# 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 June 30, 2004.

# 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, Suite 202
Bradenton, FL
(Address of principal executive
offices) |  | 34205
(Zip Code)                               

# (Registrants
Telephone Number, Including Area Code): (941) 741-4300

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 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 August 2, 2004
|------------------------- |  | --------------------------------
|Par value $0.01 per share |  | 26,929,988                      




---

# TABLE OF CONTENTS

|PART I. | FINANCIAL INFORMATION | Page                                                                                    
|------- | --------------------- | ----------------------------------------------------------------------------------------
|        |                       | ITEM 1. Financial Statements                                                            
|        |                       | Condensed Consolidated Statements of Operations for the three and six months ended      
|        |                       | June 30, 2004 and 2003 (unaudited)                                                      
|        |                       | Condensed Consolidated Balance Sheets as of June 30, 2004                               
|        |                       | and December 31, 2003 (unaudited)                                                       
|        |                       | Condensed Consolidated Statements of Cash Flows                                         
|        |                       | for the six months ended June 30, 2004 and 2003 (unaudited)                             
|        |                       | Notes to Condensed Consolidated Financial Statements (unaudited)                        
|        |                       | ITEM 2. Management's Discussion and Analysis of Financial Condition                     
|        |                       | and Results of Operations                                                               
|        |                       | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                      
|        |                       | ITEM 4. Controls and Procedures                                                         
|PART II |                       | OTHER INFORMATION                                                                       
|        |                       | ITEM 1. Legal Proceedings                                                               
|        |                       | ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
|        |                       | ITEM 4. Submission of Matters to a Vote of Security Holders                             
|        |                       | ITEM 6. Exhibits and Reports on Form 8-K                                                
|        |                       | SIGNATURE                                                                               

2


---

PART I.  FINANCIAL
INFORMATION

Item 1. Financial
Statements

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

|                                                       | FOR THE THREE MONTHS ENDED
JUNE 30, | FOR THE SIX MONTHS ENDED
JUNE 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 (expense) income, 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 convertible, redeemable preferred stock         |                                     |                                  
|                                                       |                                     |                                  
|Non-cash charges attributable to beneficial conversion |                                     |                                  
|feature and accretion of redemption value of           |                                     |                                  
|convertible, redeemable preferred stock                |                                     |                                  
|                                                       |                                     |                                  
|Preferred stock dividends                              |                                     |                                  
|                                                       |                                     |                                  
|                                                       |                                     |                                  
|Net (loss) income attributable to common shareholders  |                                     |                                  
|                                                       |                                     |                                  
|                                                       |                                     |                                  
|                                                       |                                     |                                  
|Net (loss) income per common share:                    |                                     |                                  
|                                                       |                                     |                                  
|- Basic                                                |                                     |                                  
|                                                       |                                     |                                  
|                                                       |                                     |                                  
|                                                       |                                     |                                  
|- Diluted  (Reported earnings per common share         |                                     |                                  
|includes adjustments per share of ($1.22) and          |                                     |                                  
|($1.26) for the three and six                          |                                     |                                  
|months ended June 30, 2004, respectively,              |                                     |                                  
|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 convertible, redeemable           |                                     |                                  
|preferred stock, see Note 1.)                          |                                     |                                  
|                                                       |                                     |                                  
|Weighted average common shares outstanding             |                                     |                                  
|- Basic                                                |                                     |                                  
|- Diluted                                              |                                     |                                  

See
notes to condensed consolidated financial statements.

3


---

# GEVITY HR, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED (in $000s,
except share and per share data)

|ASSETS                                           | June 30, 2004 | December 31, 2003
|------------------------------------------------ | ------------- | -----------------
|Current assets:                                  |               |                  
|Cash and cash equivalents                        |               |                  
|Certificates of deposit - restricted             |               |                  
|                                                 |               |                  
|Marketable securities - restricted               |               |                  
|Accounts receivable, net                         |               |                  
|Short-term workers' compensation receivable, net |               |                  
|                                                 |               |                  
|Deferred tax asset, 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                                         |               |                  
|Other assets                                     |               |                  
|                                                 |               |                  
|                                                 |               |                  
|Total assets                                     |               |                  
|                                                 |               |                  

See
notes to condensed consolidated financial statements.

4


---

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

|                                                                        | June 30,
2004 | December 31,
2003
|----------------------------------------------------------------------- | ------------- | -----------------
|
|
|LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED                           |               |                  
|STOCK 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                                                    |               |                  
|                                                                        |               |                  
|Dividends payable                                                       |               |                  
|                                                                        |               |                  
|Total current liabilities                                               |               |                  
|Long-term accrued workers' compensation                                 |               |                  
|insurance reserves                                                      |               |                  
|                                                                        |               |                  
|Deferred tax liability                                                  |               |                  
|                                                                        |               |                  
|Other long-term liabilities                                             |               |                  
|                                                                        |               |                  
|Total liabilities                                                       |               |                  
|                                                                        |               |                  
|                                                                        |               |                  
|Commitments and contingencies                                           |               |                  
|Series A convertible, redeemable preferred stock, $0.01 par value,      |               |                  
|($30,000 liquidation preference) 0 and 30,000 shares authorized, issued |               |                  
|and outstanding as of June 30, 2004 and December 31, 2003,              |               |                  
|respectively, net                                                       |               |                  
|                                                                        |               |                  
|                                                                        |               |                  
|                                                                        |               |                  
|Shareholders' equity:                                                   |               |                  
|Common stock, $.01 par value                                            |               |                  
|Shares authorized: 100,000,000                                          |               |                  
|Shares issued:                                                          |               |                  
|June 30, 2004 - 29,964,837                                              |               |                  
|December 31, 2003 - 22,251,477                                          |               |                  
|                                                                        |               |                  
|Additional paid in capital                                              |               |                  
|                                                                        |               |                  
|Retained earnings (Period ended June 30, 2004 includes a non-recurring, |               |                  
|non-cash charge of $29,317 attributable to the acceleration of the      |               |                  
|unamortized discount associated with the conversion into common stock   |               |                  
|of all shares of the convertible, redeemable preferred stock)           |               |                  
|Treasury stock (3,044,372 and 3,062,751 shares at cost, respectively)   |               |                  
|                                                                        |               |                  
|Total shareholders' equity                                              |               |                  
|                                                                        |               |                  
|                                                                        |               |                  
|Total liabilities, convertible redeemable preferred                     |               |                  
|stock and shareholders' equity                                          |               |                  
|                                                                        |               |                  

See
notes to condensed consolidated financial statements.

5


---

# GEVITY HR, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED(in $000s)

|                                                                | For the Six Months Ended
June 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                                |                                  
|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                               |                                  
|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 |                                  
|                                                                |                                  
|Purchase of intangible assets                                   |                                  
|Capital expenditures                                            |                                  
|                                                                |                                  
|Net cash used in investing activities                           |                                  
|                                                                |                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                           |                                  
|Payment of cash dividends to shareholders                       |                                  
|Proceeds from credit line borrowing                             |                                  
|Payments on credit line borrowing                               |                                  
|Proceeds from secondary stock offering                          |                                  
|Proceeds from issuance of Series A Convertible,                 |                                  
|Redeemable Preferred Stock, net of issuance costs               |                                  
|Purchase of treasury stock                                      |                                  
|Proceeds from issuance of common shares, net                    |                                  
|                                                                |                                  
|Net cash provided by financing activities                       |                                  
|                                                                |                                  
|Net increase (decrease) 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                                               |                                  
|                                                                |                                  

See
notes to condensed consolidated financial statements.

6


---

# GEVITY HR, INC. AND
SUBSIDIARIES                          NOTES 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
its subsidiaries (collectively, the Company or Gevity) were
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, 2003, filed with the Securities and Exchange Commission (the
Form 10-K). The financial information furnished reflects 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 Companys 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 Companys 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, medical benefit plan liabilities,
intangible assets, 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.

Conversion of Convertible
Redeemable Preferred Stock

On
May 19, 2004, the holders of the Series A Convertible, Redeemable Preferred Stock (the
Preferred Stock) converted 100% of their holdings into the Companys
common stock. The conversion price was $5.44 per share and resulted in the issuance of
5,514,705 shares of the Companys common stock. The former Preferred Stock holders
sold 3,555,000 shares of the 5,514,705 shares received upon conversion as part of the
Companys secondary stock offering (see Note 10).

In
connection with the original issue of the Preferred Stock on June 6, 2003, the Company
recorded the Preferred Stock at its fair value on the date of issuance of approximately
$30,000 less issuance costs of $2,314, and less an allocation of $27,298 to a beneficial
conversion feature. The beneficial conversion feature resulted from the conversion feature
of the Preferred Stock that was in-the-money on the date of issuance attributable to the
increase in the market price of the Companys common stock during the period from the
date on which the conversion price was fixed (approximating market price at that time) and
the date on which the Preferred Stock was issued. The beneficial conversion feature was
calculated as the difference between the market price and the conversion price on the date
of issuance, multiplied by the number of shares of common stock into which the Preferred
Stock was convertible. The beneficial conversion amount was recorded as a reduction of the
carrying value of the Preferred Stock and an increase to additional paid-in-capital. The
difference between the aggregate liquidation value of $30,000 and the initial balance of
$388 recorded in the Series A Preferred Stock account on the Companys balance sheet,
as a result of the beneficial conversion feature and the cost of issuance, was being amortized over the periods from the date of
issuance to the respective demand redemption dates for each 10,000 share tranche,
utilizing the interest method.

Following
the conversion of all shares of Preferred Stock into common stock, the Company recorded in
the second quarter of 2004 a non-recurring, non-cash charge of $29,317 to retained
earnings and reduced net income attributable to common shareholders by a corresponding
amount. This charge was required in order to account for the acceleration of the
unamortized discount related to the beneficial conversion feature and stock issuance
costs. The effect of the Preferred Stock transactions (which include the accretion of
redemption value of the Preferred Stock prior to conversion and the Preferred Stock
dividends) reduced earnings per diluted share by $1.22 and $1.26, respectively, for the
three and six months ended June 30, 2004, and the Company recorded a net loss attributable
to common shareholders of $21,834, or $0.95 per diluted share, and $15,884, or $0.75 per
diluted share, for the three and six month periods, respectively.

7


---

Earnings Per Share

The
reconciliations of net income attributable to common shareholders and shares outstanding
for purposes of calculating basic and diluted earnings per share for the three and six
months ended June 30, 2004 and 2003 are as follows:

|                                                                   | Net Income (Loss)
(Numerator) | Shares
(Denominator) | Per Share
Amount
|------------------------------------------------------------------ | ----------------------------- | -------------------- | ----------------
|
|
|For the Three Months Ended June 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 convertible, redeemable          |                               |                      |                 
|preferred stock                                                    |                               |                      |                 
|Non-cash charges attributable to beneficial conversion             |                               |                      |                 
|feature and accretion of redemption value of convertible,          |                               |                      |                 
|redeemable preferred stock                                         |                               |                      |                 
|Preferred stock dividends                                          |                               |                      |                 
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 
|Net loss attributable to common shareholders                       |                               |                      |                 
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 
|Effect of dilutive securities:                                     |                               |                      |                 
|Options                                                            |                               |                      |                 
|Convertible, redeemable preferred stock                            |                               |                      |                 
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 
|Diluted EPS:                                                       |                               |                      |                 
|Net loss attributable to common shareholders                       |                               |                      | $               
|                                                                   |                               |                      |                 

For
the three months ended June 30, 2004, inclusion of stock options to purchase 4,062,105
shares of common stock at various prices and inclusion of the Preferred Stock on an
if-converted basis for the period it was outstanding would have been
antidilutive.

|                                                          | Net Income
(Numerator) | Shares
(Denominator) | Per Share
Amount
|--------------------------------------------------------- | ---------------------- | -------------------- | ----------------
|
|
|For the Three Months Ended June 30, 2003:                 |                        |                      |                 
|Basic EPS:                                                |                        |                      |                 
|Net income                                                |                        |                      | $               
|                                                          |                        |                      |                 
|Non-cash charges attributable to beneficial conversion    |                        |                      |                 
|feature and accretion of redemption value of convertible, |                        |                      |                 
|redeemable preferred stock                                |                        |                      |                 
|Preferred stock dividends                                 |                        |                      |                 
|                                                          |                        |                      |                 
|Net income attributable to common shareholders            |                        |                      |                 
|                                                          |                        |                      |                 
|Effect of dilutive securities:                            |                        |                      |                 
|Options                                                   |                        |                      |                 
|Convertible, redeemable preferred stock                   |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|Diluted EPS:                                              |                        |                      |                 
|Net income                                                |                        |                      | $               
|                                                          |                        |                      |                 

8


---

For
the three months ended June 30, 2003, 552,182 options, 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 that the average price
of the common stock.

|                                                                   | Net Income (Loss)
(Numerator) | Shares
(Denominator) | Per Share
Amount
|------------------------------------------------------------------ | ----------------------------- | -------------------- | ----------------
|
|
|For the Six Months Ended June 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 convertible, redeemable          |                               |                      |                 
|preferred stock                                                    |                               |                      |                 
|Non-cash charges attributable to beneficial conversion             |                               |                      |                 
|feature and accretion of redemption value of convertible,          |                               |                      |                 
|redeemable preferred stock                                         |                               |                      |                 
|Preferred stock dividends                                          |                               |                      |                 
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 
|Net loss attributable to common shareholders                       |                               |                      |                 
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 
|Effect of dilutive securities:                                     |                               |                      |                 
|Options                                                            |                               |                      |                 
|Convertible, redeemable preferred stock                            |                               |                      |                 
|                                                                   |                               |                      |                 
|Diluted EPS:                                                       |                               |                      |                 
|Net loss attributable to common shareholders                       |                               |                      | $               
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 
|                                                                   |                               |                      |                 

For
the six months ended June 30, 2004, inclusion of stock options to purchase 4,062,105
shares of common stock at various prices and inclusion of the Preferred Stock on an
if-converted basis for the period it was outstanding would have been
antidilutive.

|                                                          | Net Income
(Numerator) | Shares
(Denominator) | Per Share
Amount
|--------------------------------------------------------- | ---------------------- | -------------------- | ----------------
|
|
|For the Six Months Ended June 30, 2003:                   |                        |                      |                 
|Basic EPS:                                                |                        |                      |                 
|Net income                                                |                        |                      | $               
|                                                          |                        |                      |                 
|Non-cash charges attributable to beneficial conversion    |                        |                      |                 
|feature and accretion of redemption value of convertible, |                        |                      |                 
|redeemable preferred stock                                |                        |                      |                 
|Preferred stock dividends                                 |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|Net income attributable to common shareholders            |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|Effect of dilutive securities:                            |                        |                      |                 
|Options                                                   |                        |                      |                 
|Convertible, redeemable preferred stock                   |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|Diluted EPS:                                              |                        |                      |                 
|Net income                                                |                        |                      | $               
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 

For
the six months ended June 30, 2003, 744,432 options, 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.

9


---

Stock-Based Compensation

In
December 2002, the Financial Accounting Standards Board 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. The Company has determined it will not
voluntarily change to the fair-value method of accounting for stock-based employee
compensation.

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.
Accordingly, no compensation cost has been recognized for the plans. Had compensation cost
for the 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:

|                                  |  | For the Three Months
Ended | For the Six Months Ended
|--------------------------------- |  | -------------------------- | ------------------------
|
|Net income                        |  |                            | As reported             
|Less: employee compensation       |  |                            |                         
|for stock option program,         |  |                            |                         
|net of tax effect                 |  |                            | Pro forma               
|                                  |  |                            |                         
|                                  |  |                            |                         
|Net income                        |  |                            | Pro forma               
|                                  |  |                            |                         
|                                  |  |                            |                         
|Basic (loss) earnings per share   |  |                            | As reported             
|                                  |  |                            |                         
|                                  |  |                            | Pro forma               
|                                  |  |                            |                         
|Diluted (loss) earnings per share |  |                            | As reported             
|                                  |  |                            |                         
|                                  |  |                            | Pro forma               
|                                  |  |                            |                         

# 2.    MARKETABLE SECURITIES
 RESTRICTED

At
June 30, 2004 and December 31, 2003, the Companys investment portfolio consisted of
restricted marketable debt and equity securities classified as trading and
available-for-sale.

Restricted
marketable securities designated as available-for-sale include auction market municipal
bonds, auction market preferred shares, and money market funds. These securities relate to
collateral held in connection with the Companys workers compensation programs,
collateral held in connection with the Companys general insurance programs and
escrow amounts held in connection with the TeamStaff acquisition and have been classified
as restricted in the accompanying condensed consolidated balance sheets. Due to the
short-term maturity of these instruments, the carrying amount approximates fair value. The
interest earned on these securities is recognized as interest income on the Companys
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 assumed in the EPIX acquisition
(see Note 5). 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.

10


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The
amortized cost and estimated fair value of the marketable securities portfolio by type and
classification as of June 30, 2004 and December 31, 2003 is as follows:

|                                                    | Amortized Cost | Gross Unrealized Gain | Estimated Fair Value
|--------------------------------------------------- | -------------- | --------------------- | --------------------
|As of June 30, 2004:                                |                |                       |                     
|Short-term                                          |                |                       |                     
|Auction market municipal bonds - restricted         |                |                       | $                   
|                                                    |                |                       |                     
|Auction market preferred shares - restricted        |                |                       |                     
|                                                    |                |                       |                     
|Money market - restricted                           |                |                       |                     
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Total short-term marketable securities - restricted |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Long-term                                           |                |                       |                     
|Money market - restricted                           |                |                       | $                   
|Mutual funds - trading                              |                |                       |                     
|                                                    |                |                       |                     
|Total long-term marketable securities - restricted  |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|As of December 31, 2003:                            |                |                       |                     
|Short-term                                          |                |                       |                     
|Auction market municipal bonds - restricted         |                |                       | $                   
|Auction market preferred shares - restricted        |                |                       |                     
|Money market - restricted                           |                |                       |                     
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Total short-term marketable securities - restricted |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Long-term                                           |                |                       |                     
|Money market - restricted                           |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     

For
the three and six months ended June 30, 2004 and June 30, 2003, 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 June 30, 2004 and December 31, 2003.

# 3.    ACCOUNTS RECEIVABLE

At
June 30, 2004 and December 31, 2003, accounts receivable consisted of the following:

|                                      | June 30,2004 | December 31, 2003
|------------------------------------- | ------------ | -----------------
|Billed to clients                     |              |                  
|                                      |              |                  
|Unbilled revenues                     |              |                  
|                                      |              |                  
|                                      |              |                  
|Less: Allowance for doubtful accounts |              |                  
|                                      |              |                  
|Total                                 |              |                  
|                                      |              |                  

# 4.    WORKERS
COMPENSATION RECEIVABLE

The
Company established a loss sensitive workers compensation insurance program with
member insurance companies of American International Group, Inc. (AIG)
effective January 1, 2003. In 2003, the Company began to operate a wholly-owned
Bermuda-based insurance company as a component of its workers compensation programs.
See Note 7 regarding the Companys prior years workers compensation insurance
programs with CNA Financial Corporation (CNA).

The
AIG workers compensation insurance programs provide for a sharing of risk between
the Company and AIG whereby AIG assumes risk within the following parts of the programs:
(i) individual claim stop loss insurance risk; (ii) for the 2003 program year, aggregate
claim stop loss insurance risk; and (iii) premium payment credit risk.

11


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The
Company, through its Bermuda-based insurance company, assumes risk related to claims not
subject to the individual claim stop loss insurance amount or claims not subject to the
aggregate claim stop loss insurance amount.

With
respect to the individual claim stop loss insurance risk, the Company is responsible for
paying, through AIG, claim amounts related to the first $1 million per occurrence for the
2003 policy year and $2 million per occurrence for the 2004 policy year. Claim amounts in
excess of $1 million per occurrence for the 2003 policy year and $2 million per occurrence
for the 2004 policy year are insured through the AIG program. For the 2004 policy year,
claim amounts between $1 million and $2 million per occurrence have been reinsured through
Munich American Reassurance Company. The Company, through its Bermuda-based insurance
company, remits premiums to AIG, to cover AIGs estimate of claims up to the per
occurrence claim amount. Under the 2004 workers compensation program, of the
$111,000 of such premiums paid, the Company is guaranteed by AIG to receive a 2.92% per
annum fixed return on amounts held by AIG in excess of claims paid. Under the 2003 program
with AIG, of the $85,000 of such premiums paid, the Company is guaranteed by AIG to
receive 2.42% per annum fixed return on $73,500 and 1.85% on the remaining amount in
excess of claims paid. In order for the Company to receive the guaranteed return rates,
the excess premiums must remain with AIG for at least 10 years for the 2004 program and 7
years for the 2003 program. If excess premium payments are withdrawn prior to the stated
period, the interest rate is adjusted downward based upon a sliding scale.

With
respect to the aggregate claim stop loss insurance risk for the 2003 program, claims
amount in excess of 175% of the insurance companys estimate of expected losses for
the policy year are insured through the AIG program. The amount of the expected losses is
established at the beginning of the policy year based on an expected volume of payroll. If
the payroll volume varies during the year, the amount of the aggregate claim stop loss
insurance risk changes proportionately. The Company generally does not pay additional
premiums during the policy year unless payroll volume or actual losses exceed certain
estimated amounts established at the beginning of the policy year. This results in premium
payment credit risk to AIG. Additionally, AIG does not require collateral equal to the
limits of the aggregate claim stop loss amount. The absence of this collateral requirement
results in credit risk to AIG. The Company did not elect aggregate claim stop loss
insurance for the 2004 program year.

Finally,
with respect to the premium payment credit risk, this program is a fully insured policy
written by AIG. If the Company were to fail to make premium payments to AIG as scheduled,
then AIG would be responsible for the payment of all losses under the terms of the policy.
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. The Company has reached an
agreement with AIG whereby the $17,000 of collateral related to premium payment credit
risk for the 2003 plan will serve as collateral for the 2004 year plan. This amount has
been included as long-term marketable securities-restricted as of June 30, 2004 and
December 31, 2003.

The
Company accrues for workers compensation costs under the AIG programs 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 program, return on investment
premium dollars paid and the discount rate used to determine the net present value of the
expected future payments to be made under the program. At June 30, 2004 and December 31,
2003, the discount rate used to calculate the present value of claim liabilities was 2.5%.
Premium payments made to AIG during 2004 and 2003 were in excess of the present value of
the estimated claim liabilities. This resulted in a workers compensation receivable,
net at June 30, 2004 and December 31, 2003 of $53,887 and $24,355, respectively of which
$11,734 was classified as short-term in both periods.

# 5.    INTANGIBLE ASSETS

EPIX Acquisition

On
March 26, 2004, the Company acquired the human resource outsourcing client portfolio of
EPIX Holdings Corporation (EPIX) and certain of its subsidiaries. The
transaction was accomplished by an assignment from EPIX and its subsidiaries to the
Company of all of its client service agreements, which cover approximately 2,000 clients
and approximately 30,000 client employees. Approximately 70 internal employees of EPIX
have accepted permanent employment with the Company. In addition, approximately 100
employees of EPIX remained with the Company for a transitional period of 90 days from the
date of the EPIX acquisition.

12


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The
purchase price for the acquired assets was $37,810 (including direct acquisition costs of
$1,810). In connection with the acquisition, the Company entered into a $35,000 unsecured
credit agreement with Bank of America, N.A. (see Note 8). The Company utilized $20,000 of
this credit agreement to fund the purchase price for the acquisition and paid the
remainder of the purchase price from its internal funds. Of the amount paid to EPIX,
$2,500 was placed in an escrow account as security for certain indemnification obligations
of EPIX under the asset purchase agreement. In connection with the acquisition, the
Company assumed certain employee benefit plans of EPIX that cover certain of the client
employees acquired by the Company. Amounts held in the escrow account may be used by the
Company under certain circumstances to reimburse or compensate itself for adverse
consequences resulting from a breach by EPIX of certain representations and warranties in
the asset purchase agreement or issues related to any assumed employee benefit plan that
result from any action or failure to act on the part of EPIX prior to the closing date of
the transaction. An amount equal to $1,250 (plus investment income earned), to the extent
then held in the escrow account, will be released to EPIX on March 26, 2005, with the
remaining amount, if any, released to EPIX on March 26, 2006. In June 2004, the Company
converted the EPIX clients and client employees on to Gevity's Oracle Human Resource Mananagement and Payroll applications.

The
EPIX acquisition was accounted for under the purchase method, in accordance with SFAS No.
141, Business Combinations. The results of operations for EPIX are included in the
Companys statement of operations for the period March 27, 2004 through June 30,
2004. The purchase price of $37,810 was allocated to assets acquired based upon their fair
values on the date of acquisition as determined by a third party valuation and by
management estimates. This resulted in 100% of the purchase price being allocated to the
client list intangible asset. This intangible asset will be amortized on a straight-line
basis over its estimated useful life of 5 years.

In
connection with the acquisition, the Company assumed the assets and liabilities related to
a non-qualified deferred compensation plan. At June 30, 2004, plan assets of $4,808 are
held in a rabbi trust and included in long-term investments  restricted (see Note 2)
and the related deferred compensation plan liability of $4,808 is included in other
long-term liabilities.

In
accordance with the EPIX acquisition agreement, EPIX agreed to pay the Company for the
assumption of certain employment related liabilities. EPIX also agreed to perform
transition services through June 30, 2004 for a fee and the Company agreed to process
payroll for the EPIX internal employees under a co-employment agreement. In connection
with the above and as a result of net cash received by EPIX related to client billings
subsequent to March 26, 2004, the Company has recorded a receivable of approximately
$3,017, which is included in other current assets as of June 30, 2004. Both companies are
currently finalizing their review of the receivable balance and resolution is expected in
the third quarter of 2004.

The
following pro forma data summarize the results of operations for the periods indicated as
if the EPIX acquisition had been completed as of the beginning of the periods presented.
The pro forma data gives effect to actual operating results prior to the acquisition,
adjusted to include the pro forma effect of interest expense, amortization of intangibles
and income taxes and adjusted to exclude the facility related costs of branches not
acquired, depreciation effects of assets not acquired and the effect of unusual,
nonrecurring EPIX expense items. These pro forma results are not necessarily indicative of
the results that would have actually been obtained if the acquisition occurred as of the
beginning of the periods presented or that may be obtained in the future.

13


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|                              | For the Three Months Ended | For the Six Months Ended
|----------------------------- | -------------------------- | ------------------------
|
|Pro forma revenues            |                            |                         
|                              |                            |                         
|Pro forma net income          |                            |                         
|                              |                            |                         
|Pro forma earnings per share: |                            |                         
|-Basic                        |                            |                         
|                              |                            |                         
|-Diluted                      |                            |                         

TeamStaff Acquisition

In
March 2004, the Company and TeamStaff, Inc. (TeamStaff) agreed to release to
TeamStaff $2,250 of the $2,500 held in the escrow account created in connection with the
acquisition of TeamStaff on November 17, 2003. The escrow related to contingent purchase
price was released to TeamStaff based on the retention by Gevity of approximately 90% of
former TeamStaff client employees during the measurement period. The balance of the escrow
was returned to Gevity. The $2,250 has been added to the client list intangible asset and
will be amortized over the remaining useful life of the asset.

# 6.    HEALTH BENEFITS

Blue
Cross Blue Shield of Florida (BCBS) is the Companys primary healthcare
provider in Florida, delivering medical care benefits to approximately 21,000 Florida
client employees. The Companys policy with BCBS is a minimum premium policy expiring
September 30, 2005. Pursuant to this policy, the Company is obligated to reimburse BCBS
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 loss coverage is provided to the Company at
the level of 115% of projected claims. The Companys obligation to BCBS related to
incurred but not reported claims is secured by a letter of credit. As of June 30, 2004 and
December 31, 2003, the amount of the letter of credit for BCBS securing such obligations
was $6,000. The amount of the letter of credit is intended to approximate one months
claims payments. The policy allows for an adjustment to the letter of credit amounts based
on premium volume and for increases to the claims payment factor to a maximum of two
months of expected claims payments.

Aetna
is the primary medical care benefits provider for approximately 22,000 client employees
throughout the remainder of the country including client employees acquired in the EPIX
acquisition. The Companys 2004 policy with Aetna provides for HMO and PPO offerings
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.

The
Company provides coverage to approximately 7,000 client employees under regional medical
plans 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, Capital Health
Plans in the Tallahassee, Florida region, and Health Net, Inc. in New Jersey and New York.
Such regional medical plans are subject to guaranteed cost contracts that cap the
Companys annual liability.

The
Companys dental plans, which include both PPO and HMO offerings, are primarily
provided by Aetna for all client employees who elect coverage. In addition, Delta Dental
and American Dental provide dental coverage for certain client employees acquired in the
EPIX and TeamStaff acquisitions. All dental plans are subject to guaranteed cost contracts
that cap the Companys annual liability.

14


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

Client
employees acquired in the EPIX acquisition and the prior year TeamStaff acquisition
continue to be provided medical care benefits under the medical benefit plans in which
they participated on the date of the respective acquisitions. These plans are guaranteed
cost contracts that cap the Companys annual liability.

Included
in accrued insurance premiums, health and workers compensation insurance reserves at
June 30, 2004 and December 31, 2003 are $34,075 and $20,233, respectively, of short-term
liabilities related to the Companys health care plans. There were no long-term
liabilities related to the Companys health benefit plans at June 30, 2004 and
December 31, 2003.

Health
benefit reserves are based primarily upon an independent actuarial estimate of claims
incurred but not reported and for claims reported but not yet paid. The calculation of
these reserves is based upon a number of factors, including current and historical claims
payment patterns and medical trend rates.

# 7.    WORKERS
COMPENSATION INSURANCE RESERVES

The
Company has loss sensitive workers compensation insurance programs with CNA for
policy years 2002, 2001 and 2000. See Note 4 regarding the Companys 2004 and 2003
workers compensation insurance programs with AIG.

The
CNA insurance program provides for a sharing of risk between the Company and CNA whereby
CNA assumes risk in at least four areas within the program: (i) individual claim stop loss
insurance risk; (ii) aggregate claim stop loss insurance risk; (iii) claim payment timing
risk; and (iv) premium payment credit risk.

The
Company assumes risk related to claims not subject to the individual claim stop loss
insurance amount, claims not subject to the aggregate claim stop loss insurance amount and
claims not subject to the claim payment timing risk.

With
respect to the individual claim stop loss insurance risk, the Company is responsible for
paying, through CNA, claim amounts related to the first $1 million per occurrence. Claim
amounts in excess of $1 million per occurrence are insured through the CNA program.

With
respect to the aggregate claim stop loss insurance risk, the Company is responsible for
remitting premium payments to CNA sufficient to fund 130% of the insurance companys
estimate of expected losses for the policy year. The amount of the expected losses is
established at the beginning of the policy year based on an expected volume of payroll. If
the payroll volume varies during the year, the amount of the aggregate claim stop loss
insurance risk changes proportionately. Total claims amounts during the policy year that
exceed 130% of the expected loss amount are insured through the CNA program. The Company
generally does not pay additional premiums during the policy year unless payroll volume or
losses exceed the estimated amounts established at the beginning of the policy year.

With
respect to the claim payment timing risk, the Company pays premiums to CNA and guarantees
a specific investment return on those premium payments. If the premium payments plus the
guaranteed investment returns are not adequate to fund a specific amount of claims due to
the payment pattern of those claims being faster than expected, then CNA is required to
fund the additional amounts required.

For
the 2000 and 2001 programs, the Company guaranteed that the premium paid to CNA would earn
an annual rate of return equal to seven percent. For the 2002 program, the Company
guaranteed CNA that the premium would earn a rate of return equal to four and one-quarter
percent. The Company is required to pay additional premiums to CNA after the close of each
calendar year based on the difference between the actual return earned by the premium paid
and the guaranteed annual rate of return. The additional premium paid to CNA is used to
pay claims incurred during the policy year and is included in the amount of accrued
insurance premium reserves at June 30, 2004 and December 31, 2003.

15


---

Finally,
with respect to the premium payment credit risk, since this program is a fully insured
policy written by CNA, if the Company were to fail to make premium payments to CNA as
scheduled, then CNA would be responsible for the payment of all losses under the terms of
the policy. CNA does require the Company to provide collateral based on the estimate of
expected losses for each policy year. The payment of first year claims by the Company and
premium payments to fund claims to be paid in later years by CNA reduce the amount of the
total collateral to be provided by the Company. The required collateral can be provided in
the form of deposits paid to CNA, cash and short-term investments placed into a trust
account, letters of credit and surety bond collateral provided by independent surety bond
companies. CNA does not receive collateral equal to the limits of the aggregate claim stop
loss insurance amount, which is 130% of the estimate of the expected losses for the policy
year. Such collateral amount is established at the beginning of the policy year and actual
payroll volumes may vary, resulting in a difference in the amount of expected losses and
in the amount of collateral provided based on estimates of expected losses made at the
inception of each policy year. Such variances, in addition to not receiving collateral
equal to the aggregate claim stop loss amount, results in credit and premium payment risk
to CNA.

The
Company accrues for workers compensation costs under the CNA program based upon
payroll dollars paid to client employees, the specific risks associated with the type of
work performed by the client employees, the administrative costs of the program, the
expected rate of return earned by premium dollars paid to CNA as part of the program and
the discount rate used to determine the present value of future payments to be made under
the program. Total liabilities for workers compensation costs at June 30, 2004 and
December 31, 2003 were $70,635 and $71,118, respectively, of which $59,280, was classified
as long-term for both periods. The discount rate used to calculate the present value of
the claim liabilities was 2.5% at June 30, 2004 and December 31, 2003.

The
Company pledged $79,235 and $79,136 in restricted marketable securities at June 30, 2004
and December 31, 2003, respectively, as collateral for the Companys CNA
workers compensation programs.

# 8.    REVOLVING CREDIT
FACILITY

On
March 26, 2004, in connection with the EPIX acquisition (see Note 5), the Company entered
into 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 term of 3 years. 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) the Bank of America, N.A. prime rate. Up to $7,000 of the loan commitment
can be made through letters of credit issued by the 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 is charged for any unused portion
of the loan commitment. The credit agreement includes certain financial maintenance
requirements and affirmative and negative covenants, all of which the Company were in
compliance with at June 30, 2004.

On
May 19, 2004 the Company repaid outstanding advances under the credit agreement with
proceeds from its secondary offering (see Note 10). The Company recorded interest expense
of $117 and $127, respectively for the three and six month periods ended June 30, 2004 at
a weighted average interest rate of 3.60%. As of June 30, 2004, there were no borrowings
outstanding under the credit agreement.

16


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# 9.    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. 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 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
rules affect all companies in the U.S. However, the rules that govern Professional
Employer Organizations (PEOs) constitute an evolving area due to uncertainties
resulting from the non-traditional employment relationship between the PEO, the client and
the client employees. Many federal and state laws relating to tax and employment matters
were enacted before the widespread existence of PEOs and do not specifically address the
obligations and responsibilities of these PEO relationships. If the IRS concludes that
PEOs are not employers of certain client employees for purposes of the
Internal Revenue Code of 1986, as amended (the Code), the tax qualified status
of the Companys defined contribution retirement plans in effect prior to April 1,
1997 could be revoked, its cafeteria benefit plan may lose its favorable tax status and
the Company, as defined, may no longer be able to assume the 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.

# 10.    EQUITY

On May 19, 2004, the Company completed its secondary public stock offering of
1,750,000 shares of its common stock for $21.75 per share, less underwriting discounts and
commissions of $1.305 per share. Net proceeds from the offering totaled approximately
$34,958 (net of $821 of stock issuance costs). A portion of the proceeds from the offering
totaling $20,000 was used to repay outstanding borrowings under the Companys credit
agreement with Bank of America, N.A. The remainder of the proceeds will be used for
working capital and general corporate purposes.

Included
in the public offering were 3,770,000 shares of the Companys common stock sold by
selling shareholders. Selling shareholders included the former preferred stockholders
(3,555,000 shares sold) (see Note 1) and certain members of management, directors and
other selling shareholders (215,000 shares sold). Proceeds from the sale of these shares
went directly to the selling shareholders. The shares sold by the former holders of the
Preferred Stock included 720,000 shares purchased by the underwriters pursuant to an over
allotment option granted to them.

Employee Stock Option
Plans

During
the six months ended June 30, 2004 and June 30, 2003, the Company issued 448,655 and
465,598 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 $1,725 and $1,584, respectively.

Employee Stock Purchase
Plan

During
the six months ended June 30, 2004 and June 30, 2003, 18,379 and 21,912 shares,
respectively, of the Companys common stock (from treasury) were sold to employees
participating in the Companys employee stock purchase plan, which was adopted on
July 1, 2001. Proceeds from the employee stock purchase plan were approximately $189 for
the six months ended June 30, 2004 and $75 for the six months ended June 30, 2003.

17


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# 11.    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 federal and state
income taxes. For the three and six months ended June 30, 2004 and 2003, the
Companys effective rate was 33.0%.

18


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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
and elsewhere in this Form 10-Q. See Cautionary Note Regarding Forward-Looking
Statements. 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 our Form 10-K. Historical results are not
necessarily indicative of trends in operating results for any future period.

# 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 Series A Convertible Redeemable Preferred
Stock (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 (See Note 1 of Notes to Condensed Consolidated Financial
Statements).

Reconciliation of Pro Forma Non-GAAP Financial Information:

|                                         | Three Months Ended | Six Months Ended
|---------------------------------------- | ------------------ | ----------------
|
|
|Net (loss) income 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               |                    |                 
|convertible, redeemable preferred        |                    |                 
|stock                                    |                    |                 
|Non-cash charges attributable to         |                    |                 
|beneficial conversion feature and        |                    |                 
|accretion of redemption value of         |                    |                 
|convertible, redeemable preferred        |                    |                 
|stock                                    |                    |                 
|Preferred Stock dividends                |                    |                 
|                                         |                    |                 
|Pro forma net income for                 |                    |                 
|diluted earnings per share               |                    |                 
|calculation (non-GAAP)                   |                    |                 
|                                         |                    |                 
|                                         |                    |                 
|Diluted (loss) income per                |                    |                 
|share (GAAP)                             |                    |                 
|                                         |                    |                 
|Pro forma diluted income per             |                    |                 
|share (non-GAAP)                         |                    |                 
|                                         |                    |                 
|                                         |                    |                 
|Diluted weighted average                 |                    |                 
|shares outstanding (GAAP)                |                    |                 
|Pro forma effect of dilutive securities: |                    |                 
|Options                                  |                    |                 
|Convertible, redeemable preferred stock  |                    |                 
|                                         |                    |                 
|Pro forma diluted weighted average       |                    |                 
|shares outstanding (non-GAAP)            |                    |                 
|                                         |                    |                 

19


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# OVERVIEW AND INTRODUCTION

The
Company is a leading U.S. provider of human capital management solutions. The Company
offers its clients, which are typically small to medium-sized businesses with between one
and 100 employees, a broad range of tools and services that provide a complete solution
for the clients human resource outsourcing needs. The Companys tools and
services include assisting clients with:

| |  | finding
the right employees;
| | - | ----------------------------

| |  | developing
and managing their employees;
| | - | ----------------------------------------

| |  | retaining
high-quality employees;
| | - | ---------------------------------

| |  | managing their paperwork, including benefits administration, payroll
administration, governmental compliance, risk management, unemployment service
administration, and health, welfare and retirement benefits; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | protecting
the clients business.
| | - | ---------------------------------

The Company delivers its tools and services to its clients through an integrated and
proactive client relationship management system. Each client is assigned a dedicated human
resource consultant who is located at either a local Gevity branch office near the
clients location or at the Companys centralized field support service center
located in Bradenton, Florida. In addition, the client has continuous access to its human
resource information via the Companys internal portal, Gevity CentralSM,
as well as access to specialized human resource consultants in areas including 401(k) plan
administration and unemployment service administration.

The Company believes that the human resource outsourcing market focusing on small and
medium-sized businesses, as measured by the number of employees per client, is its most
attractive market in terms of customer concentration, need for customized solutions, price
sensitivity, capital investment, new client acquisition cost, sales cycle and market
growth.

The Company believes that the human resource outsourcing competitive landscape is highly
fragmented and populated by various point solution providers who offer segments of the
entire service offering that the Company provides to its clients.

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. By delivering human resource outsourcing
solutions to its clients through a co-employment relationship, the Company is also
responsible for providing workers compensation and unemployment insurance benefits
to its clients employees as well as health and welfare benefits. In doing so, the
Company has an opportunity to generate net income and cash, but does not believe that this
can be a significant portion of its overall business profitability.

In addition to the significant market growth opportunity that exists in the underserved
small to medium-sized business market, the Company believes that there also exists a
significant opportunity to increase prices from the current level of professional service
fees being charged in delivering its human resource outsourcing services.

The
Company believes that the primary challenge and risk it faces in delivering its human
resource outsourcing solutions is its ability to convince small to medium-sized businesses
to accept the concept of human resource outsourcing. The Company believes that most small
to 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.

20


---

The
Company has transitioned its business from one that provided discounted insurance products
to its clients to one that delivers human resource outsourcing solutions for its clients.
During this transition, the total number of client employees serviced by the Company
declined from over 130,000 client employees in 1999 to under 90,000 client employees
during 2003 prior to the acquisition of TeamStaff. During the transition, 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
hiring of additional sales personnel that will result in a larger amount of new client
employees acquired, (ii) improved human resource outsourcing service offerings that will
lead to higher current client employee retention levels and (iii) acquisitions of other
human resource outsourcing client portfolios.

The
following tables for the three months and six months ending June 30, 2004 and 2003 provide
information that the Company utilizes when assessing the financial performance of its
business, which includes the effect of the TeamStaff acquisition in November 2003 and the
EPIX acquisition in March 2004:

|                              | Three Months Ended June 30,
|----------------------------- | ---------------------------
|
|
|Statistical Data:             |                            
|Average number of client      |                            
|employees paid by month       |                            
|Average wage per average      |                            
|number of client employees    |                            
|paid by month                 |                            
|Professional service fees per |                            
|average number of client      |                            
|employees paid by month       |                            
|Gross profit per average      |                            
|number of client employees    |                            
|paid by month                 |                            
|Operating income per average  |                            
|number of client employees    |                            
|paid by month                 |                            

|                              | Six Months Ended June 30,
|----------------------------- | -------------------------
|
|
|Statistical Data:             |                          
|Average number of client      |                          
|employees paid by month       |                          
|Average wage per average      |                          
|number of client employees    |                          
|paid by month                 |                          
|Professional service fees per |                          
|average number of client      |                          
|employees paid by month       |                          
|Gross profit per average      |                          
|number of client employees    |                          
|paid by month                 |                          
|Operating income per average  |                          
|number of client employees    |                          
|paid by month                 |                          

21


---

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

The
Company believes that the primary risks in being able to increase the overall number of
client employees serviced are: (i) the amount of time required for the additional sales
personnel to begin to acquire new client employees that may be longer than anticipated;
(ii) the current client employee retention levels may decrease if clients decide to source
their human resource outsourcing needs from alternative service providers; (iii) other
human resource outsourcing client employee portfolios may not be available for acquisition
due to price or quality of the portfolios; and (iv) the Company may not be able to
continue to provide insurance-related products of a quality to acquire new client
employees and to retain current client employees.

# Acquisitions

EPIX Acquisition. On March 26, 2004, the Company acquired the human resource
outsourcing client portfolio of EPIX Holdings Corporation (EPIX) and certain
of its subsidiaries. The transaction was accomplished by an assignment from EPIX (and its
subsidiaries) to the Company of all of its client service agreements, which cover
approximately 2,000 clients and approximately 30,000 client employees. Approximately
70 internal employees of EPIX have accepted permanent employment with the Company. In
addition, approximately 100 internal employees of EPIX remained with the Company for
a transitional period of 90 days from the date of the EPIX acquisition.

The purchase price for the acquired assets was $37.8 million (including direct
acquisition costs of $1.8 million). In connection with the acquisition, the Company
entered into a $35.0 million unsecured credit facility with Bank of America, N.A.
Approximately $20.0 million of this facility was utilized to fund the purchase price
for the acquisition and the remainder of the purchase price was paid from internal funds
of the Company. Of the amount paid to EPIX, $2.5 million was placed in an escrow
account as security for certain indemnification obligations of EPIX under the asset
purchase agreement. In connection with the acquisition, the Company assumed certain
employee benefit plans of EPIX that cover certain of the client employees acquired.
Amounts held in the escrow account may be used by the Company under certain circumstances
to reimburse or compensate the Company for adverse consequences resulting from a breach by
EPIX of certain representations and warranties in the asset purchase agreement or issues
related to any assumed employee benefit plan that result from any action or failure to act
on the part of EPIX prior to the closing date of the transaction. Escrow amounts
remaining, if any, will be released to EPIX over a two-year period. The Company converted
the EPIX clients and client employees on to the Gevity's Oracle Human Resource Management and Payroll applications during June 2004.

TeamStaff Acquisition. On November 17, 2003, the Company acquired the human
resource outsourcing client portfolio of TeamStaff, Inc. together with certain other
assets. The TeamStaff acquisition was accomplished through an assignment by TeamStaff (and
its subsidiaries) to Gevity of all of its client service agreements, which covered over
1,500 clients and over 16,000 client employees. The other assets acquired consisted
primarily of a proprietary benefits reconciliation software program and leases of certain
office space occupied by TeamStaff. In addition, approximately 70 internal employees
of TeamStaff became internal employees of Gevity. In connection with this acquisition, the
Company also assumed certain of the employee benefit plans that were offered by TeamStaff.
The Company has completed the conversion of the former TeamStaff clients and their
employees on to Gevity's Oracle Human Resource Management and Payroll applications.

The purchase price for the acquired TeamStaff assets was $9.7 million (including
direct acquisition costs of approximately $0.2 million), which was paid in cash from
internal funds. Of this amount, $2.5 million was held in an escrow account and was to
be released based upon the retention of former TeamStaff clients. In March 2004, the
Company and TeamStaff agreed to release $2.25 million of the escrow proceeds to
TeamStaff based on the retention by Gevity of approximately 90% of former TeamStaff client
employees during the measurement period. The balance of the escrow was returned to Gevity.

22


---

# Revenues

The
gross billings that the Company charges its clients under its Professional Services
Agreement include each client employees gross wages, a consolidated service fee and,
to the extent elected by the clients, health and welfare benefit plan costs. The
Companys consolidated service fee, which is primarily computed on a per employee
basis, is intended to yield a profit to the Company and to cover the costs of the human
resource outsourcing services provided by the Company to the client, certain
employment-related taxes and workers compensation insurance coverage. The
professional service fee component of the consolidated service fee related to human
resource outsourcing varies according to the size and the location of the client. The
component of the consolidated service fee related to workers compensation and
unemployment insurance is based, in part, on the clients historical claims
experience. All charges by the Company are invoiced along with each periodic payroll
provided to the client.

The
Company accounts for its revenues using the accrual method of accounting. Under the
accrual method of accounting, the Company recognizes its revenues in the period in which
the client employee performs work. The Company accrues revenues and unbilled receivables
for consolidated service fees relating to work performed by client employees but unpaid at
the end of each period. In addition, the related costs of services are accrued as a
liability for the same period. Subsequent to the end of each period, such wages are paid
and the related service fees are billed.

The
Company reports revenues from consolidated service fees in accordance with Emerging Issues
Task Force (EITF) No. 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent. The Company reports as revenues, on a gross basis, the total amount
billed to clients for professional service fees, health and welfare benefit plan fees,
workers compensation and unemployment insurance fees. The Company reports revenues
on a gross basis for these fees because the Company is the primary obligor and deemed to
be the principal in these transactions under EITF No. 99-19. The Company reports revenues
on a net basis for the amount billed to clients for client employee salaries, wages and
certain payroll-related taxes less amounts paid to client employees and taxing authorities
for these salaries, wages and taxes.

The
Companys revenues are impacted by the number of client employees it serves, the
number of client employees paid each period and the related wages paid, and the number of
client employees participating in the Companys benefit plans. Because a portion of
the consolidated service fee charged is computed as a percentage of gross payroll,
revenues are affected by fluctuations in the gross payroll caused by the composition of
the employee base, inflationary effects on wage levels and differences in the local
economies in the Companys markets.

# Cost of Services

Cost
of services includes health and welfare benefit plan costs, workers compensation
insurance costs and state unemployment tax costs, as well as other direct costs associated
with the Companys revenue generating activities.

Health
and welfare benefit plan costs are comprised primarily of medical benefit costs, but also
include costs of other employee benefits such as dental, vision, disability and group life
insurance. Benefit claims incurred by client employees under the benefit plans are
expensed as incurred according to the terms of each contract. In addition, for certain
contracts, liability reserves are established for benefit claims reported and not yet paid
and claims that have been incurred but not reported.

In
certain instances, the Company decides to make a contribution toward the medical benefit
plan costs of certain clients. The contribution is referred to as a health benefit
subsidy. The addition of the client employees of these clients as participants in
the Companys medical benefit plans helps to stabilize the overall claims experience
risk associated with those plans. An aggregate health benefit subsidy in excess of a
planned amount may occur when the medical cost inflation exceeds expected medical cost
trends or when medical benefit plan enrollment of those who qualify for a subsidy exceeds
expectations. Conversely, a health benefit surplus may occur when the medical
cost inflation is less than expected medical cost trends or when medical benefit plan
enrollment of those who qualify for a subsidy is less than expectations.

23


---

The
Company offers its medical benefit plans in partnership with premier health care
companies. These companies have extensive provider networks and strong reputations in the
markets in which the Company operates.

Substantially
all of the Companys client employees are covered under the Companys
workers compensation program with member insurance companies of American
International Group (AIG) which became effective January 1, 2003. Under this
program, workers compensation costs for the year are based on premiums paid to AIG
for the current year coverage, estimated total costs of claims to be paid by the Company
that fall within the policy deductible, the administrative costs of the program, the
return on investment premium dollars paid as part of the program and the discount rate
used in determining the present value of future payments to be made under the program.
Additionally, any revisions to the estimates of the prior year loss sensitive programs are
recognized in the current year. In states where private insurance is not permitted, client
employees are covered by state insurance funds. Premiums paid to state insurance funds are
expensed as incurred.

On
an annual basis, the Company reviews the current and prior year claims information with
its independent actuaries. The current accrual rate and overall workers compensation
reserves may be adjusted based on current and historical loss trends, fluctuations in the
administrative costs associated with the program, actual returns on investment earned with
respect to premium dollars paid and changes in the discount rate used to determine the
present value of future payments to be made under the program. The final costs of coverage
will be determined by the actual claims experience over time as claims close, the final
administrative costs of the program and the final return on investment earned with respect
to premium dollars paid.

State
unemployment taxes are generally paid as a percentage of payroll costs and expensed as
incurred. Rates vary from state to state and are based upon the employers claims
history. The Company aggressively manages its state unemployment tax exposure by
contesting unwarranted claims.

# Operating Expenses

Operating
expenses consist primarily of salaries, wages and commissions associated with the
Companys internal employees, and general and administrative expenses. Sales and
marketing commissions and client referral fees are expensed as incurred. The Company
expects that future revenue growth will result in increased operating leverage as the
Companys fixed operating expenses are leveraged over a larger revenue base.

# Income Taxes

The
Company records income tax expense (benefit) using the asset and liability method of
accounting for deferred income taxes. The Companys effective tax rate for the three
and six months ended June 30, 2004 and 2003 was 33.0%. Such effective tax rates differed
from the statutory federal tax rates primarily because of state taxes and federal tax
credits.

# Profitability

Profitability
is largely dependent upon the Companys success in generating professional service
fees and managing the costs that are within its control. The most volatile factors that
drive cost of services primarily relate to workers compensation coverage, health
benefit plans and state unemployment taxes. The Company seeks to manage these costs
through the use of: (i) workers compensation arrangements with carriers who
efficiently manage claims administration and the Companys internal risk assessment
and client risk management programs; (ii) appropriately designed health benefit plans that
encourage client employee participation and efficient risk pooling; and (iii) active
management of its state unemployment tax exposure.

24


---

# RESULTS OF OPERATIONS

Three Months Ended June
30, 2004 Compared to Three Months Ended June 30, 2003.

# Revenue

The
following table presents certain information related to the Companys revenues for
the three months ended June 30, 2004 and June 30, 2003:

|                                        | 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                           |                   
|                                        |                   
|Average wage per average client         |                   
|employees paid by month                 |                   
|Workers' compensation billing per one   |                   
|hundred dollars of workers'             |                   
|compensation wages                      |                   
|                                        |                   
|Workers' compensation manual premium    |                   
|per one hundred dollars of workers'     |                   
|compensation wages                      |                   
|                                        |                   
|Professional service fees per average   |                   
|number of client employees paid by      |                   
|month                                   |                   
|Client employee health benefits         |                   
|participation                           |                   
|                                        |                   

For
the three months ended June 30, 2004, revenues were $158.1 million compared to $102.1
million for the three months ended June 30, 2003 representing an increase of $56.0 million
or 54.8%. Revenue growth was primarily a result of the TeamStaff and EPIX acquisitions.
Also contributing to the growth were increases in the charges for professional service
fees, as part of the Companys strategy to emphasize the human resource consulting
services that it provides to its clients, and increases in fees for providing
workers compensation insurance and health and welfare benefits for client employees.

As
of June 30, 2004, the Company served approximately 8,900 clients as measured by each
clients FEIN and approximately 10,100 as measured by separate client payroll cycles,
with approximately 138,000 active client employees. The Company operates branch offices in
Alabama, Arizona, California, Colorado, Florida, Georgia, Minnesota, New Jersey, North
Carolina, New York, Tennessee and Texas.

The
average number of paid client employees was 129,145 at June 30, 2004, as compared to
85,786 at June 30, 2003, representing an increase of 50.5%. The increase was primarily a
result of the TeamStaff and EPIX acquisitions, which added approximately 42,000 additional
average paid employees for the period.

25


---

The
average wage of paid client employees for the three months ended June 30, 2004 increased
7.6% to $34,969 from $32,493 for the three months ended June 30, 2003. This increase is
consistent with the Companys strategy of focusing on clients that pay higher wages
to their employees.

Revenues
for professional service fees increased to $36.1 million for the three months ended June
30, 2004, from $22.6 million for the three months ended June 30, 2003, representing an
increase of $13.5 million or 59.3%. The increase was a result of increases in professional
service fees per client employee of 5.8%, from $1,056 for the three months ended June 30,
2003 to $1,117 for the three months ended June 30, 2004. Such service fee increases per
employee were attributable to both current and new client employees. In addition,
professional service fees for the three months ending June 30, 2004 were higher as a
result of the TeamStaff and EPIX acquisitions.

Revenues
for providing health and welfare benefits plans for the three months ended June 30, 2004
were $84.9 million as compared to $51.6 million for the three months ended June 30, 2003,
representing an increase of $33.3 million or 64.6%. Health and welfare benefit plan
charges primarily increased as a result of the effects of the TeamStaff and EPIX
acquisitions. 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 cost increases.

Revenues
for providing workers compensation insurance coverage increased to $31.4 million in
2004, from $26.0 million in 2003 representing an increase of $5.4 million or 20.6%.
Workers compensation billings, as a percentage of workers compensation wages
for 2004, were 2.96% as compared to 3.81% for 2003, representing a decrease of 22.3%.
Workers compensation charges increased in the second quarter of 2004 primarily due
to the TeamStaff and EPIX acquisitions and was partially offset by a decrease in billings
for Florida clients reflecting a reduction in Florida manual premium rates.

The
manual premium rate for workers compensation applicable to the Companys
clients decreased 22.9% to $3.57 during the three months ended June 30, 2004 from $4.63
for to the three months ended June 30, 2003. 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 the change in the workers compensation insurance risk profile of the
Companys clients.

Revenues
from state unemployment taxes and other revenues increased to $5.7 million for the three
months ended June 30, 2004 from $1.9 million for the three months ended June 30, 2003
representing an increase of $3.8 million or 205.3%. The increase was primarily due to the
TeamStaff and the EPIX acquisitions.

# Cost of Services

The
following table presents certain information related to the Companys cost of
services for the three months ended June 30, 2004 and 2003:

|                                        | 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                                |                   
|Workers compensation cost rate per one  |                   
|hundred dollars of  workers'            |                   
|compensation wages                      |                   
|Number of workers' compensation claims  |                   
|                                        |                   
|                                        |                   
|Frequency of workers' compensation      |                   
|claims per one million dollars of       |                   
|workers' compensation wages             |                   

26


---

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 $112.4
million for the three months ended June 30, 2004, compared to $74.3 million for the three
months ended June 30, 2003, representing an increase of $38.1 million or 51.3%. This
increase was primarily due to the effects of the TeamStaff and EPIX acquisitions.

The
cost of providing health and welfare benefit plans to clients employees for the
three months ended June 30, 2004 was $84.9 million as compared to $51.6 million for the
three months ended June 30, 2003, representing an increase of $33.3 million or 64.6%. This
increase was primarily attributable to the effects of the TeamStaff and EPIX acquisitions
and higher costs associated with providing benefits coverage.

Workers
compensation costs were $22.8 million for the three months ended June 30, 2004, as
compared to $21.0 million for the three months ended June 30, 2003, representing a
increase of $1.8 million or 8.7%. Workers compensation costs increased in the second
quarter of 2004 due to the net effect of an increase in workers compensation expense
as a result of the TeamStaff and EPIX acquisitions and the overall reduction in
workers compensation costs. The decrease in overall workers compensation costs
is due to the following factors: (i) the elimination of the aggregate stop loss coverage
under the 2004 AIG workers compensation insurance program; (ii) a decrease in
premium expense relating to the individual stop loss coverage as a result of reinsuring
the $1 million to $2 million per occurrence layer with Munich American Reassurance
Company; (iii) a decrease in general premiums and taxes associated with manual premium
rate decreases in Florida; (iv) a higher investment return on a higher premium amount with
AIG associated with claims below the $1 million per occurrence deductible; and (v)
improved workers compensation claim metrics in the second quarter of 2004.

State
unemployment taxes and other costs were $4.7 million for the three months ended June 30,
2004, compared to $1.7 million for the three months ended June 30, 2003, representing an
increase of $3.0 million or 175.8%. The increase primarily relates to the effects of the
TeamStaff and EPIX acquisitions as well as higher state unemployment tax rates beginning
January 1, 2004.

# Operating Expenses

The
following table presents certain information related to the Companys operating
expenses for the three months ended June 30, 2004 and 2003:

|                                  | 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 |                   

27


---

Total
operating expenses were $34.3 million for the three months ended June 30, 2004 as compared
to $22.9 million for the three months ended June 30, 2003, representing an increase of
$11.4 million or 50.1%.

Salaries,
wages and commissions were $18.9 million for the three months ended June 30, 2004 as
compared to $13.0 million for the three months ended June 30, 2003, representing an
increase of $5.9 million or 45.4%. The increase is primarily a result of increased
headcount related to a sales force expansion during 2003 and an increase in headcount
related to the TeamStaff and EPIX acquisitions.

Other
general and administrative expenses were $11.2 million for the three months ended June 30,
2004 as compared to $8.1 million for the three months ended June 30, 2003, representing an
increase of $3.1 million or 38.5%. This increase is primarily a result of increased costs
associated with the TeamStaff and EPIX acquisitions, including an increase in postage and
delivery fees related to the additional client employees, and an increase in rent expense
and associated utilities for additional service branches opened in 2003.

Depreciation
and amortization expenses were $4.2 million for the three months ended June 30, 2004
compared to $1.8 million for the three months ended June 30, 2003. The increase is
primarily attributable to the amortization of the intangible assets associated with the
TeamStaff and EPIX acquisitions.

# Interest Income, net

Interest
income, net, was $0.2 million for the three months ended June 30, 2004 compared to $0.4
million for the three months ended June 30, 2003. The decrease is due to an increase in
interest expense for the three months ended June 30, 2004 associated with the
Companys revolving credit facility obtained in connection with the EPIX acquisition
and repaid in connection with the Companys secondary stock offering.

# Income Taxes

Income
taxes were $3.8 million for the three months ended June 30, 2004 compared to $1.8 million
for the three months ended June 30, 2003. The increase is primarily due to an increase in
taxable income in the second quarter of 2004 compared to the second quarter of 2003. The
Companys effective tax rates for 2004 and 2003 were 33.0%. 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 Per Share

As a
result of the factors described above, net income increased 111% to $7.6 million for the
three months ended June 30, 2004 compared to $3.6 million for the three months ended June
30, 2003. Net income per common share on 27.8 million diluted shares was $0.27 for the
three months ended June 30, 2004 excluding the impact of the non-recurring, non-cash
charge related to the Preferred Stock conversion discussed below, the accretion of
redemption value of the Preferred Stock prior to conversion and the related Preferred
Stock dividends, as compared to net income per common share on 23.5 million diluted shares
of $0.15 for the three months ended June 30, 2003. There were no pro-forma adjustments
applicable to the three months ended June 30, 2003. See the reconciliation of the pro
forma information under Non-GAAP Financial Information.

Preferred Stock
Conversion and Accounting Treatment

On
May 19, 2004, the holders of the Preferred Stock converted 100% of their holdings into the
Companys common stock. The conversion price was $5.44 per share and resulted in the
issuance of 5,514,705 shares of the Companys common stock.

28


---

In
connection with the original issue of the Preferred Stock on June 6, 2003, the Company
recorded the Preferred Stock at its fair value on the date of issuance of approximately
$30,000 less issuance costs of $2,314, and less an allocation of $27,298 to a beneficial
conversion feature. The beneficial conversion feature resulted from the conversion feature
of the Preferred Stock that was in-the-money on the date of issuance attributable to the
increase in the market price of the Companys common stock during the period from the
date on which the conversion price was fixed (approximating market price at that time) and
the date on which the Preferred Stock was issued. The beneficial conversion feature was
calculated as the difference between the market price and the conversion price on the date
of issuance, multiplied by the number of shares of common stock into which the Preferred
Stock was convertible. The beneficial conversion amount was recorded as a reduction of the
carrying value of the Preferred Stock and an increase to additional paid-in-capital. The
difference between the aggregate liquidation value of $30,000 and the initial balance of
$388 recorded in the Series A Preferred Stock account on the Companys balance sheet,
as a result of the beneficial conversion feature and the cost of issuance, was being amortized over the periods from the date of
issuance to the respective demand redemption dates for each 10,000 share tranche,
utilizing the interest method.

Following
the conversion of all shares of Preferred Stock into common stock, the Company recorded in
the second quarter of 2004 a non-recurring, non-cash charge of $29,317 to retained
earnings and reduced net income attributable to common shareholders by a corresponding
amount. This charge was required in order to account for the acceleration of the
unamortized discount related to the beneficial conversion feature and stock issuance
costs.

# Six Months Ended June
30, 2004 Compared to Six Months Ended June 30, 2003.

# Revenue

The
following table presents certain information related to the Companys revenues for
the six months ended June 30, 2004 and June 30, 2003:

|                                        | Six 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                                |                 
|                                        |                 
|Average wage per average client         |                 
|employees paid by month                 |                 
|                                        |                 
|Workers' compensation billing per one   |                 
|hundred dollars of workers'             |                 
|compensation wages                      |                 
|                                        |                 
|Workers' compensation manual premium    |                 
|per one hundred dollars of workers'     |                 
|compensation wages                      |                 
|                                        |                 
|Professional service fees per average   |                 
|number of client employees paid by      |                 
|month                                   |                 
|                                        |                 
|Client employee health benefits         |                 
|participation                           |                 
|                                        |                 

For
the six months ended June 30, 2004, revenues were $284.0 million compared to $204.9
million for the six months ended June 30, 2003 representing an increase of $79.1 million
or 38.6%. Revenue growth was primarily a result of the TeamStaff and EPIX acquisitions.
Also contributing to the growth were increases in the charges for professional service
fees, as part of the Companys strategy to emphasize the human resource consulting
services that it provides to its clients, and increases in fees for providing
workers compensation insurance and health and welfare benefits for client employees.

29


---

The
average number of paid client employees was 114,946 at June 30, 2004, as compared to
86,866 at June 30, 2003, representing an increase of 32.3%. The increase was a result of
the TeamStaff and EPIX acquisitions, which added approximately 28,000 additional average
paid employees for the first half of 2004.

The
average wage of paid client employees for the six months ended June 30, 2004 increased
7.5% to $33,888 from $31,519 for the six months ended June 30, 2003. This increase is
consistent with the Companys strategy of focusing on clients that pay higher wages
to their employees.

Revenues
for professional service fees increased to $64.5 million for the six months ended June 30,
2004, from $45.1 million for the six months ended June 30, 2003, representing an increase
of $19.4 million or 43.0%. The increase was a result of increases in professional service
fees per client employee of 8.0%, from $1,038 for the six months ended June 30, 2003 to
$1,121 for the six months ended June 30, 2004. Such service fee increases per employee
were attributable to both current and new client employees. In addition, professional
service fees for the six months ending June 30, 2004 were higher as a result of the
TeamStaff and EPIX acquisitions.

Revenues
for providing health and welfare benefits plans for the six months ended June 30, 2004
were $150.3 million as compared to $104.1 million for the six months ended June 30, 2003,
representing an increase of $46.2 million or 44.4%. Health and welfare benefit plan
charges primarily increased as a result of the effects of the TeamStaff and EPIX
acquisitions. 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 cost increases.

Revenues
for providing workers compensation insurance coverage increased to $56.7 million in
2004, from $49.2 million in 2003 representing an increase of $7.5 million or 15.4%.
Workers compensation billings, as a percentage of workers compensation wages
for 2004, were 3.10% as compared to 3.64% for 2003, representing a decrease of 14.8%.
Workers compensation charges increased in the first half of 2004 primarily due to
the TeamStaff and EPIX acquisitions and were partially offset by a decrease in billings
for Florida clients reflecting a reduction in Florida manual premium rates.

The
manual premium rate for workers compensation applicable to the Companys
clients decreased 16.7% during the six months ended June 30, 2004 as compared to the six
months ended June 30, 2003. 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 the change in
the workers compensation insurance risk profile of the Companys clients.

Revenues
from state unemployment taxes and other revenues increased to $12.5 million for the six
months ended June 30, 2004 from $6.6 million for the six months ended June 30, 2003
representing an increase of $5.9 million or 89.7%. The increase was primarily due to the
TeamStaff and EPIX acquisitions.

30


---

# Cost of Services

The
following table presents certain information related to the Companys cost of
services for the six months ended June 30, 2004 and 2003:

|                                        | Six 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                                |                 
|                                        |                 
|Workers compensation cost rate per one  |                 
|hundred dollars of workers'             |                 
|compensation wages                      |                 
|                                        |                 
|Number of workers' compensation claims  |                 
|                                        |                 
|Frequency of workers' compensation      |                 
|claims per one million dollars of       |                 
|workers' compensation wages             |                 

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 $202.5
million for the six months ended June 30, 2004, compared to $152.3 million for the six
months ended June 30, 2003, representing an increase of $50.2 million or 33.0%. This
increase was primarily due to the effects of the TeamStaff and EPIX acquisitions.

The
cost of providing health and welfare benefit plans to clients employees for the six
months ended June 30, 2004 was $150.3 million as compared to $104.1 million for the six
months ended June 30, 2003, representing an increase of $46.2 million or 44.4%. This
increase was primarily attributable to the effect of the TeamStaff and EPIX acquisitions
and higher costs associated with providing benefits coverage.

Workers
compensation costs were $40.8 million for the six months ended June 30, 2004, as compared
to $43.1 million for the six months ended June 30, 2003, representing a decrease of $2.3
million or 5.3%. Workers compensation costs decreased in the first half of 2004 due
to the net effect of an overall reduction in workers compensation costs and an
increase in workers compensation expense as a result of the TeamStaff and EPIX
acquisitions. The decrease in overall workers compensation costs is due to the
following factors: (i) the elimination of the aggregate stop loss coverage under the 2004
AIG workers compensation insurance program; (ii) a decrease in premium expense
relating to the individual stop loss coverage as a result of reinsuring the $1 million to
$2 million per occurrence layer with Munich American Reassurance Company; (iii) a decrease
in general premiums and taxes associated with manual premium rate decreases in Florida;
(iv) a higher investment return on a higher premium amount with AIG associated with claims
below the $1 million per occurrence deductible; and (v) improved workers compensation
claim metrics in the first six months of 2004.

State
unemployment taxes and other costs were $11.4 million for the six months ended June 30,
2004, compared to $5.1 million for the six months ended June 30, 2003, representing an
increase of $6.3 million or 124.6%. The increase primarily relates to the effects of the
TeamStaff and EPIX acquisitions, as well as higher state unemployment tax rates beginning
January 1, 2004.

31


---

# Operating Expenses

The
following table presents certain information related to the Companys operating
expenses for the six months ended June 30, 2004 and 2003:

|                                 | Six Months Ended
|-------------------------------- | ----------------
|
|
|Operating Expenses:              |                 
|Salaries, wages and commissions  |                 
|Other general and administrative |                 
|Depreciation and amortization    |                 
|                                 |                 
|Total Operating Expenses         |                 
|                                 |                 
|Statistical Data:                |                 
|Internal employees at period end |                 

Total
operating expenses were $60.9 million for the six months ended June 30, 2004 as compared
to $44.2 million for the six months ended June 30, 2003, representing an increase of $16.7
million or 38.0%.

Salaries,
wages and commissions were $35.2 million for the six months ended June 30, 2004 as
compared to $25.5 million for the six months ended June 30, 2003, representing an increase
of $9.7 million or 37.8%. The increase is primarily a result of increased headcount
related to a sales force expansion during 2003 and an increase in headcount related to the
TeamStaff and EPIX acquisitions.

Other
general and administrative expenses were $19.4 million for the six months ended June 30,
2004 as compared to $15.0 million for the six months ended June 30, 2003, representing an
increase of $4.4 million or 28.8%. This increase is primarily a result of increased costs
associated with the TeamStaff and EPIX acquisitions, including an increase in postage and
delivery fees related to the additional client employees, and an increase in rent expense
and associated utilities for additional service branches opened in 2003.

Depreciation
and amortization expenses were $6.4 million for the six months ended June 30, 2004
compared to $3.6 million for the six months ended June 30, 2003. The increase is primarily
attributable to the amortization of the intangible assets associated with the TeamStaff
acquisition, and the EPIX acquisition.

# Interest Income, net

Interest
income, net, was $0.4 million for the six months ended June 30, 2004 compared to $0.8
million for the first six months ended June 30, 2003. The decrease is due to an increase
in interest expense for the six months ended June 30, 2004 associated with the
Companys revolving credit facility obtained in connection with the EPIX acquisition
and repaid in connection with the Companys secondary stock offering.

# Income Taxes

Income
taxes were $6.9 million for the six months ended June 30, 2004 compared to $3.1 million
for the six months ended June 30, 2003. The increase is primarily due to an increase in
taxable income for the first six months of 2004 compared to the first six months of 2003.
The Companys effective tax rates for 2004 and 2003 were 33.0%. The Companys
effective tax rates differed from the statutory federal tax rates primarily because of
state taxes and federal tax credits.

32


---

# Net Income and Diluted
Earnings Per Share

As a
result of the factors described above, net income increased 125% to $14.0 million for the
six months ended June 30, 2004 compared to $6.2 million for the six months ended June 30,
2003. Net income per common share on 27.3 million diluted shares was $0.51 for the six
months ended June 30, 2004 excluding the impact of the non-recurring, non-cash charge
related to the Preferred Stock conversion previously discussed, the accretion of
redemption value of Preferred Stock prior to conversion and the related Preferred Stock
dividends, as compared to net income per common share on 22.8 million diluted shares of
$0.27 for the six months ended June 30, 2003. There were no pro-forma adjustments
applicable for the six months ended June 30, 2003. See the reconciliation of the pro forma
information under Non-GAAP Financial Information.

# 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 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.

On
May 19, 2004, the Company completed its secondary public stock offering of 1,750,000
shares of its common stock for $21.75 per share, less underwriting discounts and
commissions of $1.305 per share. Net proceeds from the offering totaled approximately
$35.0 million (net of $0.8 million of stock issuance costs). A portion of the proceeds
from the offering totaling $20.0 million was used to repay outstanding borrowings under
the Companys credit agreement with Bank of America, N.A. The remainder of the
proceeds will be used for working capital and general corporate purposes.

On
March 26, 2004, the Company entered into an 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 $35.0 million and has a term of three
years. Loan advances bear interest at a rate equal to an applicable margin (based upon a
ratio of total debt to consolidated EBITDA, as defined in the credit agreement) plus one
of the following indexes: (i) 30-day LIBOR; and (ii) the Bank of America, N.A. prime rate.
Up to $7.0 million of the loan commitment can be made through letters of credit, 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 the 50 basis points is charged for
any unused portion of the loan commitment.

The
credit agreement includes certain financial maintenance requirements and affirmative and
negative covenants, including the following:

| |  | the
Company's consolidated net worth at the end of any quarter may not be less than the sum
of:
| | - | -----------------------------------------------------------------------------------------------

| | ° | 85%
of the Company's consolidated net worth as of December 31, 2003; plus
| | - | -------------------------------------------------------------------------

| | ° | as
of the end of each quarter commencing with the quarter ending March 31, 2004, an
amount equal to 75% of the Companys consolidated net income for the quarter then
ended; plus
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ° | 100%
of the proceeds of all issuances of the Company's capital stock after March 26, 2004; less
| | - | -----------------------------------------------------------------------------------------------

| | ° | the
amount of Series A Preferred Stock repurchased by the Company;
| | - | ------------------------------------------------------------------

33


---

| |  | the
Companys consolidated EBITDA, as defined in the credit agreement, may not be less
than $30.0 million for each twelve month period ending as of each fiscal quarter;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Companys ratio of consolidated funded indebtedness (as defined in the credit
agreement) to consolidated EBITDA as of the end of any fiscal quarter may not be greater
than 1.50 to 1.0; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Companys consolidated fixed charge coverage ratio (as defined in the credit
agreement) as of the end of any fiscal quarter may not be less than 1.5 to 1.0.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

The
covenants in the credit agreement also restrict, among other things, the Companys
ability to: incur liens; make certain investments; incur additional indebtedness; engage
in certain fundamental corporate transactions; dispose of property; redeem the Series A
Preferred Stock; or make certain restricted payments. The credit agreement contains
customary events of default and allows the bank to accelerate amounts outstanding under
the credit agreement upon the occurrence of certain events of default.

On
March 26, 2004, the Company borrowed $20.0 million under the credit agreement to partially
fund the EPIX acquisition. The Company used approximately $20.0 million of the net
proceeds from its secondary stock offering to pay in full the amount outstanding under the
credit agreement.

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, excluding
cash required for acquisitions, if any.

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 the 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 six months of 2004
were salaries, wages and payroll taxes of client employees of $2,094.0 million. 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 the service fees 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

At
June 30, 2004, the Company had $165.3 million in total cash and cash equivalents,
certificates of deposits and marketable securities, of which $54.5 million was
unrestricted. The Company is required to collateralize its obligations under its
workers compensation and health benefit plans and certain general insurance
coverage. The Company uses its cash, cash equivalents and marketable securities to
collateralize these obligations as more fully described below. Cash, cash equivalents and
marketable securities used to collateralize these obligations are designated as restricted
in the Companys financial statements.

At
June 30, 2004, the Company had pledged $110.8 million of restricted certificates of
deposit and restricted marketable securities, with original maturities of less than one
year, as collateral for certain standby letters of credit, in collateral trust
arrangements issued in connection with the Companys workers compensation and
health benefit plans, and in a rabbi trust in connection with a deferred compensation plan
assumed in the EPIX acquisition.

34


---

|                                                    | June 30, 2004 | December 31, 2003
|--------------------------------------------------- | ------------- | -----------------
|
|Certificates of deposit - restricted:               |               |                  
|BCBS standby letter of credit                       |               |                  
|Other                                               |               |                  
|                                                    |               |                  
|Total certificates of deposit - restricted          |               |                  
|                                                    |               |                  
|                                                    |               |                  
|Short-term marketable securities - restricted:      |               |                  
|Workers' compensation collateral - CNA              |               |                  
|General insurance collateral obligations - AIG      |               |                  
|Escrow for TeamStaff acquisition                    |               |                  
|                                                    |               |                  
|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 amount of collateral required to
be provided to BCBS is expected to increase based in part on the increase in plan
participation and the requirement by BCBS to increase the Companys collateralized
obligations from one months estimate of claims payment to two months. The Company
was not required to collateralize the Aetna program for 2004 and 2003.

The
Company does not anticipate any additional collateral obligations to be required in 2004
for its workers compensation arrangements.

# Operating Cash Flow

At
June 30, 2004, the Company had net working capital of $76.0 million, including restricted
funds classified as short-term of $88.9 million, as compared to $90.1 million in net
working capital as of December 31, 2003, including $90.3 million of restricted funds
classified as short-term.

Net
cash provided by operating activities was $17.3 million for the six months ended June 30,
2004 as compared to net cash provided by operating activities of $4.2 million for the six
months ended June 30, 2003, representing an increase of $13.1 million. The overall
increase in cash provided by operating activities is primarily attributable to the
increase in net income during the six months ended June 30, 2004 as compared to the six
months ended June 30, 2003, and other net changes in working capital items, including
accounts receivable, workers compensation receivable, accrued payroll and payroll
taxes, and customer deposits and prepayments.

35


---

# Cash Flow from
Investing Activities

Cash
used in investing activities for the six months ended June 30, 2004 of $41.6 million
primarily relates to the funds used for the EPIX acquisition ($37.8 million, including
direct acquisition costs of $1.8 million) and the release of $2.3 million of escrow to
TeamStaff related to the settlement of the TeamStaff acquisition contingent purchase
price. During the six months ended June 30, 2004, the Company incurred $2.8 million in
capital expenditures primarily related to investments in technology.

# Cash Flow from
Financing Activities

Cash provided by financing activities for the six months ended June 30, 2004 of $34.1
million was primarily a result of the closing of the secondary public offering of
1,750,000 shares of the Companys common stock at $21.75 per share, less underwriting
discounts and commissions, of $1.305 per share. Net proceeds from the offering totaled
approximately $35.0 million, (net of $0.8 million of issuance costs) of which $20.0
million was used to repay outstanding borrowings under the Bank of America, N.A. credit
agreement.

The
Company received approximately $1.9 million from directors, officers and employees of the
Company upon the exercise of 448,655 stock options and the purchase of 18,379 shares of
common stock under the Companys Employee Stock Purchase Plan.

The
Company paid dividends to the common and preferred shareholders of approximately $2.8
million during the first half of 2004.

# Inflation

The
Company believes that inflation in salaries and wages of client employees has a positive
impact on its results of operations as certain amounts of the professional service fee
earned from clients is proportional to such changes in salaries and wages.

# ITEM 3.       Quantitative and
Qualitative Disclosures about Market Risk

The
Company is subject to market risk from exposure to changes in interest rates based on its
investing and cash management activities. The Company utilizes U.S. government agency and
other corporate debt with fixed rates and maturities of less than one year and money
market funds to manage its exposures to interest rates. (See Note 2 to the condensed
consolidated financial statements appearing elsewhere in this Form 10-Q). The Company
holds collateral with respect to its workers compensation insurance provided by the
member insurance companies of AIG for the 2003 and 2004 workers compensation
program, which has been invested in money market funds. If interest rates decrease, the
interest income with respect to these investments would be reduced. The Company is also
subject to market risk from exposures to changes in interest rates related to insurance
premiums paid to CNA under its workers compensation programs for the policy years
2000 through 2002. The insurance premiums paid to CNA are invested in cash and cash
equivalents, government and corporate issued securities and mortgage and asset-backed
securities. In the event interest rates decrease, the returns on insurance premiums will
be reduced and as a result the Company may be required to make additional premium payments
to CNA. The insurance premiums paid to AIG under its workers compensation insurance
program earn a fixed rate of return and are not subject to market risk from changes in
interest rates. The Company does not expect changes in interest rates to have a material
effect on income or cash flows in 2004, although there can be no assurances that interest
rates will not change.

# 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 identified in the prior fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over
financial reporting.

36


---

# CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS

The
statements contained in this filing, including under the section titled
Managements Discussion and Analysis of Financial Condition and Results of
Operations, and other sections of the filing that 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 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          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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

37


---

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

| |  | 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; and
| | - | --------------------------------------------------------------------------------------

| |  | other
factors which are described in further detail in the Companys Form 10-K, and in our
other filings with the Securities and Exchange Commission (the SEC).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The | Company
undertakes no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise except as may be
required under applicable securities laws.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II. OTHER
INFORMATION

# ITEM 1.    Legal Proceedings

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. 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 employees and vigorously defends against such claims.

# ITEM 2.    Changes in
Securities and Use of Proceeds

On
May 19, 2004, the Company completed the secondary public offering of 5,520,000 shares of
the Companys common stock at $21.75 per share, less underwriting discounts and
commissions, of $1.305 per share. In the offering, the Company sold 1,750,000 shares and
3,770,000 shares were sold by selling shareholders. The Company received net proceeds from
the sale of approximately $35.0 million (net of $0.8 million of issuance costs), of which
$20.0 million was used to repay indebtedness incurred to partially fund the acquisition of
the client portfolio of EPIX Holdings Corporation. The balance of the net proceeds will be
used for working capital and other general corporate purposes.

In
connection with the offering, the holders of the Companys Preferred Stock converted
all shares of the Preferred Stock into 5,514,705 shares of the Companys common
stock. The holders of the Companys Preferred Stock sold 3,555,000 of the converted
common shares in the offering and certain members of management, directors and other
shareholders sold 215,000 shares. The shares sold by the holders of Preferred Stock
included 720,000 shares purchased by the underwriters pursuant to the over-allotment
option granted to them.

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# ITEM 4.     Submission of
Matters to a Vote of Security Holders

The
annual meeting of shareholders of the Company was held on May 20, 2004. Holders of
21,619,139 shares of common stock, which included shares voted by holders of Preferred
Stock on as as converted basis, were present in person or by proxy at the
meeting. The two proposals voted on at the annual meeting were approved. The votes of the
stockholders were as follows:

1.       
          Election of three Class III directors:

|                     | For | Withheld
|-------------------- | --- | --------
|
|
|Erik Vonk            |     |         
|Darcy E Bradbury     |     |         
|Jeffrey A Sonnenfeld |     |         

George B. Beitzel, Jonathan H. Kagan,
James F. Manning and Elliot B. Ross continue to serve as elected directors of the Company.
In addition, David S. Katz and James E. Cowie were requested by the board of directors,
and have agreed, to continue to serve as directors of the Company, even though no shares
of Preferred Stock remained outstanding.

2.       
          Approval of an amendment to our articles of incorporation to eliminate the
          staggered terms of the Companys board of directors and provide for the
          annual election of all directors beginning with the 2005 annual meeting of
          shareholders:

|For | Against    | Abstained
|--- | ---------- | ---------
|
|
|    | 21,320,786 |          

ITEM 6.       Exhibits and
Reports on Form 8-K

|(a) | Exhibits
|--- | --------

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

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

| | 32 | Certification
furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | -- | ----------------------------------------------------------------------------------

(b)    
          Reports on Form 8-K

On
April 9, 2004, a Form 8-K was filed with the Securities and Exchange Commission as a
current report announcing the acquisition by the Company of the human resources
outsourcing client portfolio of EPIX Holdings Corporation and certain of its subsidiaries.
In addition, the Company announced that it entered into a $35.0 million credit agreement
with Bank of America, N.A.

On
April 12, 2004, a Form 8-K was furnished to the Securities and Exchange Commission as a
current report containing a press release dated March 29, 2004, announcing the acquisition
by the Company of the human resources outsourcing client portfolio of EPIX Holdings
Corporation and the closing of its $35.0 million credit facility with Bank of America.

On
April 22, 2004, a Form 8-K was furnished to the Securities and Exchange Commission as a
current report announcing the Company filed a registration statement with the Securities
and Exchange Commission covering a proposed underwritten public offering of common stock.
The Company also announced the first quarter financial results for the three months ended
March 31, 2004.

On
May 6, 2004, a form 8-K/A was filed with the Securities and Exchange Commission that
amended the Form 8-K dated April 9, 2004 to include the audited financial statements of
EPIX Holdings Corporation as of and for the year ended December 31, 2003 and pro forma
financial information relating to the EPIX acquisition.

On
May 18, 2004, a Form 8-K was furnished to the Securities and Exchange Commission as a
current report announcing the Company priced its public offering of 4,800,000 shares of
its common stock.

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On
May 21, 2004, a Form 8-K was furnished to the Securities and Exchange Commission as a
current report containing a press release dated May 21, 2004, announcing the re-election
of two members of the Board of Directors, the election of a new member of the Board of
Directors, and that James Cowie and David Katz were asked by the Board of Directors to
remain as members of the Board. In addition, the Company announced the closing of the
secondary offering of common stock on May 19, 2004 and the declaration of a quarterly
dividend of $0.06 per common share payable on July 30, 2004 to all shareholders of record
as of July 15, 2004.

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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: August 9, 2004 |  | /s/ PETER C. GRABOWSKI                                                 
|                      |  | Peter C. Grabowski
Chief Financial Officer(Principal Financial Officer)
|                      |  |                                                                        

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