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Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: September 30, 2004

For the transition period from              to             .

Commission File No: 0-31527

CERTIFIED SERVICES, INC.

(Exact name of registrant as specified in its charter)

(Registrant’s Telephone Number Including Area Code):

(954) 315-2300

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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period of 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS:

Check whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act after the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common Stock, $.001 par value, 14,919,261 shares at September 30, 2004.

Transitional Small Business Disclosure Format (Check one):    Yes  ¨    No  x

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CERTIFIED SERVICES, INC. AND SUBSIDIARIES

Form 10-Q - Quarter Ended September 30, 2004

INDEX

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The unaudited condensed consolidated balance sheet of the Registrant as of September 30, 2004, the audited consolidated balance sheet at December 31, 2003, and the unaudited condensed consolidated statements of operations for the nine month and the three month periods ended September 30, 2004 and September 30, 2003 follow. These condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to a fair statement of the Registrant’s results for the interim periods presented.

Certified Services, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See notes to the condensed consolidated financial statements.

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Certified Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

See notes to the condensed consolidated financial statements.

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Certified Services, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

See notes to the consolidated financial statements

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Certified Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

See notes to the condensed consolidated financial statements.

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Certified Services, Inc. and Subsidiaries

Supplemental Schedule of Non-Cash Investing and Financing Activities

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Capital stock accounts and additional paid in capital were adjusted in 2004 for the following:

On August 2, 2004, the Registrant purchased all of the outstanding common stock of Kenneth I. Tobey, Inc. (“KIT”). This acquisition was recognized in the following components:

Additional paid in capital was credited in 2004 for $1,207,144 and 121 shares of Preferred Series D stock were issued to Midwest Merger Management, LLC at par for insurance deposits of $1,207,145.

On April 1, 2004, the Registrant restructured a promissory note payable to a seller and the principal shareholder of America’s PEO, Adrienne Hopkins. Accordingly, the Registrant cancelled a note payable in the principal amount of $268,142 and issued a promissory note in the amount of $2,273,542.

On April 15, 2004, the Registrant completed a financing arrangement comprised of an $8,500,000 Secured Convertible Term Note. The proceeds of the note were recognized in the following components:

Capital stock accounts and additional paid in capital were adjusted in 2003 for the following:

On June 27, 2003, the Registrant purchased certain PEO operations of BACE International, Inc. (“BACE”) which included all of BACE’s issued and outstanding capital stock of ASR Acquisition, Inc. and its operating subsidiaries, Meridian Investment and Management, Inc., The ABP Group, Inc. and its operating subsidiaries, as well as certain assets of StaffAmerica, Inc. and ABP IV, Inc. The acquisition of BACE was recognized in the following components:

In 2003, notes payable for $12,800,000 were agreed to be assumed based upon representations made by the seller of financial condition and net worth in the acquisition of the PEO operations of BACE International, Inc. (“BACE”). Included in the BACE acquisition debt, was a note payable for $6,856,000, which have reduced Excess Purchase Price over Net Book Value of Assets Acquired as of December 31, 2003, as a result of pending litigation and the uncertainty of the outcome. A non-interest bearing note payable for $772,578 was assumed from BACE subsequent to closing in 2003, for which a $90,186 present value discount was taken.

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Additionally, an obligation of $4,850,000 to a related party was assumed. During the third quarter 2003, the $4,850,000 note obligation was cancelled for the removal of corresponding insurance deposits in the form of letters of credit.

Additional paid in capital was credited in 2003 for $18,999,999 and 1,520 shares of Preferred Series A stock were issued at par for insurance deposits in the form of letters of credit of $19,000,000.

Additional paid in capital was debited in 2003 for $37,719,998 and 3,018 shares of Preferred Series A stock were returned at par for the removal of all insurance deposits in the form of letters of credit of $37,720,000.

Additional paid in capital was credited in 2003 for $3,499,999 and 350 shares of Preferred Series B stock were issued at par for insurance deposits of $3,500,000.

Additional paid in capital was credited in 2003 for $359,550 and 450,000 shares of Common stock were issued at par for services rendered. As of December 31, 2003, $256,667 of these services has been deferred until 2004.

See notes to the condensed consolidated financial statements.

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Certified Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month and three month periods ended September 30, 2004, and 2003 are not necessarily indicative of the results that may be expected for the respective years ended December 31, 2004, and 2003. The unaudited condensed financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Registrant’s annual report on Form 10-K for the year ended December 31, 2003, supplemented by the notes included herein.

Segment Reporting

The Registrant operates in two reportable segments under Statement of Financial Standards (“SFAS”) 131, Disclosures about Segments of an Enterprise and Related Information.

Use of Estimates

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

Cash and Equivalents

For the purpose of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Allowance for Doubtful Accounts

The Registrant provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in the collection of all receivables. The estimated losses are based on a review of the current status of the existing receivables. The allowance for doubtful accounts is $1,110,213 and $894,526 at September 30, 2004 and December 31, 2003, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation, which includes amortization of assets under capital leases, is calculated using the straight-line method over the estimated useful lives of the assets of 5-7 years for furniture, fixtures and equipment. Repairs and maintenance expenditures which do not extend the useful lives of related assets are expensed as incurred.

Evaluation of Long-Lived Assets

Long-lived assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated undiscounted future net cash flows of the related long-lived asset.

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NOTE 2 – ACQUISITIONS

On August 2, 2004, the Registrant executed and consummated a Stock Purchase Agreement with the sole shareholders (the “Sellers”) of Kenneth I. Tobey, Inc., a Washington corporation and licensed managing general agent (“KIT”) to acquire all the Sellers’ issued and outstanding shares of capital stock of KIT (the “KIT Shares”). The purchase price of the KIT Shares was two million dollars ($2,000,000) and two hundred thousand (200,000) newly-issued shares of the Registrant’s restricted common stock, par value $.001 per share (the “Share Consideration”)(collectively, the “Purchase Price”). The Purchase Price shall be paid to the Sellers in accordance with their pro rata ownership of the KIT Shares. The Share Consideration was issued to the Sellers at the Closing. The Registrant shall make four (4) installment payments of which $300,000 was paid at the Closing, $233,333.33 on November 2, 2004, $233,333.33 on February 2, 2005 and $233,333.34 on May 2, 2005. The Registrant also executed a non-negotiable promissory note for the principal sum of one million dollars ($1,000,000), with interest at the rate of four percent (4%) per annum, payable to the Sellers over ten (10) years.

The operations of KIT are included in the accompanying consolidated statement of operations from the date of acquisition, August 2, 2004 through September 30, 2004. The pro forma unaudited consolidated statements of operations for the nine months ended September 30, 2004 and 2003 for the Registrant, including KIT, prior to August 2, 2004, appear below:

On June 27, 2003, and effective as of April 1, 2003, the Registrant, through its wholly owned subsidiary American HR Holdings, Inc. (“AmerHR”), acquired from BACE International, Inc., a non-affiliated North Carolina corporation (“BACE”), all of BACE’s professional employer, payroll and human resource services operations for an aggregate purchase price of approximately $6,255,015. The purchase price was comprised of $350,000 cash, a 4% promissory note in the principal amount of $3,500,000 payable over five years, the assumption of approximately $2,225,814 of BACE’s acquisition and capital requirement debt, and the balance represented by 650,000 shares of the Registrant’s restricted common stock valued at $.89 per share (the “BACE Shares”). The Registrant accounts for the BACE Shares as outstanding, but has not delivered the shares to BACE pending the outcome of litigation between the Registrant and BACE. Also included is an option to purchase an additional 100,000 common shares for $2 per common share if and when the Company’s common stock attains a value of at least $12 per common share.

Concurrent with the acquisition, the Company retained the former chief executive of the acquired BACE business unit as a consultant for the four year period through June 30, 2007, at an annual rate of $250,000, and agreed to continue certain co-marketing activities with BACE through September 30, 2004, at an annual cost of $900,000. Such payments have ceased in the fourth quarter of 2003. In the fourth quarter of 2003, the Registrant discovered that BACE’s undisclosed liabilities exceeded BACE’s assets in the amount of $14,300,000 and the amounts due to BACE under the acquisition debt and promissory note by approximately $3,000,000, the Registrant re-measured the nature of the liability so that $6,856,000 was re-stated as a contingent liability. As a result thereof, the Registrant ceased payments on the promissory note and the acquisition debt in the fourth quarter 2003 (See NOTE 9 – BACE International, Inc., et. al. v. Brentwood Capital Corp., et. al. and Prairie Capital Mezzanine Fund, L.P., et al. v. BACE International Corporation, et al)

The operations of American HR Holdings, Inc. are included in the accompanying consolidated statement of operations from the date of acquisition, April 1, 2003. The pro forma unaudited consolidated statements of operations for the Nine months ended September 30, 2004 and 2003 for the Registrant, including BACE, prior to April 1, 2003, appear below:

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In furtherance of the acquisition of America’s PEO Holdings, Inc. (“APEO”) and the subsequent agreement between the parties to amend the purchase price in September 2002, the Registrant agreed to restructure the consideration payable to Adrienne Hopkins (“AH”), a seller and former shareholder of APEO. Accordingly, the parties agreed to cancel a promissory note payable to AH in the amount of $268,142, and to terminate her 5 year employment contract through November 30, 2006 at an annual rate of $163,000. The Registrant issued a new non-interest bearing promissory note to AH in the amount of $2,273,142 payable in equal monthly installments of $32,140 over 96 months.

NOTE 3 – INSURANCE DEPOSITS

An integral part of the relationship with the entities participating in the Registrant’s risk management program involves the retention by those entities of security deposits, which the Registrant fulfills with cash placed in escrow, annual renewable letters of credit and other forms of collateral which amounted to $17,799,154 and $8,208,366 as of September 30, 2004 and December 31, 2003, respectively.

NOTE 4- ACCRUED EXPENSES

At September 30, 2004, and December 31, 2003 accrued expenses consisted of the following:

At September 30, 2004, and December 31, 2003, the Registrant is also the beneficiary of customers’ letters of credit aggregating $138,000 and $569,729, respectively.

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NOTE 5 – NOTES PAYABLE

At September 30, 2004 and December 31, 2003 long-term indebtedness consisted of the following:

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Unused credit available on the lines of credit was $577,000 and $0 at September 30, 2004 and December 31, 2003 respectively.

Recent negotiations with respect to the $8,500,000 secured convertible term note have provided that interest will accrue based on unrestricted loan proceeds advanced to the Registrant. At September 30, 2004, the outstanding balance due of unrestricted loan proceeds was $1,500,000 and the outstanding balance due of restricted loan proceeds was $7,000,000.

On June 27, 2003, in furtherance of its acquisition of BACE’s PEO Operations, the Registrant executed a promissory note in favor of BACE in the principal amount of $3,500,000 with interest at the rate of 4%, payable over fifty-nine (59) monthly payments (the “BACE Note”). As a result of the Registrant’s discovery that the liabilities of the PEO Operations exceeded its assets by approximately $14,300,000, and the Registrant’s contractual ability to offset any sums owed to BACE by the amount of such liabilities, the Registrant has suspended payments on the BACE Note pending a resolution of the current litigation with BACE. (See NOTE 9 - BACE International, Inc., et. al. v. Brentwood Capital Corp., et. al. and Prairie Capital Mezzanine Fund, L.P., et al. v. BACE International Corporation, et al)

On January 27, 2004, the Registrant entered into an Amended and Restated Promissory Note with Certified HR’s former shareholders pursuant to which the promissory notes the Registrant executed in connection with the acquisition of Certified HR were amended to provide fifty-five monthly payments of $38,506.72 to Certified HR’s selling shareholders. The Registrant is currently in arrears for the May 15 2004 through September 15, 2004 payments. The Registrant is currently performing a review of its acquisition of Certified HR and the financial statement representations provided therewith.

On April 15, 2004, the Registrant completed a financing arrangement with Laurus Master Fund, Ltd., a Cayman Islands corporation (“Laurus”) in the aggregate amount of $8,500,000. The financing is comprised of a three-year $8,500,000 Secured Convertible Term Note (the “Note”) with interest at the rate of prime plus two and one-half percent (2.5%) subject to reduction based upon the market price of the Registrant’s common stock par value $0.001 per share (the “Common Stock”). The fixed monthly payments of principal, interest and fees are convertible into shares of Common Stock at a conversion price of $0.95 per share. To date Laurus has converted $216,128.84 of principal and interest into 227,455 shares of the Registrant’s common stock.

NOTE 6 – COST OF SERVICES

Cost of services is comprised of the following:

Workers Compensation Cost:

Beginning July 1, 2003, the Registrant under the guidance of its Risk Manager and principal shareholder, Midwest Merger Management, LLC (“Midwest”) arranged for coverage to be placed through several admitted insurance carriers providing statutory coverage with staggered policy ending periods between December 31, 2004 and February 15, 2005 (“current risk management programs”). The carriers include Union American Insurance Co., Providence Property Casualty Co./Imperial Casualty and Indemnity Co., and Cascade National Insurance Co. The Registrant believes this arrangement has improved its spread of risk.

On November 16, 2004, the Registrant agreed to terms of workers compensation coverage with Guarantee Insurance Company (“Guarantee”) to provide first dollar coverage to the individual clients of Certified HR Services. While Guarantee will initially initiate coverage in the State of Florida, it is authorized to provide coverage in twenty states. Guarantee’s policy will commence on December 1, 2004 and expire on December 1, 2005.

The Registrant’s workers compensation cost increased $7.2 million for the Nine months ended September 30, 2004 as compared to the Nine months ended September 30, 2003. Payments to Midwest made under the Registrant’s current risk management programs are calculated on a percentage of gross payroll which sums include amounts for premiums, reported claims costs, collateral costs and its cost of administration. Payments were $39,483,966 and $32,336,307 for the nine months ended September 30, 2004 and September 30, 2003, respectively. The increases were primarily the result of the Registrant’s acquisition of the PEO operations of BACE International and premium increases. At September 30, 2004, the Registrant had collateral placed with the Carriers in the amount of $19,149,154, which consists of $17,799,154 of cash and fully funded letters of credit and a $1,350,000 surplus note against existing workplace claims of approximately $10,000,000. Pursuant to the Risk Allocation Agreement, Midwest is primarily responsible for the $10,000,000 obligation. Midwest’s failure to timely liquidate all or a portion of the estimated liability would materially impair the Registrant’s ability to receive the return of its collateral deposits with the Carriers.

Prior to July 1, 2003, the Registrant’s operating subsidiary, Certified HR Services Company. (“Certified HR”) primarily covered its workers compensation risk through Continental Casualty Company, et. al (“CNA”). Certified HR is a defendant in the litigation entitled Continental Casualty Company et al v. The Cura Group, Inc. See Note 9- Litigation. An adverse result of the litigation against Certified HR would likely have a material adverse affect upon the business of the Registrant.

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Health Benefit Plans:

The Company’s dental plans, which include both a PPO and HMO offerings’ are primarily provided by Aetna for all clients employees who elect coverage. All dental plans are subject to guaranteed cost contracts that cap the Company’s annual liability.

In addition to dental coverage, the Company offers various other guaranteed cost insurance programs to client employees such as vision care, life, accidental death and dismemberment, short-term disability and long-term disability. The Company also offers a flexible spending account for healthcare and dependent care costs.

401-(k) Plan:

The Company offers a 401 (k) retirement plan, designed to be a “multiple employer” plan under the Internal Revenue Code of 1986, as amended (the “Code”) Section 413c. This plan design enables owners of clients and highly-compensated client employees, as well as highly-compensated internal employees of the Company, to participate. Generally, employee benefit plans are subject to provisions of both the Code and the Employee Retirement Income Security Act (“ERISA”).

NOTE 7 – SEGMENT INFORMATION

Segment information is presented in accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information. This standard is based on a management approach which requires segmentation based upon our internal organization and reporting of revenue and operating income based upon internal accounting methods. Our financial reporting systems present internal profit and loss statements prepared on a basis that is consistent with U.S. GAAP. As a result, the segment information presented herein is in conformity with SFAS 131 and U.S. GAAP. Our two segments are: Certified HR Services (“CSRVHR”) and Kenneth I. Tobey, Inc. (“KIT”).

CSRVHR provides clients with a broad range of human resources (“HR”) services encompassing payroll and benefits administration, employee record keeping and regulatory compliance, health and workers’ compensation insurance programs, risk management and worksite safety management. Revenue is principally generated through fees billed to customers, which are typically small and medium-size businesses having between 10 and 500 employees.

On August 2, 2004, the Registrant executed and consummated a Stock Purchase Agreement with the sole shareholders (the

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“Sellers”) of KIT, a Washington corporation and licensed managing general agent to acquire all the Sellers’ issued and outstanding shares of capital stock of KIT. KIT provides insurance brokerage and services to a wide variety of commercial, industrial, institutional and retail customers located in the northwestern region of the United States. Commission revenue is principally generated through the negotiation and placement of insurance for its customers. The segment information below of KIT represents activity recognized from the date of acquisition, August 2, 2004 through September 30, 2004.

NOTE 8 – INCOME TAXES

The Company has available net operating loss carry forwards as to which full valuation allowance has been established which may be used to reduce Federal and State taxable income and tax liabilities in 2004 in the amount of $4,500,000 and $4,000,000, respectively. Accordingly, the provision for Federal and State income taxes for the Nine months ended September 30, 2004 is $0. The provision for Federal and State income taxes for the Nine months ended September 30, 2003 was $410,000.

NOTE 9 - LITIGATION

Prairie Capital Mezzanine Fund, L.P., et al. v. BACE International Corporation, et al.

The Registrant’s motion for leave to sue Ernst & Young, LLP, (“E&Y”) Kyle C. Mann and Robert J. Phillips, Jr., ASR’s former auditors and executives, respectively was granted by the Court on August 26, 2004. The third-party complaint alleges reckless and negligent failure to perform their professional responsibilities on the part of E&Y, that in order to sell the ASR Companies at an inflated purchase price and further alleges that Mann and Phillips provided and certified fraudulent information to E&Y.

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Continental Casualty Company et al v. The Cura Group, Inc.

In August 2004, in the action entitled Continental Casualty Company, et. al (“CNA”). v. The Cura Group, Inc. (now known as Certified HR Services Company (“Certified HR”), CNA filed an amended complaint naming the Registrant, certain of its operating subsidiaries, its principal shareholder, its current and former officers and directors, as well as other related and unrelated parties (collectively, the “Defendants”). The amended complaint alleges the Defendants collectively conspired to induce CNA to provide insurance coverage to the Registrant’s operating subsidiaries by creating several fraudulent letters of credit. The amended complaint seeks damages against the Defendants and alleges violations of the federal RICO Act and various state laws.

The Defendants have filed various motions to dismiss the amended complaint. Certified HR’s original counter-claim against CNA alleges that CNA falsely inflated premiums and collateral requirements, negligently handled and overpaid workers’ compensation claims, and defrauded Certified HR by making material misrepresentations, nondisclosures and concealing facts, under Certified HR’s policies with CNA.

NOTE 10 – SUBSEQUENT EVENT

On October 26, 2004 the Registrant completed a one year renewal of its existing revolving line of credit in the amount of $2,500,000 with Wachovia Bank. The new maturity date is September 30, 2005.

ITEM 2. Management’s Discussion and Analysis

The following discussion contains forward-looking statements regarding the Registrant, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Registrant’s actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitation, the Registrant’s ability to successfully develop new products for new markets; the impact of competition on the Registrant’s revenues, changes in law or regulatory requirements that adversely affect or preclude customers from using the Registrant’s products for certain applications, delays in the Registrant’s introduction of new products or services, and failure by the Registrant to keep pace with emerging technologies.

When used in this discussion, words such as “believes,” “anticipates,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

Management Overview

CSRVHR

During 2004 the Registrant has taken several steps to improve the quality and consistency of services offered to its customer base. In addition, the Registrant has completed other initiatives to improve the overall quality of its customer portfolio and to lower the cost structure of operations. Below is a summary of the key initiatives in these areas:

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from BACE in 2003. In many cases, the Registrant’s criteria for the timing of invoice payments were accelerated over those practices under prior ownership. As a result of its efforts, the Registrant realized a reduction in accounts receivable excluding accrued revenues for wages earned not yet paid to $ 3,535,262 at September 30, 2004 from $ 5,705,289 at December 31,2003.

The Registrant believes that the measures taken as outlined above have provided greater consistency of the products and services delivered to its client base. In addition, the Registrant has improved its pricing structure and the timing of cash flows while reducing the cost of its processing centers. Some of the initiatives outlined above have created some pressure on the Registrant’s client base and in particular those client’s acquired in the BACE acquisition. With respect to the clients acquired from BACE, the Registrant’s policies and consolidation efforts have represented measures that in some cases were materially different than those under prior ownership. As a result the Registrant has experienced some net attrition of the average number of paid worksite employees during 2004. For the first nine months of 2004 the average number of paid worksite employees was 41,508, a decrease of 3.3% over the first nine months of 2003. For the three months ended September 30, 2004 the number of average paid worksite employees was 37,547, a decrease of 24.8% over the same period one year ago. The Registrant believes that the existing base of customers at September 30, 2004 is represented by greater profitability and production of cash flows than that of the overall customer base at September 30, 2003.

Results of Operations - Nine Months Ended September 30, 2004 and September 30, 2003

The table below presents our results of operations and statistical data on a consolidated basis and for our two segments (CSRVHR and KIT) for the nine months ended September 30, 2004 and 2003:

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Revenues - The Registrant recognizes revenue under a policy in which the salaries, wages and certain payroll taxes of worksite employees will no longer be recognized as revenue components (‘net method’). The change in policy was made in response to an industry wide SEC comment letter requesting the change to the net method of revenue recognition which was based in part on the collective weight of the indicators included in Emerging Issues Task Force Issue No. 99-19, Reporting Revenues Gross as a Principal versus Net as an Agent (“EITF 99-19”). The policy has been applied to the current financial statement and retroactively applied to the previous year’s financial statement. Accordingly for the Nine months ended September 30, 2004 and September 30, 2003, respectively the Registrant netted $507,319,512 and $612,192,072 of payroll and related taxes. The policy has no effect on the gross profit, net income or shareholders’ equity amounts previously reported by the Registrant in its public filings.

The Registrant’s Florida revenues are subject to the effects of seasonality. Consequently, the operating results for the three and Nine months ended September 30, 2004 are not necessarily indicative of the Company’s overall results to be expected for the full year. The Registrant’s customer base is comprised of approximately 17% of clients in the hospitality and agriculture industries. Revenues were partially impaired by the unusually active hurricane season in Florida during the months of August and September 2004 over the same period one year ago.

CSRVHR Revenues for the Nine months ended September 30, 3004 (“9M4”) were $66,216,395 versus $56,569,560 for the Nine months ended September 30, 2003 (“9M3”) resulting in an increase of $9,646,835 or 17.1% between periods. The most significant portion of this increase was attributable to the Registrant’s acquisition of BACE during the second quarter of 2003. In addition, the Registrant has implemented increased pricing structures of its core program and service fees in 9M4. As a result, billed revenue generated from new clients added in 9M4 are averaging increases of 120% for administrative services and 101% for workers compensation fees compared to 9M3. Revenue per average paid worksite employee for the first nine months of 2004 increased to $1,595, an increase of 21.1% over the first nine months of 2003 reflecting a trend by the Registrant to improve the pricing of its products and services. Through its relationships with approximately 1,300 insurance agents nationwide, KIT placed coverage for approximately 40,000 policies through its relationships with over 35 insurance carriers. KIT places approximately 35% of its business through Cascade National Insurance Company and the balance through its other insurance carriers as discussed above.

Cost of Services – Cost of services increased to $40,024,817 during 9M4 compared to $30,362,310 during 9M3; an increase of $9,662,507 or 31.8%. This increase resulted in cost of service rising to 59.8% of revenue for 9M4 compared to 53.7% of revenue for 9M3. For the first nine months of 2004 the cost of service per average paid worksite employee was $964, an increase of 36.4% over the first nine months of 2003. The unfavorable cost increases were principally attributable to the rapidly accelerating cost of workers’ compensation programs that have become an industry-wide issue, particularly in view of the lead times required under the Registrant’s shared employment agreements before the Registrant can recoup such costs from its clients.

Operating Expenses

Operating expenses similarly rose to $25,007,671 for 9M4 compared to $24,158,422 for 9M3; an increase of $849,249 or 3.5%. The acquisition of KIT contributed $807,420 of the overall increase in 9M4. For 9M4, operating expenses per average paid worksite employee was $631 for CSRVHR, an increase of 3.4% over 9M3. In connection with the current litigation the Registrant has incurred a material increase in professional and legal fees in 9M4 compared to 9M3. Professional and legal fees increased to $2,320,224 during 9M4 compared to $1,394,311 in 9M3; an increase of $925,913 or 66.4%. The Registrant incurred a one time expense in the amount of $235,545 during 9M4 related to the relocation of its Chief Executive Officer.

Net Income – Consistent with the foregoing analysis, the Registrant reported net income of $1,873,806 or $.16 per share-basic for 9M4, compared to net income of $1,638,828 or $.19 per share for 9M3, based upon weighted average shares outstanding of 11,839,864 and 8,751,561, respectively.

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Results of Operations - Three Months Ended September 30, 2004 and September 30, 2003

The table below presents our results of operations and statistical data on a consolidated basis and for our two segments (CSRVHR and KIT) for the three months ended September 30, 2004 and 2003: