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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER 0-22141

COMPLETE BUSINESS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

MICHIGAN
(State or Other Jurisdiction of
Incorporation or Organization)

32605 WEST TWELVE MILE ROAD, SUITE 250
FARMINGTON HILLS, MICHIGAN 48334
(Address of principal executive office)
38-2606945
(IRS Employer Identification No.)

48334
(Zip Code)

Registrant's telephone number, including area code: (248) 488-2088

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of common stock held by non-affiliates of the
registrant as of March 24, 1999 was $467,329,559.

The number of shares outstanding of the registrant's common stock as of
March 24, 1999 was 37,307,266.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT FOR ITS 1999 ANNUAL
MEETING OF SHAREHOLDERS TO THE EXTENT EXPRESSLY SO STATED, ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS REPORT.
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2

COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES

FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

INDEX

PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 10
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations................................... 12
Item 8. Financial Statements and Supplementary Data................. 20
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure.................................... 41
PART III
Item 10. Directors and Executive Officers of the Company............. 42
Item 11. Executive Compensation...................................... 42
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 42
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV
Exhibits, Financial Statements Schedules and Reports on Form
Item 14. 8-K......................................................... 43
Signatures............................................................ 45

PART I

ITEM 1. BUSINESS

SUMMARY

Complete Business Solutions, Inc. is a leading provider of information
technology services offering clients flexible delivery capabilities through a
focused partnership sourcing approach. We offer clients a broad range of IT
services, from advising them on IT business strategy and strategic technology
plans to developing and implementing appropriate IT applications solutions. We
are a single source provider of a broad range of IT services, including: (1) IT
consulting; (2) large systems applications development and maintenance; (3)
reengineering legacy applications to client/server technology; (4) client/server
applications development; (5) packaged software implementation, such as ERP; (6)
year 2000 conversion and testing services; and (7) contract programming
services.

We apply industry-specific IT consulting services to a wide range of
leading technology platforms and perform these services in a variety of emerging
computing environments. Our emerging technology service offerings include: (1)
data warehousing solutions; (2) electronic commerce solutions; and (3) network
services to support enterprise-wide applications such as sales force automation
and Internet/intranet development. We believe that our broad and expanding range
of services minimizes our dependence on any single technology, enables us to
serve as a single-source provider for our clients' IT applications needs and
provides us with the ability to cross-sell our services to existing clients.

We offer flexible, cost-effective project delivery capabilities by
providing our clients a choice among any combination of the following options:
(1) onsite at the client facility; (2) offsite at one of our eight development
facilities in the U.S. and Canada; or (3) offshore at one of our three
development facilities in India and the Philippines. We have been developing our
extensive offshore infrastructure since 1992 and believe that it is one of the
largest in the industry. Our ability to deliver services globally is enhanced by
our local branch management and recruiting infrastructure, consisting of a
geographically dispersed network of 25 branch offices and 135 sales and account
managers. Our local branch infrastructure allows us to demonstrate our
commitment to each market and enhances our ability to attract locally based
clients and consultants.

Our flexible delivery capabilities enable our clients to determine their
degree of project involvement and to control the costs and speed of project
delivery, consistent with our team-focused partnership sourcing approach. Under
this approach, we seek to establish long-term relationships with our clients by
serving as a virtual extension of their organizations. Proven, innovative
methodologies combined with highly competent IT professionals enable us to
deliver flexible, team-oriented solutions to meet our clients' expectations.

Our goal is to become the preferred, single-source provider of IT services
to an expanding base of clients by establishing teams that quickly and cost
effectively provide strong industry-specific IT applications solutions. To
achieve this goal, our strategy is to:

- Support each service offering with our program management team to create
new opportunities and leverage existing relationships;

- Capitalize on the marketing and development efforts of six vertically
focused industry solutions groups;

- Expand the breadth and depth of our technical capabilities through a
continued evaluation of emerging technologies and development of
industry solutions;

- Expand our branch infrastructure, both domestically and internationally,
and capitalize on our significant investment in offsite and offshore
development centers;

- Create virtual partnerships with our clients to provide them with a
broad range of IT solutions and create cross-selling opportunities; and

- Seek mergers and acquisitions that complement our core skills or expand
our geographic reach and have the potential to increase our overall
value.

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4

THE CBSI ADVANTAGE

The CBSI advantage enables our clients to use IT as a more effective
business tool consistent with their evolving business needs. The key attributes
of the CBSI advantage are that we:

- Offer clients a single-source provider of a broad range of IT services,
from advising them on IT business strategy and strategic technology
plans to developing and implementing appropriate IT applications
solutions. This range includes emerging technology services such as data
warehousing solutions, electronic commerce solutions and network
services.

- Provide flexible project delivery by offering our clients any
combination of the following options: (1) onsite at the client facility;
(2) offsite at one of our eight development facilities in the U.S. and
Canada; or (3) offshore at one of our three development facilities in
India and the Philippines. This flexibility enables our clients to
determine their degree of project involvement and to control the costs
and speed of project delivery.

- Offer a local presence by delivering our services to clients through a
geographically dispersed network of 25 branch offices and 135 sales and
account managers. Our local presence allows us to demonstrate our
commitment to each local market and enhances our ability to attract
locally based clients and consultants.

- Recruit and train our consultants globally through our established
domestic and international network. Consultants receive up to two months
of training in software engineering techniques and key technologies at
one of our five U.S. training centers or one of our two overseas
training centers in India. These centers are equipped with a variety of
hardware, software and development tools.

CBSI GROWTH STRATEGY

Our goal is to become the preferred single-source provider of IT services
to an expanding base of clients by establishing teams that quickly and cost
effectively provide industry-based IT applications solutions. To achieve this
goal, our strategy is to:

- Support each service offering with a program management team to create
new opportunities and develop existing accounts. We have 45 sales people
in our branch offices developing new accounts and over 100 account
managers maintaining and expanding existing client relationships by
cross selling our broad range of service offerings. These long-term
relationships provide us with a significant advantage over our
competitors in marketing additional services and solutions to our
clients.

- Capitalize on six vertically focused industry solutions groups. These
groups develop solutions based on in-depth knowledge of particular
industries and a detailed understanding of the client's business. They
sell and market a broad range of ERP and other solutions to existing
clients and also obtain new clients within our targeted industries.
Targeted industries include banking and financial services, health care,
manufacturing, public sector, retail and distribution and utilities and
telecommunications.

- Expand the breadth and depth of our technical capabilities through
training existing personnel, recruiting experienced talent and acquiring
or merging with complementary businesses. Our continued evaluation of
emerging technologies enables us to add new service offerings and
minimizes our dependence on any single technology.

- Expand our branch infrastructure, both domestically and internationally,
and capitalize on our significant investment in offsite and offshore
development centers, as well as our systems, methodologies, training
programs and marketing efforts. We believe that our existing development
centers can be further leveraged to support a significantly larger
number of consultants.

- Create virtual partnerships with our clients to provide them with IT
solutions so that we become an extension of their organization. This
partnership sourcing model uses a team approach that makes

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the client an integral team member. We consider the impact of each
project on the entire application to build a broader solution over time.
We quickly assemble capable teams and use the strategic insights of the
client to produce flexible, supportable business and IT solutions.

- Seek mergers and acquisitions that complement our core skills or expand
our geographic reach and have the potential to increase our overall
value, rather than merely increase our revenues. We believe that our
branch management organization allows us to efficiently integrate
acquisitions.

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6

CBSI SERVICES

We offer our clients a broad range of IT services, from advising clients on
strategic technology plans to developing and implementing appropriate IT
solutions. We provide services in the following categories:

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

IT Consulting - IT business strategy and strategic
technology planning
- Provide technical architecture and network
design and business process reengineering
consulting services
--------------------------------------------------------------------------------------------
Large Systems Applications Development and - Design, develop and maintain large-scale,
Maintenance complex solutions capable of managing
transaction-intensive applications
--------------------------------------------------------------------------------------------
Reengineering Legacy Applications to Client/ - Reengineer from centralized,
Server Technology mainframe-based systems to open,
distributed architectures
--------------------------------------------------------------------------------------------
Client/Server Applications Development - Conceptualize and design systems based on
distributed object-oriented technologies
and methodologies
--------------------------------------------------------------------------------------------
Packaged Software Implementation - Implement packaged software solutions,
including ERP
- Customize software packages to client
specifications
--------------------------------------------------------------------------------------------
Year 2000 Conversion and Testing - Conduct impact assessments and assist
clients with strategic planning for Year
2000 compliance
- Renovate, replace or reengineer existing
applications to be Year 2000 compliant
--------------------------------------------------------------------------------------------
Contract Programming - Develop, maintain and enhance
client/server and mainframe software
applications
- Reengineer software applications across
platforms
--------------------------------------------------------------------------------------------
Data Warehousing Solutions - Design enterprise-wide repositories and
update mechanisms for data culled from
operational systems
- Design, build and implement datamarts that
employ portions of the data warehouses for
specific applications
--------------------------------------------------------------------------------------------
Electronic Commerce Solutions - Develop business-to-business and
consumer-to-business applications
- Couple web-enabled front-end systems
across a network to back-end database
systems
--------------------------------------------------------------------------------------------
Network Services - Provide assessments of existing network
stability and capacity
- Provide network design services to support
new enterprise-wide applications
- Conceptualize and design Internet/intranet
solutions
--------------------------------------------------------------------------------------------

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INDUSTRY SOLUTIONS

We have designed and developed proprietary software to solve
industry-specific problems for our clients. These include APECS/Discovery,
Clarety and Business Solutions Framework.

APECS enables K-12 school districts and higher education institutions to
manage their business and student records. Our APECS Product has been
reengineered to a client/server platform and renamed Discovery. We market the
Student Administration module of Discovery jointly with PeopleSoft's finance and
HR/payroll applications.

Clarety is a set of reusable software modules for the public employee
retirement systems (PERS) industry. We are currently implementing Clarety
software for California PERS, Mississippi PERS, Nevada PERS and the Ohio State
Teachers Retirement System.

The Business Solutions Framework consists of infrastructure software used
as a foundation for our e-commerce solutions practice. This Business Solutions
Framework allows us to build e-commerce solutions more efficiently for our
clients and is written in JAVA.

CLIENTS

Approximately 70% of our clients are middle market companies with annual
revenues between $500 million and $4 billion. Using our partnership sourcing
approach, we are quickly becoming an important supplier to these middle market
clients. We have also started to serve emerging companies with revenues from $50
million to $500 million. These emerging companies require the expertise CBSI can
provide and have limited alternative sources, either internal or external, to
meet their IT needs.

In 1998 we provided services to approximately 500 clients in the United
States, Europe and Asia. Our strategy is to maximize our client retention rate
and to secure additional engagements by providing quality services and by being
responsive to client needs. For each of the past five years, existing clients
from the previous fiscal year generated more than 80% of our revenues.

Certain of our representative clients in various industries are listed in
the following table:

BANKING AND FINANCIAL SERVICES

Banc One Services Corporation
Chase Manhattan Corporation
Fidelity Investments
Fleet Services Corporation
Foremost Corporation of America
Putnam Investments
UNUM Corporation
VISA U.S.A. Inc.

HEALTH CARE

Anthem Blue Cross Blue Shield of Connecticut
Baystate Health System
Blue Cross and Blue Shield of Michigan

MANUFACTURING

DaimlerChrysler AG
Ford Motor Company
General Motors Corporation
Herman Miller, Inc.
Johnson Controls, Inc.
Weyerhaeuser Company
Willamette Industries, Inc.
PUBLIC SECTOR

State of California
State of Indiana
State of Michigan
State of Mississippi
State of Nevada
State of North Carolina
State of Ohio

RETAIL AND DISTRIBUTION

Duty Free Shops
Fred Meyer, Inc.
The GAP, Inc.
Lands' End, Inc.
Limited Stores
Spartan Stores, Inc.

UTILITIES AND TELECOMMUNICATIONS

American Telephone and Telegraph Company
Alltel Information Services, Inc.
Ameritech Corporation
PacificCorp
South Carolina Electric and Gas Company
Southern California Edison
Sprint Corporation
Tucson Electric Power Company

5
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REPRESENTATIVE ENGAGEMENTS

We have provided IT services to an international financial services company
for the past four years. The client needed to migrate their legacy applications
to a client/server platform using migration tools. We proposed an application
reengineering approach using our global delivery concept. Based on the success
of this multi-million dollar solution, the relationship transitioned into
partnership sourcing. Today, our projects include applications maintenance,
applications support and Year 2000 solutions using our global delivery
capability.

We have provided IT services to an automotive manufacturer for the past
eleven years executing several projects including Year 2000 remediation, custom
development and applications maintenance. Currently, we are delivering IT
consulting and web-based systems development. On a recent project, we performed
business process engineering and implemented a state-of-the-art supply chain
solution by first performing a process analysis and then developing a
three-tier, thin-client component-based solution that is used in 110 countries
with over 4,000 vehicle combinations.

We managed and implemented a new building materials distribution project
for a forest products manufacturer. This custom development project replaced
their legacy systems with a relational database, client/server technology and
business applications. The project was based on a comprehensive requirements
analysis and was designed and developed with significant user involvement.

We have been working with a utility company's IT group for the past four
years, providing value-added services for a variety of their requirements. Our
engagements include applications maintenance, applications support, large CIS
system implementation, Year 2000 solutions, financial system implementation and
client/server system development and maintenance. Our engagements make use of
our global delivery approach while maintaining our local presence via our local
branch.

SALES AND MARKETING

We generate the majority of new sales through our branch management
structure. Our branches focus on all clients within a geographic area. The
manager of each branch office is responsible for managing client relationships,
ensuring the delivery team is performing as expected and identifying new
business opportunities, and is compensated primarily on the financial
performance of the branch. This structure fosters an entrepreneurial atmosphere
within each branch and results in a significant number of client referrals and
opportunities to cross-sell our services.

In many cases, we use a consultant from one of our industry solutions
groups, an expert in the IT needs of the specific industry, to enhance the
initial planning and development phase of a project. They are also able to share
common solutions for an industry with a specific client prospect. Our ability to
provide industry-specific solutions enables our clients to take advantage of our
vertically focused business and IT knowledge.

Our partnership sourcing approach facilitates the sale of services to
clients by making us an extension of their organization and making the client a
member of our service delivery team. When clients view us as part of their team,
they often decide to source their additional IT services needs through us with
little sales effort on our part.

Cross-selling our industry solutions and other services to existing clients
has proven to be a successful way to expand our business and accounts for much
of the extensive recurring revenue volume we have enjoyed over the years. Our
acquisitions have expanded our range of industry solutions and services,
enabling us to be even more successful in this activity.

In addition to our sales group, we have a dedicated marketing department
which is responsible for coordination of all corporate communications, including
the scheduling of press conferences to promote our services and delivery
methodologies. In addition, the marketing group provides information to industry
analysts including the Gartner, Giga and Meta Groups and Forrester.

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9

HUMAN RESOURCES

Our success depends in large part on our ability to attract, develop,
motivate and retain highly skilled IT professionals. Our strategy for achieving
"career-based employment" includes career planning, thorough initial and ongoing
training, allocation of assignments in accordance with employee skills and
career objectives and a comprehensive benefits package including a
Company-matched 401(k) plan, stock purchase plan, health and dental insurance,
short-term disability insurance, a flexible spending account and tuition
reimbursement. In 1999, we will add preventive medical and more extensive dental
care and vision coverage for our employees. We also will continue to grant stock
options as part of our recruitment and retention strategy. As part of our effort
for minimizing turnover we emphasize:

- Human resource management;

- Competitive salaries;

- Comprehensive benefits;

- Employee stock options; and

- Deferred compensation.

Our branch offices use intensive programs to recruit consultants throughout
the United States, screen them through a variety of interview and testing
processes and select them for future assignments on our project teams. In
addition, our recruiting activities seek to draw on an international pool of IT
talent. We actively recruit in India, England, Australia, New Zealand, the
Philippines, Mexico and Singapore. Recruiting methods include advertising in
leading newspapers and trade magazines, using the Internet and participation in
career fairs. In addition, we actively involve our employees in referring
individuals and screening candidates for new positions.

Our consultants typically have Bachelor's or Master's degrees in Computer
Science or another technical discipline. As of December 31, 1998, we had 4,584
employees comprised of 4,062 IT professionals, 147 sales and marketing personnel
and 375 general and administrative personnel. As of December 31, 1998, we also
had 233 independent contractors working on client engagements.

We have established five employee training centers located in the United
States and two in India. These training centers employ full-time instructors and
are equipped with hardware, software and development tools. New college
graduates receive two months of full-time classroom instruction in program
analysis and design. Along with technical training, we provide business skills
to enhance team building, diversity awareness and key consulting skills such as
presentations and communications training. We also provide training to prepare
for specific future technical assignments followed by one month of self-study.

Between projects and after business hours, all IT professionals receive
ongoing training on a variety of technology platforms. Our education and
training department helps employees make the transition from legacy to
client/server skills by providing cross-platform training in new technologies.
In addition to comprehensive technical training, we provide extensive training
in quality processes and cross-cultural communications skills. In addition, we
offer training courses to non-employees for a fee and may hire graduates of
these training programs.

We provide over 200 courses on our computer-based training system, which is
available 24 hours a day, 7 days a week. In addition to technical skills in a
variety of programming languages, we offer courses in business and
administration skills.

ITEM 2. PROPERTIES

We lease approximately 70,000 square feet of office space in Farmington
Hills, Michigan for our headquarters office. In addition to our headquarters, we
lease office space throughout the world. Currently, our facilities are adequate
for our needs, however, additional space may be required as our business
expands. We believe we will be able to obtain suitable space as needed.

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10

We have principal offices in the following locations:

NORTH AMERICA INTERNATIONAL

Basking Ridge, NJ Milwaukee, WI Bangalore, India
Boston, MA Minneapolis, MN Brussels, Belgium
Charlotte, NC Montreal, Canada Chennai, India
Chicago, IL Nashua, NH Hyderabad, India
Cleveland, OH Phoenix, AZ London, United Kingdom
Columbus, OH Pittsburgh, PA Manila, Phillipines
Farmington Hills, MI Portland, OR Singapore
Grand Rapids, MI Providence, RI Sydney, Australia
Hartford, CT Sacramento, CA
Indianapolis, IN Seattle, WA
Lansing, MI Springfield, MA
Los Angeles, CA Tampa, FL
Milpitas, CA

We believe that these facilities are adequate for our anticipated future
needs.

ITEM 3. LEGAL PROCEEDINGS

CBSI is party to a third-party complaint filed against it and other parties
on February 3, 1997, by Network Six, Inc. ("NSI") in the Circuit Court of the
First Circuit for the State of Hawaii. The third-party claims are asserted in an
action that the State of Hawaii has brought against NSI. CBSI has also received
an answer and counterclaim, dated January 31, 1997, served by NSI in a
collection action brought by CBSI against NSI in the Superior Court of the State
of Rhode Island. CBSI acted as a subcontractor to NSI in connection with the
development of software for the State of Hawaii. Additionally, NSI and CBSI were
parties to a letter of intent, now terminated, for the purpose of exploring a
business combination or merger. CBSI's suit against NSI in Rhode Island, as well
as the State of Hawaii's suit against NSI in Hawaii, arise from the Hawaii
software project.

The allegations of NSI's third-party complaint in the Hawaii action and
NSI's counterclaim in the Rhode Island action are substantively identical. NSI
alleges that CBSI wrongfully used information gained in connection with the
letter of intent to attempt to gain control of the State of Hawaii project,
interfered with NSI's relationship with the State of Hawaii, employed or
solicited the employment of NSI employees in violation of the contract, and
otherwise breached contractual or other obligations to NSI. NSI seeks damages of
approximately $481 thousand for services and personnel allegedly provided to
CBSI by NSI, damages of $60 million predicated on a decline in the market value
of NSI's publicly-traded stock, and other unspecified damages. On May 30, 1997,
the Circuit Court of the First Circuit for the State of Hawaii granted the
Company's motion to dismiss claims asserting bad faith breach of contract with
prejudice, and conspiracy without prejudice. CBSI continues to pursue discovery.

CBSI believes that it has not breached any contractual or other obligation
to NSI as alleged either in the third-party complaint or the counterclaim, and
that it has meritorious defenses or set-offs to all of NSI's claims. CBSI does
not believe that NSI's actions will result in material liability to it, or that
the actions will have a material adverse effect on CBSI's financial condition,
business, or operations. CBSI intends to vigorously contest the claims asserted
in both actions.

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

No matters were submitted to a vote of CBSI's security holders during the
fourth quarter of the year ended December 31, 1998.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock is traded on the Nasdaq National Market under the symbol
CBSI. The following table sets forth, for the periods indicated, the range of
high and low bid prices for our common stock as reported on the Nasdaq National
Market.

PRICE RANGE OF
COMMON STOCK
--------------
HIGH LOW

Year Ended December 31, 1997:
First Quarter (From March 5, 1997)........................ $ 6 $ 4 3/8
Second Quarter............................................ $12 11/16 $ 4 5/16
Third Quarter............................................. $15 7/8 $11 15/16
Fourth Quarter............................................ $21 7/16 $14 1/4
Year Ended December 31, 1998:
First Quarter............................................. $35 7/8 $19 3/8
Second Quarter............................................ $41 15/16 $23 1/2
Third Quarter............................................. $37 3/8 $15 1/8
Fourth Quarter............................................ $33 3/4 $15 3/8

As of March 24, 1999, their were approximately 642 shareholders of record
of CBSI's common stock.

Since our initial public offering, we have not paid cash dividends on our
common stock. We currently anticipate that all of our earnings will be retained
for the continued development of our business and we do not anticipate paying
any cash dividends in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for the five years ended
December 31, 1998, are derived from CBSI's Consolidated Financial Statements and
related Notes thereto. The selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes thereto
included in Item 8 of this Form 10-K.

On January 27, 1998 and July 24, 1998, CBSI merged with c.w. Costello &
Associates, inc. ("Costello") and Claremont Technology Group, Inc.
("Claremont"), respectively. These mergers were accounted for by the pooling of
interests method of accounting and accordingly, the consolidated balance sheets,
statements of income, cash flows and shareholders' equity and all financial
information of CBSI included in this Form 10-K have been retroactively restated.

CBSI and Costello had fiscal years ending December 31 and Claremont had a
fiscal year ending June 30. The statement of income data presented below for the
four years ended December 31, 1997, combine CBSI's and Costello's results for
the years ended December 31, 1997, 1996, 1995 and 1994, with Claremont's results
for the years ended June 30, 1997, 1996, 1995 and 1994, respectively. The
statement of income data for the year ended December 31, 1998, combine all three
companies' results for the year ended December 31, 1998. The balance sheet data
as of December 31, 1997, 1996, 1995 and 1994 combine CBSI's and Costello's
balance sheets as of December 31, 1997, 1996, 1995 and 1994, with Claremont's
balance sheet as of June 30, 1997, 1996, 1995 and 1994, respectively. The
balance sheet data as of December 31, 1998, combine all three companies' balance
sheets as of that date.

YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF INCOME DATA:
Revenues.............................................. $93,416 $125,378 $182,632 $261,282 $376,567
Cost of revenues...................................... 66,761 88,110 126,247 178,780 249,099
------- -------- -------- -------- --------
Gross profit.......................................... 26,655 37,268 56,385 82,502 127,468
Selling, general and administrative expenses.......... 20,289 29,729 43,569 64,618 85,468
Merger costs and other(a)............................. -- -- 111 1,559 28,250
------- -------- -------- -------- --------
Income from operations................................ 6,366 7,539 12,705 16,325 13,750
Other expense (income)................................ 373 672 934 (842) (2,927)
------- -------- -------- -------- --------
Income before provision for income taxes and minority
interest............................................ 5,993 6,867 11,771 17,167 16,677
Provision for income taxes............................ 1,235 1,490 2,444 7,278 9,986
Minority interest..................................... 176 252 158 82 --
------- -------- -------- -------- --------
Net income............................................ $ 4,582 $ 5,125 $ 9,169 $ 9,807 $ 6,691
======= ======== ======== -------- --------
Pro forma incremental income tax benefit(b)............................................ $ (764) $ (1,417)
-------- --------
Pro forma net income................................................................... $ 10,571 $ 8,108
======== ========
Pro forma diluted earnings per share................................................... $ 0.33 $ 0.22
======== ========
Diluted weighted average shares outstanding............................................ 32,029 36,211

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AS OF DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 3,308 $ 1,603 $ 4,463 $ 72,698 $ 60,732
Working capital....................................... 8,537 12,690 17,906 101,106 108,857
Total assets.......................................... 31,555 40,895 68,281 168,240 191,045
Revolving credit facility and long-term debt.......... 6,717 8,770 17,348 4,958 --
Total shareholders' equity............................ 13,490 17,738 28,724 125,326 141,155

- -------------------------
(a) Fiscal year 1998 consists of approximately $12.7 million in transaction
costs related to the mergers with Costello and Claremont and approximately
$15.6 million related primarily to the write-down of certain assets which
Claremont determined, prior to June 30, 1998, were no longer realizable. For
the year ended December 31, 1997, consists of approximately $1.6 million in
transaction costs related to the merger with of Synergy Software, Inc.

(b) The pro forma adjustments for the incremental income tax benefit reflects
the additional benefit for Federal and state income taxes at the effective
income tax rate as if the applicable companies' Subchapter S elections had
been revoked prior to January 1, 1997, and the companies had been taxed as C
corporations.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following section should be read in conjunction with our Consolidated
Financial Statements and related Notes appearing in Item 8 of this Form 10-K.
With the exception of statements regarding historical matters and statements
concerning our current status, certain matters discussed in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements that involve substantial risks and uncertainties.
Such forward-looking statements may be identified by the words "anticipate,"
"believe," "estimate," "expect" or "intend" and similar expressions. Our actual
results, performance or achievements could differ materially from these
forward-looking statements. Factors that could cause or contribute to such
material differences include our failure to recruit and retain IT professionals,
risks related to our merger and acquisition strategy, variability of our
operating results, government regulation of immigration, potential cost overruns
on fixed-price projects, increasing significance of non-U.S. operations,
decreasing demand for Year 2000 services, exposure to regulatory, political and
economic conditions in India and competition in the IT services industry, each
of which are discussed herein under the caption "Factors that may Affect Future
Results."

OVERVIEW

Complete Business Solutions, Inc. provides IT services worldwide, offering
clients flexible global delivery capabilities. CBSI's strategy is to establish
long-term client relationships and to secure additional engagements with
existing clients by providing quality services and by being responsive to client
needs. For each of the past five years, over 80% of CBSI's revenues were
generated from existing clients from the previous fiscal year.

CBSI offers its clients a broad range of IT services, from advising them on
IT business strategy and strategic technology plans to developing and
implementing appropriate IT applications solutions through its partnership
sourcing approach.

CBSI's service offerings include: (1) IT consulting; (2) large systems
applications development and maintenance; (3) reengineering legacy applications
to client/server technology; (4) client/server applications development; (5)
packaged software implementation; (6) Year 2000 conversion and testing services;
and (7) contract programming services. CBSI's emerging technology service
offerings include: (1) data warehousing solutions; (2) electronic commerce
solutions; and (3) network services to support enterprise-wide applications such
as sales force automation and Internet/intranet development. CBSI generally
assumes responsibility for project management and may bill the client on either
a time-and-materials or fixed-price basis, although such projects are generally
billed on a time-and-materials basis. Contract programming services are
typically provided as a member of a project team working under the direct
supervision of the client, billed on a time-and-materials basis, and have lower
gross profit margins than other service offerings. CBSI continues to shift its
business away from contract programming services toward higher margin service
offerings.

CBSI recognizes revenues on time-and-materials engagements as the services
are performed. On fixed-price engagements, CBSI recognizes revenues under the
percentage of completion method. For the year ended December 31, 1998
approximately 15.6% of total revenues were generated from fixed-price
engagements.

CBSI's most significant cost is project personnel cost, which consists
primarily of salaries, wages and benefits for its IT professionals. CBSI strives
to maintain its gross profit margin by controlling project costs and offsetting
increases in salaries and benefits with increases in billing rates. CBSI uses a
human resource allocation team to ensure that IT professionals are quickly
placed on assignments to minimize nonbillable time and are placed on assignments
that use their technical skills and allow for maximum billing rates. CBSI has
realized higher gross profit margins from its shift away from contract
programming services and from its shift to offshore projects in India, where the
personnel cost of IT professionals is lower as a percentage of professional
service fees. This benefit is partially offset due to additional coordination
efforts and costs for offshore projects.

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In an effort to sustain its growth and profitability, CBSI has made and
continues to make substantial investments in its infrastructure, including: (1)
software development centers in the United States, Canada, India, and the
Philippines; (2) global recruiting and training centers in the United States and
India; (3) system methodologies; (4) a geographically dispersed branch
management structure; and (5) internal systems.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected
statement of income data as a percentage of revenues:

YEARS ENDED
DECEMBER 31,
---------------------------
1996 1997 1998

Revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues...................................... 69.1 68.4 66.1
----- ----- -----
Gross profit.......................................... 30.9 31.6 33.9
Selling, general and administrative expenses.......... 23.8 24.8 22.7
Merger costs and other................................ 0.1 0.6 7.5
----- ----- -----
Income from operations................................ 7.0% 6.2% 3.7%

1998 COMPARED TO 1997

Revenues. CBSI's revenues increased 44.1% to $376.6 million for fiscal 1998
from $261.3 million in fiscal 1997. This growth in revenues is primarily
attributable to increases in CBSI's IT professional workforce, increases in
average billing rates, further expansion of CBSI's international operations and
additional services provided to existing clients. CBSI's IT professional
workforce increased 33% for 1998 compared to 1997. Revenues from international
operations, principally offshore development centers, increased 147% to $45.8
million in fiscal 1998 from $18.6 million in fiscal 1997. Revenues from existing
clients increased $89.1 million for fiscal 1998 over fiscal 1997.

Gross Profit. Gross profit consists of revenues less cost of revenues. Cost
of revenues consists primarily of salaries (including nonbillable and training
time), benefits, travel and relocation for IT professionals. In addition, cost
of revenues includes depreciation and amortization, direct facility costs and
contractual services. Gross profit increased 54.5% to $127.5 million in fiscal
1998 from $82.5 million in fiscal 1997. This increase is primarily attributable
to increases in CBSI's IT professional workforce and average U.S. billing rates,
as well as the continued expansion of CBSI's offshore development centers. Gross
profit as a percentage of revenues increased to 33.9% for fiscal 1998 from 31.6%
in fiscal 1997. This increase in gross profit margin as a percentage of revenues
is primarily attributable to CBSI's continued strategic shift of its business
toward higher service offerings and the increasing utilization and expansion of
CBSI's offshore development centers which operate at higher gross profit and
operating margins. For fiscal 1998, 11% of revenues were generated from contract
programming services as compared to 17% in fiscal 1997.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of costs associated with CBSI's direct
selling and marketing efforts, human resources and recruiting departments,
administration and indirect facility costs. Selling, general and administrative
expenses increased 32.3% to $85.5 million in fiscal 1998 from $64.6 million in
fiscal 1997. This increase resulted from the continued expansion of CBSI's
direct selling and marketing effort, further investments in infrastructure, and
other general overhead cost increases necessary to support CBSI's continued
revenue growth. As a percentage of revenues, selling, general and administrative
expenses decreased to 22.7% in fiscal 1998 from 24.8% in fiscal 1997 as CBSI
continued to leverage its existing infrastructure.

Other Expense (Income). Other expense (income) represents interest earned
on cash equivalents, net of interest expense on borrowings. Other income for
fiscal 1998 was $2.9 million compared to $.8 million in fiscal 1997. This change
is primarily due to reduced interest expense, resulting from the repayment of
CBSI's

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outstanding debt in 1997, the repayment of Costello's and Claremont's debt in
1998 and interest earned from the investment of net proceeds from CBSI's and
Claremont's public offerings of common stock in 1997.

1997 COMPARED TO 1996

Revenues. CBSI's revenues increased 43% to $261.3 million in 1997 from
$182.6 million in 1996. This growth in revenues is primarily attributable to
increases in CBSI's IT professional workforce, increases in average billing
rates, further expansion of CBSI's international operations and additional
services provided to existing clients. Revenues from international operations,
principally offshore development centers, increased 131% to $18.6 million in
1997 from $8.1 million in the previous year. Revenues from existing clients
increased $52.2 million in 1997 from the previous year.

Gross Profit. Gross profit increased 46% to $82.5 million in 1997 from
$56.4 million in 1996. This increase in gross profit is primarily attributable
to increases in CBSI's IT professional workforce and average U.S. billing rates,
as well as the continued expansion of CBSI's offshore development centers. Gross
profit as a percentage of revenues was 31.6% in 1997 and 30.9% in 1996.
Increases in gross profit as a percentage of revenues resulting from CBSI's
continued strategic shift of its business toward higher margin service offerings
and the increasing utilization and expansion of CBSI's offshore development
centers which operate at higher gross profit and operating margins, were
partially offset by non-recurring deferred compensation arrangements, bonuses
and taxes related to the merger with Costello.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 48% to $64.6 million in 1997 from $43.6
million in 1996. This increase resulted from the continued expansion of CBSI's
direct selling and marketing effort, further enhancement of infrastructure, and
other general overhead cost increases necessary to support CBSI's continued
revenue growth. Selling, general and administrative expenses represented 24.8%
and 23.8% of revenues in 1997 and 1996, respectively.

Other Expense (Income). Other income for 1997 was $0.8 million, as compared
to other expense of $0.9 million in 1996. This change is primarily due to
reduced interest expense, resulting from the repayment of outstanding debt
during the first quarter of 1997, and interest earned from the investment of net
proceeds from CBSI's and Claremont's public offerings of common stock in fiscal
1997.

LIQUIDITY AND CAPITAL RESOURCES

CBSI generally funds its operations and working capital needs through
internally generated funds, periodically supplemented by borrowings under CBSI's
revolving credit and long-term debt facilities with commercial banks. CBSI's
cash provided by operating activities was $14.4 million, $12.9 million and $2.0
million for the years ended December 31, 1998, 1997 and 1996, respectively.

The principal use of cash for investing activities during the three years
ended December 31, 1998 was for the purchase of property and equipment,
primarily as part of the development and enhancement of CBSI's offshore software
development centers and the investment in internally developed computer
software.

Historically, borrowings and repayments under CBSI's revolving credit
facilities represented the most significant components of cash provided or used
by financing activities. Under an arrangement with a commercial bank, CBSI may
borrow an amount not to exceed $21.0 million with interest at the bank's prime
interest rate, or the LIBOR rate plus 1 1/4%. Borrowings under this facility are
short-term, payable on demand and are secured by trade accounts receivable and
equipment of CBSI.

Net cash provided by financing activities for the year ended December 31,
1997 of $71.4 million was primarily due to CBSI and Claremont realizing net
proceeds of $88.5 million from issuances of their common stock in fiscal 1997,
principally in their initial public and follow-on offerings.

A significant use of cash by financing activities was the partial
distributions of previously undistributed S corporation earnings following the
terminations of the companies' S corporation status. Partial distributions of S
corporation earnings were $1.1 million, $11.1 million and $.7 million for the
years ended December 31, 1998, 1997 and 1996, respectively.

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The international operations of CBSI, principally the offshore development
centers, accounted for 12.2%, 7.1%, and 4.4% of CBSI's total revenues for the
years ended December 31, 1998, 1997 and 1996, respectively. Most of CBSI's
revenues are billed in U.S. dollars. CBSI recognizes transaction gains and
losses in the period of occurrence. Foreign currency fluctuations in 1998, 1997
and 1996 did not have a material impact on income from operations as currency
fluctuations on revenue denominated in a foreign currency were offset by
currency fluctuations on expenses denominated in a foreign currency. There were
no material operating trends or effects on liquidity as a result of fluctuations
in the functional currency. CBSI does not generally use any types of derivatives
to hedge against foreign currency fluctuations, nor does it speculate in foreign
currency.

Inflation did not have a material impact on CBSI's revenues or income from
operations in fiscal years 1998, 1997 and 1996.

CBSI has evaluated its primary information technology infrastructure for
Year 2000 compliance. CBSI does not expect that the cost to modify its primary
information technology infrastructure to be Year 2000 compliant will be material
to its financial condition or results of operations. CBSI does not anticipate
any material disruption in its operations as a result of any failure to be in
compliance. CBSI does not currently have any information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
CBSI's significant suppliers, including providers of electricity, gas, water,
communication and telephone services, or customers do not successfully and
timely achieve Year 2000 compliance, CBSI's business or operations may be
adversely affected.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Failure to Recruit, Train and Retain Skilled IT Professionals Could Increase
Costs or Limit Growth

We need to recruit and retain highly trained professionals in order to
deliver our IT services to our clients. Our continued success depends upon our
ability to attract, develop, motivate and retain highly skilled IT professionals
and project managers with the technical skills and experience necessary to
deliver our services to our clients. The qualified IT professionals we require
are in high demand worldwide and are likely to remain a limited resource for the
foreseeable future. We cannot be certain that we will be able to attract or
retain the IT professionals that we seek.

Failure to Properly Manage Mergers and Acquisitions Could Adversely Affect Our
Business

We have expanded, and plan to continue to expand, our operations through
the merger with or acquisition of additional businesses that complement our core
skills and have the potential to increase our overall value. We may not be able
to continue to identify and merge with or acquire businesses with which we are
compatible. Mergers and acquisitions involve a number of special risks,
including:

- Diversion of management's attention;

- Potential failure to retain key personnel;

- Assumption of unanticipated legal liabilities and other problems;

- Difficulties in integrating systems, operations and cultures;

- Amortization of acquired intangible assets; and

- Potential dilution of earnings per share.

Since our initial public offering in March 1997, we have had three major
mergers We may not be able to profitably manage these businesses or successfully
integrate any business that we merge with or acquire without substantial
expense, delay or other operational or financial problems. Our reputation is a
valuable asset and performance problems and client dissatisfaction with a firm
which we acquired or merged with could adversely affect our reputation. In
addition, we cannot be certain that businesses we acquire or merge with will
achieve anticipated revenues and earnings. Failure to successfully manage our
merger and acquisition strategy could have an adverse effect on our business.

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Variability of Quarterly Operating Results

Our revenues and operating results can vary from quarter to quarter
depending on a number of factors, including:

- The timing and number of client projects commenced and completed during a
quarter;

- The number of working days in a quarter;

- Employee hiring, attrition and utilization rates;

- Progress on fixed-price projects during a quarter;

- The consummation of mergers and acquisitions;

- The ability of clients to terminate engagements without penalty;

- The size and scope of assignments; and

- General economic conditions.

Because a high percentage of our expenses are fixed, such as personnel and
facilities costs, a variation in revenues may cause a significant variation in
our quarterly operating results and could result in losses. Also, our costs
periodically increase due to the hiring of new employees and the making of
strategic investments in infrastructure in anticipation of future opportunities
for revenue growth.

Impact of Government Regulation of Immigration Could Limit Growth

We recruit IT professionals globally to create a workforce that can be
deployed wherever required by our clients. As a result, we must comply with the
immigration laws in the countries in which we operate, particularly the United
States. As of December 31, 1998, approximately 25% of our worldwide workforce
was working under H-1B temporary work permits in the United States. Government
regulation limits the number of new H-1B permits that may be approved in a
fiscal year. If the limit is reached in any year, we may not be able to recruit
enough IT professionals to meet our personnel requirements. This could
materially affect our business. Congress and administrative agencies with
jurisdiction over immigration matters have periodically expressed concern over
the level of legal and illegal immigration into the United States. These
concerns have often resulted in proposals aimed at reducing the number of work
permits that may be issued. Any change making it more difficult for us to hire
foreign nationals, or limiting our ability to retain foreign employees, could
require us to incur additional unexpected labor costs and other expenses.

Our Fixed-Price Projects Contain Cost Overrun Risks

We undertake certain projects on a fixed-price basis, as distinguished from
billing on a time-and-materials basis. We realized approximately 15.6% of our
revenues from fixed-price projects during the year ended December 31, 1998.
Significant cost overruns can occur if we fail to:

- Adequately estimate the resources required to complete a project;

- Properly determine the scope of an engagement; or

- Complete our contractual obligation in a manner consistent with the
project plan.

The potential for cost overruns may be heightened if we act as a
subcontractor on a fixed-price project, because we have a limited ability to
control project variables and to negotiate directly with the ultimate client. We
cannot be certain that any of our existing or future fixed-price projects will
be profitable.

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Increasing Significance and Risks of Non-U.S. Operations

Our international consulting and offshore software development operations
accounted for approximately 12% of our total revenues for the year ended
December 31, 1998. Our international operations and international business
activities are subject to the following risks:

- Unexpected changes in regulatory environments;

- Foreign currency fluctuations;

- Tariffs and other trade barriers;

- Difficulty in managing international operations;

- Potential foreign tax consequences, including repatriation of earnings;

- Burden of complying with a wide variety of foreign laws and regulations;

- Unexpected changes in the local and regional political climate and the
possible reaction to those changes by the international community,
including economic sanctions;

- Risk of increased duties, taxes and governmental royalties; and

- Changes in laws and policies governing operations of foreign-based
companies.

Our international operations greatly depend upon business and technology
transfer laws and related restrictions and upon continued development of
technology infrastructure. We cannot be certain that our international
operations will continue to be profitable or support our growth strategy.

Demand for Year 2000 Services Will Decrease

During the year ended December 31, 1998, we realized approximately 17% of
our total revenues from Year 2000 engagements. We expect the number of Year 2000
engagements and revenues derived from such engagements to peak prior to calendar
year 2000 as companies become Year 2000 compliant. To maintain our current level
of operations, we will need to obtain revenue from other sources and types of
engagements to replace the revenue lost due to the decline in Year 2000
engagements. There can be no assurance that we will be able to replace revenues
that are currently derived from Year 2000 engagements.

Exposure to Regulatory, Political and General Economic Conditions in India

A significant element of our business strategy is to expand our offshore
software development centers in Bangalore and Chennai, India. As of December 31,
1998, approximately 25% of our workforce was located in India. We benefit
directly from certain incentives provided by the Indian government to encourage
foreign investment, including tax holidays (temporary exemptions from taxation
on operating income) and liberalized import and export duties. If the Indian
government changes any of these incentives, it could negatively impact the
profitability of our Indian operations.

Although wage costs in India are significantly lower than in the United
States and elsewhere for comparably skilled IT professionals, wages in India are
increasing at a faster rate than in the United States. In the past, India has
experienced significant inflation and shortages of foreign exchange, and has
been subject to civil unrest and acts of terrorism. Changes in interest rates,
inflation rates, tax rates and policies, or other social, political, economic or
diplomatic developments affecting India in the future could have an adverse
effect on our business.

We Operate in Highly Competitive Markets

The IT services industry is highly competitive, undergoing consolidation
and is served by many national, regional and local firms, all of which are
either existing or potential competitors. Our primary competitors

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include Cambridge Technology Partners, Inc., IMR Global Corp., Keane, Inc.,
Whittman-Hart, Inc. and participants within a variety of market segments,
including:

- Large accounting firms;

- Implementation firms;

- Software applications firms;

- Service groups of computer equipment companies;

- General management consulting firms; and

- Programming companies and temporary staffing firms.

Many of these competitors have substantially greater resources and greater
name recognition than we do. In addition, there are relatively few barriers to
entry into our markets. We have faced, and we expect to continue to face,
additional competition from new entrants into our markets. In addition, clients
may increase their use of internal IT resources to satisfy their applications
solutions needs instead of engaging us. Each of these competitive factors may
limit our ability to increase prices commensurate with increases in labor costs
which could result in reduced margins. We cannot be certain that we will be able
to compete successfully with existing or new competitors.

Our Contracts are Short-Term and Contain Termination Provisions

A typical contract with our clients has a term of one-to-three years. A
client may choose not to renew its contract when it terminates. Under our
contracts, clients may unilaterally reduce the use of our services with little
or no notice and without penalty. If we are unable to retain our existing
clients, our business could be adversely affected. An unanticipated termination
of a major project could result in a loss of revenues and could require us to
pay a number of unassigned IT professionals until new engagements can be
obtained. In the alternative, we could also be forced to terminate unassigned IT
professionals.

Failure to Properly Manage Growth Could Adversely Affect Our Business

As a result of our internal growth and acquisition strategy, we have
experienced a rapid increase in the number of branch locations, the number of
employees and revenues. This rapid growth has placed significant demands on our
managerial, administrative and operational resources. Effective management of
our growth will require us to continue to improve our operational, financial and
other management processes and systems and to quickly and efficiently integrate
businesses we merge with or acquire. We cannot be sure that we will continue to
grow or that we will be able to manage our growth.

Possible Write-Off of Computer Software Development Costs Could Adversely Affect
Our Business

Prior to its merger with CBSI, Claremont wrote off approximately $8.3
million of capitalized software development costs related to their Premost and
Clarety software modules. We have remaining net capitalized software development
costs relating to the Clarety module of $4.4 million as of December 31, 1998. If
the remaining capitalized software development costs exceed the potential
revenue that can derive from the software, we would be required under generally
accepted accounting principles to immediately write-off the excess amount. The
amount of the write-off in any particular period may be as much as the total
amount of capitalized software development costs then carried on our balance
sheet and could have an adverse effect on our results of operations and
financial condition.

Limited Protection of Intellectual Property Rights

Our success depends in part upon certain methodologies we utilize in
providing IT services to our clients. We have not registered copyrights to such
methodologies, which may impair our ability to protect these methodologies. We
rely upon a combination of nondisclosure and other contractual arrangements and
trade

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secret, copyright and trademark laws to protect our proprietary rights and the
proprietary rights of third parties from whom we license intellectual property.

We enter into confidentiality agreements with our employees and limit the
distribution of proprietary information. However, we cannot be sure that these
steps will be adequate to deter misappropriation of proprietary information or
that we will be able to detect unauthorized use of and take appropriate steps to
enforce our intellectual property rights.

The laws of certain foreign countries in which our products are, or may be,
developed or sold may not protect our products or intellectual property rights
to the same extent as do the laws of the U.S. This lack of protection may impair
our ability to adequately protect our intellectual property.

Although we do not believe that our products infringe on the rights of
third parties, third parties may nevertheless make infringement claims against
us in the future. Such claims may result in costly litigation or require us to
obtain a license for such intellectual property rights.

Potential Liability to Clients

Many of our engagements, including Year 2000 projects, involve projects
that are critical to the operation of our client's businesses and provide
benefits that may be difficult to quantify. We attempt to contractually limit
our liability for damages arising from errors, mistakes, omissions or negligent
acts in rendering our services. We cannot be sure that our attempts to limit
liability will be successful. If we fail to meet a client's expectations in the
execution of our services, it could result in an adverse change to our client's
operations. This could give rise to claims against us or damage our reputation,
which could adversely affect our business.

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ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Complete Business Solutions, Inc.:

We have audited the accompanying consolidated balance sheets of Complete
Business Solutions, Inc. (a Michigan corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1997 and 1996
financial statements of Claremont Technology Group, Inc. and c.w. Costello &
Associates, inc., companies that Complete Business Solutions, Inc. merged with
during 1998, in transactions accounted for as poolings of interests, as
discussed in Note 1. Such statements are included in the related consolidated
financial statements of Complete Business Solutions, Inc. and reflect total
revenues and net income of 53% and 24% in 1997, 49% and 44% in 1996,
respectively, and 43% of total assets in 1997, of the related consolidated
totals. These statements were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to amounts included for
Claremont Technology Group, Inc. and c.w. Costello & Associates, inc., is based
solely upon the reports of the other auditors.

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 and the reports of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Complete Business Solutions, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Detroit, Michigan,
February 2, 1999.

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors of
Claremont Technology Group, Inc.
and Subsidiaries:

We have audited the consolidated balance sheet of Claremont Technology
Group, Inc. and subsidiaries as of June 30, 1997 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the two-year period ended June 30, 1997 not presented separately
herein. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Claremont
Technology Group, Inc. and subsidiaries as of June 30, 1997 and the results of
their operations and their cash flows for each of the years in the two-year
period ended June 30, 1997 in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Portland, Oregon
August 14, 1997

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REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders
c.w. Costello & Associates, inc.
Wethersfield, Connecticut

We have audited the balance sheet of c.w. Costello & Associates, inc. (an
"S" Corporation) (the "Company") as of December 31, 1997, and the related
statements of operations, shareholders' equity and of cash flows for each of the
two years in the period ended December 31, 1997 not presented separately herein.
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.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of c.w. Costello & Associates, inc. (an "S"
Corporation) as of December 31, 1997, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

As discussed in Note 10 to those financial statements, on January 27, 1998,
the Company merged with Complete Business Solutions, Inc.

DELOITTE & TOUCHE LLP

Hartford, Connecticut
February 9, 1998

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COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
1998 1997
(DOLLARS IN THOUSANDS)
(NOTE 1)

ASSETS
Current assets:
Cash and cash equivalents.............................. $ 60,732 $ 72,698
Accounts receivable, net............................... 72,007 52,814
Revenue earned in excess of billings, net.............. 11,597 6,687
Deferred and refundable income taxes................... 8,459 5,639
Prepaid expenses and other............................. 3,311 2,551
-------- --------
Total current assets.............................. 156,106 140,389
-------- --------
Property and equipment, net................................. 17,846 14,215
Computer software, net...................................... 4,425 8,826
Goodwill, net............................................... 10,383 2,809
Other assets, net........................................... 2,285 2,001
-------- --------
Total assets...................................... $191,045 $168,240
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 6,113 $ 6,345
Accrued payroll and related costs...................... 26,479 19,194
Revolving credit facility.............................. -- 3,380
Current portion of long-term debt...................... -- 993
Other accrued liabilities.............................. 12,589 6,208
Distribution payable to shareholders................... 365 1,325
Deferred revenue....................................... 1,703 1,838
-------- --------
Total current liabilities......................... 47,249 39,283
-------- --------
Deferred taxes.............................................. 1,025 2,883
Other liabilities........................................... 1,616 748
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued............................... -- --
Common stock, no par value, 200,000,000 shares
authorized, 34,862,642 and 33,056,759 shares issued
and outstanding as of December 31, 1998 and 1997,
respectively (Note 17)................................ -- --
Additional paid-in capital............................. 117,590 108,671
Retained earnings...................................... 30,912 19,822
Stock subscriptions receivable......................... (6,079) (2,503)
Cumulative translation adjustment...................... (1,268) (664)
-------- --------
Total shareholders' equity........................ 141,155 125,326
-------- --------
Total liabilities and shareholders' equity........ $191,045 $168,240
======== ========

The accompanying notes are an integral part of these consolidated balance
sheets.
23
26

COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(NOTE 1)

Revenues.................................................... $376,567 $261,282 $182,632
Cost of revenues:
Salaries, wages and employee benefits.................. 195,237 145,947 106,656
Contractual services................................... 34,678 19,951 11,316
Project travel and relocation.......................... 15,334 10,695 6,597
Depreciation and amortization.......................... 3,850 2,187 1,678
-------- -------- --------
Total cost of revenues............................ 249,099 178,780 126,247
-------- -------- --------
Gross profit...................................... 127,468 82,502 56,385
Selling, general and administrative expenses................ 85,468 64,618 43,569
Merger costs and other...................................... 28,250 1,559 111
-------- -------- --------
Income from operations............................ 13,750 16,325 12,705
Other expense (income)...................................... (2,927) (842) 934
-------- -------- --------
Income before provision for income taxes and
minority interest............................... 16,677 17,167 11,771
Provision for income taxes.................................. 9,986 7,278 2,444
Minority interest........................................... -- 82 158
-------- -------- --------
Net income........................................ $ 6,691 $ 9,807 $ 9,169
======== ======== ========
Basic earnings per share --
Weighted average shares outstanding....................... 34,414 29,126 20,206
======== ======== ========
Basic earnings per share.................................. $ 0.19 $ 0.34 $ 0.45
======== ======== ========
Diluted earnings per share --
Weighted average shares outstanding....................... 34,414 29,126 20,206
Dilutive effect of stock options.......................... 1,797 2,903 4,073
-------- -------- --------
Diluted weighted average shares outstanding............... 36,211 32,029 24,279
======== ======== ========
Diluted earnings per share................................ $ 0.18 $ 0.31 $ 0.38
======== ======== ========
Pro forma information:
Net income as reported...................................... $ 6,691 $ 9,807 $ 9,169
Pro forma incremental income tax provision (benefit)........ (1,417) (764) 2,175
-------- -------- --------
Pro forma net income........................................ $ 8,108 $ 10,571 $ 6,994
======== ======== ========
Earnings per share --
Pro forma basic earnings per share..................... $ 0.24 $ 0.36 $ 0.35
======== ======== ========
Pro forma diluted earnings per share................... $ 0.22 $ 0.33 $ 0.29
======== ======== ========

The accompanying notes are an integral part of these consolidated financial
statements.
24
27

COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

COMMON ADDITIONAL STOCK CURRENCY TOTAL
SHARES PAID-IN RETAINED SUBSCRIPTIONS TRANSLATION SHAREHOLDERS'
OUTSTANDING CAPITAL EARNINGS RECEIVABLE ADJUSTMENT EQUITY
(DOLLARS IN THOUSANDS) (NOTE 1)

Balance -- December 31, 1995..... 19,213,251 $ 649 $ 17,395 $ -- $ (158) $ 17,886
Net income..................... -- -- 9,169 -- -- 9,169
Translation adjustment......... -- -- -- -- (51) (51)
Distribution to shareholders... -- -- (423) -- -- (423)
Capital contribution........... -- 1,100 -- -- -- 1,100
Stock dividends and other,
net.......................... 351,113 104 (272) -- -- (168)
Stock options exercised........ 1,617,145 3,336 -- (2,125) -- 1,211
---------- -------- -------- ------- ------- --------
Balance -- December 31, 1996..... 21,181,509 5,189 25,869 (2,125) (209) 28,724
Net income..................... -- -- 9,807 -- -- 9,807
Translation adjustment......... -- -- -- -- (378) (378)
Stock options and warrants
exercised.................... 1,397,472 6,395 -- (685) -- 5,710
Repayment of stock
subscriptions receivable..... -- -- -- 307 -- 307
Conversion of minority
shareholder.................. 1,105,264 4,593 -- -- (77) 4,516
Issuances of common stock,
net.......................... 9,372,514 88,860 -- -- -- 88,860
Distributions to
shareholders................. -- -- (12,220) -- -- (12,220)
Recapitalizations.............. -- 3,634 (3,634) -- -- --
---------- -------- -------- ------- ------- --------
Balance -- December 31, 1997..... 33,056,759 108,671 19,822 (2,503) (664) 125,326
Net income..................... -- -- 6,691 -- -- 6,691
Translation adjustment......... -- -- -- -- (433) (433)
Stock options exercised........ 1,598,768 9,541 -- (5,015) -- 4,526
Repayment of stock
subscriptions receivable..... -- -- -- 1,439 -- 1,439
Issuances of common stock...... 21,769 389 -- -- -- 389
Distributions to
shareholders................. -- -- (133) -- -- (133)
Recapitalization............... -- (3,484) 3,484 -- -- --
Adjustment for pooling of
interests.................... 185,346 2,473 1,048 (171) 3,350
---------- -------- -------- ------- ------- --------
Balance -- December 31, 1998..... 34,862,642 $117,590 $ 30,912 $(6,079) $(1,268) $141,155
========== ======== ======== ======= ======= ========

The accompanying notes are an integral part of these consolidated financial
statements.
25
28

COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
(DOLLARS IN THOUSANDS)
(NOTE 1)

Cash flows from operating activities --
Net income.................................................. $ 6,691 $ 9,807 $ 9,169
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 7,450 5,960 3,843
Provision for doubtful accounts........................ 1,100 903 483
Minority interest...................................... -- 82 158
Writedown of other assets and other.................... 15,649 -- --
Provision (benefit) for deferred taxes................. (8,343) (958) 784
Equity in loss of investee and other................... -- 279 110
Stock option expense................................... -- 592 107
Change in assets and liabilities:
Accounts receivable.................................. (22,739) (14,016) (17,114)
Prepaid expenses and other assets.................... (925) (3,552) (2,172)
Accounts payable, accrued payroll and related costs
and other liabilities............................. 13,852 14,077 6,170
Deferred revenue..................................... 1,674 (300) 446
-------- -------- -------
Net cash provided by operating activities....... 14,409 12,874 1,984
-------- -------- -------
Cash flows from investing activities --
Investment in property, equipment and other............... (10,531) (8,359) (8,276)
Investment in computer software........................... (1,510) (6,901) (2,077)
Payment for purchase of assets, net of cash acquired...... (4,241) (291) (130)
Investment in affiliate................................... -- (405) (195)
Net borrowings (repayments) on notes receivable........... -- (31) 555
-------- -------- -------
Net cash used in investing activities........... (16,282) (15,987) (10,123)
-------- -------- -------
Cash flows from financing activities --
Net borrowings (payments) on revolving credit facility and
long-term debt......................................... (4,471) (12,390) 8,576
Net proceeds from issuances of common stock............... -- 88,510 --
S corporation distributions............................... (1,093) (11,092) (671)
Net proceeds from exercise of stock options and other,
net.................................................... 6,354 6,367 1,211
Proceeds from sale of stock in subsidiary, net............ -- -- 3,500
Repurchase of stock in subsidiary......................... -- -- (2,708)
Capital contribution...................................... -- -- 1,100
-------- -------- -------
Net cash provided by financing activities....... 790 71,395 11,008
-------- -------- -------
Effect of exchange rate changes on cash..................... (46) (47) (9)
-------- -------- -------
Increase (decrease) in cash and cash equivalents............ (1,129) 68,235 2,860
Cash and cash equivalents at beginning of period............ 61,861 4,463 1,603
-------- -------- -------
Cash and cash equivalents at end of period.................. $ 60,732 $ 72,698 $ 4,463
======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 128 $ 1,049 $ 895
Income taxes........................................... $ 12,153 $ 6,378 $ 939

The accompanying notes are an integral part of these consolidated financial
statements.
26
29

COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations

Complete Business Solutions, Inc. (CBSI) was founded in 1985. CBSI and its
subsidiaries (the Company) provide information technology (IT) services
worldwide to large and mid-size organizations. The Company offers its clients a
broad range of IT services, from advising clients on IT business strategy and
strategic technology plans to developing and implementing appropriate IT
solutions.

Principles of Consolidation and Organization

The consolidated financial statements include the accounts of CBSI and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.

In July 1998, the Company closed an Agreement and Plan of Merger with
Claremont Technology Group, Inc. (Claremont), a publicly held Oregon
corporation. The merger with Claremont was accounted for by the pooling of
interests method of accounting, and accordingly, the accompanying consolidated
balance sheets and statements of income, shareholders' equity and cash flows
have been retroactively restated. Claremont had a fiscal year end of June 30.
The consolidated statements of income, shareholders' equity and cash flows for
the years ended December 31, 1997 and 1996, combine CBSI's results for the years
ended December 31, 1997 and 1996, with Claremont's results for the years ended
June 30, 1997 and 1996, respectively. The consolidated statements of income,
shareholders' equity and cash flows for the year ended December 31, 1998 combine
CBSI's and Claremont's results for the year ended December 31, 1998. The
consolidated balance sheet as of December 31, 1997 combines CBSI's balance sheet
as of December 31, 1997, with Claremont's balance sheet as of June 30, 1997. The
consolidated balance sheet as of December 31, 1998 combines CBSI's and
Claremont's balance sheets as of that date. All footnote information stated as
of and for the years ended December 31, 1997 and 1996, combines CBSI's
information as of and for the years ended December 31, 1997 and 1996 with
Claremont's information as of and for the year ended June 30, 1997 and 1996,
respectively. Footnote information stated as of and for the years ended December
31, 1998 combines CBSI's and Claremont's information as of and for the year
ended December 31, 1998. As a result of these pooling of interests period
combinations, an adjustment has been included in the consolidated statements of
shareholders' equity to adjust all components of shareholders' equity to their
respective balances as of December 31, 1998. See Note 3.

In January 1998, the Company closed an Agreement and Plan of Merger with
c.w. Costello & Associates, inc. (Costello), a privately held Delaware
corporation. The merger with Costello was accounted for by the pooling of
interests method of accounting, and accordingly, the accompanying consolidated
balance sheets and statements of income, shareholders' equity and cash flows
have been retroactively restated.

In November 1997, the Company closed an Agreement and Plan of Merger with
Synergy Software, Inc., (Synergy) a privately held Illinois corporation. The
merger with Synergy was accounted for by the pooling of interests method of
accounting, and accordingly, the accompanying consolidated balance sheets and
statements of income, shareholders' equity and cash flows have been
retroactively restated.

CBS Complete Business Solutions (Mauritius) Limited (CBS Mauritius) held a
76% interest in Complete Business Solutions (India) Limited (CBS India) with the
remaining 24% interest held by an entity affiliated with a CBSI shareholder
(affiliated entity). In July 1996, CBS Mauritius sold an ownership interest to
an unrelated entity for approximately $3,500, net of transaction costs.
Simultaneously, CBS Mauritius repurchased its stock held by the affiliated
entity for approximately $2,708 and CBSI made a capital contribution of $1,708
to CBS Mauritius. As a result of this transaction, CBSI owned 72% and the
unrelated entity owned 28% of CBS Mauritius. As authorized in the CBS Mauritius
shareholders agreement and in

27
30
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

connection with the initial public offering of CBSI's Common Stock, the 28%
shareholder of CBS Mauritius converted its ownership interest into 1,105,264
shares of CBSI's Common Stock.

Foreign Currency

For significant foreign operations, the local currencies have been
designated as the functional currencies. The financial statements of these
subsidiaries are translated into U.S. dollars using exchange rates in effect at
year end for assets and liabilities and at the average exchange rate during the
year for revenues and expenses. The resulting foreign currency translation
adjustment is reflected as a separate component of shareholders' equity as of
December 31, 1998 and 1997.

Transaction gains and losses, which were not significant in the years
presented, are reflected in the consolidated statements of income.

Cash and Cash Equivalents

Cash and cash equivalents include investments in highly liquid money market
funds and commercial paper.

Financial Instruments

The fair values and carrying amounts of certain of the Company's financial
instruments, primarily accounts receivable and payable, are approximately
equivalent.

The carrying amount of the revolving credit facility approximates fair
value due primarily to the variable rate of interest on this credit facility.

The fair value of long-term debt was estimated by discounting the future
cash flows using market interest rates and does not differ significantly from
that reflected in the financial statements.

Goodwill

Goodwill represents the excess of cost over the net tangible and
identifiable intangible assets related to a business acquired and the
acquisition of shares owned by the 28% minority shareholder of CBS Mauritius
during the years ended December 31, 1998 and 1997, respectively. Goodwill is
carried at cost, less accumulated amortization, and is amortized on a
straight-line basis over periods ranging from 20 to 30 years. The Company
continually evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of goodwill may warrant revision or
that the remaining balance may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses an
estimate of the related business's undiscounted cash flow over the remaining
life of the goodwill in measuring whether the goodwill is recoverable.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided
primarily using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the expected life of the asset
or term of the lease, whichever is shorter.

Revenue Recognition

The Company recognizes professional service fee revenue on
time-and-materials contracts as the services are performed.

Revenues on fixed-priced contracts are recognized using the percentage of
completion method. The percentage of completion is determined by relating the
actual cost of work performed to date to the estimated

28
31
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

total cost for each contract. If the estimate indicates a loss on a particular
contract, a provision is made for the entire estimated loss without reference to
the percentage of completion. Retainages, which are not material for any of the
years presented, are included in accounts receivable in the accompanying
consolidated balance sheets. Revenue earned in excess of billings is comprised
of revenue recognized on certain contracts in excess of contractual billings on
such contracts. Billings in excess of revenue earned are classified as deferred
revenue.

Computer Software

The Company performs research to develop software for various business
applications. The costs of such research are charged to expense when incurred.
When the technological feasibility of the product is established, subsequent
costs are capitalized. Capitalized software costs are amortized on a product-by-
product basis. Amortization is recorded on a.) the straight-line method over the
estimated economic life of the product, generally three years to five years, or
b.) the ratio of current gross revenues for each product to the total of current
and anticipated gross revenues for each product, commencing when such product is
available. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenue, estimated economic product
lives and changes in software and hardware technology. These assumptions are
reevaluated and adjusted as necessary at the end of each accounting period. On
an ongoing basis, management reviews the valuation and amortization of
capitalized development costs. As part of this review, the Company considers the
value of future cash flows attributable to the capitalized development costs in
evaluating potential impairment of the asset. The amortization of software
development costs was $1,583, $860 and $917 for the years ended December 31,
1998, 1997 and 1996, respectively.

In Claremont's third and fourth quarters of fiscal 1998, management
determined that certain of the Company's computer software products were no
longer realizable and recorded a charge of approximately $8,300.

Accumulated amortization on computer software amounted to $5,027 and $3,032
as of December 31, 1998 and 1997, respectively.

Amounts capitalized were $1,510, $6,901 and $2,643 for the years ended
December 31, 1998, 1997 and 1996, respectively.

Amounts charged to expense for research and development of computer
software were not material in the periods presented.

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.

Income Taxes

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

29
32
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reclassifications

Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with the 1998 presentation.

2. COMMON STOCK OFFERINGS

In August 1997, CBSI completed a secondary offering of 5,200,000 shares of
its Common Stock at a price of $14 1/8 per share. This offering consisted of
2,900,000 shares of newly issued Common Stock and 2,300,000 shares sold by
selling shareholders. After underwriting discounts, commissions and other
issuance costs, net proceeds to the Company from this offering were
approximately $38,000.

In March 1997, CBSI completed its initial public offering of 5,000,000
shares of its Common Stock at a price of $6 per share. This offering consisted
of 4,600,000 shares of newly issued Common Stock and 400,000 shares sold by a
selling shareholder. After underwriting discounts, commissions and other
issuance costs, net proceeds to the Company from this offering were
approximately $23,600.

In July 1996, Claremont completed its initial public offering of 2,171,417
shares of its common stock at a price of $19 3/8 per share. This offering
consisted of 1,357,136 shares of newly issued common stock and 814,281 shares
sold by selling shareholders. After underwriting discounts, commissions and
other issuance costs, net proceeds to Claremont from this offering were
approximately $26,900.

3. MERGERS AND ACQUISITIONS

On July 24, 1998, the Company closed a merger agreement with Claremont.
This merger agreement provided for all of the outstanding Claremont common stock
to be exchanged for approximately 7,235,000 shares of CBSI's common stock. (See
Note 11.)

Unaudited summarized results of operations and other changes in
shareholders' equity of the previously separate entities for the six month
period ended June 30, 1998 are as follows:

COMPLETE BUSINESS
SOLUTIONS, INC. CLAREMONT
(INCLUDING TECHNOLOGY
COSTELLO) GROUP INC.

Revenues.................................................. $127,549 $ 46,317
======== ========
Gross profit.............................................. $ 38,979 $ 19,017
======== ========
Income (loss) from operations............................. $ 10,933 $(13,160)
======== ========
Net (loss) income......................................... $ 6,282 $(10,056)
======== ========
Other significant changes to shareholders' equity
S Corporation distributions and other................... $ 133 $ --
======== ========

The activity for Claremont for the period from July 1, 1997 to December 31,
1997, has not been reflected in the consolidated statements of income for CBSI
as a result of the periods combined. (See Note 1). Unaudited summarized results
of operations for the six month period ended December 31, 1997 for Claremont are
as follows:

Revenue..................................................... $43,975
=======
Gross profit................................................ $18,381
=======
Income from operations...................................... $ 1,785
=======
Net income.................................................. $ 1,048
=======

30
33
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 27, 1998, the Company closed a merger agreement with Costello.
This merger agreement provided for all of the outstanding Costello common stock
to be exchanged for approximately 3,363,000 shares of CBSI's common stock. See
Note 11.

Audited summarized results of operations and other changes in shareholders'
equity of the previously separate entities for the year ended December 31, 1997
are as follows:

COMPLETE BUSINESS C.W. COSTELLO &
SOLUTIONS, INC. ASSOCIATES, INC.

Revenues................................................ $123,775 $70,175
======== =======
Gross profit............................................ $ 34,175 $16,821
======== =======
Income (loss) from operations........................... $ 10,442 $(1,034)
======== =======
Net income (loss)....................................... $ 7,501 $(1,940)
======== =======
Other significant changes to shareholders' equity --
S Corporation distributions and other................. $ 12,220 $ --
======== =======

On November 20, 1997, the Company closed a merger agreement with Synergy.
The merger agreement provided for all of the outstanding Synergy common stock to
be exchanged for approximately 1,391,000 shares of CBSI's common stock. See Note
11.

Accounting policies of CBSI, Synergy, Costello and Claremont were
substantially the same. There were no significant intercompany transactions
requiring elimination in any period presented.

4. ACCOUNTS RECEIVABLE AND CREDIT RISK

The allowance for doubtful accounts is as follows:

1998 1997 1996

Balance -- beginning of period.............................. $1,155 $ 704 $ 331
Provision................................................... 1,100 903 483
Charge-offs................................................. (10) (486) (110)
------ ------ -----
Balance -- end of period.................................... $2,245 $1,121 $ 704
====== ====== =====

The Company grants credit to clients based upon management's assessment of
their creditworthiness. Substantially all of the Company's revenues (and the
resulting accounts receivable) are from large and mid-size companies, major
systems integrators and governmental agencies.

5. PROPERTY AND EQUIPMENT

As of December 31, 1998 and 1997, property and equipment consisted of the
following:

DECEMBER 31, ESTIMATED
------------------- USEFUL
1998 1997 LIVES

Equipment and purchased software....................... $ 26,408 $ 20,304 3-5 years
Buildings.............................................. 698 1,044 31 years
Furniture and fixtures................................. 4,565 3,535 5-7 years
Leasehold improvements................................. 1,951 1,009 5-7 years
Automobiles............................................ 832 429 5 years
-------- --------
34,454 26,321
Accumulated depreciation............................... (16,608) (12,106)
-------- --------
Property and equipment, net............................ $ 17,846 $ 14,215
======== ========

31
34
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. RELATED PARTY TRANSACTIONS

During 1997 and 1996, Costello made interest bearing loans to an affiliate
of a shareholder for the purchase of real estate, of $98 and $25, respectively.
As of December 31, 1998 and 1997, $219 and $261, respectively, of these loans
were outstanding. Through December 31, 1997, Costello leased this real estate
from the affiliate for various marketing and administrative purposes. During
1997 and 1996, Costello incurred rent expense of $150 and $102, respectively.
These leases were cancelled during 1998.

Claremont issued promissory notes totaling $514 to certain employees during
their fiscal year 1996. The notes were due at varying dates through July 31,
1997 and bore interest at rates ranging from 4.0% to 7.1%.

During 1996, a shareholder loaned $608 to CBSI in exchange for a note. The
note was short-term and bore interest at 8.25%. This note and accrued interest
were repaid during 1996.

CBSI paid approximately $654, $551 and $295 for the years ended December
31, 1998, 1997 and 1996, respectively, for consulting services provided by an
affiliate of an outside director.

In August 1997, in connection with CBSI's secondary offering, a related
party paid the Company approximately $300 as required under Section 16(b) of the
Exchange Act of 1934. This amount has been included in additional paid-in
capital in the accompanying consolidated balance sheets.

7. REVOLVING CREDIT FACILITY

Under a credit arrangement with a commercial bank, the Company may borrow
an amount not to exceed $21,000 at the bank's prime interest rate, or LIBOR plus
1.5%. Borrowings under the facility are short-term, payable on demand and are
secured by trade accounts receivable and equipment of the Company. There were no
amounts outstanding under this agreement at December 31, 1998 and 1997. The
credit agreement contains various restrictive covenants which, among other
items, require the Company to maintain certain levels of tangible net worth, a
debt to earnings ratio, and a funded debt to capitalization ratio.

Costello maintained line of credit arrangements with commercial banks which
included a base borrowing line of $11,000 and a special advance of $1,500 as of
December 31, 1997. The line was secured by substantially all of the assets of
Costello and bore interest at the bank's prime rate. The balance outstanding
under this arrangement at December 31, 1997 was $3,380. The weighted average
interest rate on the outstanding borrowings was 8.5% at December 31, 1997. The
outstanding balance on these line of credit arrangements were repaid in 1998 and
the credit arrangements were terminated.

Claremont was a guarantor on a nonrevolving line of credit with a bank,
which provided for borrowings of up to $2 million for purposes of facilitating
the purchase of Company common stock by Claremont executives. As of December 31,
1997, there was $923 of related debt outstanding against the line. Advances
under the line of credit were made directly to the executives with full recourse
and bore interest. All amounts due under this line of credit have been repaid
and the line of credit expired in September 1998.

8. LONG-TERM DEBT

Long-term debt consists of notes payable to banks of $0 and $1,578 as of
December 31, 1998 and 1997, respectively. Interest rates on these notes payable
ranged from 7.6% to 8.05% at December 31, 1997.

9. SELF-INSURANCE

CBSI and Claremont are self-insured for health and dental benefits up to
$80 and $35, respectively, per occurrence. Insurance coverage is carried for
risks in excess of this amount. The Company recognized health and dental
benefits expense of approximately $6,475, $5,855 and $4,254 for the years ended
December 31, 1998, 1997 and 1996, respectively. Estimated claims incurred but
not reported were $1,850 and $945 as of

32
35
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1998 and 1997, respectively, and are included in other accrued
liabilities in the accompanying consolidated balance sheets.

10. LEASES

The Company leases its headquarters, regional offices, equipment and
certain automobiles under noncancelable, long-term operating leases.

Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted
to approximately $5,516, $3,619, and $2,591, respectively. The future minimum
lease payments required under these operating leases for the years ending
December 31, are as follows:

1999........................................................ $ 4,895
2000........................................................ 4,284
2001........................................................ 4,986
2002........................................................ 3,621
2003........................................................ 2,527
Thereafter.................................................. 9,609
-------
$29,922
=======

11. STOCK OPTIONS

CBSI maintains a Stock Option Plan (the Plan). Under the Plan, eligible
employees and directors may be granted either Incentive Stock Options (ISOs) or
Non-Incentive Stock Options (NISOs) at the discretion of the Compensation
Committee of the Board of Directors. There are 7,247,454 shares of Common Stock
authorized for grant under the Plan. Options under the Plan are granted at fair
value on the date of grant. The options vest over periods determined by the
Compensation Committee of the Company's Board of Directors. As a result of the
merger with Synergy, as discussed in Note 3, outstanding Synergy stock options
as of November 20, 1997 were converted into approximately 418,000 options of
CBSI. These options retained their original terms and vesting periods. As a
result of the merger with Costello, as discussed in Note 3, outstanding Costello
stock options as of January 27, 1998 were converted into approximately 57,000
options of CBSI. These options retained their original terms and vesting
periods. As a result of the merger with Claremont, as discussed in Note 3,
outstanding Claremont stock options as of July 24, 1998 were converted into
approximately 1,225,000 options of CBSI. These options retained their original
terms and vesting periods.

The Plan agreements provide for the option holder to exercise the options
in exchange for cash, or a promissory note payable to the Company over a period
of at least five years for NISOs and at least two years for ISOs. These notes
are full recourse and bear interest at the prime rate of interest determined at
the date of exercise. Interest on the loans is payable every six months.

The Company has elected to provide the pro forma disclosures, as permitted
under the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation ("SFAS No. 123")". Accordingly, no
additional compensation expense has been recognized for the Plan within the
accompanying consolidated statements of income. Had compensation expense for the
Plan been determined based on the fair value at the grant date for awards in
1998, 1997 and 1996 consistent with the

33
36
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provisions of SFAS No. 123, the Company's pro forma net income and pro forma
diluted earnings per common share would have been reduced to the amounts
indicated below:

1998 1997 1996

Net income --
As reported............................................... $6,691 $9,807 $9,169
SFAS No. 123 pro forma.................................... $1,659 $8,451 $8,488
Diluted earnings per share --
As reported............................................... $ 0.18 $ 0.31 $ 0.38
SFAS No. 123 pro forma.................................... $ 0.05 $ 0.26 $ 0.35

A summary of option activity, restated to give effect to the mergers with
Costello and Claremont, is as follows:

OPTIONS OUTSTANDING
------------------------------ WEIGHTED AVERAGE
WEIGHTED AVERAGE OPTIONS FAIR VALUE OF
SHARES EXERCISE PRICE EXERCISABLE OPTIONS GRANTED
(IN
THOUSANDS)

BALANCE, DECEMBER 31,
1995..................... 4,467 1.67 1,511
=====
Options granted............ 1,032 4.48 $ 0.53
======
Options exercised.......... (1,617) 1.72
Options cancelled.......... (130) 4.32
------
BALANCE, DECEMBER 31,
1996..................... 3,752 2.33 1,504
------ =====
Options granted............ 2,300 13.51 $ 5.37
======
Options exercised.......... (1,397) 1.46
Options cancelled.......... (436) 12.82
------
BALANCE, DECEMBER 31,
1997..................... 4,219 7.62 1,114
------ =====
Options granted............ 2,107 23.84 $16.35
======
Options exercised.......... (1,784) 4.59
Options cancelled.......... (515) 18.62
------
BALANCE, DECEMBER 31,
1998..................... 4,027 $16.53 880
====== ====== =====

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
the 1998 and 1997 grants: risk-free rate of interest of 5.5 and 6.5%, dividend
yield of 0%; and expected lives of 4 to 5 years. A volatility factor of 93% and
68% was used in 1998 and 1997, respectively.

34
37
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of options outstanding, adjusted to give effect to the mergers
with Costello and Claremont, at December 31, 1998, is as follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE OF WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICE 1998 LIFE PRICE 1998 EXERCISE PRICE

$ 0.01 - 6.00.................. 1,020 6.7 $ 3.78 549 $ 2.63
$ 6.01 - 14.99.................. 831 8.7 $13.15 123 $13.11
$15.00 - 19.34.................. 472 8.4 $17.87 128 $18.06
$19.35 - 22.89.................. 780 9.8 $22.75 2 $22.70
$22.90 - 34.58.................. 924 9.1 $26.13 78 $26.32

12. BENEFIT PLANS

CBSI maintains the Complete Business Solutions, Inc. Incentive Savings Plan
and Trust (the 401(k) plan). All employees of CBSI are eligible to participate
in the 401(k) plan once they have completed one year of service and have
attained age 21. The 401(k) plan is a defined contribution plan, qualified as a
profit sharing plan under Section 401(k) of the Internal Revenue Code. The
401(k) plan allows eligible employees to contribute up to 18% of their
compensation with CBSI matching a percentage of the contributions. For the years
ended December 31, 1998, 1997 and 1996, CBSI matched 40% of the employees'
contribution up to a maximum of 2.4% of the employees' compensation.

Matching contributions made by CBSI amounted to approximately $1,286, $489
and $406 for the years ended December 31, 1998, 1997 and 1996, respectively.
CBSI may also make an additional contribution, at its discretion, to the 401(k)
plan. No such additional contributions have been made to date.

Through December 31, 1997, Synergy and Costello maintained defined
contribution 401(k) plans for substantially all of their employees. Under the
plans, eligible employees could elect to contribute a portion of their base
compensation. Synergy contributed an additional 25% of the employees'
contributions up to 1% of the employees' aggregate base compensation. Costello
contributions were discretionary. Contributions to these plans amounted to $454
and $395 for the years ended December 31, 1997 and 1996, respectively. In the
first quarter of 1998, all employees of Synergy and Costello became eligible to
participate in CBSI's 401(k) plan.

Claremont maintained a defined contribution 401(k) plan for substantially
all of its employees. Under the plan, eligible employees could elect to
contribute a portion of their base compensation. Claremont's plan contributions
amounted to $247, $117 and $129 for the years ended December 31, 1998, 1997 and
1996. In the third quarter of 1998, all employees of Claremont became eligible
to participate in CBSI's 401(k) plan.

The Company maintains various employee retention programs, including bonus
and deferred compensation. The expense related to these programs is recognized
as the compensation is earned.

13. STOCK WARRANT

In May 1996, Claremont issued a five-year warrant to purchase approximately
310,000 shares of common stock at an exercise price of $13.32 per share. The
warrant was exercised in October 1996 using a net exercise provision, for a
total of approximately 219,000 shares of common stock. As of December 31, 1997,
the warrant was fully exercised and no shares of the common stock remain
issuable under this warrant.

35
38
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. INCOME TAXES

Prior to CBSI's initial public offering and the date of the merger with
Synergy, the shareholders of the respective companies had elected, under the
provisions of Subchapter S of the United States Internal Revenue Code
(Subchapter S), to have income and related tax benefits of each company included
in the taxable income of the shareholders. The shareholders of Costello also
elected to be governed under the provisions of Subchapter S through the date of
its merger with CBSI in 1998. As a result, no provision for U.S. federal income
taxes and only certain state income taxes have been included in the consolidated
statements of income prior to CBSI's initial public offering and the date of the
mergers with Synergy and Costello.

Upon termination of the Subchapter S elections, future income of the
Company is subject to federal and state income taxes at the corporate level.
Accordingly, the application of the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," resulted in the
recognition of deferred tax assets and liabilities, and a corresponding charge
to the provision for income taxes of approximately $1,400 and $920 for the years
ended December 31, 1998 and 1997, respectively.

Subsequent to the terminations, the Company has provided federal and state
income taxes in the consolidated statements of income based on the effective tax
rate for fiscal years 1998 and 1997. The unaudited pro forma net income in the
consolidated statements of income reflects applicable pro forma adjustments to
the provision for income taxes to reflect net income as if the Subchapter S
elections had been revoked prior to January 1, 1996. See Note 20.

CBS Mauritius is incorporated in Mauritius and is not subject to income
taxes. CBS India is an Indian corporation subject to income taxes and receives
certain exemptions from Indian income taxes under free trade zone and software
exporters provisions of Indian tax law. CBS India's tax provision has been
included in the consolidated statements of income as part of the provision for
income taxes. The Company considers all undistributed earnings of its foreign
subsidiaries to be permanently invested. Therefore, no United States income
taxes have been provided on these earnings.

The provision for income taxes consists of:

YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996

Current --
Federal.................................................. $17,047 $7,551 $1,232
State and local.......................................... 988 685 345
Foreign.................................................. 294 -- 83
------- ------ ------
18,329 8,236 1,660
Deferred --
Federal.................................................. (8,164) (744) 552
State and local.......................................... (459) 433 232
Foreign.................................................. 280 (647) --
------- ------ ------
(8,343) (958) 784
------- ------ ------
$ 9,986 $7,278 $2,444
======= ====== ======

36
39
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:

DECEMBER 31,
------------------
1998 1997

Deferred tax assets --
Accrued expenses.......................................... $ 8,421 $ 2,841
Allowance for doubtful accounts........................... 1,231 276
State net operating loss carryforward..................... -- 365
Alternative minimum tax credit carryforward............... 220 120
Foreign net operating losses.............................. 397 647
Other..................................................... 325 207
------- -------
Total gross deferred tax assets........................ 10,594 4,456
Deferred tax liabilities --
Capitalized software development costs.................... (1,974) (3,360)
S to C Corporation conversion............................. (1,301) --
Accounts receivable....................................... -- (678)
CBS Mauritius............................................. (210) (204)
Other..................................................... (184) (203)
------- -------
Total gross deferred tax liabilities................... (3,669) (4,445)
------- -------
Net deferred tax assets.............................. $ 6,925 $ 11
======= =======

The items accounting for the difference between income taxes computed at
the federal statutory rate and the consolidated effective rate are as follows:

YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996

Federal statutory rate...................................... 35% 35% 34%
Effect of --
Tax rate differences on foreign earnings not subject to
U.S. tax............................................... (10) (4) --
Nondeductible merger costs................................ 26 -- --
State income taxes, not of federal tax effect............. 2 2 3
Other, net................................................ 3 3 3
--- -- ---
56% 36% 40%
S Corporation earnings and terminations................... 4 6 (19)
--- -- ---
60% 42% 21%
=== == ===

15. SEGMENT INFORMATION

Effective December 31, 1998 the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 introduced a new model for segment
reporting, called the "management approach". The management approach is based on
the way the segments are organized for making operating decisions and assessing
performance.

The Company is a provider of IT services, and is organized into office
locations throughout the United States, Europe and Asia. The chief operating
decision-makers evaluate each location's performance based primarily on their
revenues, gross margin and operating income. Under this organization, the
operating segments have been aggregated into one reportable segment. The
accounting policies of the operating segments are the same as those described in
the summary of significant accounting policies.

37
40
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes selected financial information of the
Company's operations by geographic location. Revenues are attributed to
countries based on the location of the customer.

YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996

Revenues --
United States....................................... $362,469 $254,514 $179,343
India............................................... 33,877 13,644 4,994
Less Intersegment................................ (31,751) (11,847) (4,781)
-------- -------- --------
2,126 1,797 213
Other international................................. 11,972 4,971 3,076
-------- -------- --------
$376,567 $261,282 $182,632
======== ======== ========
Long-Lived Assets --
United States....................................... $ 18,337 $ 20,911 $ 13,198
India............................................... 5,558 3,970 1,994
Other international................................. 661 161 102
-------- -------- --------
Total............................................ $ 24,556 $ 25,042 $ 15,294
======== ======== ========

16. COMMITMENTS, CONTINGENCIES AND POTENTIAL LIABILITY TO CLIENTS

The Company is party to a third-party complaint filed against it and other
parties on February 3, 1997, by Network Six, Inc. ("NSI") in the Circuit Court
of the First Circuit for the State of Hawaii. The third-party claims are
asserted in an action that the State of Hawaii has brought against NSI. The
Company has also received an answer and counterclaim, dated January 31, 1997,
served by NSI in a collection action brought by the Company against NSI in the
Superior Court of the State of Rhode Island. The Company acted as a
subcontractor to NSI in connection with the development of software for the
State of Hawaii. Additionally, NSI and the Company were parties to a letter of
intent, now terminated, for the purpose of exploring a business combination or
merger. The Company's suit against NSI in Rhode Island, as well as the State of
Hawaii's suit against NSI in Hawaii, arise from the Hawaii software project.

The allegations of NSI's third-party complaint in the Hawaii action and
NSI's counterclaim in the Rhode Island action are substantively identical. NSI
alleges that the Company wrongfully used information gained in connection with
the letter of intent to attempt to gain control of the State of Hawaii project,
interfered with NSI's relationship with the State of Hawaii, employed or
solicited the employment of NSI employees in violation of the contract, and
otherwise breached contractual or other obligations to NSI. NSI seeks damages of
approximately $481 for services and personnel allegedly provided to the Company
by NSI, damages of $60,000 predicated on a decline in the market value of NSI's
publicly-traded stock, and other unspecified damages. On May 30, 1997, the
Circuit Court of the First Circuit for the State of Hawaii granted the Company's
motion to dismiss claims asserting bad faith breach of contract with prejudice,
and conspiracy without prejudice. The Company continues to pursue discovery.

The Company believes that it has not breached any contractual or other
obligation to NSI as alleged either in the third-party complaint or the
counterclaim, and that it has meritorious defenses or set-offs to all of NSI's
claims. The Company does not believe that NSI's actions will result in material
liability to it, or that the actions will have a material adverse effect on the
Company's financial condition, business, or operations. The Company intends to
vigorously contest the claims asserted in both actions.

The Company is also, from time to time, a party to ordinary, routine
litigation incidental to the Company's business. After discussion with its legal
counsel, the Company does not believe that the ultimate

38
41
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

resolution of any other existing matter will have a material adverse effect on
its financial condition, results of operations or cash flows.

In addition, many of the Company's engagements, including Year 2000
projects, involve projects that are critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. The Company
attempts to contractually limit its liability for damages arising from errors,
mistakes, omissions or negligent acts in rendering its services.

17. STOCK DIVIDEND

On February 18, 1998, the Board of Directors declared a two-for-one split
of the Company's common stock, effected in the form of a stock dividend payable
on March 19, 1998 to shareholders of record on March 5, 1998. All agreements
concerning stock options provide for the issuance of additional shares due to
the declaration of the stock split. All references to number of shares, except
shares authorized, the number of options and to per share information in the
consolidated financial statements and related notes have been adjusted to
reflect the stock split on a retroactive basis.

Costello declared a 15% stock dividend on December 31, 1996.

18. SUBSEQUENT EVENT -- STOCK OFFERING

In February 1999, CBSI completed a secondary offering of 5,400,000 shares
of its Common Stock at a price of $31 per share. This offering consisted of
2,135,000 shares of newly issued Common Stock and 3,265,000 shares sold by
selling shareholders. After underwriting discounts, commissions and other
issuance costs, net proceeds to the Company from sale of the newly issued shares
in this offering were approximately $60 million.

19. SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED)

The following quarterly information is unaudited and has been restated to
give effect to the mergers with Costello and Claremont which were accounted for
by the poolings of interests method of accounting.

1998 QUARTER ENDED
- ---- -----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31

Revenues........................................... $83,161 $90,705 $98,688 $104,013
Gross profit....................................... 27,195 30,801 34,055 35,417
Income (loss) from operations...................... (4,148) 1,921 3,106 12,871
Net income (loss).................................. (6,637) 2,863 1,270 9,195
Net income (loss) per weighted-average share....... $ (0.20) $ 0.08 $ 0.03 $ 0.25
Pro forma net income............................... (5,220) 2,863 1,270 9,195
Pro forma diluted earnings per share............... $ (0.16) $ 0.08 $ 0.03 $ 0.25

1997 QUARTER ENDED
- ---- -----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31

Revenues........................................... $55,560 $62,745 $69,880 $73,097
Gross profit....................................... 17,649 20,565 23,549 20,739
Income from operations............................. 4,213 5,300 6,500 312
Net income......................................... 2,257 3,455 4,470 (375)
Net income per weighted-average share.............. $ 0.08 $ 0.11 $ 0.14 $ (0.01)
Pro forma net income............................... 2,572 3,348 4,205 446
Pro forma diluted earnings per share............... $ 0.09 $ 0.11 $ 0.13 $ 0.01

39
42
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. PRO FORMA STATEMENT OF INCOME INFORMATION (UNAUDITED)

The pro forma adjustments for the incremental income tax provision
(benefit) included in the accompanying consolidated statements of income
reflects the additional provision (benefit) for Federal and state income taxes
at the effective income tax rate as if the companies' Subchapter S elections had
been revoked prior to January 1, 1996 and the companies had been taxed as C
corporations. The differences between the United States Federal statutory rate
and the consolidated effective rate are as follows:

YEAR ENDED
DECEMBER 31,
------------------------
1998 1997 1996

Statutory Federal income tax rate........................... 35% 35% 34%
State income taxes, net of Federal tax effect............... 2 4 5
Tax rate differences on foreign earnings not subject to U.S.
tax....................................................... (10) (4) (2)
Non-deductible merger costs................................. 26 2 --
Other....................................................... (2) 1 2
--- -- --
51% 38% 39%
=== == ==

The Company considers all undistributed earnings of foreign subsidiaries to
be permanently invested. Therefore, no United States income taxes have been
provided on these earnings.

40
43

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

41
44

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information required by this item is included in our Proxy Statement
for our 1999 Annual Meeting of Shareholders under the caption Directors and
Executive Officers and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is included in our Proxy Statement
for our 1999 Annual Meeting of Shareholders under the caption Executive
Compensation and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included in our Proxy Statement
for our 1999 Annual Meeting of Shareholders under the caption Director and
Executive Officer Ownership of CBSI Common Stock and is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included in our Proxy Statement
for our 1999 Annual Meeting of Shareholders under the caption Certain
Relationships and Related Transactions and is incorporated herein by reference.

42
45

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) Documents filed as a part of the report:

1. Consolidated Financial Statements

The following consolidated financial statements of the Company and
its subsidiaries are filed herewith:

PAGE
----

Independent Auditors' Report................................ 21
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 23
Consolidated Statements of Income for each of the years
ended December 31, 1998, 1997 and 1996.................... 24
Consolidated Statements of Shareholders' Equity for each of
the years ended December 31, 1998, 1997 and 1996.......... 25
Consolidated Statements of Cash Flows for each of the years
ended December 31, 1998, 1997 and 1996.................... 26
Notes to Consolidated Financial Statements.................. 27

2. Financial Statement Schedules

None

3. Exhibits

EXHIBIT
NUMBER DESCRIPTION

3.1* Restated Articles of Incorporation of the Company, as
amended.
3.2* Bylaws of the Company.
4.1* See Exhibits 3.1 and 3.2 for provisions of the Restated
Articles of Incorporation and Restated Bylaws of the Company
defining rights of the holders of Common Stock of the
Company.
4.2* Specimen Stock Certificate.
21.1 Subsidiaries of Registrant. (Filed Herein)
23.1 Consent of Arthur Andersen LLP. (Filed Herein)
23.2 Consent of KPMG Peat Marwick LLP. (Filed Herein)
23.3 Consent of Deloitte & Touche LLP. (Filed Herein)
27.1 Financial Data Schedule.(Filed Herein)

- -------------------------
* Incorporated herein by reference to exhibit of the same number in the Form
S-1 Registration Statement of the Registrant (Registration No. 333-18413)
dated as of December 20, 1996, as amended.

(b) Reports on Form 8-K

None

43
46

SIGNATURES

Pursuant to the requirements of Sections 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

COMPLETE BUSINESS SOLUTIONS, INC.

By: /s/ RAJENDRA B. VATTIKUTI
------------------------------------
Rajendra B. Vattikuti
President, Chief Executive Officer
and Director
March 29, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:

/s/ RAJENDRA B. VATTIKUTI President, Chief Executive Officer, Director, March 29, 1999
- --------------------------------------------------- (Principal Executive Officer)
Rajendra B. Vattikuti

/s/ TIMOTHY S. MANNEY Executive Vice President of Finance and March 29, 1999
- --------------------------------------------------- Administration, Treasurer and Director (Principal
Timothy S. Manney Financial and Accounting Officer)

/s/ FRANK D. STELLA Director March 29, 1999
- ---------------------------------------------------
Frank D. Stella

/s/ DOUGLAS S. LAND Director March 29, 1999
- ---------------------------------------------------
Douglas S. Land

Director March 29, 1999
- ---------------------------------------------------
John A. Stanley

Director March 29, 1999
- ---------------------------------------------------
William Brooks

Director March 29, 1999
- ---------------------------------------------------
Charles W. Costello

/s/ JERRY L. STONE Director March 29, 1999
- ---------------------------------------------------
Jerry L. Stone

/s/ RONALD K. MACHTLEY Director March 29, 1999
- ---------------------------------------------------
Ronald K. Machtley