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

-----------
FORM 10-Q
-----------

(Mark One)

(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

FOR THE PERIOD ENDED DECEMBER 31, 1998

( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

PROBUSINESS SERVICES, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE 94-2976066
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)

4125 HOPYARD ROAD
PLEASANTON, CA 94588

(Address of principal executive offices)

(925) 737-3500

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 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

As of February 2, 1999, there were 20,780,843 shares of the Registrant's
Common Stock outstanding.

PROBUSINESS SERVICES, INC.
INDEX

PART I. FINANCIAL INFORMATION PAGE NO.
---------

ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED):

Condensed Balance Sheets
December 31, 1998 and June 30, 1998 ................................ 3

Condensed Statements of Operations
Three and six months ended December 31, 1998 and 1997 .............. 4

Condensed Statement of Stockholders' Equity
Six months ended December 31, 1998 ................................. 5

Condensed Statements of Cash Flows
Six months ended December 31, 1998 and 1997 ........................ 6

Notes to Unaudited Condensed Financial Statements .................... 7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
ITEM 2. RESULTS OF OPERATIONS ............................................. 10

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS ................................................... 21

ITEM 2. CHANGES IN SECURITIES ............................................... 21

ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..................................... 21

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................. 21

ITEM 5. OTHER INFORMATION ................................................... 22

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................... 22

SIGNATURES .......................................................... 23

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

PROBUSINESS SERVICES, INC.
CONDENSED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)

December 31, 1998 June 30, 1998
----------------- ---------------

ASSETS

Current Assets:
Cash and cash equivalents $ 81,491 $ 13,771
Accounts receivable, net of allowance 4,088 2,612
Prepaid expenses and other current assets 2,806 2,122
----------------- ---------------
88,385 18,505

Payroll tax funds invested 646,941 332,667
----------------- ---------------
Total current assets 735,326 351,172

Equipment, furniture and fixtures, net 21,757 13,958
Other assets 11,759 10,879
----------------- ---------------
Total assets $ 768,842 $ 376,009
----------------- ---------------
----------------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable, accrued liabilities, current
portion of capital lease obligations and deferred
revenue $ 16,161 $ 15,182
Payroll tax funds collected but unremitted 646,941 332,667
----------------- ---------------
Total current liabilities 663,102 347,849

Capital lease obligations, less current portion 1,143 1,414
Stockholders' equity 104,597 26,746
----------------- ---------------
Total liabilities and stockholders' equity $ 768,842 $ 376,009
----------------- ---------------
----------------- ---------------

See notes to condensed financial statements.

PROBUSINESS SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Three months ended, Six months ended
December 31, December 31,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------

Revenue $ 16,068 $ 10,325 $ 30,257 $ 19,552

Operating expenses:
Cost of providing services 8,276 5,772 15,944 10,791
General and administrative expenses 2,497 1,600 4,897 3,368
Research and development expenses 1,416 1,020 2,792 2,130
Client acquisition costs 6,399 4,092 12,525 8,070
--------- --------- --------- ---------
Total operating expenses 18,588 12,484 36,158 24,359

Loss from operations (2,520) (2,159) (5,901) (4,807)
Interest expense (125) (119) (430) (374)
Other income 1,004 234 1,259 260
--------- --------- --------- ---------

Net loss $ (1,641) $ (2,044) $ (5,072) $ (4,921)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net loss per share $ (0.08) $ (0.12) $ (0.27) $ (0.48)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing basic and
diluted net loss per share 20,595 16,602 18,924 10,298
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma basic and diluted net loss per
share $ (0.12) $ (0.34)
--------- ---------
--------- ---------
Shares used in computing pro forma
basic and diluted net loss per share 16,602 14,547
--------- ---------
--------- ---------

See notes to consolidated financial statements.

PROBUSINESS SERVICES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

COMMON STOCK
--------------------------------- NOTES
ADDITIONAL RECEIVABLE TOTAL
PAID-IN ACCUMULATED FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS EQUITY

---------------------------------------------------------------------------
Balances at June 30, 1998 17,114,855 $ 17 $ 53,286 $ (25,469) $ (1,088) $ 26,746

Issuance of common stock in
connection with public
offering, net of offering
costs 3,191,250 3 80,708 - - 80,711

Exercise of warrants 142,796 - 450 - - 450

Exercise of stock options 131,126 - 306 - - 306

Issuance of stock under the
employee stock purchase plan 188,549 1,303 1,303

Payment of notes receivable
from stockholders 153 153

Net loss - - - (5,072) - (5,072)
---------------------------------------------------------------------------

Balances at December 31, 1998 20,768,576 $ 20 $ 136,053 $ (30,541) $ (935) $ 104,597
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See notes to condensed financial statements.

PROBUSINESS SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)

Six months ended
December 31,
----------------------
1998 1997
---------- ----------

OPERATING ACTIVITIES
Net loss $ (5,072) $ (4,921)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,479 2,042

Changes in operating assets and liabilities:
Accounts receivable, net (1,476) (309)
Prepaid expenses and other current assets (684) (303)
Other assets 787 1,416
Accounts payable, accrued liabilities,
and deferred revenue (169) 2,108
---------- ----------
Net cash provided by (used in) operating activities (4,135) 33
---------- ----------
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (8,624) (5,078)
Capitalization of software development costs (2,050) (1,702)
---------- ----------
Net cash used in investing activities (10,674) (6,780)
---------- ----------
FINANCING ACTIVITIES
Borrowings under line of credit agreements - 6,874
Repayments of borrowings under line of credit agreements - (11,632)
Repayments under subordinated debt - (3,909)
Repayments under note payable to stockholder - (150)
Proceeds from notes receivable from stockholder 153 -
Principal payments on capital lease obligations (394) (384)
Proceeds from issuance of common stock 82,770 28,039
---------- ----------
Net cash provided by financing activities 82,529 18,838
---------- ----------
Net increase in cash and cash equivalents 67,720 12,091
Cash and cash equivalents, beginning of period 13,771 5,047
---------- ----------
Cash and cash equivalents, end of period $ 81,491 $ 17,138
---------- ----------
---------- ----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 274 $ 368
---------- ----------
---------- ----------
Purchases of equipment under capital lease obligations $ 1,271 $ -
---------- ----------
---------- ----------

See notes to condensed financial statements.

PROBUSINESS SERVICES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

OPERATIONS

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

BASIS OF PRESENTATION

The Company has prepared its interim condensed financial statements
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.

The information included in this report should be read in conjunction
with the Company's audited financial statements and notes thereto included in
the Company's 1998 Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited interim
condensed financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the financial
position, results of operations and cash flows for such periods. The results for
the interim period ended December 31, 1998 are not necessarily indicative of the
results that may be expected for any future periods.

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

Historical net loss per share is presented under the requirements of FAS
No. 128, "Earnings per Share" ("FAS 128"). Common stock equivalent shares from
convertible preferred stock and from stock options and warrants are not included
in the Company's calculation of diluted net loss per share as the effect is
anti-dilutive.

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

PROBUSINESS SERVICES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

1. ACCOUNTING POLICIES (Continued)
RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
FAS No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements and is
effective for fiscal years beginning after December 15, 1997. Adoption of FAS
130 will be required in fiscal 1999. Adoption of FAS 130 is not expected to have
a material effect on the Company's financial position, results of operations or
cash flows.

In June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for the reporting of information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
Adoption of FAS 131 will be required in fiscal 1999 and require interim
disclosures beginning in fiscal 2000. The Company has not reached a conclusion
as to the appropriate segments, if any, it will be required to report to comply
with the provisions of FAS 131. Adoption of FAS 131 will not have a material
effect on the Company's financial position, results of operations or cash flows.

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

2. DEBT

LINE OF CREDIT AGREEMENT

At December 31, 1998, the Company has a line of credit agreement with a
financial institution. The agreement provides for borrowings that are limited to
the lesser of $20,000,000, or the sum of five times the Company's average
monthly net collections, as defined in the agreement, plus the lesser of five
times the Company's average monthly collections of the interest on tax
investment funds as defined in the agreement or $5,000,000, plus $1,500,000. At
December 31, 1998, no borrowings were outstanding under the agreement and the
amount available for borrowing under the agreement was approximately
$20,000,000. The agreement expires on December 31, 2000, and is subject to
automatic and continuous renewal unless termination notice is given by either
party in accordance with the agreement.

PROBUSINESS SERVICES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

2. DEBT (Continued)
INTEREST RATE SWAP AGREEMENTS

The Company has entered into various interest rate swap agreements with a
financial institution. These agreements, with fixed interest rates between
4.759% and 5.905%, each have a term of two years, one of which has a
cancellation option after one year, and expire at various dates through December
2000. Interest is paid or received based upon the difference in the fixed
interest rate and the contractual floating rate option times the contractual
notional balance. The actual notional balance varies on a monthly basis due to
fluctuations in projected holdings of collected but unremitted payroll tax
funds. The average monthly notional balance for the remaining term of the
agreements was $290,292,000. The agreements require collateral if interest rates
increase and certain other conditions are met as defined in the agreements. At
December 31, 1998, no collateral was required.

3. STOCKHOLDER'S EQUITY

In September 1998, the Company completed a public offering of common
stock. The offering consisted of 2,775,000 shares of common stock issued at
$27.00 per share. In September 1998, the underwriters exercised an option to
purchase an additional 416,250 shares of common stock at the price of $27.00 per
share to cover over-allotments in connection with the public offering.

STOCK SPLIT

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements. Potential risks and
uncertainties include, among others, those set forth under "Overview" and
"Additional Factors that May Affect Future Results" included in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The following discussion also should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Quarterly
Report.

OVERVIEW

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

The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. Since 1994, the Company has
experienced significant growth of its revenue, client base and average client
size. Revenue increased from $13.9 million in fiscal 1996 to $46.3 million in
fiscal 1998. From December 31, 1996 to December 31, 1998, the client base for
payroll processing services increased from approximately 300 to approximately
540 clients, while the average size of the Company's payroll clients increased
from approximately 600 employees to approximately 1,300 employees. As of
December 31, 1998, the Company provided services to approximately 1,550 clients.
The Company's revenue growth is primarily due to continued growth in its client
base, the introduction of its payroll tax service in fiscal 1996, an increase in
the average size of its clients, the introduction of new features and other
services, and a high retention rate of existing payroll clients (approximately
92% for fiscal 1998). The Company does not anticipate it will sustain this rate
of growth in the future.

The establishment of new client relationships involves lengthy and
extensive sales and implementation processes. The sales process generally takes
three to twelve months or longer, and the implementation process generally takes
an additional three to nine months or longer. The Company has experienced
significant operating losses since its inception and expects to incur
significant operating losses in the future due to continued client acquisition
costs, investments in research and development, and costs associated with
expanding its sales efforts and operations to new geographic regions. As of
December 31, 1998, the Company had an accumulated deficit of approximately $30.5
million. There can be no assurance that the Company will achieve or sustain
profitability in the future.

The Company's cost of providing services consists primarily of ongoing
account management, tax and benefits administration operations and production
costs. General and administrative expenses consist primarily of personnel costs
associated with finance, corporate services and information technology,
professional fees, and other overhead costs for finance and corporate services.
Research and development expenses consist primarily of personnel costs, and to a
lesser extent, amortization of capitalized software development costs. Client
acquisition costs consist of sales and implementation expenses and, to a lesser
extent, marketing expenses.

RESULTS OF OPERATIONS

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

Three months ended Six months ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
--------- -------- -------- --------

STATEMENTS OF OPERATIONS DATA:
Revenue 100.0% 100.0% 100.0% 100.0%

Operating expenses:
Cost of providing services 51.5 55.9 52.7 55.2
General and administrative expenses 15.6 15.5 16.2 17.2
Research and development expenses 8.8 9.9 9.2 10.9
Client acquisition costs 39.8 39.6 41.4 41.3
--------- -------- -------- --------
Total operating expenses 115.7 120.9 119.5 124.6

Loss from operations (15.7) (20.9) (19.5) (24.6)
Interest expense (0.8) (1.2) (1.4) (1.9)
Other income 6.3 2.3 4.1 1.3
--------- -------- -------- --------
Net loss (10.2)% (19.8)% (16.8)% (25.2)%
--------- -------- -------- --------
--------- -------- -------- --------

REVENUE. Revenue increased 55.6% in the second quarter and 54.8% in the
first six months of fiscal 1999, when compared with the same periods of fiscal
1998, primarily due to increases in the number and average size of the Company's
payroll and tax clients. Interest income earned on payroll tax funds invested
was $3.8 million and $6.9 million for the second quarter and for the first six
months of fiscal 1999, respectively, as compared to $2.0 million and $3.9
million for the same periods of fiscal 1998. The increases were primarily the
result of higher average daily payroll tax fund balances.

COST OF PROVIDING SERVICES. Cost of providing services increased 43.4%
in the second quarter and 47.8% for the first six months of fiscal 1999 when
compared with the same periods of fiscal 1998 and decreased as a percentage of
revenue to 51.5% and 52.7% in the second quarter and for the first six months of
fiscal 1999, respectively, when compared with the same periods of fiscal 1998.
Cost of providing services increased in absolute dollars primarily due to
increased personnel in operations such as account management and production
resulting from an increase in client base, production expenses related to an
increase in the number of payroll clients, and to a lesser extent, increases in
personnel expenses related to the Company's payroll tax service.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 56.1% in the second quarter and 45.4% for the first six months of
fiscal 1999 when compared with the same periods of fiscal 1998 and remained
unchanged as a percentage of revenue at 15.6% in the second quarter and
decreased as a percentage of revenue to 16.2% for the first six months compared
with the same periods of fiscal 1998. The increase in absolute dollars was
primarily due to the expansion of information technology infrastructure and
hiring of additional management and administrative personnel to support the
Company's growth.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 38.8% in the second quarter and 31.1% for the first six months of
fiscal 1999 when compared with the same

periods of fiscal 1998 and decreased as a percentage of revenue to 8.8% and 9.2%
in the second quarter and for the first six months of fiscal 1999, respectively,
when compared with the same periods of fiscal 1998. The increase in absolute
dollars was primarily a result of increases in personnel to develop enhancements
and new features to the Company's existing services. The decrease as a
percentage of revenue is a result of higher revenue. Capitalized software
development costs were $1.0 million for both the second quarter of fiscal 1999
and 1998, and $2.1 million and $1.7 million for the first six months of fiscal
1999 and 1998, respectively.

CLIENT ACQUISITION COSTS. Client acquisition costs increased 56.4% in
second quarter and 55.2% for the first six months of fiscal 1999 when compared
with the same periods of fiscal 1998 and increased as a percentage of revenue to
39.8% and 41.4% in the second quarter and for the first six months of fiscal
1999, respectively, when compared with the same periods of fiscal 1998. The
increase in absolute dollars was primarily due to the expanded sales and
implementation force for payroll and national tax services.

INTEREST EXPENSE. Interest expense increased 5.0% in second quarter and
15.0% for the first six months of fiscal 1999 when compared with the same
periods of fiscal 1998 and decreased as a percentage of revenue to 0.8% and 1.4%
in the second quarter and for the first six months of fiscal 1999, respectively,
when compared with the same periods of fiscal 1998. Interest expense remained
relatively unchanged for the second quarter of fiscal 1999 when compared to the
same period of fiscal 1998.

OTHER INCOME. Other income increased as a percentage of revenue to 6.3%
and 4.1% in second quarter and for the first six months of fiscal 1999,
respectively, when compared with the same periods of fiscal 1998. The increase
in other income was due to higher cash and investment balances resulting from
the Company's initial public offering in September 1997 and follow-on public
offering in September 1998.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, the Company's principal sources of liquidity
included $81.5 million of cash and cash equivalents and a secured $20 million
revolving line of credit which expires December 2000. There were no outstanding
borrowings under the line of credit as of December 31, 1998.

Net cash used in operating activities was $4.1 million, compared to net
cash provided by operating activities of $33,000 for the first six months of
fiscal 1999 and 1998, respectively. The net cash used in operating activities
for the first six months of fiscal 1999 was primarily attributable to the net
loss for the first six months and an increase in accounts receivable and prepaid
expenses and other assets, partially offset by increases in depreciation and
amortization.

Net cash used in investing activities was $10.7 million and $6.8 million
for the first six months of fiscal 1999 and 1998, respectively. The increase in
net cash used in investing activities related primarily to the purchase of a
customer care system for $4.5 million.

Net cash provided by financing activities was $82.5 million and $18.8
million for the first six months of fiscal 1999 and 1998, respectively. Net cash
provided by financing activities for first six months of fiscal 1999 related
primarily to $80.7 million of net proceeds from the Company's public offering of
common stock in September 1998.

The Company believes that existing cash balances and amounts available
under its current credit facility will be sufficient to meet its working capital
and capital expenditure requirements for at least the next 12 months.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

OPERATING LOSSES; NEED TO COMMIT TO EXPENSE IN ADVANCE OF REVENUES. The
Company has experienced significant operating losses since its inception and
expects to incur significant operating losses in the future due to continued
client acquisition costs, investments in research and development and costs
associated with expanding its sales efforts and operations to new geographic
regions. As of December 31, 1998, the Company had an accumulated deficit of
approximately $30.5 million. The establishment of new client relationships
involves lengthy and extensive sales and implementation processes. The sales
process generally takes three to twelve months or longer, and the implementation
process generally takes an additional three to nine months or longer. In
connection with the acquisition of each new client, the Company incurs
substantial client acquisition costs, which consist primarily of sales and
implementation expenses and, to a lesser extent, marketing expenses. The
Company's ability to achieve profitability will depend in part upon its ability
to attract and retain new clients, offer new services and features and achieve
market acceptance of new services. There can be no assurance that the Company
will achieve or sustain profitability in the future. Failure to achieve or
sustain profitability in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.

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

The Company's quarterly operating results have in the past and will in
the future vary significantly depending on a variety of factors, including the
number and size of new clients starting services, the decision of one or more
clients to delay or cancel implementation or ongoing services, interest rates,
seasonality, the ability of the Company to design, develop and introduce new
services and features for existing services on a timely basis, costs associated
with strategic acquisitions and alliances or investments in technology, the
success of any such strategic acquisition, alliance or investment, costs to
transition to new technologies, expenses incurred for geographic expansion,
risks associated with payroll tax and benefits administration services, price
competition, a reduction in the number of employees of its clients and general
economic factors. Revenue from new clients typically represents a significant
portion of quarterly revenue in the third and fourth fiscal quarters. A
substantial majority of the Company's operating expenses, particularly personnel
and related costs, depreciation and rent, is relatively fixed in advance of any
particular quarter. The Company's agreements with its clients generally do not
have significant penalties for cancellation. As a result, any decision by a
client to delay or cancel implementation of the Company's services or the
Company's underutilization of personnel may cause significant variations in
operating results in a particular quarter and could result in losses for such
quarter. As the Company secures larger clients, the time required for
implementing the Company's services increases, which could contribute to larger
fluctuations in revenue. Interest income earned from investing payroll tax
funds, which is a significant portion of the Company's revenue, is vulnerable to
fluctuations in interest rates. In addition, the Company's business may be
affected by shifts in the

general condition of the economy, client staff reductions, strikes, acquisitions
of its clients by other companies and other downturns. There can be no assurance
that the Company's future revenue and results of operations will not vary
substantially. It is possible that in some future quarter the Company's results
of operations will be below the expectations of public market analysts and
investors. In either case, the market price of the Company's common stock could
be materially adversely affected.

RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND INVESTMENTS. While the
Company has no current agreements or negotiations underway with respect to any
acquisition of, or investment in, businesses that provide complementary services
or technologies to those of the Company, the Company has in the past and intends
in the future to make additional acquisitions of, and investments in, such
businesses. There can be no assurance that any such future acquisition or
investment will be completed or that, if completed, will be effectively
assimilated into the Company's business. In connection with such acquisitions or
investments, the Company has in the past incurred and will likely incur in the
future costs associated with adding personnel, integrating technology,
increasing overhead to support the acquired businesses, acquiring in-process
technology and amortization expenses related to intangible assets. In addition,
future acquisitions could result in the issuance of dilutive equity securities,
the incurrence of debt or contingent liabilities. Furthermore, there can be no
assurance that any strategic acquisition or investment will succeed. Any future
acquisitions or investments could have a material adverse effect on the
Company's business, financial condition and results of operations.

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

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

The Company's benefits administration services are subject to various
risks resulting from errors and omissions in processing and filing COBRA or
other benefit plan forms in accordance with governmental regulations and the
respective plans. The Company processes data received from employees and
employers and is subject to penalties for any late or misfiled plan forms. There
can be no assurance the Company's reserves or insurance for such penalties will
be adequate. In addition, failure

to properly file plan forms would have a material adverse effect on the
Company's reputation, which could adversely affect its relationships with
existing clients and its ability to gain new clients. The Company's benefits
administration services are also dependent upon government regulations which are
subject to continuous changes that could reduce or eliminate the need for
benefits administration services.

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

INVESTMENT RISKS. The Company invests funds, including payroll tax funds
transferred to it by clients, in short-term, top tier, high quality financial
instruments such as overnight U.S. government direct and agency obligation
repurchase agreements, commercial paper and institutional money market funds.
These investments are exposed to several risks, including credit risks from the
possible inability of the borrowers to meet the terms of their obligations under
the financial instruments. The Company would be liable for any losses on such
investments.

Interest income earned from the investment of client tax funds represents
a significant portion of the Company's revenues. As a result, the Company's
business, financial condition and results of operations are significantly
impacted by interest rate fluctuations. The Company enters into interest rate
swap agreements to minimize the impact of interest rate fluctuations. There can
be no assurance, however, that the Company's swap agreements will protect the
Company from all interest rate risks. Under certain circumstances if interest
rates rise, the Company would have payment obligations under its interest rate
swap agreements which may not be offset by interest earned by the Company on
deposited funds. A payment obligation under the Company's swap agreements could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that the
Company would have sufficient funds to meet any such swap payment obligations. A
default by the Company under its swap agreements could result in acceleration
and setoff by the bank of all outstanding contracts under the swap agreement,
and could result in cross-defaults of other debt agreements of the Company, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.

MANAGEMENT OF GROWTH. The Company's business has grown significantly in
size and complexity over the past four years. This growth has placed, and is
expected to continue to place, significant demands on the Company's management,
systems, internal controls, and financial and physical resources. In order to
meet such demands, the Company intends to continue to hire new employees, open
new offices to attract clients in new geographic regions, increase expenditures
on research and development, and invest in new equipment and make other capital
expenditures. In addition, the Company expects that it will need to develop
further its financial and managerial controls and reporting systems and
procedures to accommodate any future growth. Failure to expand any of the
foregoing areas in an efficient manner could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company opened a satellite sales and implementation center in Newark,
New Jersey in January 1999 and may open additional sales offices in the future.
In addition, the Company intends to move its benefits administration center from
its current location in Bellevue, Washington to another location within the
Seattle area, and the Company has leased additional office space to be built

adjacent to its Pleasanton headquarters. There can be no assurance that the
Company will be able to establish such facilities on a timely basis. Any
inability to manage growth effectively could have a material adverse effect on
the Company's business, financial condition and results of operations.

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

RISKS ASSOCIATED WITH THE DEVELOPMENT AND INTRODUCTION OF NEW OR ENHANCED
SERVICES; RISKS OF SOFTWARE DEFECTS. The technologies in which the Company has
invested to date are rapidly evolving and have short life cycles, which requires
the Company to anticipate and rapidly adapt to technological changes. In
addition, the Company's industry is characterized by increasingly sophisticated
and varied needs of clients, frequent new service and feature introductions and
emerging industry standards. The introduction of services embodying new
technologies and the emergence of new industry standards and practices can
render existing services obsolete and unmarketable. The Company's future success
will depend, in part, on its ability to develop or acquire advanced
technologies, enhance its existing services with new features, add new services
that address the changing needs of its clients, and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. Several of the Company's competitors invest substantially
greater amounts in research and development than the Company, which may allow
them to introduce new services or features before the Company. Even if the
Company is able to develop or acquire new technologies in a timely manner, it
may incur substantial costs in developing or acquiring such technologies and in
deploying new services and features to its clients, including costs associated
with acquiring in-process technology, amortization expenses related to
intangible assets and costs of additional personnel. If the Company is unable to
develop or acquire and successfully introduce new services and new features of
existing services in a timely or cost-effective manner, the Company's business,
financial condition and results of operations could be materially adversely
affected.

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

DEPENDENCE ON THIRD-PARTY PROVIDERS. The Company depends on third-party
courier services to deliver paychecks to clients. The Company does not have any
formal written agreements with any of

the courier services that it uses. Such courier services have been in the past
and may be in the future unable to timely pick up or deliver the paychecks from
the Company to its clients for a variety of reasons, including employee strikes,
storms or other adverse weather conditions, earthquakes or other natural
disasters, logistical or mechanical failures or accidents. Failure by the
Company to deliver client paychecks on a timely basis could damage the Company's
reputation and have a material adverse effect on the Company's business,
financial condition and results of operations.

DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA. The Company currently
conducts substantially all of its payroll and payroll tax processing at the
Company's headquarters in Pleasanton, California and divides the payroll
printing and finishing between its Pleasanton and Irvine, California facilities.
The Irvine facility serves both as an alternative processing center and a
back-up payroll center. The Company's benefits administration services are
conducted solely in Bellevue, Washington, and no benefits administration back-up
facility exists. The Company establishes for each payroll client a complete set
of payroll data at the Pleasanton processing center, as well as at the client's
site. In the event of a disaster in Pleasanton, clients would have the ability
to process payroll checks based on the data they have on site if necessary.
There can be no assurance that the Company's disaster recovery procedures are
sufficient or that the payroll data recovered at the client site would be
sufficient to allow the client to calculate and produce payroll in a timely
fashion.

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

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

NEED TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL. The Company's success
depends to a significant degree on its ability to attract and retain experienced
employees. There is substantial competition for experienced personnel, which the
Company expects to continue. Many of the companies with which the Company
competes for experienced personnel have greater financial and other resources
than the Company. The Company has in the past and may in the future experience
difficulty in recruiting sufficient numbers of qualified personnel. In
particular, the Company's ability to find and train implementation employees is
critical to the Company's ability to achieve its growth objectives. The
inability to attract and retain experienced personnel as required could have a
material adverse effect on the Company's business, financial condition and
results of operations.

RISK ASSOCIATED WITH GEOGRAPHIC EXPANSION. A substantial majority of the
Company's revenue historically has been derived from clients located in the
western United States. The Company's ability to achieve significant future
revenue growth will in large part depend on its ability to gain new clients
throughout the United States. Growth and geographic expansion have resulted in
new and increased responsibilities for management personnel and have placed and
continue to place a significant strain on the Company's management and operating
and financial systems. The Company will be required to continue to implement and
improve its systems on a timely basis and in such a manner as is necessary to
accommodate the increased number of transactions and clients and the increased
size of the Company's operations. Any failure to implement and improve the
Company's systems or to hire and retain the appropriate personnel to manage its
operations would have a material adverse effect on the Company's business,
financial condition and results of operations.

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

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

The Company believes that its current products are, and future products
will be, fully Year 2000 compliant. The Company's past software products, many
of which are currently used by clients, are not Year 2000 compliant. The Company
has begun the process of transitioning existing clients to its Year 2000
compliant products; however, there can be no assurance that the Company will be
successful in providing all of its clients with Year 2000 compliant products by
2000. Any failure by the Company to transition its clients to Year 2000
compliant products could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that Year 2000 errors or defects will not be discovered in the
Company's current and future products. The Company is not assessing the Year
2000 compliance of its clients' systems or the possible effects on its
operations of the Year 2000 compliance of its clients' systems. Due to the
substantial integration between the Company's computer systems and its clients'
systems, the failure by the Company's clients to have Year 2000 compliant
systems could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is assessing the
possible effects on its operations of the Year 2000 readiness of key suppliers
and subcontractors. The Company's reliance on suppliers and subcontractors, and,
therefore, on the proper functioning of their information systems and software,
means that failure by such suppliers and subcontractors to address

Year 2000 issues could have a material adverse effect on the Company's business,
financial condition and results of operations.

LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS. The Company's success is dependent in part upon its proprietary
software technology. The Company has no patents, patent applications or
registered copyrights. The Company relies on a combination of contract,
copyright and trade secret laws to establish and protect its proprietary
technology. The Company distributes its services under software license
agreements that grant clients licenses to use the Company's services and contain
various provisions protecting the Company's ownership and the confidentiality of
the underlying technology. The Company generally enters into confidentiality
and/or license agreements with its employees and existing and potential clients,
and limits access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology. There can be no assurance
that the Company's services and technology do not infringe any existing patents,
copyrights or other proprietary rights of others, or that third parties will not
assert infringement claims in the future. If any such claims are asserted and
upheld, the costs of defense could be substantial and any resulting liability to
the Company could have a material adverse effect on the Company's business,
financial condition and results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
common stock is likely to be highly volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new services by the Company or its
competitors, market conditions in the information services industry, changes in
financial estimates by securities analysts or other events or factors, many of
which are beyond the Company's control. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology and services
companies and that often have been unrelated to the operating performance of
such companies. These broad market fluctuations may adversely affect the market
price of the Company's common stock.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS. Forward-looking statements
contained in this Quarterly Report are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995 and are highly dependent upon a
variety of important factors that could cause actual results to differ
materially from those reflected in such forward-looking statements. When used in
this document and documents referenced herein, the words "intend," "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company are included to identify such forward-looking statements. These
forward-looking statements include statements regarding the demand for
outsourcing employee administrative services; the Company's expansion of its
client base; the Company's intention to increase its direct sales force; the
development of a comprehensive and fully integrated suite of employee
administrative services; the Company's ability to offer additional services; the
initiation or completion of any strategic acquisition, investment or alliance;
the Company's ability to extend its technology leadership; the Company's ability
to attract and retain new clients; market acceptance of any new services offered
by the Company; the Company's ability to minimize the impact of interest rate
fluctuations; the Company's ability to develop its financial and managerial
controls and systems; the opening of additional facilities; the sufficiency of
the Company's back-up facilities and disaster recovery procedures; the Company's
ability to develop or acquire new technologies; the Company's ability to attract
and retain experienced employees; the ability of the Company to make its
internal system Year 2000 compliant and to transition its clients to a Year 2000
compliant system; the Company's ability to maintain a high payroll client
retention rate and the Company's ability to increase its national presence.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties, including
without limitation, those identified under

"Additional Factors That May Affect Future Results" and elsewhere in this
Quarterly Report and other risks and uncertainties indicated from time to time
in the Company's filings with the Securities and Exchange Commission. Actual
results could differ materially from these forward-looking statements. In
addition, important factors to consider in evaluating such forward-looking
statements include changes in external market factors, changes in the Company's
business or growth strategy or an inability to execute its strategy due to
changes in its industry or the economy generally, the emergence of new or
growing competitors and various other competitive factors. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this Quarterly Report will in fact occur.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

(c) On November 30, 1998, the Company issued 14,275 shares of Common Stock to
SDK Inc. upon the exercise of warrants at an exercise price of $2.65 per
share. On December 14, 1998, the Company issued 53,521 shares of Common
Stock Coast Business Credit upon the exercise of warrants at an exercise
price of $2.65 per share. The issuance of the shares of Common Stock
pursuant to exercise of the warrants were exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act. The shares
of Common Stock issued pursuant to exercise of the warrants are restricted
securities.

(d) On September 19, 1997, the Company commenced an initial public offering,
which consisted of 4,312,500 shares of its Common Stock (the "Offering") at
$7.33 per share pursuant to a registration statement (No. 333-23189)
declared effective by the Securities and Exchange Commission on September
19, 1997. As of October 1, 1998, approximately $8.7 million of the net
proceeds from the Offering were invested in short-term financial
instruments. From October 1, 1998 to December 31, 1998, the Company used
approximately $8.5 million of these proceeds from the short-term financial
instruments for working capital.

On September 25, 1998, the Company commenced a secondary public offering
(the "Secondary Offering"), which consisted of 3,191,250 shares of its
Common Stock at $27.00 per share pursuant to a registration statement (No.
333-60745) declared effective by the Securities and Exchange Commission on
September 25, 1998. As of December 31, 1998, approximately $80.7 million,
all net proceeds from the Secondary Offering, were invested in short-term
financial instruments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

(a) The Company held its Annual Meeting of Stockholders (the "Annual Meeting")
on November 12, 1998.

(b) At the Annual Meeting, the stockholders elected Thomas H. Sinton as the
Class I Director to serve for a term of three years. The term of office as a
director of Mr. Sinton, William T. Clifford, David C. Hodgson, Ronald W.
Readmond and Thomas P. Roddy continued after the Annual Meeting.

1. the election of a Class I director to serve for a term of three years;

2. an amendment to the Company's 1996 Stock Option Plan to increase the
number of shares reserved for issuance thereunder by 950,000 shares; and

3. The ratification of the appointment of Ernst & Young LLP as independent
accountants of the Company for the fiscal year ending June 30, 1999.

Votes were cast for the election of Thomas H. Sinton as Class I director as
follows:

14,257,911 votes;
7,259 votes withheld.

The amendment to the Company's 1996 Stock Option Plan to increase the number of
shares reserved for issuance increase was approved as follows:

11,393,336 votes for;
882,407 votes against;
35,551 abstentions; and
1,953,876 broker non-votes.

The appointment of Ernst & Young LLP as auditors for fiscal year ending June 30,
1999 was approved as follows:

14,245,708 votes for;
15,227 votes against; and
4,235 abstentions.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(b) Exhibits.

See exhibit list following signature page.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: February 16, 1999

PROBUSINESS SERVICES, INC.
(Registrant)

/s/ Thomas H. Sinton
------------------
President and Chief Executive Officer

/s/ Steven E. Klei
---------------
Senior Vice President, Finance and
Chief Financial Officer

Index to Exhibits

EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- --------------- ------------- ----------------------------------------------------------------------------------

(1) 2.1 Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and
Dimension Solutions.
(1) 2.2 Stock Acquisition Agreement, dated January 1, 1997 between Registrant and
BeneSphere Administrators, Inc.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(1) 3.2 Bylaws of Registrant.
(1) 4.1 Specimen Common Stock Certificate of Registrant.
(1) 4.2 Amended and Restated Registration Rights Agreement, dated March 12, 1997, between
Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P.
and certain stockholders of Registrant.
(1) 4.3 Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon
Valley Bank and related Antidilution and Registration Rights Agreements.
(1) 4.4(a) Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast
Business Credit and related Antidilution and Registration Rights Agreement.
(1) 4.4(b) Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast
Business Credit and related Antidilution and Registration Rights Agreement.
(1) 4.5 Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between
Registrant and LINC Capital Management.
(1) 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between Registrant and
certain purchasers.
(1) 4.6(b) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and T.J. Bristow and Elizabeth S. Bristow.
(1) 4.6(c) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and SDK Incorporated.
(1) 4.6(d) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and Laurence Shushan and Magdalena Shushan.
(1) 4.7(a) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and
Louis R. Baransky.
(1) 4.7(b) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and
Ben W. Reppond.
(1) 4.8 Form of Note issued by Registrant on October 20, 1995 and December 12, 1995.
10.28 Sublease agreement, dated December 9, 1998, between Registrant and Maritz, Inc.
27.1 Financial Data Schedule.

(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-23189), declared effective on September 18, 1997.

(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (File No. 333-37129) filed with the Securities and Exchange Commission
on October 3, 1997.