# UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-Q

ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
          of 1934

# For the quarterly
period ended September 30, 2005.

# or

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

# For the transition
period from ________________ to__________________

# Commission File No.
0-22701

# GEVITY HR, INC.(Exact Name of
Registrant as Specified in Its Charter)

|Florida
(State or other jurisdiction of incorporation or
organization)   |  | 65-0735612
(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------ |  | -----------------------------------------------
|                                                                         |  |                                                
|600 301 Blvd West
Bradenton, FL
(Address of principal executive
offices) |  | 34205
(Zip Code)                               

# (941) 741-4300(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.

Yesý    No
o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).

Yesý    No
o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).

Yeso    No
ý

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the last
practicable date.

|Class of common stock     |  | Outstanding as of October 21, 2005
|------------------------- |  | ----------------------------------
|Par value $0.01 per share |  | 27,512,300                        




---

|        | TABLE OF CONTENTS                                                                   | Page
|------- | ----------------------------------------------------------------------------------- | ----
|PART I  | FINANCIAL INFORMATION                                                               |     
|        | ITEM 1. Financial Statements                                                        | 3   
|        | Condensed Consolidated Statements of Operations for the three and nine months ended
|        | September 30, 2005 and 2004 (unaudited)                                             | 3   
|        | Condensed Consolidated Balance Sheets as of September 30, 2005                     
|        | and December 31, 2004 (unaudited)                                                   | 4   
|        | Condensed Consolidated Statements of Cash Flows                                    
|        | for the nine months ended September 30, 2005 and 2004 (unaudited)                   | 6   
|        | Notes to Condensed Consolidated Financial Statements (unaudited)                    | 7   
|        | ITEM 2. Management's Discussion and Analysis of Financial Condition                
|        | and Results of Operations                                                           | 18  
|        | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                  | 36  
|        | ITEM 4. Controls and Procedures                                                     | 36  
|PART II | OTHER INFORMATION                                                                  
|        | ITEM 1. Legal Proceedings                                                           | 36  
|        | ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds                 | 36  
|        | ITEM 6. Exhibits                                                                    | 37  
|        | SIGNATURE                                                                           | 38  

2


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# PART I. FINANCIAL
INFORMATION

# ITEM 1. Financial Statements

# GEVITY HR, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSUNAUDITED(in $000s, except
share and per share data)

|                                                       | For the Three Months
Ended
September 30, | For the Nine Months
Ended
September 30,
|------------------------------------------------------ | ---------------------------------------- | ---------------------------------------
|
|Revenues                                               |                                          |                                        
|Cost of services                                       |                                          |                                        
|                                                       |                                          |                                        
|Gross profit                                           |                                          |                                        
|                                                       |                                          |                                        
|Operating expenses:                                    |                                          |                                        
|Salaries, wages and commissions                        |                                          |                                        
|Other general and administrative                       |                                          |                                        
|Depreciation and amortization                          |                                          |                                        
|                                                       |                                          |                                        
|Total operating expenses                               |                                          |                                        
|                                                       |                                          |                                        
|Operating income                                       |                                          |                                        
|Interest income, net                                   |                                          |                                        
|Other non-operating income (expense), net              |                                          |                                        
|                                                       |                                          |                                        
|Income before income taxes                             |                                          |                                        
|Income tax provision                                   |                                          |                                        
|                                                       |                                          |                                        
|Net income                                             |                                          |                                        
|                                                       |                                          |                                        
|Non-recurring, non-cash charge attributable to the     |                                          |                                        
|acceleration of the unamortized discount associated    |                                          |                                        
|with the conversion into common stock of all shares    |                                          |                                        
|of the Series A convertible, redeemable preferred      |                                          |                                        
|stock                                                  |                                          |                                        
|Non-cash charges attributable to beneficial conversion |                                          |                                        
|feature and accretion of redemption value of Series A  |                                          |                                        
|convertible, redeemable preferred stock                |                                          |                                        
|Series A convertible, redeemable preferred stock       |                                          |                                        
|dividends                                              |                                          |                                        
|                                                       |                                          |                                        
|Net income (loss) attributable to common shareholders  |                                          |                                        
|                                                       |                                          |                                        
|                                                       |                                          |                                        
|Net income (loss) per common share:                    |                                          |                                        
|- Basic                                                |                                          |                                        
|                                                       |                                          |                                        
|                                                       |                                          |                                        
|- Diluted (reported earnings per common share          |                                          |                                        
|includes adjustments per share of ($1.14) for the      |                                          |                                        
|nine months ended September 30, 2004,                  |                                          |                                        
|substantially all attributable to the                  |                                          |                                        
|non-recurring, non-cash charge related                 |                                          |                                        
|to the acceleration of the unamortized                 |                                          |                                        
|discount associated with the conversion                |                                          |                                        
|into common stock of all shares of the                 |                                          |                                        
|Series A convertible, redeemable preferred stock)      |                                          |                                        
|                                                       |                                          |                                        
|Weighted average common shares outstanding:            |                                          |                                        
|- Basic                                                |                                          |                                        
|- Diluted                                              |                                          |                                        

See
notes to condensed consolidated financial statements.

3


---

# GEVITY HR, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED
BALANCE SHEETSUNAUDITED(in $000s)

|                                                 | September 30,
2005 | December 31,
2004
|------------------------------------------------ | ------------------ | -----------------
|ASSETS                                           |                    |                  
|Current assets:                                  |                    |                  
|Cash and cash equivalents                        |                    |                  
|Certificate of deposit                           |                    |                  
|                                                 |                    |                  
|Certificates of deposit - restricted             |                    |                  
|                                                 |                    |                  
|Marketable securities - restricted               |                    |                  
|Accounts receivable, net                         |                    |                  
|                                                 |                    |                  
|Short-term workers' compensation receivable, net |                    |                  
|                                                 |                    |                  
|Other current assets                             |                    |                  
|                                                 |                    |                  
|Total current assets                             |                    |                  
|                                                 |                    |                  
|Property and equipment, net                      |                    |                  
|                                                 |                    |                  
|Long-term marketable securities - restricted     |                    |                  
|                                                 |                    |                  
|Long-term workers' compensation receivable, net  |                    |                  
|                                                 |                    |                  
|Intangible assets, net                           |                    |                  
|                                                 |                    |                  
|Goodwill                                         |                    |                  
|                                                 |                    |                  
|Deferred tax asset, net                          |                    |                  
|                                                 |                    |                  
|Other assets                                     |                    |                  
|                                                 |                    |                  
|Total assets                                     |                    |                  
|                                                 |                    |                  

See
notes to condensed consolidated financial statements.

4


---

# GEVITY HR, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED
BALANCE SHEETS (continued)UNAUDITED(in $000s,
except share and per share data)

|                                                                      | September 30,
2005 | December 31,
2004
|--------------------------------------------------------------------- | ------------------ | -----------------
|LIABILITIES AND SHAREHOLDERS' EQUITY                                  |                    |                  
|Current liabilities:                                                  |                    |                  
|Accrued payroll and payroll taxes                                     |                    |                  
|Accrued insurance premiums, health and                                |                    |                  
|workers' compensation insurance reserves                              |                    |                  
|Customer deposits and prepayments                                     |                    |                  
|Accounts payable and other accrued liabilities                        |                    |                  
|Income taxes payable                                                  |                    |                  
|Deferred tax liability, net                                           |                    |                  
|                                                                      |                    |                  
|Dividends payable                                                     |                    |                  
|                                                                      |                    |                  
|                                                                      |                    |                  
|Total current liabilities                                             |                    |                  
|Long-term accrued workers' compensation                               |                    |                  
|insurance reserves                                                    |                    |                  
|Other long-term liabilities                                           |                    |                  
|                                                                      |                    |                  
|Total liabilities                                                     |                    |                  
|                                                                      |                    |                  
|Commitments and contingencies  (see notes)                            |                    |                  
|Shareholders' equity:                                                 |                    |                  
|Common stock, $.01 par value, 100,000,000 shares authorized,          |                    |                  
|30,902,004 and 30,408,220 issued as of September                      |                    |                  
|30, 2005 and December 31, 2004, respectively                          |                    |                  
|                                                                      |                    |                  
|Additional paid-in capital                                            |                    |                  
|                                                                      |                    |                  
|Retained earnings                                                     |                    |                  
|Deferred compensation                                                 |                    |                  
|                                                                      |                    |                  
|                                                                      |                    |                  
|Treasury stock (3,107,427 and 3,034,974 shares at cost, respectively) |                    |                  
|                                                                      |                    |                  
|                                                                      |                    |                  
|Total shareholders' equity                                            |                    |                  
|                                                                      |                    |                  
|                                                                      |                    |                  
|Total liabilities and shareholders' equity                            |                    |                  
|                                                                      |                    |                  

See
notes to condensed consolidated financial statements.

5


---

# GEVITY HR, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWSUNAUDITED(in $000s)

|                                                               | For the Nine Months Ended
September 30,
|-------------------------------------------------------------- | ---------------------------------------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                          |                                        
|Net income                                                     |                                        
|Adjustments to reconcile net income to net cash provided by    |                                        
|operating activities:                                          |                                        
|Depreciation and amortization                                  |                                        
|Deferred tax provision, net                                    |                                        
|Provision for bad debts                                        |                                        
|Other                                                          |                                        
|Changes in operating working capital:                          |                                        
|Accounts receivable, net                                       |                                        
|Other current assets                                           |                                        
|Workers' compensation receivable, net                          |                                        
|Deferred tax asset, net                                        |                                        
|Other assets                                                   |                                        
|Accrued insurance premiums, health and                         |                                        
|workers' compensation insurance reserves                       |                                        
|Accrued payroll and payroll taxes                              |                                        
|Accounts payable and other accrued liabilities                 |                                        
|Income taxes payable                                           |                                        
|Customer deposits and prepayments                              |                                        
|Long-term accrued workers' compensation                        |                                        
|insurance reserves                                             |                                        
|Other long-term liabilities                                    |                                        
|                                                               |                                        
|Net cash provided by operating activities                      |                                        
|                                                               |                                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                          |                                        
|Purchases of marketable securities and certificates of deposit |                                        
|Maturities of marketable securities and certificates of        |                                        
|deposit                                                        |                                        
|Assets acquired in business acquisitions                       |                                        
|Capital expenditures                                           |                                        
|                                                               |                                        
|Net cash used in investing activities                          |                                        
|                                                               |                                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                          |                                        
|Payment of cash dividends to shareholders                      |                                        
|Proceeds of credit line borrowing                              |                                        
|Payments on credit line borrowing                              |                                        
|Proceeds from secondary stock offering                         |                                        
|Debt issuance costs                                            |                                        
|Purchase of treasury stock                                     |                                        
|Proceeds from issuance of common shares, net                   |                                        
|                                                               |                                        
|Net cash (used in) provided by financing activities            |                                        
|                                                               |                                        
|Net increase in cash and cash equivalents                      |                                        
|Cash and cash equivalents - beginning of period                |                                        
|                                                               |                                        
|                                                               |                                        
|Cash and cash equivalents - end of period                      |                                        
|                                                               |                                        
|Supplemental disclosure of cash flow information:              |                                        
|Income taxes paid                                              |                                        
|                                                               |                                        
|                                                               |                                        
|Interest paid                                                  |                                        
|                                                               |                                        

See
notes to condensed consolidated financial statements.

6


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# GEVITY HR, INC. AND
SUBSIDIARIESNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(in $000s,
except share and per share data)

# 1.       GENERAL

The
accompanying unaudited condensed consolidated financial statements of Gevity HR, Inc. and
subsidiaries (collectively, the Company or Gevity) have been
prepared in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form 10-Q. These
financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2004, as filed with the Securities and Exchange Commission
(the Form 10-K). These financial statements reflect all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of operations and
cash flows for the interim periods presented.

The
Companys significant accounting policies are disclosed in Note 1 of the
Companys consolidated financial statements contained in the Form 10-K. The
Companys critical accounting estimates are disclosed in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, in the Form
10-K. On an ongoing basis, the Company evaluates its policies, estimates and assumptions,
including those related to revenue recognition, workers compensation
receivable/reserves, intangible assets, medical benefit plan liabilities, state
unemployment taxes, allowance for doubtful accounts, and deferred taxes. Since the date of
the Form 10-K, there have been no material changes to the Companys significant
accounting policies and critical accounting estimates.

Certain
prior period amounts have been reclassified to conform to current period presentation.

Significant Accounting
Policies

Stock-Based
Compensation  In December 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 148, Accounting for Stock-Based CompensationTransition and DisclosureAn
Amendment of SFAS No. 123. This statement provides alternative methods of transition
for a voluntary change to the fair-value based method of accounting for stock-based
employee compensation. This statement also amends the disclosure requirements of SFAS No.
123, Accounting for Stock-Based Compensation,and Accounting Principles Board
(APB) Opinion No. 28, Interim Financial Reporting, to require prominent
disclosures in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on reported
results. The Company implemented SFAS No. 148 effective January 1, 2003 regarding
disclosure requirements for condensed financial statements for interim periods.

As
permitted by SFAS No. 123, and as amended by SFAS No. 148, the Company has elected to
continue to account for its stock option plans in accordance with the intrinsic value
method prescribed by APB Opinion No. 25 and related interpretations. Intrinsic value per
share is the amount by which the market price of the underlying stock exceeds the exercise
price of the stock option or award on the measurement date, generally the date of grant.
This has resulted in compensation expense recognized only with respect to awards of
restricted stock under the Companys stock compensation plans (see Note 9). Had
compensation cost for the stock options granted under the plans been determined based on
the fair value at the grant date consistent with the method prescribed by SFAS No. 123,
the Companys net income and earnings per share would have been reduced to the pro
forma amounts indicated below:

7


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|                                  |  | For the Three Months Ended | For the Nine Months Ended
|--------------------------------- |  | -------------------------- | -------------------------
|
|
|Net income                        |  |                            | As reported              
|Add: Total stock-based            |  |                            |                          
|compensation included in          |  |                            |                          
|net income, net of tax            |  |                            |                          
|effect                            |  |                            | As reported              
|Less: Total stock-based           |  |                            |                          
|employee compensation             |  |                            |                          
|expense determined under          |  |                            |                          
|fair value method for all         |  |                            |                          
|awards, net of  tax effect        |  |                            | Pro forma                
|                                  |  |                            |                          
|Net income                        |  |                            | Pro forma                
|                                  |  |                            |                          
|Basic earnings (loss) per share   |  |                            | As reported              
|                                  |  |                            | Pro forma                
|                                  |  |                            |                          
|Diluted earnings (loss) per share |  |                            | As reported              
|                                  |  |                            | Pro forma                

In
December 2004, FASB issued Statement No. 123 (Revised 2004), Share-Based Payment
(SFAS No. 123(R)). SFAS No. 123(R) requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements over the period
during which an employee is required to provide service in exchange for the award. SFAS
No. 123(R) establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value based
method in accounting for share-based transactions with employees. SFAS No. 123(R) also
amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be
reported as cash inflow from financing activities rather than as a reduction of taxes
paid. On April 14, 2005, the effective date of SFAS No. 123(R) was amended by the
Securities and Exchange Commission and is effective for the Company beginning January 1,
2006.

The
Company is evaluating the requirements of SFAS No. 123(R) and expects that its
implementation will have a significant impact on the Companys consolidated results
of operations and earnings per share. The impact of the implementation of SFAS No.123(R)
cannot be predicted at this time because it will depend on levels of share-based payments
granted in the future. The Company will be required to expense the fair value of its stock
option grants and stock purchases under its employee stock purchase plan rather than the
current practice of disclosure of their impact on its consolidated net income within the
footnotes. The amounts currently disclosed within the Companys footnotes are not
necessarily indicative of the amounts that will be expensed upon the implementation of
SFAS No.123(R). Compensation expense calculated under SFAS No. 123(R) may differ
from amounts currently disclosed within the Companys footnotes based on changes in
the fair value of its common stock, changes in the number of options granted or the terms
of such options, the treatment of tax benefits and changes in interest rates or other
factors. In addition, upon implementation of SFAS No. 123(R), the Company may choose to
use a different valuation model from that currently used to value the compensation expense
associated with employee stock options.

# 2.       MARKETABLE SECURITIES
 RESTRICTED

At
September 30, 2005 and December 31, 2004, the Companys investment portfolio
consisted of restricted money market funds classified as available-for-sale and restricted
mutual funds classified as trading.

8


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Restricted
money market funds relate to collateral held in connection with the Companys
workers compensation programs and collateral held in connection with the
Companys general insurance programs. These securities are recorded at fair value.
The interest earned on these investments is recognized as interest income on the
Companys condensed consolidated statements of operations.

Restricted
marketable securities designated as trading are mutual funds held in a rabbi trust in
connection with a non-qualified deferred compensation plan. These securities are recorded
at fair value. Realized and unrealized holding gains and losses related to these
investments, as well as the offsetting compensation expense, are recognized in net income
as they occur.

The
fair value of the marketable securities portfolio by type and classification as of
September 30, 2005 and December 31, 2004 is as follows:

|                                                    | Amortized
Cost | Gross
Unrealized
Gain | Estimated
Fair Value
|--------------------------------------------------- | -------------- | --------------------- | --------------------
|
|
|As of September 30, 2005:                           |                |                       |                     
|Short-term                                          |                |                       |                     
|Money market - restricted                           |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Total short-term marketable securities - restricted |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Long-term                                           |                |                       |                     
|Money market - restricted                           |                |                       | $                   
|Mutual funds - trading - restricted                 |                |                       |                     
|                                                    |                |                       |                     
|Total long-term marketable securities - restricted  |                |                       | $                   
|                                                    |                |                       |                     
|As of December 31, 2004:                            |                |                       |                     
|Short-term                                          |                |                       |                     
|Money market - restricted                           |                |                       | $                   
|                                                    |                |                       |                     
|Total short-term marketable securities - restricted |                |                       | $                   
|                                                    |                |                       |                     
|Long-term                                           |                |                       |                     
|Money market - restricted                           |                |                       | $                   
|Mutual funds - trading - restricted                 |                |                       |                     
|                                                    |                |                       |                     
|Total long-term marketable securities - restricted  |                |                       | $                   
|                                                    |                |                       |                     

For
the three and nine months ended September 30, 2005 and September 30, 2004, there were no
realized gains or losses from the sale of marketable securities. There were no unrealized
gains or losses on marketable securities as of September 30, 2005 and December 31, 2004.

# 3. ACCOUNTS RECEIVABLE

At
September 30, 2005 and December 31, 2004, accounts receivable from clients consisted of
the following:

|                                      | September 30,
2005 | December 31,
2004
|------------------------------------- | ------------------ | -----------------
|
|
|Billed to clients                     |                    |                  
|                                      |                    |                  
|Unbilled revenues                     |                    |                  
|                                      |                    |                  
|                                      |                    |                  
|Less: Allowance for doubtful accounts |                    |                  
|                                      |                    |                  
|Total                                 |                    |                  
|                                      |                    |                  

9


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The
Company establishes an allowance for doubtful accounts based upon managements
assessment of the collectibility of specific accounts and other potentially uncollectible
amounts. The Company reviews its allowance for doubtful accounts on a quarterly basis.

# 4.       WORKERS
COMPENSATION RECEIVABLE/ RESERVES

The
Company has had a loss sensitive workers compensation insurance program since
January 1, 2000. The program is insured by CNA for the 2000, 2001 and 2002 program years.
The program is currently insured by AIG and includes coverage for the 2003, 2004 and 2005
program years. In states where private insurance is not permitted, client employees are
covered by state insurance funds.

The
insured loss sensitive programs provide insurance coverage for claims incurred in each
program year but which may be paid out over future periods dependent upon the nature and
extent of the worksite injury. The fully insured loss sensitive programs provide for a
sharing of risk between the insurance companies and the Company whereby the Company is
responsible for paying, through the respective insurance company, the first $1.0 million
per occurrence of claims for program years 2000 through 2003 and $2.0 million per
occurrence of claims for program years 2004 and 2005, and the respective insurance company
is responsible for amounts in excess of the Companys per occurrence amount. For the
2005 and 2004 program years, the Company purchased additional insurance coverage from
Munich American Reassurance Company for the layer of claims between $0.750 million and
$2.0 million per occurrence for 2005 and for the layer of claims between $1.0 million and
$2.0 million per occurrence for 2004. The workers compensation insurance programs
are fully insured policies written by the respective carriers. If the Company were to fail
to make premium payments to the carriers as scheduled, then the carriers would be
responsible for the payment of all losses under the terms of the policy.

For
program years 2000 through 2003, the Company obtained aggregate stop-loss insurance
coverage through CNA and AIG, as applicable, further limiting its ultimate liability. The
stop loss coverage provided by CNA for the 2000-2002 program years limits the
Companys aggregate exposure for claims below the $1.0 million per occurrence level
to 130% of the expected losses as determined by CNA. The stop loss coverage provided by
AIG for the 2003 program year limits the Companys aggregate exposure for claims
below the $1.0 million per occurrence level to 175% of the expected losses as determined
by AIG. The Company did not purchase aggregate stop loss coverage for the 2005 and 2004
program years as the Company believed that the risk of losses exceeding the proposed
aggregate stop loss level was remote.

Effective
September 30, 2004, the Company entered into agreements with AIG and CNA whereby the
Company paid $102,000 to purchase insurance from AIG to cover the Companys
workers compensation claims liability up to the $1.0 million per occurrence
deductible level for program years 2000, 2001 and 2002. CNA remains the insurer on the
underlying claims for these policy years. The insurance purchased from AIG also provides
the Company greater protection relative to the aggregate insurance stop-loss coverage by
effectively reducing the Companys maximum exposure for claims that fall below the
$1.0 million deductible level from 130% of expected total losses to approximately 117% of
expected total losses over the life of the 2000, 2001 and 2002 policies. The insurance
purchased from AIG was funded substantially through the release by CNA to the Company of
restricted marketable securities of approximately $76,500 previously pledged to CNA as
collateral and the release by CNA to the Company of premium payments and deposits
approximating $24,700 previously paid to CNA. Of the total premium paid by the Company to
AIG, AIG deposited $94,400 into an interest bearing loss fund account to fund all claims
under the program up to AIGs aggregate limit. Interest on the loss fund (which will
be reduced as claims are paid out over the life of the policy) will accrue to the benefit
of the Company at a fixed annual rate of 3.0% until all claims are closed. AIG will return
to the Company that portion of the loss fund account, if any, not used or retained to pay
claims, including interest earned, at intervals of 36, 60, 84 and 120 months from the date
of the inception of the agreement. The maximum return amount, which is based upon a
pre-determined formula, at 36 and 60 months is limited to $5,500 each, with no limit as to
the return amount at 84 and 120 months. This transaction did not have an impact on the
overall loss estimates associated with these policy years. Benefits to the Company include
a contractual arrangement for the return of excess premium payments (the original
agreement with CNA did not provide specific guidelines for the return of excess
collateral) and the expected reduction of future administrative expenses associated with
the 2000, 2001 and 2002 program years. On August 9, 2005, the agreement between AIG and
the Company was amended to provide that of the $94,400 paid by the Company to AIG, $88,900
would reside in an interest bearing loss fund held by AIG and $5,500 would reside in an
interest bearing escrow account held by CNA. The AIG loss fund bears an interest rate of
3.0% and the escrow account bears an interest rate based upon the rate as provided for in
the facility to which it will be deposited into. Any agreed upon reduction in the escrow
account between CNA and AIG will be deposited into the AIG loss fund account.

10


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With
respect to the 2003, 2004 and 2005 policy years, the Company, through its wholly-owned
Bermuda-based insurance subsidiary, remits premiums to AIG to cover AIGs estimates
of claims related to the first $2.0 million ($1.0 million for policy year 2003) per
occurrence. AIG deposits the funds into an interest bearing loss fund account to fund all
claims up to the $2.0 million per occurrence amount ($1.0 million for policy year 2003).
Interest on the loss fund (which will be reduced as claims are paid out over the life of
the policy) will accrue to the benefit of the Company at fixed annual rates. Under the
2003 program year, the Company paid $85,000 of such premium and is guaranteed to receive a
2.42% per annum fixed return on $73,500 and 1.85% on $11,500 so long as the program and
the interest accrued under the program remain with AIG for at least 7 years. Under the
2004 program year, the Company paid $111,400 of such premiums and is guaranteed to receive
a 2.92% per annum fixed return so long as the program and the related interest accrued
under the program remain with AIG for a 10-year period. Under the 2005 program year, the
Company will pay $100,000 of such premiums and is guaranteed to receive a 3.75% per annum
fixed return so long as the program and the related accrued interest under the program
remain with AIG for a 10-year period. If any of the programs are terminated early, the
respective interest rate for the terminated program is adjusted downward based upon a
sliding scale. All program years provide for an initial premium true-up eighteen months
after the policy inception and annually thereafter. The true-up is based upon a
pre-determined loss factor times the amount of incurred claims as of the date of the
true-up.

Under
the 2003 program, AIG required the Company to provide $17,000 of collateral related to
premium payment credit risk. The required collateral was provided in the form of cash and
short-term investments placed into a trust account. With respect to the 2004 program year
the Company reached an agreement with AIG whereby the $17,000 of collateral related to
premium payment credit risk for the 2003 program would serve as collateral for the 2004
program. During the third quarter of 2004, AIG released approximately $13,600 of this
collateral to the Company in connection with the premium audit and annual loss provision
adjustment for the 2003 program year. The remaining AIG workers compensation
collateral is included with long-term marketable securities  restricted as of
September 30, 2005 and December 31, 2004. No additional collateral was required by AIG for
the 2005 program year.

During
the third quarter of 2005, AIG released approximately $53,904 of cash from the 2003, 2004
and 2005 loss fund accounts, collectively, in connection with premium audits and annual
loss provision adjustments for those policy years.

At
least annually, the Company obtains an independent actuarially-determined calculation of
the estimated cost of claims incurred based on the Companys current and historical
loss development trends, which is used in the Companys development of overall loss
estimates related to each open policy year. The estimated cost of the claims calculated
may be revised during each year by the Company and its independent actuary based on
developments relating to the actual claims incurred. A certain amount of judgment is used
in this estimation process by both the independent actuary and the Company.

To
the extent that the premium payments to the carriers and the related accrued interest for
the Companys per occurrence responsibility of claims less claim payments made is
greater than (less than) the present value of the remaining claim liability estimate
accrued to date, a receivable (liability) is recorded. If the actual cost of the claims
incurred is higher than the estimates determined by the Company and its independent
actuary, then the accrual rate used to determine workers compensation costs could
increase. If the actual cost of the claims incurred is lower than the estimates determined
by the Company and its independent actuary, then the accrual rate used to determine
workers compensation costs could decrease.

11


---

At
September 30, 2005, the Company lowered its ultimate loss estimates for the 2003 and 2004
program years based upon continued favorable claims development that occurred during the
nine months ended September 30, 2005. This revision resulted in a net reduction of
workers compensation expense of approximately $7,777 ($4,938 net of related taxes)
and a related increase in long-term workers compensation receivable, net, as of
September 30, 2005.

The
Company accrues for workers compensation costs based upon premiums paid, estimated
total costs of claims to be paid by the Company that fall within the policy deductible,
the administrative costs of the programs, return on investment premium dollars paid and
the discount rate used to determine the net present value of the expected future claim
payments to be made under the programs. At September 30, 2005 and December 31, 2004 the
weighted average discount rate used to calculate the present value of the claim liability
was 3.08% and 2.83% respectively. Premium payments made to AIG during 2005, 2004 and 2003
were in excess of the present value of the estimated claim liabilities. This resulted in a
workers compensation receivable, net, at September 30, 2005 and December 31, 2004 of
$101,141 and $112,715, respectively, of which $14,048 and $33,405 was classified as
short-term at September 30, 2005 and December 31, 2004, respectively. This receivable
represents a significant concentration of credit risk for the Company.

# 5.       INTANGIBLE ASSETS

At
September 30, 2005 and December 31, 2004, intangible assets consisted of the following:

|                                    | September 30,
2005 | December 31,
2004
|----------------------------------- | ------------------ | -----------------
|
|
|Purchased client service agreements |                    |                  
|                                    |                    |                  
|Accumulated amortization            |                    |                  
|                                    |                    |                  
|                                    |                    |                  
|Intangible assets, net              |                    |                  
|                                    |                    |                  

Amortization
expense for the three months ended September 30, 2005 and 2004 was $2,410 and $2,381,
respectively, and for the nine months ended September 30, 2005 and 2004 was $7,229 and
$5,221, respectively. Estimated amortization expense for the remainder of 2005 and for
each of the next four succeeding years is $2,409, $9,638, $9,638, $9,638 and $1,581,
respectively.

# 6.       HEALTH BENEFITS

Blue
Cross Blue Shield of Florida (BCBSF) is the Companys primary healthcare
provider in Florida, delivering medical care benefits to approximately 22,000
Florida-based client employees. The Companys policy with BCBSF is a minimum premium
policy expiring September 30, 2008. Pursuant to this policy, the Company is obligated to
reimburse BCBSF for the cost of the claims incurred by participants under the plan, plus
the cost of plan administration. The administrative costs per covered client employee
associated with this policy are specified by year and the aggregate stop-loss coverage is
provided to the Company at the level of 110% of projected claims for the plan year
beginning October 1, 2005.

The
Company is required to pre-fund the estimated monthly expenses and claim liability charges
of the plan by the first of each calendar month. The estimated monthly expenses are based
upon the Minimum Premium Rate and the Annual Excess liability rate, as set forth in the
agreement, times the number of insureds. The estimated claim liability charge is based
upon expected claims for the annual contract period divided by 12. Differences between the
pre-funded amounts and actual amounts subsequently determined shall be settled in the
following month.

12


---

The
Companys obligation to BCBSF may require an Irrevocable Letter of Credit
(LOC) in favor of BCBSF if a certain Coverage Ratio, as set forth in the
agreement, is not maintained. The Coverage Ratio is calculated quarterly. Calculation of a
Coverage Ratio outside of the minimum requirement will require an LOC valued at up to two
months of projected claims. As of September 30, 2005, the minimum coverage ratio was met
and no LOC was required. Under the Companys previous agreement with BCBSF, a $6,000
certificate of deposit was pledged as collateral for a standby LOC. This collateral was
released by BCBSF and is no longer classified as restricted in the Companys
consolidated balance sheet as of September 30, 2005.

Aetna
is the primary medical care benefits provider for approximately 28,000 client employees
throughout the remainder of the country. The Companys 2005 policy with Aetna
provides for an HMO and PPO offering to plan participants. The Aetna HMO medical benefit
plans are subject to a guaranteed cost contract that caps the Companys annual
liability. The Aetna PPO medical benefit plan is a retrospective funding arrangement
whereby the PPO plan is subject to a 7.5% additional premium if actual claims are greater
than projected at the inception of the policy year (maximum charge per year is 7.5% with
carryover into subsequent years of amounts that exceed 7.5%). Beginning October 1, 2005,
the Aetna additional premium has been reduced to 5.0%.

The
Company provides coverage under various regional medical benefit plans to approximately
2,000 client employees in various areas of the country. Included in the list of medical
benefit plan providers are Kaiser Foundation Health Plan, Inc. in California, Health
Partners (Minnesota) in Minnesota, Harvard Pilgrim Healthcare in Massachusetts and Capital
Health Plans in the Tallahassee, Florida region. These regional plans are subject to fixed
cost contracts that cap the Companys liability.

The
Companys dental plans, which include both a PPO and HMO offering, are primarily
provided by Aetna for all client 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 fixed 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, dependent care and transportation costs.

Beginning
October 1, 2004, part-time employees of clients were eligible to enroll in limited benefit
programs from Star HRG. These plans include fixed cost sickness, accident and dental
insurance programs, and a vision discount plan.

Included
in accrued insurance premiums, health and workers compensation insurance reserves at
September 30, 2005 and December 31, 2004 are $14,638 and $18,831, respectively, of
short-term liabilities related to the Companys healthcare plans. Of these amounts,
$14,145 and $14,580, respectively, represent an accrual for the estimate of claims
incurred but not reported at September 30, 2005 and December 31, 2004. There were no
long-term liabilities related to the Companys health benefit plans at September 30,
2005 and December 31, 2004.

Health
benefit reserves are based primarily upon an annual independent actuarial estimate of
claims incurred but not reported and for claims reported but not yet paid at year end, and
a rollforward analysis by the Company at interim dates. The calculation of these reserves
is based upon a number of factors, including current and historical claims payment
patterns and medical trend rates.

13


---

# 7.       REVOLVING CREDIT
FACILITY

The
Company maintains a $35,000 unsecured credit agreement with Bank of America, N.A. Certain
of the Companys subsidiaries named in the credit agreement have guaranteed the
obligations under the credit agreement. The credit agreement provides for revolving
borrowings in an amount not to exceed $35,000 and has a three-year term that expires on
March 26, 2007. Loan advances under the agreement bear an interest rate equal to the
applicable margin (based upon a ratio of total debt to EBITDA, as defined in the credit
agreement), plus one of the following indexes: (i) 30-day LIBOR and (ii) Bank of America,
N.A. prime rate. Up to $7,000 of the loan commitment can be made through letters of credit
issued by Bank of America. A fee, determined by reference to the applicable margin, will
be charged on the aggregate stated amount of each outstanding letter of credit. A fee of
50 basis points per annum is charged for any unused portion of the loan commitment. There
were no outstanding advances under the credit agreement at September 30, 2005 or December
31, 2004. The Company recorded $61 and $61 of interest expense for the three months ended
September 30, 2005 and 2004, respectively, and $171 and $216 for the nine months ended
September 30, 2005 and 2004, respectively, primarily related to the amortization of loan
costs and unused loan commitment fees. The credit agreement includes certain financial
maintenance requirements and affirmative and negative covenants, all of which the Company
was in compliance with at September 30, 2005.

# 8.       COMMITMENTS AND
CONTINGENCIES

Litigation

The
Company is a party to certain pending claims that have arisen in the normal course of
business, none of which, in the opinion of management, is expected to have a material
adverse effect on the consolidated financial position or results of operations if
adversely resolved against the Company. However, the defense and settlement of such claims
may impact the future availability, retention amounts and cost to the Company of
applicable insurance coverage.

From
time to time, the Company is made a party to claims based upon the acts or omissions of
its clients and its clients employees and vigorously defends against such claims.

Regulatory Matters

The
Companys employer and health care operations are subject to numerous federal, state
and local laws related to employment, taxes and benefit plan matters. Generally, these
laws affect all U.S. companies; however, the rules and regulations that govern
professional employer organizations constitute an evolving area due to uncertainties
resulting from the non-traditional employment relationship between the professional
employer organization, the client and the client employees. Many federal and state laws
relating to tax and employment matters were enacted before the widespread existence of
professional employer organizations and do not specifically address the obligations and
responsibilities of these professional employer organization relationships. If the
Internal Revenue Service concludes that professional employer organizations are not
employers of certain client employees for purposes of the Internal Revenue
Code of 1986, as amended, the tax qualified status of the Companys defined
contribution retirement plans in effect prior to April 1, 1997 could be revoked, its
cafeteria benefits plan may lose its favorable tax status and the Company, as defined, may
no longer be able to assume a clients federal employment tax withholding
obligations, and certain defined employee benefit plans maintained by the Company may be
denied the ability to deliver benefits on a tax-favored basis as intended.

# 9.       EQUITY

Employee Stock Option
Plans

During
the nine months ended September 30, 2005 and 2004, the Company issued 376,190 and 585,478
shares, respectively, of its common stock to directors, officers and employees of the
Company under the Companys stock option plans for aggregate proceeds of
approximately $2,449 and $2,186, respectively, including 8,716 shares of its common stock
received in lieu of cash for the exercise of stock options during the nine months ended
September 30, 2005. The shares received by the Company were valued at approximately $161
(which was calculated based upon the market value of the stock on the date of exercise)
and are included as treasury shares as of September 30, 2005.

14


---

During
the nine months ended September 30, 2005, the Company granted 92,594 shares of restricted
common stock under its 2002 Stock Incentive Plan and 25,000 shares of restricted common
stock under its 2005 Equity Incentive Plan to certain employees of the Company. Under the
terms of the grants, the recipients are entitled to dividends declared, if any, and voting
rights for each share of restricted stock granted. The intrinsic value of the grants,
based upon the market value of the stock on the date of the grants, was approximately
$2,443. The value of the grants were recorded in equity as deferred compensation and are
being amortized to compensation expense over the vesting period of 4 years. For the three
and nine months ended September 30, 2005, the Company recognized related compensation
expense of approximately $140 and $310, respectively ($89 and $203, net of related income
taxes, respectively). As of September 30, 2005, 112,519 shares of restricted stock remain
outstanding and 5,075 shares were forfeited and included as treasury shares. There was no
restricted stock outstanding at December 31, 2004 and no compensation expense related to
restricted stock for the three and nine months ended September 30, 2004.

Employee Stock Purchase
Plan

During
the nine months ended September 30, 2005 and 2004, 23,238 and 27,777 shares, respectively,
of the Companys common stock (from treasury) were sold to employees participating in
the Companys employee stock purchase plan. Proceeds from the employee stock purchase
were approximately $400 for the nine months ended September 30, 2005 and $366 for the nine
months ended September 30, 2004.

Stock Repurchase Program

On
September 27, 2005, the Companys board of directors authorized the repurchase of up
to $50,000 of the Companys common stock. Stock repurchases under this program may be
made at such times and in such amounts as the Company deems appropriate, based on a
variety of factors including price, corporate and regulatory requirements and overall
market conditions. As of September 30, 2005, the Company had purchased 81,900 shares of
its common stock at a cost of $2,220. The repurchased shares are included in treasury
shares at September 30, 2005.

The
Company purchased additional shares of its common stock during October 2005. As of October
27, 2005, the Company has purchased a total of 459,238 shares at a cost of $12,110 since
the inception of the repurchase program.

# 10.       INCOME TAXES

The
Company records income tax expense using the asset and liability method of accounting for
deferred income taxes. Under such method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the
financial statement carrying values and the income tax bases of the Companys assets
and liabilities. The Companys effective tax rate provides for both federal and state
income taxes. For the three and nine months ended September 30, 2005 the Companys
effective tax rate was 36.5% and 34.4%, respectively, and for the three and nine months
ended September 30, 2004, the Companys effective rate was 33.0% for both periods.

During
the third quarter of 2005, the Company reclassified approximately $9,786 of its deferred
tax assets against its current tax liability in connection with the filing of its 2004
income tax returns.

# 11.       EARNINGS PER SHARE
(EPS)

The
reconciliation of net income attributable to common shareholders and shares outstanding
for the purposes of calculating basic and diluted earnings per share for the three and
nine months ended September 30, 2005 and 2004 is as follows:

15


---

|                                               | Net Income
(Numerator) | Shares
(Denominator) | Per Share
Amount
|---------------------------------------------- | ---------------------- | -------------------- | ----------------
|
|
|For the Three Months Ended September 30, 2005: |                        |                      |                 
|Basic EPS:                                     |                        |                      |                 
|Net income                                     |                        |                      | $               
|                                               |                        |                      |                 
|Effect of dilutive securities:                 |                        |                      |                 
|Options to purchase common stock               |                        |                      |                 
|Restricted stock                               |                        |                      |                 
|                                               |                        |                      |                 
|Diluted EPS:                                   |                        |                      |                 
|Net income                                     |                        |                      | $               
|                                               |                        |                      |                 

For
the three months ended September 30, 2005, 38,300 options to purchase common stock,
weighted for the portion of the period they were outstanding, were excluded from the
diluted earnings per share computation because the exercise price of the options was
greater than the average price of the common stock.

|                                               | Net Income
(Numerator) | Shares
(Denominator) | Per Share
Amount
|---------------------------------------------- | ---------------------- | -------------------- | ----------------
|
|
|For the Three Months Ended September 30, 2004: |                        |                      |                 
|Basic EPS:                                     |                        |                      |                 
|Net income                                     |                        |                      | $               
|                                               |                        |                      |                 
|Effect of dilutive securities:                 |                        |                      |                 
|Options to purchase common stock               |                        |                      |                 
|                                               |                        |                      |                 
|Diluted EPS:                                   |                        |                      |                 
|Net loss attributable to common shareholders   |                        |                      | $               
|                                               |                        |                      |                 

For
the three months ended September 30, 2004, 712,987 options to purchase common stock,
weighted for the portion of the period they were outstanding, were excluded from the
diluted earnings per share computation because the exercise price of options was greater
than the average price of common stock.

|                                              | Net Income
(Numerator) | Shares
(Denominator) | Per Share
Amount
|--------------------------------------------- | ---------------------- | -------------------- | ----------------
|
|
|For the Nine Months Ended September 30, 2005: |                        |                      |                 
|Basic EPS:                                    |                        |                      |                 
|Net income                                    |                        |                      | $               
|                                              |                        |                      |                 
|Effect of dilutive securities:                |                        |                     
|Options to purchase common stock              |                        |                      |                 
|Restricted stock                              |                        |                      |                 
|                                              |                        |                      |                 
|Diluted EPS:                                  |                        |                      |                 
|Net income                                    |                        |                      | $               
|                                              |                        |                      |                 

For
the nine months ended September 30, 2005, 871,170 options to purchase common stock,
weighted for the portion of the period they were outstanding, were excluded from the
diluted earnings per share computation because the exercise price of the options was
greater than the average price of the common stock.

16


---

|                                                                   | Net Income
(Numerator) | Shares
(Denominator) | Per Share
Amount
|------------------------------------------------------------------ | ---------------------- | -------------------- | ----------------
|
|
|For the Nine Months Ended September 30, 2004:                      |                        |                      |                 
|Basic EPS:                                                         |                        |                      |                 
|Net income                                                         |                        |                      | $               
|Non-recurring, non-cash charge attributable to the acceleration of |                        |                      |                 
|the unamortized discount associated with the conversion into       |                        |                      |                 
|common stock of all shares of the Series A convertible,            |                        |                      |                 
|redeemable preferred stock                                         |                        |                      |                 
|Non-cash charges attributable to beneficial conversion             |                        |                      |                 
|feature and accretion of redemption value of Series A              |                        |                      |                 
|convertible, redeemable preferred stock                            |                        |                      |                 
|Series A convertible, redeemable preferred stock dividends         |                        |                      |                 
|                                                                   |                        |                      |                 
|Net loss attributable to common shareholders                       |                        |                      |                 
|                                                                   |                        |                      |                 
|Effect of dilutive securities:                                     |                        |                     
|Options to purchase common stock                                   |                        |                      |                 
|Series A convertible, redeemable preferred stock                   |                        |                      |                 
|                                                                   |                        |                      |                 
|Diluted EPS:                                                       |                        |                      |                 
|Net loss attributable to common shareholders                       |                        |                      | $               
|                                                                   |                        |                      |                 
|                                                                   |                        |                      |                 

For
the nine months ended September 30, 2004, inclusion of stock options to purchase 3,851,341
shares of common stock at various prices and inclusion of the Series A convertible,
redeemable preferred stock (Preferred Stock) on an if-converted
basis for the period it was outstanding would have been anti-dilutive.

17


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# ITEM 2.  Management's
Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion contains forward-looking statements. The Companys actual
results could differ materially from those discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include those discussed below,
elsewhere in this Form 10-Q and in the Companys Form 10-K. See Cautionary Note
Regarding Forward-Looking Statements included herein. The following discussion
should be read in conjunction with the Companys condensed consolidated financial
statements and notes thereto included elsewhere in this filing and in conjunction with the
Form 10-K. Historical results are not necessarily indicative of trends in operating
results for any future period.

In
the following analysis of financial information, data derived from the consolidated
financial information is disclosed that is not presented in the Companys financial
statements prepared in accordance with U.S. generally accepted accounting principles
(GAAP). Certain of this information is considered to be non-GAAP
financial measures under the U.S. Securities and Exchange Commission rules. See
Non-GAAP Financial Information included herein for a supplemental explanation
and reconciliation of this information.

# OVERVIEW AND INTRODUCTION

Gevity
is a leading U.S. provider of a comprehensive, fully integrated employee management
solution to small- and medium-sized businesses. The Companys solution allows it to
effectively become the insourced human resource department for its clients. Gevity creates
value for its clients by helping them achieve workforce alignment, obtain administrative
relief and access business protection services.

| |  | Workforce
alignment is the term used by the Company to refer to the engagement of the right people
in the right place at the right time doing the right things. The Company assists its
clients in achieving workforce alignment by helping them find exceptional talent,
implement formal human resource (HR) processes and professional management
standards, and utilize employee motivation and retention practices.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Administrative
relief is obtained by clients through the Companys management of employee
administrative matters, such as processing of payroll, taxes and insurance premiums and
by the Companys comprehensive record keeping and technology.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Business
protection is provided to clients by the Company helping to ensure employment-related
regulatory compliance and sound risk management practices, encompassing up-to-date
regulatory compliance and cost-effective risk management practices and insurance
programs.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
the delivery of its solution to its clients, the Company provides employee recruitment and
development assistance, payroll and benefits administration, access to workers
compensation insurance, health, welfare and retirement plans and employment-related
regulatory guidance. The Companys solution is delivered through a combination of
dedicated HR professionals, a shared processing center and a Web portal.

The Company focuses on the professional service fees that it earns from its clients
as the primary source of its net income and cash flow. When delivering its human resource
outsourcing solution to its clients through a co-employment relationship, the Company is
also responsible for providing workers compensation and unemployment insurance
benefits to its clients employees as well as health and welfare benefits. In so
doing, the Company has an opportunity to generate net income and cash but does not believe
that this should be a significant portion of its long-term overall business profitability.

The
Company believes that the primary challenge and risk it faces in delivering its human
resource outsourcing solutions is its ability to convince small- and medium-sized business
to accept the concept of human resource outsourcing. The Company believes that most small-
and medium-sized businesses outsource certain aspects of the Companys total
solution, including payroll administration, health and welfare administration and
providing workers compensation insurance, but that only a small number of businesses
outsource the entire offering that the Company provides.

18


---

The
Company has transitioned its business from one that provided low cost insurance offerings
and payroll processing services to its clients to one that delivers a comprehensive, fully
integrated employee management solution to its clients. As a result, the Company increased
its profitability by focusing on increased profitability per client employee.

The
Company continues to focus on increasing the profitability of each client employee as well
as on increasing the overall number of client employees serviced. The Company believes
that it can increase the overall number of client employees serviced through: (i) the
enlargement of its target market focus to client prospects having 20-500 employees; (ii)
the reconfiguration of sales territories to fewer territories that are larger in size;
(iii) improved human resource outsourcing service offerings that will lead to higher
current client employee retention levels; and (iv) acquisitions of other human resource
outsourcing client portfolios.

The
Company has announced a long-range strategic objective of providing a comprehensive
platform of insourced human resource services to its clients without the risk associated
with providing workers compensation and healthcare insurance programs to its
clients. The Company expects to evolve toward a business model that does not require the
co-employment relationship but allows clients to retain their own insurance programs,
which the Company will administer. To date, the results of this new business model have
not had a significant impact on the Companys revenues or results of operations.

The
following tables provide information that the Company utilizes when assessing the
financial performance of its business:

|                                         | Three Months Ended September 30,
|---------------------------------------- | --------------------------------
|
|
|Statistical data:                        |                                 
|Client employees at period end           |                                 
|Clients at period end (1)                |                                 
|Average number of client                 |                                 
|employees/clients at period end          |                                 
|Average number of client employees       |                                 
|paid by month (2)                        |                                 
|Annualized average wage per average      |                                 
|number of client employees paid by       |                                 
|month (3)                                |                                 
|Annualized professional service fees per |                                 
|average number of client employees       |                                 
|paid by month (3)                        |                                 
|Annualized gross profit per average      |                                 
|number of client employees paid by       |                                 
|month (3)                                |                                 
|Annualized operating expense excluding   |                                 
|depreciation and amortization per        |                                 
|average number of client employees       |                                 
|paid by month (3)                        |                                 
|Annualized operating income per average  |                                 
|number of client employees paid by       |                                 
|month (3)                                |                                 

19


---

|                                           | Nine Months Ended September 30,
|------------------------------------------ | -------------------------------
|
|
|Statistical data:                          |                                
|Client employees at period end             |                                
|Clients at period end (1)                  |                                
|Average number of client                   |                                
|employees/clients at period end            |                                
|Average number of client employees         |                                
|paid by month (2)                          |                                
|Annualized average wage per average number |                                
|of client employees paid by month (3)      |                                
|Annualized professional service fees per   |                                
|average number of client employees         |                                
|paid by month (3)                          |                                
|Annualized gross profit per average number |                                
|of client employees paid by month (3)      |                                
|Annualized operating expense excluding     |                                
|depreciation and amortization per          |                                
|average number of client employees         |                                
|paid by month (3)                          |                                
|Annualized operating income per average    |                                
|number of client employees paid by         |                                
|month (3)                                  |                                

|(1) | Clients
measured by individual client Federal Employer Identification Number
               (FEIN).
|--- | ---------------------------------------------------------------------------------------------------

|(2) | The
average number of client employees paid by month is calculated based upon
               the sum of the number of paid client employees at the end of each month
divided                by the number of months in the period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Annualized
statistical information is based upon actual period-to-date amounts,                which
have been annualized (divided by three or nine and multiplied by twelve)
               and then divided by the average number of client employees paid by month.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company believes that the primary risks to its ability to increase the overall number of
client employees serviced are: (i) the amount of time required for sales personnel to
acquire new client employees may be longer than anticipated; (ii) the current client
employee retention levels may decrease if clients decide to use alternative providers to
service their human resource outsourcing needs; (iii) potential human resource outsourcing
client employee portfolios may not be available for acquisition by the Company due to
price, quality of the portfolios, or other factors; (iv) the Company (under its
co-employed service option) may not be able to continue to provide insurance-related
products at the necessary quality level to acquire new client employees and to retain
current client employees; (v) the time to achieve acceptance by prospective clients of the
Companys new business model may be longer than anticipated; and (vi) the
inexperience of much of its sales force.

# RESULTS OF OPERATIONS

Three Months Ended
September 30, 2005 Compared to Three Months Ended September 30, 2004

# Revenue

The
following table presents certain information related to the Companys revenues for
the three months ended September 30, 2005 and September 30, 2004:

20


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|                                    | Three Months Ended | 
|----------------------------------- | ------------------ | 
|
|
|Revenues:                           |                    | 
|Professional service fees           |                    | 
|Employee health and welfare         |                    | 
|benefits                            |                    | 
|Workers' compensation               |                    | 
|State unemployment taxes and other  |                    | 
|                                    |                    | 
|Total revenues                      |                    | 
|                                    |                    | 
|Statistical data:                   |                    | 
|Gross salaries and wages (in        |                    | 
|thousands)                          |                    | 
|Average number of client employees  |                    | 
|paid by month (1)                   |                    | 
|Annualized average wage per average |                    | 
|client employees paid by month (2)  |                    | 
|Workers' compensation billing per   |                    | 
|one hundred dollars of workers'     |                    | 
|compensation wages (3)              |                    | 
|Workers' compensation manual        |                    | 
|premium per one hundred dollars     |                    | 
|of workers' compensation wages      |                    | 
|(3),(4)                             |                    | 
|Annualized professional service     |                    | 
|fees per average number of          |                    | 
|client employees paid by month (2)  |                    | 
|Client employee health benefits     |                    | 
|participation                       |                    | 

|(1) | The
average number of client employees paid by month is calculated based upon
               the sum of the number of paid client employees at the end of each month
divided                by the number of months in the period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Annualized
statistical information is based upon actual quarter-to-date amounts,
               which have been annualized (divided by three and multiplied by twelve) and
then                divided by the average number of client employees paid by month.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Workers compensation
wages exclude the wages of clients electing out of                the Companys
workers compensation program.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(4) | Manual
premium rate data are derived from tables of AIG in effect for 2005 and
               2004, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------

For
the three months ended September 30, 2005, total revenues were $152.9 million compared to
$148.0 million for the three months ended September 30, 2004, representing an increase of
$4.9 million or 3.3%. The increase in total revenues was primarily a result of the
increase in health revenues and an increase in professional service fees. The increase was
partially offset by a decline in workers compensation revenues.

As
of September 30, 2005, the Company served 8,300 clients as measured by each clients
FEIN with approximately 134,800 active client employees. This compares to approximately
8,800 clients as measured by each clients FEIN with approximately 134,100 active
client employees at September 30, 2004. The change in the number of client employees is a
function of client employees added through organic growth, less attrition, plus the net
changes due to hiring and termination of employees by existing clients.

The
annualized average wage of paid client employees for the three months ended September 30,
2005 increased 7.7% to $38,831 from $36,061 for the three months ended September 30, 2004.
This increase is consistent with the Companys strategy of focusing on clients that
pay higher wages to their employees.

Revenues
from professional service fees increased to $35.9 million for the three months ended
September 30, 2005, from $35.0 million for the three months ended September 30, 2004,
representing an increase of $0.9 million or 2.6%. The increase was primarily a result of
the increase in annualized professional service fees per average number of client
employees paid by month of 2.5%, from $1,117 for the three months ended September 30, 2004
to $1,145 for the three months ended September 30, 2005. Such service fee increase per
employee are the result of increases in the charges to its clients for professional
service fees, as part of the Companys strategy to enhance and emphasize the human
resource consulting services that it provides to its clients attributable to both existing
and new client employees.

Revenues
for providing health and welfare benefits for the three months ended September 30, 2005
were $84.5 million as compared to $79.5 million for the three months ended September 30,
2004, representing an increase of $5.0 million or 6.3%. Health and welfare benefit plan
charges primarily increased as a result of higher costs to the Company to provide such
coverage for client employees and the Companys approach to pass along all
insurance-related costs to its clients.

21


---

Revenues for providing workers'  compensation  insurance coverage decreased to $29.1 million for the three
months ended  September 30, 2005,  from $30.0 million in the three months ended  September 30, 2004  representing a
decrease of $0.9 million or 3.1%.  This  decrease in revenues is  reflective  of a reduction in the manual  premium
rates as well as an improvement in the risk profile of the Companys client base. Workers  compensation  billings,
as a  percentage  of workers  compensation  wages for the three  months ended  September  30, 2005,  were 2.57% as
compared  to 2.80%  for the same  period  in 2004,  representing  a  decrease  of  8.2%.  The risk  profile  of the
Companys  client base has  continued  to improve  throughout  2005,  which has resulted in a reduction of workers
compensation  revenues by approximately  $1.3 million as a percentage of workers  compensation wages when compared
to the first half of 2005.

The
manual premium rate for workers compensation applicable to the Companys
clients decreased 5.2% during the three months ended September 30, 2005 as compared to the
three months ended September 30, 2004. Manual premium rates are generally the allowable
rates that employers can be charged by insurance companies for workers compensation
insurance coverage. The decrease in the Companys manual premium rates reflects
primarily the reduction in the Florida manual premium rates.

Revenues
from state unemployment taxes and other revenues decreased to $3.4 million for the three
months ended September 30, 2005 from $3.5 million for the three months ended September 30,
2004 representing a decrease of $0.1 million or 3.0%. The decrease was primarily due to
the minor reduction of other miscellaneous revenues.

# Cost of Services

The
following table presents certain information related to the Companys cost of
services for the three months ended September 30, 2005 and 2004:

22


---

|                                           | Three Months Ended | 
|------------------------------------------ | ------------------ | 
|
|
|Cost of services:                          |                    | 
|Employee health and welfare                |                    | 
|benefits                                   |                    | 
|Workers' compensation                      |                    | 
|State unemployment taxes and               |                    | 
|other                                      |                    | 
|                                           |                    | 
|Total cost of services                     |                    | 
|                                           |                    | 
|                                           |                    | 
|Statistical data:                          |                    | 
|Gross salaries and wages (in thousands)    |                    | 
|                                           |                    | 
|Average number of client employees paid    |                    | 
|by month (1)                               |                    | 
|Workers compensation cost rate per one     |                    | 
|hundred dollars of workers'                |                    | 
|compensation wages (2)                     |                    | 
|Number of workers' compensation claims (3) |                    | 
|Frequency of workers' compensation         |                    | 
|claims per one million dollars of          |                    | 
|workers' compensation wages (2)            |                    | 

|(1) | The
average number of client employees paid by month is calculated based upon
               the sum of the number of paid client employees at the end of each month
divided                by the number of months in the period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Workers compensation
wages exclude the wages of clients electing out of                the Companys
workers compensation program.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
number of workers compensation claims reflects the number of claims
               reported by the end of the respective period and does not include claims
with                respect to a specific policy year that are reported subsequent to the
end of                such period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost
of services that include the cost of the Companys health and welfare benefit plans,
workers compensation insurance, state unemployment taxes and other costs were $102.4
million for the three months ended September 30, 2005, compared to $103.9 million for the
three months ended September 30, 2004, representing a decrease of $1.5 million or 1.4%.
This decrease was primarily due to the decrease in workers compensation cost and
partially offset by the increase in health and welfare benefit costs.

The
cost of providing health and welfare benefits to clients employees for the three
months ended September 30, 2005 was $83.9 million as compared to $79.4 million for the
three months ended September 30, 2004, representing an increase of $4.5 million or 5.6%.
This increase was primarily attributable to the overall higher cost of health benefits and
was partially offset by a reduction in health benefit costs of approximately $0.6 million
due to continued favorable claims experience in the 2005 Aetna plan year.

Workers
compensation costs were $14.7 million for the three months ended September 30, 2005, as
compared to $21.2 million for the three months ended September 30, 2004, representing a
decrease of $6.5 million or 30.8%. Workers compensation costs decreased in the third
quarter of 2005 primarily due to the lowering of the Companys ultimate loss
estimates for the 2003 and 2004 program years based upon continued favorable claims
development that occurred during the nine months ended September 30, 2005. This revision
resulted in a net reduction of workers compensation expense of approximately $7.8
million ($4.9 million net of related taxes) during the third quarter of 2005. If the Company experiences continued favorable claims development, a further
downward adjustment of the Company's workers' compensation loss estimates may occur in the fourth quarter of 2005.

23


---

State
unemployment taxes and other costs were $3.8 million for the three months ended September
30, 2005, compared to $3.3 million for the three months ended September 30, 2004,
representing an increase of $0.6 million or 17.7%. The increase primarily relates to
higher state unemployment tax rates beginning January 1, 2005.

# Operating Expenses

The
following table presents certain information related to the Companys operating
expenses for the three months ended September 30, 2005 and 2004:

|                                  | Three Months Ended | 
|--------------------------------- | ------------------ | 
|
|
|Operating expenses:               |                    | 
|Salaries, wages and commissions   |                    | 
|Other general and administrative  |                    | 
|Depreciation and amortization     |                    | 
|                                  |                    | 
|Total operating expenses          |                    | 
|                                  |                    | 
|Statistical data:                 |                    | 
|Internal employees at quarter end |                    | 

Total
operating expenses were $34.0 million for the three months ended September 30, 2005 as
compared to $32.3 million for the three months ended September 30, 2004, representing an
increase of $1.7 million or 5.3%. Excluding depreciation and amortization, annualized
operating expenses per average number of client employees paid was $969 for the
three-month period ended September 30, 2005 compared to $906 for the three months ended
September 30, 2004.

Salaries,
wages and commissions were $18.3 million for the three months ended September 30, 2005 as
compared to $17.4 million for the three months ended September 30, 2004, representing an
increase of $0.9 million or 5.2%. The majority of the increase is attributable to an
increase in internal employees primarily in the client services area as well as the
addition of senior management personnel throughout 2004 and 2005.

Other
general and administrative expenses were $12.0 million for the three months ended
September 30, 2005 as compared to $10.9 million for the three months ended September 30,
2004, representing an increase of $1.1 million or 10.0%. This increase is primarily a
result of an increase marketing expenses associated with strategic initiatives as well as
an increase in recruiting and placement fees associated with the hiring of new employees
for certain senior management positions.

Depreciation
and amortization expenses were $3.6 million for the three months ended September 30, 2005
compared to $3.9 million for the three months ended September 30, 2004. The decrease is
primarily attributable to a reduction in depreciation expense as assets reach the end of
their depreciable lives.

# Income Taxes

Income
taxes were $6.1 million for the three months ended September 30, 2005 compared to $4.0
million for the three months ended September 30, 2004. The increase is primarily due to an
increase in income for the third quarter of 2005 compared to the third quarter of 2004 as
well as an increase in the Companys effective tax rate. The Companys effective
tax rate for the three months ended September 30, 2005 and 2004 was 36.5% and 33.0%,
respectively. The Companys effective tax rates differed from the statutory federal
tax rates primarily because of state taxes and federal tax credits.

24


---

# Net Income and Diluted
Earnings Per Share

As
a result of the factors described above, net income increased 31.6% to $10.7 million for
the three months ended September 30, 2005 compared to $8.1 million for the three months
ended September 30, 2004. Net income per common share on 28.8 million diluted shares was
$0.37 for the three months ended September 30, 2005 compared to net income per common
share of $0.29 on 28.5 million diluted shares for the three months ended September 30,
2004.

Nine Months Ended
September 30, 2005 Compared to Nine Months Ended September 30, 2004

# Revenue

The
following table presents certain information related to the Companys revenues for
the nine months ended September 30, 2005 and September 30, 2004:

|                                        | Nine Months Ended | 
|--------------------------------------- | ----------------- | 
|
|
|Revenues:                               |                   | 
|Professional service fees               |                   | 
|Employee health and welfare             |                   | 
|benefits                                |                   | 
|Workers' compensation                   |                   | 
|State unemployment taxes and other      |                   | 
|                                        |                   | 
|Total revenues                          |                   | 
|                                        |                   | 
|Statistical data:                       |                   | 
|Gross salaries and wages (in            |                   | 
|thousands)                              |                   | 
|Average number of client                |                   | 
|employees paid by month (1)             |                   | 
|Annualized average wage per             |                   | 
|average client employees paid by        |                   | 
|month (2)                               |                   | 
|Workers' compensation billing           |                   | 
|per one hundred dollars of              |                   | 
|workers' compensation wages (3)         |                   | 
|Workers' compensation manual            |                   | 
|premium per one hundred dollars         |                   | 
|of workers' compensation wages (3), (4) |                   | 
|Annualized professional service         |                   | 
|fees per average number of              |                   | 
|client employees paid by month (2)      |                   | 
|Client employee health benefits         |                   | 
|participation                           |                   | 

|(1) | The
average number of client employees paid by month is calculated based upon
               the sum of the number of paid client employees at the end of each month
divided                by the number of months in the period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25


---

|(2) | Annualized
statistical information is based upon actual year-to-date amounts,                which
have been annualized (divided by nine and multiplied by twelve) and then
               divided by the average number of client employees paid by month.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Workers compensation
wages exclude the wages of clients electing out of                the Companys
workers compensation program.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(4) | Manual
premium rate data are derived from tables of AIG in effect for 2005 and
               2004, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------

For
the nine months ended September 30, 2005, total revenues were $454.6 million compared to
$431.9 million for the nine months ended September 30, 2004, representing an increase of
$22.7 million or 5.2%. Revenue growth was primarily a result of the EPIX Holdings
Corporation (EPIX) client portfolio acquisition in March of 2004 having a full
impact on the nine months ended September 30, 2005 versus a partial impact for the nine
months ended September 30, 2004. Also contributing to the growth were increases in the
charges for professional service fees, as part of the Companys strategy to enhance
and emphasize the human resource consulting services that it provides to its clients,
increases in fees for providing health and welfare benefits for client employees, and an
increase in state unemployment tax rates.

The
average number of paid client employees was 120,871 for the nine months ended September
30, 2005, as compared to 119,171 for the nine months ended September 30, 2004,
representing an increase of 1.4%. The increase was primarily a result of the EPIX client
portfolio acquisition having a full impact on the nine months ended September 30, 2005 and
a partial impact for the nine months ended September 30, 2004 as well as organic growth in
excess of client attrition for the nine months ended September 30, 2005.

The
annualized average wage of paid client employees for the nine months ended September 30,
2005 increased 9.5% to $37,710 from $34,426 for the nine months ended September 30, 2004.
This increase is consistent with the Companys strategy of focusing on clients that
pay higher wages to its employees.

Revenues
from professional service fees increased to $104.5 million for the nine months ended
September 30, 2005, from $99.4 million for the nine months ended September 30, 2004,
representing an increase of $5.0 million or 5.1%. The increase was a result of increases
in annualized professional service fees per client employee of 3.6%, from $1,113 for the
nine months ended September 30, 2004 to $1,153 for the nine months ended September 30,
2005. Such service fee increases per employee were attributable to both current and new
client employees. In addition, professional service fees for the nine months ending
September 30, 2005 were higher as a result of the EPIX client portfolio acquisition having
a full impact on the nine months ended September 30, 2005 versus a partial impact for the
nine months ended September 30, 2004.

Revenues
for providing health and welfare benefits for the nine months ended September 30, 2005
were $245.2 million as compared to $229.8 million for the nine months ended September 30,
2004, representing an increase of $15.4 million or 6.7%. Health and welfare benefit plan
charges primarily increased as a result of the EPIX client portfolio acquisition having a
full impact on the nine months ended September 30, 2005 versus a partial impact for the
nine months ended September 30, 2004. Additionally, health and welfare benefit plan
revenues increased as a result of higher costs to the Company to provide such coverage for
client employees and the Companys approach to pass along all insurance-related costs
to its clients.

Revenues
for providing workers compensation insurance coverage decreased to $85.4 million in
the nine months ended September 30, 2005, from $86.7 million in the nine months ended
September 30, 2004 representing a decrease of $1.3 million or 1.5%. Workers
compensation billings, as a percentage of workers compensation wages for the nine
months ended September 30, 2005, were 2.69% as compared to 2.99% for the same period in
2004, representing a decrease of 10.0%. The decrease in workers compensation revenue
for the nine months ended September 30, 2005 was primarily due to the net effect of a
decrease in billings for Florida clients reflecting a reduction in Florida manual premium
rates, an improvement in the risk profile of the Company's client base, and partially offset by the full impact of the EPIX acquisition on the nine months
ended September 30, 2005 versus the partial impact on the nine months ended September 30,
2004.

26


---

The
manual premium rate for workers compensation applicable to the Companys
clients decreased 8.6% during the nine months ended September 30, 2005 as compared to the
nine months ended September 30, 2004. The decrease in the Companys manual premium
rates reflects the reduction in the Florida manual premium rates.

Revenues
from state unemployment taxes and other revenues increased to $19.5 million for the nine
months ended September 30, 2005 from $16.0 million for the nine months ended September 30,
2004 representing an increase of $3.5 million or 22.2%. The increase was primarily due to
the effect of the EPIX acquisition on the first quarter of 2005 and the limited impact of
the EPIX acquisition on the first quarter of 2004. State unemployment tax revenues have
the greatest impact on the first quarter of the calendar year as most wage caps that limit
state unemployment revenues are not met until the second quarter of the calendar year. In
addition, there were increases in state unemployment tax rates that were passed along to
the Companys clients.

# Cost of Services

The
following table presents certain information related to the Companys cost of
services for the nine months ended September 30, 2005 and 2004:

|                                          | Nine Months Ended | 
|----------------------------------------- | ----------------- | 
|
|
|Cost of services:                         |                   | 
|Employee health and welfare               |                   | 
|benefits                                  |                   | 
|Workers' compensation                     |                   | 
|State unemployment taxes and              |                   | 
|other                                     |                   | 
|                                          |                   | 
|                                          |                   | 
|Total cost of services                    |                   | 
|                                          |                   | 
|Statistical data:                         |                   | 
|Gross salaries and wages (in thousands)   |                   | 
|                                          |                   | 
|Average number of client employees paid   |                   | 
|by month (1)                              |                   | 
|                                          |                   | 
|Workers compensation cost rate per one    |                   | 
|hundred dollars of workers'               |                   | 
|compensation wages (2)                    |                   | 
|Number of workers' compensation claims(3) |                   | 
|Frequency of workers' compensation        |                   | 
|claims per one million dollars of         |                   | 
|workers' compensation wages (2)           |                   | 

|(1) | The
average  number of client  employees  paid by month is calculated  based upon the sum of
the number of          paid client employees at the end of each month divided by the
number of months in the period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Workers'
 compensation  wages  exclude  the  wages  of  clients  electing  out of the  Company's
 workers'          compensation program.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
number of  workers'  compensation  claims  reflects  the number of claims  reported  by
the end of the          respective  period and does not include  claims with  respect to
a specific  policy year that are reported          subsequent to the end of such period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27


---

Cost
of  services  that  include the cost of the  Company's  health and welfare  benefit
 plans,  workers' compensation  insurance,  state  unemployment  taxes and other costs
were $315.2  million for the nine months ended September  30, 2005,  compared to $306.4
 million for the nine months ended  September  30, 2004,  representing  an increase of
$8.8 million or 2.9%.  This  increase was  primarily  due to an increase in health and
welfare  benefit costs as well as the full impact of the EPIX client  portfolio
 acquisition for the nine months ended September 30, 2005, compared to a partial impact
for the nine months ended September 30, 2004.

The
cost of  providing  health and  welfare  benefits  to clients'  employees  for the nine
 months  ended September 30, 2005 was $241.3 million as compared to $229.7  million for
the nine months ended  September 30, 2004, representing an increase of $11.5 million or
5.0%.  This increase was primarily  attributable to the higher cost of health  benefits
 for the nine months  ended  September  30, 2005 and the full impact of the EPIX client
 portfolio acquisition.  This increase was  partially  offset by a $3.9 million
 reduction in health  benefit costs related to finalization of the 2004 Aetna premium
true-up and favorable  claims  experience in the 2005 Aetna plan year during the nine
months ended September 30, 2005.

Workers'
 compensation  costs were $54.8 million for the nine months ended September 30, 2005, as
compared to $62.0 million for the nine months ended  September 30, 2004,  representing  a
decrease of $7.2 million or 11.7%. Workers'  compensation  costs  decreased  in the
 first  nine  months of 2005 due to the net  effect of an  overall reduction in workers'
 compensation costs, and was partially offset by an increase in workers  compensation
expense as a result of the full impact of the EPIX client  portfolio  acquisition  for
the nine months ended  September 30, 2005.  Workers'  compensation costs decreased in the
first nine months of 2005 primarily due to the lowering of the Company's  ultimate  loss
 estimates  for the 2003 and 2004 program  years based upon  continued  favorable  claims
development  that  occurred  during the nine months ended  September  30,  2005.  This
 revision  resulted in a net reduction of workers' compensation  expense of
 approximately  $7.8 million  ($4.9  million net of related  taxes) during the third
quarter of 2005.

State
 unemployment  taxes and other  costs were $19.1  million for the nine months  ended
 September  30, 2005,  compared to $14.7  million for the nine months ended  September
30, 2004,  representing  an increase of $4.4 million or 30.3%.  The  increase  primarily
 relates to the full impact of the EPIX  acquisition  in the first nine months of 2005
versus the  partial  impact of the EPIX client  portfolio  acquisition  for the first
nine months of 2004, as well as higher state unemployment tax rates beginning January 1,
2005.

# Operating Expenses

The
following  table presents  certain  information  related to the Company's  operating
 expenses for the nine months ended September 30, 2005 and 2004:

|                                  | Nine Months Ended | 
|--------------------------------- | ----------------- | 
|
|
|Operating expenses:               |                   | 
|Salaries, wages and commissions   |                   | 
|Other general and administrative  |                   | 
|Depreciation and amortization     |                   | 
|                                  |                   | 
|                                  |                   | 
|                                  |                   | 
|Total operating expenses          |                   | 
|                                  |                   | 
|                                  |                   | 
|Statistical data:                 |                   | 
|Internal employees at quarter end |                   | 
|                                  |                   | 

28


---

Total
operating expenses were $98.3 million for the nine months ended September 30, 2005 as
compared to $93.2 million for the nine months ended September 30, 2004, representing an
increase of $5.1 million or 5.4%. Excluding depreciation and amortization, annualized
operating expenses per average number of client employees paid was $962 for the nine
months period ended September 30, 2005 compared to $927 for the nine months ended
September 30, 2004.

Salaries,
wages and commissions were $52.8 million for the nine months ended September 30, 2005 as
compared to $52.6 million for the nine months ended September 30, 2004, representing an
increase of $0.2 million or 0.3%. The increase is primarily a result of the increase in
payroll costs associated with the hiring of additional senior management personnel
throughout 2004 and 2005.

Other
general and administrative expenses were $34.4 million for the nine months ended September
30, 2005 as compared to $30.3 million for the nine months ended September 30, 2004,
representing an increase of $4.1 million or 13.6%. This increase is primarily a result of
an increase in marketing costs and consulting fees associated with strategic initiatives
and an increase in recruiting and placement fees associated with the hiring of additional
senior management personnel during 2005.

Depreciation
and amortization expenses were $11.1 million for the nine months ended September 30, 2005
compared to $10.3 million for the nine months ended September 30, 2004. The increase is
primarily attributable to the full impact during 2005 of the amortization of the
intangible assets associated with the EPIX acquisition and partially offset by a reduction
in depreciation expense as assets reach the end of their depreciable lives.

# Income Taxes

Income
taxes were $14.4 million for the nine months ended September 30, 2005 compared to $10.9
million for the nine months ended September 30, 2004. The increase is primarily due to an
increase in taxable income for the first nine months of 2005 compared to the first nine
months of 2004 as well as an increase in the Companys effective tax rate. The
Companys effective tax rate for the nine months ended September 30, 2005 and 2004
was 34.4% and 33.0%, respectively. The Companys effective tax rates differed from
the statutory federal tax rates primarily because of state taxes and federal tax credits.

# Net Income and Diluted
Earnings (Loss) Per Share

As
a result of the factors described above, net income increased 24.2% to $27.5 million for
the nine months ended September 30, 2005 compared to $22.1 million for the nine months
ended September 30, 2004. Net income per common share on 28.6 million diluted shares was
$0.96 for the nine months ended September 30, 2005, compared to net income per common
share of $0.80 on 27.7 million diluted shares for the nine months ended September 30,
2004, excluding the impact of the non-recurring, non-cash charge related to the Preferred
Stock conversion, the accretion of redemption value of Preferred Stock prior to conversion
and the related Preferred Stock dividends in 2004. Including the impact of the Preferred
Stock items, the diluted loss per share on 23.1 million shares was $0.34 for the nine
months ended September 30, 2004. See the reconciliation of the pro forma information to
GAAP information under Non-GAAP Financial Information included herein.

29


---

# LIQUIDITY AND CASH FLOWS

# Cash Flow

General

The
Company periodically evaluates its liquidity requirements, capital needs and availability
of capital resources in view of its plans for expansion of its human resource outsourcing
portfolio through acquisitions, collateralization requirements for insurance coverage,
possible acquisitions of businesses complementary to the business of the Company, and
other operating cash needs. As a result of this process, the Company has in the past
sought, and may in the future seek, to obtain additional capital from either private or
public sources.

The
Company currently believes that its current cash balances and cash flow from operations
will be sufficient to meet its operational requirements for the next 12 months. In
addition, the Company has an available unsecured line of credit for $35.0 million with
Bank of America, N.A.

The
Companys primary short-term liquidity requirements relate to the payment of accrued
payroll and payroll taxes of its internal and client employees, accounts payable for
capital expenditures, the payment of workers compensation premiums and medical
benefit plan premiums. The Companys billings to its clients include: (i) each client
employees gross wages; (ii) a professional service fee which is primarily computed
as a percentage of each clients aggregate gross wages; (iii) related payroll taxes;
and (iv) the clients portion of benefits, including medical and retirement benefits,
provided to the client employees based on elected coverage levels by the client and the
client employees. Included in the Companys billings during the first nine months of
2005 were salaries, wages and payroll taxes of client employees of $3.666 billion. The
billings to clients are managed from a cash flow perspective so that a matching exists
between the time that the funds are received from a client to the time that the funds are
paid to the client employees and to the appropriate tax jurisdictions. As a co-employer,
and under the terms of each of the Companys professional services agreements, the
Company is obligated to make certain wage, tax and regulatory payments. Therefore, the
objective of the Company is to minimize the credit risk associated with remitting the
payroll and associated taxes before receiving reimbursement from the client. To the extent
this objective is not achieved, short-term cash requirements can be significant. In
addition, the timing and amount of payments for payroll, payroll taxes and benefit
premiums can vary significantly based on various factors, including the day of the week on
which a payroll period ends and the existence of holidays at or immediately following a
payroll period-end.

Restricted
Cash

The
Company is required to collateralize its obligations under its workers compensation
and certain general insurance coverage. The Company uses its certificates of deposit and
marketable securities to collateralize these obligations as more fully described below.
Certificates of deposit and marketable securities used to collateralize these obligations
are designated as restricted in the Companys condensed consolidated financial
statements.

At
September 30, 2005, the Company had $105.8 million in total cash and cash equivalents,
certificates of deposit (restricted and unrestricted) and restricted marketable
securities, of which $93.5 million was unrestricted. At September 30, 2005, the Company
had pledged $12.3 million of restricted certificates of deposit and restricted marketable
securities as collateral for certain standby letters of credit, in collateral trust
arrangements issued in connection with the Companys workers compensation and
certain other insurance plans, and, in a rabbi trust in connection with a deferred
compensation plan assumed in the EPIX client portfolio acquisition as follows:

30


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|                                                    | September 30,
2005 | December 31, 2004
|--------------------------------------------------- | ------------------ | -----------------
|
|
|Certificates of deposit - restricted:               |                    |                  
|BCBSF standby letter of credit                      |                    |                  
|Other                                               |                    |                  
|                                                    |                    |                  
|Total certificates of deposit - restricted          |                    |                  
|                                                    |                    |                  
|Short-term marketable securities - restricted:      |                    |                  
|General insurance collateral obligations - AIG      |                    |                  
|                                                    |                    |                  
|Total short-term marketable securities - restricted |                    |                  
|                                                    |                    |                  
|Long-term marketable securities restricted:         |                    |                  
|Workers' compensation collateral - AIG              |                    |                  
|Rabbi trust                                         |                    |                  
|                                                    |                    |                  
|Total long-term marketable securities - restricted  |                    |                  
|                                                    |                    |                  
|Total restricted assets                             |                    |                  
|                                                    |                    |                  

The
Companys obligation to BCBSF may require an Irrevocable Letter of Credit
(LOC) in favor of BCBSF if a certain Coverage Ratio, as set forth in the
agreement, is not maintained. The Coverage Ratio is calculated quarterly. Calculation of a
Coverage Ratio outside of the minimum requirement will require an LOC valued at up to two
months of projected claims. As of September 30, 2005, the minimum coverage ratio was met
and no LOC was required. Under the Companys previous agreement with BCBSF, a $6,000
certificate of deposit was pledged as collateral for a standby LOC. This collateral was
released by BCBSF and is no longer classified as restricted in the Companys
consolidated balance sheet as of September 30, 2005. The Company was not required to
collateralize the Aetna program for 2005 and 2004.

As
of September 30, 2005, the Company has recorded a $101.1 million receivable from AIG
representing premium payments made to AIG in excess of the present value of the estimated
claims liability. This receivable represents a significant concentration of credit risk
for the Company.

The
Company does not anticipate any additional collateral obligations to be required in 2005
for its workers compensation arrangements.

Cash
Flows from Operating Activities

At
September 30, 2005, the Company had net working capital of $45.7 million, including
restricted funds classified as short-term of $4.2 million, as compared to $23.3 million in
net working capital as of December 31, 2004, including $10.2 million of restricted funds
classified as short-term.

Net
cash provided by operating activities was $55.6 million for the nine months ended
September 30, 2005 as compared to net cash provided by operating activities of $33.7
million for the nine months ended September 30, 2004, representing an increase of $21.9
million. The overall increase in cash provided by operating activities is primarily
attributable to the net effects of: (i) the receipt of approximately $53.9 million from
AIG related to workers compensation premium audits and the annual loss provision
adjustment (ii) an increase in the workers compensation receivable due to current
year workers compensation premium payments in excess of workers compensation
costs; (iii) a reduction in accrued insurance premiums, health and workers
compensation insurance reserves as a result of timing differences; (iv) less favorable
timing of the receipts of client payments at September 30, 2005 resulting in a reduction
of client deposits and prepayments; (v) a reclassification of deferred tax assets against
the current tax liability in connection with the filing of the 2004 tax returns; (vi) the
increase in net income during the nine months ended September 30, 2005 compared to the
nine months ended September 30, 2004; and (vii) an increase in the deferred tax provision.
There were also other net changes in working capital items, including accounts receivable,
that on a net basis favorably impacted net cash provided by operating activities.

31


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If
current workers compensation trends continue, the Company expects to receive
approximately $14.0 million from AIG during the third quarter of 2006 as a return of
premium from AIG in connection with premium adjustments for the 2003-2005 program years.
Additional releases of premium by AIG are also anticipated in future years if such trends
continue. The Company believes that it has provided AIG a sufficient amount of cash to
cover its short-term and long-term workers compensation obligations related to open
policy years.

Cash
Flow from Investing Activities

Cash
used in investing activities for the nine months ended September 30, 2005 of $3.9 million,
primarily relates to capital expenditures for technology-related items. Cash used in
investing activities for the nine months ended September 30, 2004 of $26.0 million
primarily related to the $40.1 million used in the acquisitions of client portfolios, $3.3
million used for capital expenditures, and was partially offset by the net activities in
the Companys investment portfolio. The Company plans to spend approximately $2.9
million on capital expenditures during the fourth quarter of 2005 including approximately
$2.2 million related to the relocation of the Companys corporate office.

Cash
Flow from Financing Activities

Cash used by financing activities for the nine months ended September 30, 2005 of $5.0
million was a result of the net effect of $5.5 million of cash dividends paid, $2.2
million to repurchase 81,900 shares of the Companys common stock, and cash received
of approximately $2.7 million from directors, officers and employees of the Company upon
the exercise of 376,190 stock options and the purchase of 23,238 shares of common stock
pursuant to the Companys employee stock purchase plan. Cash provided from financing
activities during the nine months ended September 30, 2004 of $32.7 million was primarily
a result of $34.7 million proceeds received under a secondary stock offering and, $2.6
million received from issuance of common stock, less $4.4 million of cash dividends paid.

# Commitments and
Contractual Obligations

Off-Balance
Sheet Arrangements

The
Company does not have any off-balance sheet arrangements.

Contractual
Obligations

There
have been no material changes to the Companys contractual obligations from those
disclosed in the Form 10-K under Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations, other than those
described below.

On
June 6, 2005, the Company entered into a lease agreement with Osprey-Lakewood Ranch
Properties, LLC, in order to relocate the Companys corporate facility within
Bradenton, Florida. Under the terms of the lease agreement, the Company has leased
approximately 97,000 square feet for a period of 10 years commencing on the later of: (i)
the substantial completion of certain improvements referred to in the lease agreement; or
(ii) December 1, 2005. The lease agreement provides for a commercially reasonable base
rent in consideration of the size and type of building and the surrounding area and is not
materially different from the Companys rent expense in its current location. The
base rent will increase 3% each year commencing on the first anniversary of the
commencement date of the term of the lease. The Company has the option to renew the lease
for two additional five-year terms. The Companys lease of its current Bradenton
facility expires January 31, 2006. The Companys approximately 500 Bradenton-area
employees are expected to move into the new facility during January of 2006.

32


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# CRITICAL ACCOUNTING
ESTIMATES

The
preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosures of contingent assets and liabilities. Accounting
estimates related to workers compensation receivables/reserves, intangible assets,
medical benefit plan liabilities, state unemployment taxes, allowance for doubtful
accounts and deferred income taxes are those that the Company considers critical in
preparing its financial statements because they are particularly dependent on estimates
and assumptions made by management that are uncertain at the time the accounting estimates
are made. While management has used its best estimates based upon facts and circumstances
available at the time, different estimates reasonably could have been used in the current
period, which may have had a material impact on the presentation of the Companys
financial condition and results of operations. Management periodically reviews the
estimates and assumptions and reflects the effects of revisions in the period they are
determined to be necessary. The discussion under Item 7  Managements
Discussion and Analysis of Financial Condition and Results of Operations  Critical
Accounting Estimates in the Form 10-K describes the significant accounting estimates
used in the preparation of the Companys financial statements.

# NEW ACCOUNTING
PRONOUCEMENTS

See
Note 1 to the condensed consolidated financial statements contained elsewhere in this Form
10-Q for information regarding the Companys implementation and impact of new
accounting standards.

# CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS

Certain
statements contained in this Form 10-Q, under Item 2  Managements
Discussion and Analysis of Financial Condition and Results of Operations, and
elsewhere are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including without limitation, statements regarding the Companys
expectations, hopes, beliefs, intentions or strategies regarding the future. Words such as
may, will, should, could,
would, predicts, potential, continue,
expects, anticipates, future, intends,
plans, believes, estimates, and similar expressions,
as well as statements in future tense, identify forward-looking statements. These
forward-looking statements are based on the Companys current expectations and
beliefs concerning future developments and their potential effects on the Company. There
can be no assurance that future developments affecting the Company will be those that the
Company has anticipated. These forward-looking statements involve a number of risks,
uncertainties (some of which are beyond the Companys control) or other assumptions
that may cause actual results or performance to be materially different from those
expressed or implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to, those factors listed below:

| |  | potential
 liability as a co-employer as a result of acts or omissions by the Company's  clients or
client          employees;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | exposure
 to client  credit  risk as a result of the  Company's  obligation  to make  certain
 payments in          respect of client employees;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | unfavorable
 determinations  under  certain laws and  regulations  regarding  the  Company's  status
as an          "employer" of client employees;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

33


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| |  | inadequacy
of the Company's insurance-related loss reserves to cover its ultimate liability for
losses;
| | - | -------------------------------------------------------------------------------------------------------

| |  | unavailability
 of insurance  coverage for workers'  compensation,  medical benefits and general
liability          on financial terms and premium rates acceptable to the Company;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | significant
 collateral  requirements  in respect of the Company's  obligations to its insurance
 carriers          and the potential for those requirements to increase in the future;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Company's failure to comply with applicable laws and regulations in a complex regulatory
environment;
| | - | ---------------------------------------------------------------------------------------------------------

| |  | inexperience
of a large portion of the Company's sales staff;
| | - | -------------------------------------------------------------

| |  | the
Companys failure to properly manage its growth and to successfully integrate
acquired companies, including risks of client attrition in acquired portfolios and the
risks associated with assumed employee benefit plans;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | risks
associated with geographic market concentration;
| | - | ------------------------------------------------------

| |  | risks
associated with expansion into additional states with varying state regulatory
requirements;
| | - | --------------------------------------------------------------------------------------------------

| |  | the
impact of competition from existing and new businesses offering human resource
outsourcing services;
| | - | --------------------------------------------------------------------------------------------------------

| |  | the
ability of the  Company's  clients to terminate  their  relationship  with the Company
upon 30 days or          less notice;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | errors
or omissions by the Company in performing its services;
| | - | --------------------------------------------------------------

| |  | the
Company's  dependency on key personnel and potential  difficulties and expenses in the
recruitment and          retention of key employees;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Company's inability to attract and retain qualified human resource consultants and sales
personnel;
| | - | -------------------------------------------------------------------------------------------------------

| |  | risks
 associated  with the  Company's  dependency  on  technology  services  and third party
 licenses of          technology;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | the
Company's inability to use the Internet as a means of delivering human resource services;
| | - | ---------------------------------------------------------------------------------------------

| |  | fluctuations
in interest rates and the associated effect on the Company's investments;
| | - | --------------------------------------------------------------------------------------

| |  | the
Company's failure to adequately protect its proprietary rights;
| | - | -------------------------------------------------------------------

| |  | the
Company's reliance on one financial institution to transfer its payroll funds;
| | - | ----------------------------------------------------------------------------------

| |  | the
Companys reliance on a single company to provide its workers compensation
insurance coverage and the Companys receivable from such company for all program
years;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | exposure
to natural disasters,  such as hurricanes and electrical  failures,  which affect the
Company and          its clients;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | risks
 associated  with the  interruption  of  clients'  businesses  due to natural  disasters,
 which are          potentially increased due to geographic concentration;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | unproven
client acceptance of new business model service offerings; and
| | - | -----------------------------------------------------------------------

| |  | other
factors which are described in further detail in the Form 10-K, and in other filings by
the Company with the Securities and Exchange Commission.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

34


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The
Company cautions that the factors described above could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made by the
Company. Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.

# NON-GAAP FINANCIAL
INFORMATION

The
following table reconciles results calculated using Generally Accepted Accounting
Principles (GAAP) and results reported excluding certain charges
(non-GAAP financial information). The pro forma non-GAAP financial information
is included to provide investors a more complete and transparent understanding of the
Companys underlying operational results and trends, but should only be used in
conjunction with results reported in accordance with GAAP. The Company believes that the
pro forma non-GAAP financial information set forth below provides useful information to
show the effect on diluted earnings per share when the non-recurring, non-cash charge to
retained earnings to accelerate the amortization of the discount associated with the
Preferred Stock, the accretion of redemption value of the Preferred Stock prior to
conversion and the related Preferred Stock dividends, are excluded, in light of the full
conversion of the Preferred Stock into common stock on May 19, 2004. There were no pro
forma adjustments related to the three and nine months ended September 30, 2005 and the
three months ended September 30, 2004.

Reconciliation of pro forma non-GAAP
financial information (in thousands, except share and per share data):

|                                                                | Nine Months Ended
September 30,
2004
|--------------------------------------------------------------- | ------------------------------------
|
|
|Net loss attributable to common shareholders for purposes of    |                                     
|computing diluted earnings per share (GAAP)                     |                                     
|Pro forma adjustments:                                          |                                     
|Non-recurring, non-cash charge attributable to the              |                                     
|acceleration of the unamortized discount associated with        |                                     
|the conversion into common stock of all shares of the           |                                     
|Preferred Stock                                                 |                                     
|Non-cash charges attributable to beneficial conversion          |                                     
|feature and accretion of redemption value of the Preferred      |                                     
|Stock                                                           |                                     
|Preferred Stock dividends                                       |                                     
|                                                                |                                     
|                                                                |                                     
|Pro forma net income for diluted earnings per share calculation |                                     
|(non-GAAP)                                                      |                                     
|                                                                |                                     
|                                                                |                                     
|Diluted loss per share (GAAP)                                   |                                     
|                                                                |                                     
|Pro forma diluted earnings per share (non-GAAP)                 |                                     
|                                                                |                                     
|Diluted weighted average shares outstanding (GAAP)              |                                     
|Pro forma effect of dilutive securities:                        |                                     
|Options                                                         |                                     
|Preferred Stock                                                 |                                     
|                                                                |                                     
|Pro forma diluted weighted average                              |                                     
|shares outstanding (non-GAAP)                                   |                                     
|                                                                |                                     

35


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# ITEM 3.       Quantitative and
Qualitative Disclosures about Market Risk

There
have been no material changes from the information previously reported under Item 7A of
the Form 10-K, which Item 7A is hereby incorporated by reference.

# ITEM 4.       Controls and
Procedures

As
of the end of the period covered by this report, the Companys management, including
the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon
that evaluation, the Companys management concluded that the Companys
disclosure controls and procedures were effective as of the end of the period covered by
this report and no changes in the Companys internal controls over financial
reporting were made during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. The Companys management concluded in the Form 10-K
that disclosure controls and procedures were not effective as of December 31, 2004 due to
a material weakness in the Companys internal control over financial reporting. Such
material weakness related to a control activity which operates only once a year, generally
in the fourth quarter. Therefore, this material weakness has no effect on the information
contained in the Form 10-Q. The Companys management has a plan to remediate the
material weakness during the quarter ending December 31, 2005. The Company has therefore
not had the opportunity to test the operating effectiveness of the control activity as of
the end of the period covered by this report.

# PART II.       OTHER
INFORMATION

# ITEM 1.       Legal Proceedings

See
Note 8 to the condensed consolidated financial statements included in this Form 10-Q for
information concerning the Companys legal proceedings.

ITEM 2.        Unregistered Sales of
Equity Securities and Use of Proceeds

The
following table provides information about purchases by the Company during the three
months ended September 30, 2005, of equity securities that are registered by the Company
pursuant to Section 12 of the Securities and Exchange Act.

|Period                | Total Number of Shares
Purchased (1) | Average Price
Paid per Share | Total Number of
Shares Purchased as
Part of Publicly
Announced Program (1) | Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the Program
($000's) (2)
|--------------------- | ------------------------------------ | ---------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|
|
|7/01/2005 - 7/31/2005 |                                      |                              |                                                                            | --                                                                                         
|8/01/2005 - 8/31/2005 |                                      |                              |                                                                            | --                                                                                         
|9/01/2005 - 9/30/2005 |                                      |                              |                                                                            | 81,900                                                                                     

| | (1) | On
September 28, 2005, the Company announced that the board of directors
               authorized the repurchase of up to $50,000 of the Companys common
stock                effective immediately. Stock repurchases under this program may be
made at such                times and in such amounts as the Company deems appropriate,
based on a variety                of factors including price, corporate and regulatory
requirements and overall                market conditions.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36


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| | (2) | Unless
terminated earlier by resolution of the board of directors, the                repurchase
program will expire when the Company has utilized all funds                authorized for
the repurchase of shares under the program.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company purchased additional shares of its common stock during October 2005. As of October
27, 2005, the Company has purchased a total of 459,238 shares at a cost of $12,110 since
the inception of the repurchase program. The Company intends to complete stock repurchases under this program as soon as practical.

# ITEM 6.       Exhibits

| | Exhibit No. | Description
| | ----------- | -----------

| | 10 | Form
of Blue Cross  /Blue  Shield of Florida  Group  Master  Policy for the Company
                  effective  October 1, 2005  (certain  confidential  information
 contained  in this                   document,  marked by asterisks and brackets,  has
been omitted and filed separately                   with  the  Securities  and  Exchange
 Commission  pursuant  to  Rule  24b-2  of the                   Securities and Exchange
Commission Act of 1934, as amended).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.1 | Certification
 of the Chief  Executive  Officer,  pursuant  to Section  302 of the  Sarbanes-Oxley  Act
of                   2002.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification
of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------

| | 32 | Certification
 pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

37


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# SIGNATURE

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.

|                        |  |                                                                                               
|----------------------- |  | ----------------------------------------------------------------------------------------------
|                        |  |                                                                                               
|                        |  | GEVITY HR, INC.                                                                               
|Dated: October 27, 2005 |  | /s/ Peter  C. GrabowskiPeter C. Grabowski Chief Financial Officer(Principal Financial Officer)
|                        |  |                                                                                               

38


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