly issued and fully paid and nonassessable,
and will not have been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right;

(vii) Each of the Company and NovaCare has the corporate power and authority to
enter into this Agreement and the Company has the corporate power and authority
to issue, sell and deliver to the Underwriters the Shares to be issued and sold
by it hereunder;

(viii) This Agreement has been duly authorized by all necessary corporate action
on the part of the Company and NovaCare and has been duly executed and delivered
by the Company and NovaCare and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company and NovaCare,
enforceable against each of the Company and NovaCare in accordance with its
terms, except insofar as indemnification provisions may be limited by applicable
law and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles;

(ix) The Registration Statement has become effective under the Act and, to such
counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or overtly threatened under the Act;

(x) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including supporting
schedules) and the other financial and statistical data included therein, as to
which such counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations;

(xi) The information in the Prospectus under the caption "Description of Capital
Stock," to the extent that it constitutes matters of law or legal conclusions,
has been reviewed by such counsel and is a fair summary of such matters and
conclusions; and the forms of certificates evidencing the Common Stock comply
with Delaware law;

(xii) The description in the Registration Statement and the Prospectus of the
charter and bylaws of the Company and of statutes are accurate and fairly
present the information required to be presented by the Act and the applicable
Rules and Regulations;

(xiii) To such counsel's knowledge, there are no agreements, contracts, leases
or documents to which the Company is a party of a character required to be
described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which are not described or
referred to therein or filed as required;
<PAGE> 22
(xiv) The performance of this Agreement and the consummation of the transactions
herein contemplated (other than performance of the indemnification obligations
of the Company and NovaCare hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations;

(xv) No consent, approval, authorization or order of or qualification with any
court, government or governmental agency or body having jurisdiction over the
Company, NovaCare or any of their subsidiaries, or over any of their properties
or operations is necessary in connection with the consummation by the Company
and NovaCare of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;

(xvi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or overtly threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations or by the
Exchange Act or the applicable rules and regulations of the Commission
thereunder other than those described therein;

(xvii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective charter or
bylaws, or (b) in material breach of any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries, or over any of their properties or operations; and

(xviii) To such counsel's knowledge, except as set forth in the Registration
Statement and Prospectus, no holders of Common Stock or other securities of the
Company have registration rights relating to securities of the Company and,
except as set forth in the Registration Statement and Prospectus, all holders of
securities of the Company having rights known to such counsel to registration of
such shares of Common Stock or other securities, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by reason
of lapse of time following notification of the Company's intent to file the
Registration Statement or have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such rights.
<PAGE> 23
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives and Underwriters' Counsel at which such conferences
the contents of the Registration Statement and Prospectus and related matters
were discussed, and although they have not verified the accuracy or completeness
of the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and the other financial and statistical information included therein,
as to which such counsel need express no comment) contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the States of New York and
Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company and NovaCare and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to
you, as Representatives of the Underwriters, and to Underwriters' Counsel.

(e) You shall have received on the Closing Date and on any later date on which
Option Shares are to be purchased, as the case may be, an opinion of Dewey
Ballantine LLP, counsel for the Underwriters, in form and substance satisfactory
to you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.

(f) You shall have received on the Closing Date and on any later date on which
Option Shares are to be purchased, as the case may be, a letter from Price
Waterhouse LLP addressed to the Underwriters, dated the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than three (3) business days prior to the Closing
Date or such later date on
<PAGE> 24
which Option Shares are to be purchased, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter delivered by such firm are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise or any other
entity to which such letter relates from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. The Original Letter from Price Waterhouse LLP, shall be addressed to
or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth their opinion with
respect to their examination of the consolidated balance sheet of the Company or
any other entity to which such letter relates and related consolidated
statements of operations, shareholders' equity, and cash flows, (iii) state that
the firm delivering such letter has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and provide the report of the firm delivering such letter
as described in SAS 71 on the interim financial statements (the "Quarterly
Financial Statements"), (iv) state that in the course of such review, nothing
came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented and (v) address other matters
agreed upon by the firm delivering such letter and you. In addition, you shall
have received from Price Waterhouse LLP a letter addressed to the Company and
made available to you for the use of the Underwriters stating that their review
of the Company's system of internal accounting controls, to the extent they
deemed necessary in establishing the scope of their examination of the Company's
consolidated financial statements as of June 30, 1997 did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.

(g) You shall have received on the Closing Date and on any later date on which
Option Shares are to be purchased, as the case may be, certificates of the
Company and NovaCare, dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, signed by the Chief Executive
Officer and Chief Financial Officer of the Company and NovaCare, as the case may
be, to the effect that, and you shall be satisfied that:

(i) The representations and warranties of the Company or NovaCare, as the case
may be, in this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
<PAGE> 25
purchased, as the case may be, and the Company or NovaCare, as the case may be,
has complied in all material respects with all the agreements and satisfied all
the conditions on its part to be performed or satisfied in all material respects
at or prior to the Closing Date or any later date on which Option Shares are to
be purchased, as the case may be;

(ii) No stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act;

(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included therein by the Act
and the Rules and Regulations and in all material respects conformed to the
requirements of the Act and the Rules and Regulations or the Exchange Act and
the applicable rules and regulations of the Commission thereunder, as the case
may be, the Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and, since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth; and

(iv) Subsequent to the respective dates as of which information is given in the
Registration Statement and Prospectus, there has not been (a) any material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise, (b) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered into in
the ordinary course of business, (c) any obligation, direct or contingent, that
is material to the Company and its subsidiaries considered as one enterprise,
incurred by the Company or its subsidiaries, except obligations incurred in the
ordinary course of business, (d) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries that is material to the
Company and its subsidiaries considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or any of its subsidiaries, or (f) any loss or damage (whether or not
insured) to the property of the Company or any of its subsidiaries which has
been sustained or will have been sustained which has a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise.

(h) The Company shall have obtained and delivered to you an agreement from each
officer and director of the Company, and each beneficial owner of Common Stock
in writing prior to the date hereof that such person will not, during the
Lock-up Period, effect the Disposition of any Securities now
<PAGE> 26
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of BancAmerica Robertson Stephens; provided, however, that such
agreements need not be obtained from persons holding solely employee stock
options to purchase less than 5,000 shares of Common Stock. The foregoing
restriction shall have been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than the such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.

(i) The Company shall have furnished to you such further certificates and
documents as you shall reasonably request (including certificates of officers of
the Company and NovaCare as to the accuracy of the representations and
warranties of the Company and NovaCare herein, as to the performance by the
Company and NovaCare of their obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder).

All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you with
such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.

7. Option Shares.

(a) On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the Company
hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 675,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be
<PAGE> 27
purchased by each Underwriter upon the exercise of such option shall be the same
proportion of the total number of Option Shares to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to
the total number of Firm Shares purchased by the several Underwriters (set forth
in Schedule A hereto), adjusted by the Representatives in such manner as to
avoid fractional shares.

Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by wire transfer of immediately available
funds to the Company. Such delivery and payment shall take place at the offices
of Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New York or at
such other place as may be agreed upon among the Representatives and the Company
(i) on the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to the Closing
Date, or (ii) on a date which shall not be later than the third (3rd) full
business day following the date the Company receives written notice of the
exercise of such option, if such notice is received by the Company less than two
(2) full business days prior to the Closing Date.

The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full FAST transfer to the accounts at The Depository
Trust Company designated by the Representatives.

It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.

(b) Upon exercise of any option provided for in Section hereof, the
obligations of the several Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company and NovaCare herein, to the accuracy of
the statements of the Company and NovaCare and their respective officers made
pursuant to the provisions hereof, to the performance in all material respects
by the Company and NovaCare of their respective obligations hereunder, to
satisfaction of the conditions set forth in Section 6 hereof, and to the
condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be reasonably
satisfactory in form and substance
<PAGE> 28
to you and to Underwriters' Counsel, and you shall have been furnished with all
such documents, certificates and opinions as you may reasonably request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company and NovaCare or the satisfaction of any of the conditions herein
contained.

8. Indemnification and Contribution.

(a) Each of NovaCare and the Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and each of
NovaCare and the Company agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that neither NovaCare nor the Company shall be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, such Preliminary Prospectus
or the Prospectus, or any such amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected had not been sent or
given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.

The indemnity agreement in this Section shall extend upon the same terms
and conditions to, and shall inure to the benefit of, each
<PAGE> 29
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which NovaCare or the Company may otherwise have.

(b) Each Underwriter, severally and not jointly, agrees to indemnify and hold
harmless the Company against any losses, claims, damages or liabilities, joint
or several, to which the Company may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8 to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action.

The indemnity agreement in this Section shall extend upon the same terms
and conditions to, and shall inure to the benefit of, each officer of the
Company who signed the Registration Statement and each director of the Company,
and each person, if any, who controls the Company and NovaCare within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each Underwriter may otherwise have.

(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it shall elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available
<PAGE> 30
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal defenses
and to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying party
to such indemnified party of the indemnifying party's election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Sections and
hereof who are parties to such action), (ii) the indemnifying party shall not
have employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. In no event
shall any indemnifying party be liable in respect of any amounts paid in
settlement of any action unless the indemnifying party shall have approved the
terms of such settlement; provided that such consent shall not be unreasonably
withheld. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnification could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on all claims that are the subject matter of such
proceeding.

(d) In order to provide for just and equitable contribution in any action in
which a claim for indemnification is made pursuant to this Section 8 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 8 provides for indemnification in
such case, all the parties hereto (including, without limitation, NovaCare)
shall contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (after contribution from others) in such proportion so
that the Underwriters severally and not jointly are responsible pro rata for the
portion represented by the percentage that the underwriting discount bears to
the initial public offering price, and the Company is responsible for the
remaining portion; provided, however, that (i) no Underwriter shall be required
to contribute any amount in excess of the amount by which the underwriting
discount applicable to the Shares purchased by such Underwriter exceeds the
amount of damages which such Underwriter has otherwise been required to pay and
(ii) no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. The contribution agreement
in this Section 8
<PAGE> 31
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
NovaCare within the meaning of the Act or the Exchange Act and each officer of
the Company who signed the Registration Statement and each director of the
Company.

(e) The parties to this Agreement hereby acknowledge that they are sophisticated
business persons who were represented by counsel during the negotiations
regarding the provisions hereof including, without limitation, the provisions of
this Section 8, and are fully informed regarding said provisions. They further
acknowledge that the provisions of this Section 8 fairly allocate the risks in
light of the ability of the parties to investigate the Company and its business
in order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Act and the Exchange Act.

9. Representations, Warranties, Covenants and Agreements to Survive Delivery.
All representations, warranties, covenants and agreements of the Company,
NovaCare and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or NovaCare or any of their respective officers, directors
or controlling persons within the meaning of the Act or the Exchange Act, and
shall survive the delivery of the Shares to the several Underwriters hereunder
or termination of this Agreement.

10. Substitution of Underwriters. If any Underwriter or Underwriters shall fail
to take up and pay for the number of Firm Shares agreed by such Underwriter or
Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.

If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid by such postponed Closing
Date, the Closing Date may, at the option of the Company, be
<PAGE> 32
postponed for a further twenty-four (24) hours, if necessary, to allow the
Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.

In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company shall be
liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor
shall any Underwriter (other than an Underwriter who shall have failed,
otherwise than for some reason permitted under this Agreement, to purchase the
number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, and the
other Underwriters for damages, if any, resulting from such default) be
liable to the Company (except to the extent provided in Sections 5 and 8
hereof).

The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.

11. Effective Date of this Agreement and Termination.

(a) This Agreement shall become effective at the earlier of (i) 6:30 A.M.,
San Francisco time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall
mean the time of the release by you, for publication, of the first
newspaper advertisement relating to the Shares, or the time at which the
Shares are first generally offered by the Underwriters to the public by
letter, telephone, telegram or telecopy, whichever shall first occur. By
giving notice as set forth in Section 12 before the time this Agreement
becomes effective, you, as Representatives of the several Underwriters, or
the Company, may prevent this Agreement from becoming effective without
liability of any party to any other party, except as provided in Sections,
5 and 8 hereof.

(b) You, as Representatives of the several Underwriters, shall have the
<PAGE> 33
right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later
date on which Option Shares are to be purchased, as the case may be, (i) if
the Company or NovaCare shall have failed, refused or been unable to
perform any agreement on its respective part to be performed, or because
any other condition of the Underwriters' obligations hereunder required to
be fulfilled is not fulfilled, including, without limitation, any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse, or (ii) if
additional material governmental restrictions, not in force and effect on
the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock
Exchange or in the over the counter market by the NASD, or trading in
securities generally shall have been suspended on either such exchange or
in the over the counter market by the NASD, or if a banking moratorium
shall have been declared by federal, New York or California authorities, or
(iii) if the Company shall have sustained a loss by strike, fire, flood,
earthquake, accident or other calamity of such character as to interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured, or (iv) if
there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment
makes it inadvisable or impracticable to proceed with the offering, sale
and delivery of the Shares, or (v) if there shall have been an outbreak or
escalation of hostilities or of any other insurrection or armed conflict or
the declaration by the United States of a national emergency which, in the
reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus. In the event of termination pursuant to
subparagraph (i) above, the Company shall remain obligated to pay costs and
expenses pursuant to Sections 4, 5 and 8 hereof. Any termination pursuant
to any of subparagraphs (ii) through (v) above shall be without liability
of any party to any other party except as provided in Sections 5 and 8
hereof.

If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each
case confirmed by letter. If the Company shall elect to prevent this
Agreement from becoming effective, the Company shall promptly notify you by
telephone, telecopy or telegram, in each case, confirmed by letter.

12. Notices. All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to you shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to you c/o BancAmerica Robertson Stephens, 555 California Street, Suite
2600, San Francisco, California 94104, telecopier number (415) 781-0278,
Attention: General Counsel, with copies to Dewey Ballantine LLP, 1301 Avenue of
the Americas, New York, New York 10019; if sent to the Company, such notice
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by
<PAGE> 34
letter) to NovaCare Employee Services, Inc., 2621 Van Buren Avenue, Norristown,
PA 19403, telecopier number (610) 650-4705, Attention: Loren J. Hulber, Chief
Executive Officer, with copies to Haythe & Curley, 237 Park Avenue, New York,
New York 10017 and to NovaCare, Inc., 1016 West Ninth Avenue, King of Prussia,
Pennsylvania 19406, Attention: General Counsel; and if sent to NovaCare, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to NovaCare, Inc., 1016 West Ninth Avenue,
King of Prussia, Pennsylvania 19406, Attention: General Counsel.

13. Parties. This Agreement shall inure to the benefit of and be binding upon
the several Underwriters, the Company and NovaCare and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
or entity, other than the parties hereto and their respective executors,
administrators, successors and assigns, and the controlling persons within the
meaning of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim in respect of
this Agreement or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.

In all dealings with the Company under this Agreement, you shall
act on behalf of each of the several Underwriters, and the Company shall be
entitled to act and rely upon any statement, request, notice or agreement
made or given by you jointly or by BancAmerica Robertson Stephens on behalf
of you.

14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.

15. Counterparts. This Agreement may be signed in several counterparts, each of
which will constitute an original.

If the foregoing correctly sets forth the understanding among the
Company, NovaCare and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among the Company, NovaCare and the several
Underwriters.

Very truly yours,

NOVACARE EMPLOYEE SERVICES, INC.
<PAGE> 35
By

NOVACARE, INC.

Accepted as of the date first above written:

BANCAMERICA ROBERTSON STEPHENS
SMITH BARNEY INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.

By BANCAMERICA ROBERTSON STEPHENS

By
Authorized Signatory

SCHEDULE A

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

Underwriter
- ------------------------------------------------------------

Number of Firm Shares
to be Purchased

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

- ------------------------------------------------------------
BancAmerica Robertson
Stephens. . . . . . . . . .
. . . . . . . . . . . . . .
. . . . . . . . . . .

<PAGE> 36
- ------------------------------------------------------------
- ---------------------------

- ---------------------------
- ------------------------------------------------------------
Smith Barney Inc. . . . .
. . . . . . . . . . . . . .
. . . . . . . . . . . . . .
. . . . . . . . . . . . . .
.

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

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

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

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

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

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

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

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

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

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

- -----------------------------------------------------------
<PAGE> 37
- ---------------------------

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

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

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

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

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

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

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

Total

- -----------------------------------------------------------
<PAGE> 38
- ---------------------------

4,500,000

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

SCHEDULE B

<PAGE> 1
Exhibit 5

November 7, 1997

NovaCare Employee Services, Inc.
2621 Van Buren Avenue
Norristown, Pennsylvania 19403

Dear Sirs:

We have acted as counsel for NovaCare Employee Services, Inc., a Delaware
corporation (the "Company"), in connection with the registration statement on
Form S-1 (No. 333-35071), as amended (the "Registration Statement"), filed by
the Company under the Securities Act of 1933, as amended, with respect to (i)
4,500,000 shares (the "Firm Shares") of common stock, $.01 par value (the
"Common Stock"), of the Company to be issued and sold to a group of
underwriters (the "Underwriters") represented by BancAmerica Robertson Stephens
and (ii) 675,000 shares (the "Over-Allotment Shares") of Common Stock issuable
upon exercise of the Underwriters' over-allotment option, as set forth in the
Underwriting Agreement to be entered into between the Company and the
Underwriters (the Firm Shares and the Over-Allotment Shares being hereinafter
collectively referred to as the "Shares").

In connection with the Registration Statement, we have examined such
records and documents and such questions of law as we have deemed necessary or
appropriate for the purposes of this opinion. On the basis of such examination,
we advise you that in our opinion the Shares have been duly and validly
authorized and, when issued and paid for in accordance with resolutions duly
adopted by the board of directors of the Company, will be duly and validly
issued, fully paid and non-assessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus constituting a part of the Registration Statement.

Very truly yours,

/s/ Haythe & Curley

<PAGE> 1
Exhibit 23(a)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 31, 1997, except
for Notes 1 and 13 as to which the date is November 6, 1997, relating
to the financial statements of NovaCare Employee Services, Inc., which appears
in such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the year ended June 30, 1997 listed under Item
16(b) of this Registration Statement when such schedule is read in conjunction
with the financial statements referred to in our report. The audit referred to
in such report is also included this schedule. We also consent to the references
to us under the headings "Experts" and "Selected Financial Data" in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Financial Data."

Price Waterhouse LLP

Philadelphia, Pennsylvania
November 7, 1997

<PAGE> 1
EXHIBIT 23(c)

[BREWER, BEEMER, KUEHNHACKL & KOON, P.A. LETTERHEAD]

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 4, 1997, relating
to the financial statements of Resource One, Inc., which appears in
such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that Brewer, Beemer, Kuehnhackl & Koon, P.A. has not prepared or
audited such "Selected Financial Data."

/s/ Brewer, Beemer, Kuehnhackl & Koon, P.A.

BREWER, BEEMER, KUEHNHACKL & KOON, P.A.

Orlando, Florida
November 6, 1997

<PAGE> 1
EXHIBIT 23.D

[CPA ASSOCIATES, P.A. LETTERHEAD]

CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANT

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated March 8, 1997 and April
17, 1997, relating to the combined financial statements of Employee Services of
America, Inc. and subsidiaries, which appears in such Prospectus. We also
consent to the references to our Firm under the heading "Experts" in such
Prospectus.

/s/ CPA Associates, P.A.

CPA ASSOCIATES, P.A.
(Successor to the practice of Varnadore, Tyler, Hoffner, King, Hawthorne,
Hammer & Stathis, P.A.)

Bradenton, Florida

November 6, 1997

<PAGE> 1
EXHIBIT 23.E

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

We hereby consent to the use in this Amendment No. 3 to the Registration
Statement of our reports dated March 7, 1997 and April 11, 1997, relating to
the consolidated financial statements of The TPI Group Ltd. and subsidiaries,
and to the reference to our firm under the caption "Experts" in the Prospectus.

/s/ Lazar, Levine & Company LLP
--------------------------------
LAZAR, LEVINE & COMPANY LLP

New York, New York
November 6, 1997