# 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 March 31, 2005.

# or

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

# For the transition
period from ________________ to__________________

# Commission File No.
0-22701

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

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

# (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 April 30, 2005
|------------------------- |  | --------------------------------
|Par value $0.01 per share |  | 27,661,213                      




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# TABLE OF CONTENTS

|        |  | Page                                                                      
|------- |  | --------------------------------------------------------------------------
|PART I  |  | FINANCIAL INFORMATION                                                     
|        |  | ITEM 1. Financial Statements                                              
|        |  | Condensed Consolidated Statements of Operations for the three months ended
|        |  | March 31, 2005 and 2004 (unaudited)                                       
|        |  | Condensed Consolidated Balance Sheets as of March 31, 2005                
|        |  | and December 31, 2004 (unaudited)                                         
|        |  | Condensed Consolidated Statements of Cash Flows                           
|        |  | for the three months ended March 31, 2005 and 2004 (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 6. Exhibits                                                          
|        |  | SIGNATURE                                                                 

2


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# PART I. FINANCIAL
INFORMATION

# Item 1. Financial
Statements

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

|                                                          | For the Three Months EndedMarch 31,
|--------------------------------------------------------- | -----------------------------------
|
|
|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 income, net                                         |                                    
|                                                          |                                    
|Income before income taxes                                |                                    
|Income tax provision                                      |                                    
|                                                          |                                    
|                                                          |                                    
|Net income                                                |                                    
|                                                          |                                    
|Non-cash charges attributable to beneficial conversion    |                                    
|feature and accretion of redemption value of convertible, |                                    
|redeemable preferred stock                                |                                    
|                                                          |                                    
|Preferred stock dividends                                 |                                    
|                                                          |                                    
|Assumed preferred stock dividend (assuming full           |                                    
|distribution of net income)                               |                                    
|                                                          |                                    
|                                                          |                                    
|Net income attributable to common shareholders            |                                    
|                                                          |                                    
|Net income per common share                               |                                    
|-
Basic                                                   |                                    
|                                                          |                                    
|- Diluted                                                 |                                    
|                                                          |                                    
|Weighted average common shares outstanding                |                                    
|- Basic                                                   |                                    
|- Diluted                                                 |                                    
|                                                          |                                    

See
notes to condensed consolidated financial statements.

3


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# GEVITY HR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED
BALANCE SHEETSUNAUDITED(in $000s)

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

See
notes to condensed consolidated financial statements.

4


---

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

|                                                                      | March 31,
2005 | December 31,
2004
|--------------------------------------------------------------------- | -------------- | -----------------
|LIABILITIES AND SHAREHOLDERS' EQUITY                                  |                |                  
|Current liabilities:                                                  |                |                  
|Accrued payroll and payroll taxes                                     |                |                  
|Accrued insurance premiums, health and                                |                |                  
|workers' compensation insurance reserves                              |                |                  
|Customer deposits and prepayments                                     |                |                  
|Accounts payable and other accrued liabilities                        |                |                  
|Income taxes payable                                                  |                |                  
|Deferred tax liability, net                                           |                |                  
|                                                                      |                |                  
|Dividends payable                                                     |                |                  
|                                                                      |                |                  
|Total current liabilities                                             |                |                  
|Long-term accrued workers' compensation                               |                |                  
|insurance reserves                                                    |                |                  
|                                                                      |                |                  
|Other long-term liabilities                                           |                |                  
|                                                                      |                |                  
|Total liabilities                                                     |                |                  
|                                                                      |                |                  
|Commitments and contingencies (see notes)                             |                |                  
|Shareholders' equity:                                                 |                |                  
|Common stock, $.01 par value, 100,000,000 shares authorized,          |                |                  
|30,694,307 and 30,408,220 issued and outstanding as of March 31,      |                |                  
|2005 and December 31, 2004, respectively                              |                |                  
|                                                                      |                |                  
|Additional paid-in capital                                            |                |                  
|Retained earnings                                                     |                |                  
|                                                                      |                |                  
|Deferred compensation                                                 |                |                  
|                                                                      |                |                  
|Treasury stock (3,033,677 and 3,034,974 shares at cost, respectively) |                |                  
|                                                                      |                |                  
|Total shareholders' equity                                            |                |                  
|                                                                      |                |                  
|                                                                      |                |                  
|                                                                      |                |                  
|                                                                      |                |                  
|Total liabilities and shareholders' equity                            |                |                  
|                                                                      |                |                  
|                                                                      |                |                  
|                                                                      |                |                  

See
notes to condensed consolidated financial statements.

5


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

|                                                                | For the Three Months Ended
March 31,
|--------------------------------------------------------------- | ------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                           |                                     
|Net income                                                      |                                     
|Adjustments to reconcile net income to net cash provided by     |                                     
|operating activities:                                           |                                     
|Depreciation and amortization                                   |                                     
|Deferred tax provision, net                                     |                                     
|Provision for bad debts                                         |                                     
|Other                                                           |                                     
|Changes in operating working capital:                           |                                     
|Accounts receivable, net                                        |                                     
|Other current assets                                            |                                     
|Workers' compensation receivable, net                           |                                     
|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 |                                     
|Assets acquired in business acquisitions                        |                                     
|Capital expenditures                                            |                                     
|                                                                |                                     
|Net cash used in investing activities                           |                                     
|                                                                |                                     
|CASH FLOWS FROM FINANCING ACTIVITIES:                           |                                     
|Payment of cash dividends to shareholders                       |                                     
|Proceeds of credit line borrowing                               |                                     
|Debt issuance costs                                             |                                     
|Proceeds from issuance of common shares                         |                                     
|                                                                |                                     
|Net cash (used in) 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                                               |                                     
|                                                                |                                     
|                                                                |                                     
|Interest paid                                                   |                                     
|                                                                |                                     

See
notes to condensed consolidated financial statements.

6


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

# 1.       GENERAL

The
accompanying unaudited condensed consolidated financial statements of Gevity HR, Inc. and
subsidiaries (collectively, the Company or Gevity) have been
prepared in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form 10-Q. These
financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2004, 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 Form 10-K. The
Companys critical accounting estimates are disclosed in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, in the Form
10-K. On an ongoing basis, the Company evaluates its policies, estimates and assumptions,
including those related to revenue recognition, workers compensation
receivable/reserves, intangible assets, medical benefit plan liabilities, state
unemployment taxes, allowance for doubtful accounts, and deferred taxes. Since the date of
the Form 10-K, there have been no material changes to the Companys significant
accounting policies and critical accounting estimates.

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

Significant Accounting
Policies

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

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

7


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|                           |  | Three Months Ended
|-------------------------- |  | ------------------
|
|
|Net income                 |  |                   
|Add: Total stock-based     |  |                   
|compensation included in   |  |                   
|net income, net of tax     |  |                   
|effect                     |  |                   
|Less: Total stock-based    |  |                   
|employee compensation      |  |                   
|expense determined under   |  |                   
|fair value method for all  |  |                   
|awards, net of tax effect  |  |                   
|                           |  |                   
|Net income                 |  |                   
|                           |  |                   
|                           |  |                   
|                           |  |                   
|Basic earnings per share   |  |                   
|                           |  |                   
|Diluted earnings per share |  |                   
|                           |  |                   

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

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

# 2.       MARKETABLE SECURITIES
 RESTRICTED

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

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

8


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

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

|                                                    | AmortizedCost | GrossUnrealizedGain | EstimatedFair Value
|--------------------------------------------------- | ------------- | ------------------- | -------------------
|
|
|As of March 31, 2005:                               |               |                     |                    
|Short-term                                          |               |                     |                    
|Money market - restricted                           |               |                     | $                  
|                                                    |               |                     |                    
|Total short-term marketable securities - restricted |               |                     | $                  
|                                                    |               |                     |                    
|                                                    |               |                     |                    
|Long-term                                           |               |                     |                    
|Money market - restricted                           |               |                     | $                  
|Mutual funds - trading - restricted                 |               |                     |                    
|                                                    |               |                     |                    
|Total long-term marketable securities - restricted  |               |                     | $                  
|                                                    |               |                     |                    
|                                                    |               |                     |                    
|As of December 31, 2004:                            |               |                     |                    
|Short-term                                          |               |                    
|Money market - restricted                           |               |                     | $                  
|                                                    |               |                     |                    
|Total short-term marketable securities - restricted |               |                     | $                  
|                                                    |               |                     |                    
|                                                    |               |                     |                    
|Long-term                                           |               |                     |                    
|Money market - restricted                           |               |                     | $                  
|Mutual funds - trading - restricted                 |               |                     |                    
|                                                    |               |                     |                    
|                                                    |               |                     |                    
|Total long-term marketable securities - restricted  |               |                     | $                  
|                                                    |               |                     |                    

For
the three months ended March 31, 2005 and March 31, 2004, there were no realized gains or
losses from the sale of marketable securities. As of March 31, 2005 and December 31, 2004,
there were no unrealized gains or losses on marketable securities.

# 3.       ACCOUNTS RECEIVABLE

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

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

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

9


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# 4.       WORKERS
COMPENSATION RECEIVABLE/ RESERVES

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

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

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

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

10


---

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

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

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

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

The
Company accrues for workers compensation costs based upon premiums paid, estimated
total costs of claims to be paid by the Company that fall within the policy deductible,
the administrative costs of the programs, return on investment premium dollars paid and
the discount rate used to determine the net present value of the expected future claim
payments to be made under the programs. At March 31, 2005 and December 31, 2004 the
weighted average discount rate used to calculate the present value of the claim liability
was 3.06% and 2.83% respectively. Premium payments made to AIG during 2005, 2004 and 2003
were in excess of the present value of the estimated claim liabilities. This resulted in a
workers compensation receivable, net, at March 31, 2005 and December 31, 2004 of
$126,831 and $112,715, respectively, of which $39,405 and $33,405 was classified as
short-term at March 31, 2005 and December 31, 2004, respectively. This receivable
represents a significant concentration of credit risk for the Company.

11


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# 5.       INTANGIBLE ASSETS

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

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

Amortization
expense for the three months ended March 31, 2005 and 2004 was $2,410 and $459,
respectively. Estimated amortization expense for the remainder of 2005 and for each of the
next four succeeding years is $7,228, $9,638, $9,638, $9,638 and $1,581, respectively.

# 6.       HEALTH BENEFITS

Blue
Cross Blue Shield of Florida (BCBSFL) is the Companys primary healthcare
provider in Florida, delivering medical care benefits to approximately 21,000
Florida-based client employees. The Companys policy with BCBSFL is a minimum premium
policy expiring September 30, 2005. Pursuant to this policy, the Company is obligated to
reimburse BCBSFL for the cost of the claims incurred by participants under the plan, plus
the cost of plan administration. The administrative costs per covered client employee
associated with this policy are specified by year and the aggregate stop-loss coverage is
provided to the Company at the level of 115% of projected claims. The Companys
obligation to BCBSFL related to incurred but not reported claims is secured by a letter of
credit. As of March 31, 2005 and December 31, 2004, the amount of the letter of credit for
BCBSFL securing such obligations was $6,000. The amount of the letter of credit was
originally 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 26,000 client employees
throughout the remainder of the country. The Companys 2005 policy with Aetna
provides for an HMO and PPO offering to plan participants. The Aetna HMO medical benefit
plans are subject to a guaranteed cost contract that caps the Companys annual
liability. The Aetna PPO medical benefit plan is a retrospective funding arrangement
whereby the PPO plan is subject to a 7.5% additional premium if actual claims are greater
than projected at the inception of the policy year (maximum charge per year is 7.5% with
carryover into subsequent years of amounts that exceed 7.5%).

The
Company provides coverage under various regional medical benefit plans to approximately
1,500 client employees in various areas of the country. Included in the list of medical
benefit plan providers are Kaiser Foundation Health Plan, Inc. in California, Health
Partners (Minnesota) in Minnesota, Harvard Pilgrim Healthcare in Massachusetts and Capital
Health Plans in the Tallahassee, Florida region. These regional plans are subject to fixed
cost contracts that cap the Companys liability.

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

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

12


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

Included
in accrued insurance premiums, health and workers compensation insurance reserves at
March 31, 2005 and December 31, 2004 are $18,326 and $18,831, respectively, of short-term
liabilities related to the Companys health care plans. Of these amounts $13,904 and
$14,580, respectively, represent an accrual for the estimate of claims incurred but not
reported at March 31, 2005 and December 31, 2004. There were no long-term liabilities
related to the Companys health benefit plans at March 31, 2005 and December 31,
2004.

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

# 7.       REVOLVING CREDIT
FACILITY

The
Company maintains a $35,000 unsecured credit agreement with Bank of America, N.A. Certain
of the Companys subsidiaries named in the credit agreement have guaranteed the
obligations under the credit agreement. The credit agreement provides for revolving
borrowings in an amount not to exceed $35,000 and has a three-year term that expires on
March 26, 2007. Loan advances under the agreement bear an interest rate equal to the
applicable margin (based upon a ratio of total debt to EBITDA, as defined in the credit
agreement), plus one of the following indexes: (i) 30-day LIBOR and (ii) 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 per annum is charged for any unused portion of the loan
commitment. There were no outstanding advances under the credit agreement at March 31,
2005 and December 31, 2004. The Company recorded $59 of interest expense for the three
months ended March 31, 2005 related to the amortization of loan costs and unused loan
commitment fees. Interest expense for the three months ended March 31, 2004 was
approximately $10. The credit agreement includes certain financial maintenance
requirements and affirmative and negative covenants, all of which the Company was in
compliance with at March 31, 2005.

# 8.       COMMITMENTS AND
CONTINGENCIES

Litigation

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

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

13


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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 constitute an evolving area due to uncertainties resulting from the
non-traditional employment relationship between the professional employer organization,
the client and the client employees. Many federal and state laws relating to tax and
employment matters were enacted before the widespread existence of professional employer
organizations and do not specifically address the obligations and responsibilities of
these professional employer organization relationships. If the Internal Revenue Service
concludes that professional employer organizations are not employers of
certain client employees for purposes of the Internal Revenue Code of 1986, as amended,
the tax qualified status of the Companys defined contribution retirement plans in
effect prior to April 1, 1997 could be revoked, its cafeteria benefits plan may lose its
favorable tax status and the Company, as defined, may no longer be able to assume 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.

# 9.       EQUITY

Employee Stock Option
Plans

During
the three months ended March 31, 2005 and March 31, 2004, the Company issued 203,488 and
224,453 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 $816 and $966, respectively, including 8,716 shares of its common stock
received in lieu of cash for the exercise of stock options during the three months ended
March 31, 2005. The shares received by the Company were valued at approximately $161
(which was calculated based upon the market value of the stock on the date of exercise)
and are included as treasury shares as of March 31, 2005.

On
February 15, 2005, the Company granted 82,599 shares of restricted common stock, under its
2002 Stock Incentive Plan, to certain employees of the Company. Under the terms of the
grant, the recipients are entitled to dividends declared, if any, and voting rights for
each share of restricted stock granted. The intrinsic value of the grant, based upon the
market value of the stock on the date of grant, was approximately $1,746. The value of the
grant was recorded in equity as deferred compensation and is being amortized to
compensation expense over the vesting period of 4 years. For the three months ended March
31, 2005, the Company recognized related compensation expense of approximately $55 ($37
net of related income taxes). As of March 31, 2005, 81,933 shares of restricted stock
remain outstanding and 666 shares were forfeited and included as treasury shares. There
was no restricted stock outstanding at December 31, 2004 and no compensation expense
related to restricted stock for the three months ended March 31, 2004.

Employee Stock Purchase
Plan

During
the three months ended March 31, 2005 and March 31, 2004, 10,679 and 18,379 shares,
respectively, of the Companys common stock (from treasury) were sold to employees
participating in the Companys employee stock purchase plan. Proceeds from the
employee stock purchase were approximately $187 for the three months ended March 31, 2005
and $189 for the three months ended March 31, 2004.

# 10.       INCOME TAXES

The
Company records income tax expense using the asset and liability method of accounting for
deferred income taxes. Under such method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the
financial statement carrying values and the income tax bases of the Companys assets
and liabilities. The Companys effective tax rate provides for both federal and state
income taxes. For the three months ended March 31, 2005 and 2004, the Companys
effective rate was 33.0%.

14


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# 11.       EARNINGS PER SHARE
(EPS)

The
reconciliation of net income attributable to common shareholders and shares outstanding
for the purposes of calculating basic and diluted earnings per share for the three months
ended March 31, 2005 and 2004 is as follows:

|                                                                    | Net Income(Numerator) | Shares(Denominator) | Per ShareAmount
|------------------------------------------------------------------- | --------------------- | ------------------- | ---------------
|
|
|For the Three Months Ended March 31, 2005:                          |                       |                     |                
|Basic EPS:                                                          |                       |                     |                
|Net income                                                          |                       |                     | $              
|                                                                    |                       |                     |                
|Effect of dilutive securities:                                      |                       |                     |                
|Options to purchase common stock                                    |                       |                     |                
|                                                                    |                       |                     |                
|Diluted
EPS:                                                        |                       |                    
|Net income                                                          |                       |                     | $              
|                                                                    |                       |                     |                
|                                                                    |                       |                     |                
|For the Three Months Ended March 31, 2004:                          |                       |                     |                
|Basic EPS:                                                          |                       |                     |                
|Net income                                                          |                       |                     | $              
|Non-cash charges attributable to beneficial conversion              |                       |                     |                
|feature and accretion of redemption value of convertible,           |                       |                     |                
|redeemable preferred
 stock                                         |                       |                     |                
|Preferred stock dividend                                            |                       |                     |                
|                                                                    |                       |                     |                
|Assumed preferred stock dividend (assuming full distribution of net |                       |                     |                
|income)                                                             |                       |                     |                
|                                                                    |                       |                     |                
|Net income attributable to common shareholders                      |                       |                     |                
|                                                                    |                       |                     |                
|Effect of dilutive securities:                                      |                       |                     |                
|Options to purchase common stock                                    |                       |                     |                
|Convertible, redeemable preferred stock                             |                       |                     |                
|                                                                    |                       |                     |                
|Diluted EPS:                                                        |                       |                    
|Net income                                                          |                       |                     | $              
|                                                                    |                       |                     |                

For
the three months ended March 31, 2005 and 2004, 806,301 and 495 options to purchase common
stock, respectively, 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.

15


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

The
following discussion contains forward-looking statements. The Companys actual
results could differ materially from those discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include those discussed below,
elsewhere in this Form 10-Q and in the Form 10-K. 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 the Form 10-K. Historical
results are not necessarily indicative of trends in operating results for any future
period.

# OVERVIEW AND INTRODUCTION

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

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

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

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

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

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

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

The
Company has transitioned its business from one that provided low cost insurance offerings
and payroll processing services to its clients to one that delivers a comprehensive, fully
integrated employee management solution to its clients. As a result, the Company increased
its profitability by focusing on increased profitability per client employee. 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. The
Company serviced approximately 125,000 client employees as of March 31, 2005.

16


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

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

The
following table provides information that the Company utilizes when assessing the
financial performance of its business:

|                                           | Three Months Ended March 31,
|------------------------------------------ | ----------------------------
|
|
|Statistical data:                          |                             
|Client employees at period end             |                             
|Clients at period end (1)                  |                             
|Average number of client                   |                             
|employees/clients at period end            |                             
|Average number of client employees         |                             
|paid by month (2)                          |                             
|Annualized average wage per average number |                             
|of client employees paid by month (3)      |                             
|Annualized professional service fees per   |                             
|average number of client employees         |                             
|paid by month (3)                          |                             
|Annualized gross profit per average number |                             
|of client employees paid by month (3)      |                             
|Annualized operating expense excluding     |                             
|depreciation and amortization per          |                             
|average number of client
employees         |                             
|paid by month (3)                          |                             
|                                           |                             
|Annualized operating income per average    |                             
|number of client employees paid by         |                             
|month (3)                                  |                             

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

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

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

17


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

# RESULTS OF OPERATIONS

Three Months Ended March
31, 2005 Compared to Three Months Ended March 31, 2004

# Revenue

The
following table presents certain information related to the Companys revenues for
the three months ended March 31, 2005 and March 31, 2004:

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

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

18


---

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

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

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

For
the three months ended March 31, 2005, total revenues were $153.9 million compared to
$125.9 million for the three months ended March 31, 2004, representing an increase of
$28.0 million or 22.2%. Revenue growth was primarily a result of the acquisition of the
client portfolios of EPIX Holding Corporation on March 26, 2004 (the EPIX
acquisition). 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 March 31, 2005, the Company served over 8,200 clients as measured by each clients
FEIN with over 125,000 active client employees. This compares to over 9,300 clients as
measured by each clients FEIN with over 138,000 active client employees at March 31,
2004. The change in client employees is a function of client employees added through
organic growth, less attrition (primarily in the acquisition client portfolios acquired in
the EPIX acquisition and in the acquisition of client portfolios of TeamStaff, Inc. on
November 17, 2003), plus the net changes due to hiring and termination of employees by
existing clients. Although the EPIX acquisition impacted the March 31, 2004 census
information, the effect on revenues and expenses for the quarter ended March 31, 2004 was
minimal as the acquisition occurred on March 26, 2004.

The
average number of paid client employees was 117,620 for the three months ended March 31,
2005, as compared to 103,107 for the three months ended March 31, 2004, representing an
increase of 14.1%. The increase was primarily a result of the EPIX acquisition having a
full impact on the three months ended March 31, 2005 and a minimal impact for the three
months ended March 31, 2004.

The
annualized average wage of paid client employees for the three months ended March 31, 2005
increased 16.7% to $37,062 from $31,759 for the three months ended March 31, 2004. This
increase is consistent with the Companys strategy of focusing on clients that pay
higher wages to their employees.

Revenues
from professional service fees increased to $34.3 million for the three months ended March
31, 2005, from $28.4 million for the three months ended March 31, 2004, representing an
increase of $5.9 million or 20.7%. The increase was a result of increases in annualized
professional service fees per client employee of 5.8%, from $1,101 for the three months
ended March 31, 2004 to $1,165 for the three months ended March 31, 2005. 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 March 31, 2005 were higher
as a result of the EPIX acquisition.

Revenues
for providing health and welfare benefits for the three months ended March 31, 2005 were
$80.5 million as compared to $65.4 million for the three months ended March 31, 2004,
representing an increase of $15.1 million or 23.1%. Health and welfare benefit plan
charges primarily increased as a result of the effect of the EPIX acquisition.
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 $27.6 million in
the three months ended March 31, 2005, from $25.4 million in the three months ended March
31, 2004 representing an increase of $2.2 million or 8.8%. Workers compensation
billings, as a percentage of workers compensation wages for the three months ended
March 31, 2005, were 2.76% as compared to 3.27% for the same period in 2004, representing
a decrease of 15.6%. Workers compensation charges increased in the first quarter of
2005 primarily due to the EPIX acquisition and was partially offset by a decrease in
billings for Florida clients reflecting a reduction in Florida manual premium rates.

19


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The
manual premium rate for workers compensation applicable to the Companys
clients decreased 13.9% during the three months ended March 31, 2005 as compared to the
three months ended March 31, 2004. Manual premium rates are generally the allowable rates
that employers can be charged by insurance companies for workers compensation
insurance coverage. The decrease in the Companys manual premium rates reflects the
change in the workers compensation insurance risk profile of the Companys
clients.

Revenues
from state unemployment taxes and other revenues increased to $11.5 million for the three
months ended March 31, 2005 from $6.8 million for the three months ended March 31, 2004
representing an increase of $4.7 million or 69.7%. The increase was primarily due to the
EPIX acquisition and an increase in state unemployment tax rates that was passed along to
clients.

# Cost of Services

The
following table presents certain information related to the Companys cost of
services for the three months ended March 31, 2005 and 2004:

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

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

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

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

Cost
of services that include the cost of the Companys health and welfare benefit plans,
workers compensation insurance, state unemployment taxes and other costs were $110.3
million for the three months ended March 31, 2005, compared to $90.1 million for the three
months ended March 31, 2004, representing an increase of $20.1 million or 22.3%. This
increase was primarily due to the full effect of the EPIX acquisition for the three months
ended March 31, 2005.

20


---

The
cost of providing health and welfare benefits to clients employees for the three
months ended March 31, 2005 was $79.5 million as compared to $65.4 million for the three
months ended March 31, 2004, representing an increase of $14.1 million or 21.6%. This
increase was primarily attributable to the full effect of the EPIX acquisition for the
three months ended March 31, 2005 and higher cost of health benefits. This increase was
partially offset by a $1.0 million reduction in health benefit costs related to
finalization of the Aetna premium true-up in the first quarter of 2005.

Workers
compensation costs were $19.7 million for the three months ended March 31, 2005, as
compared to $18.0 million for the three months ended March 31, 2004, representing an
increase of $1.7 million or 9.5%. Workers compensation costs increased in the first
quarter of 2005 due to the net effect of an increase in workers compensation expense as a
result of the full effect of the EPIX acquisition for the three months ended March 31,
2005 and an overall reduction in workers compensation costs due to the following
factors: (i) a decrease in general premiums and taxes associated with manual premium rate
decreases in Florida; (ii) a higher investment return on premium amounts with AIG
associated with claims below the per occurrence deductible; and (iii) improved workers
compensation claim metrics in the first quarter of 2005.

State
unemployment taxes and other costs were $11.0 million for the three months ended March 31,
2005, compared to $6.7 million for the three months ended March 31, 2004, representing an
increase of $4.3 million or 63.9%. The increase primarily relates to the full effect of
the EPIX acquisition in the first quarter of 2005, as well as higher state unemployment
tax rates beginning January 1, 2005.

# Operating Expenses

The
following table presents certain information related to the Companys operating
expenses for the three months ended March 31, 2005 and 2004:

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

Total
operating expenses were $31.6 million for the three months ended March 31, 2005 as
compared to $26.6 million for the three months ended March 31, 2004, representing an
increase of $5.0 million or 18.9%. Excluding depreciation and amortization, annualized
operating expenses per average number of client employees paid was $947 for both of the
three month periods ended March 31, 2005 and 2004.

Salaries,
wages and commissions were $17.4 million for the three months ended March 31, 2005 as
compared to $16.3 million for the three months ended March 31, 2004, representing an
increase of $1.1 million or 6.8%. The increase is primarily a result of the full effect of
EPIX acquisition during the three months ended March 31, 2005.

21


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Other
general and administrative expenses were $10.5 million for the three months ended March
31, 2005 as compared to $8.1 million for the three months ended March 31, 2004,
representing an increase of $2.3 million or 28.7%. This increase is primarily a result of
increased costs associated with the full effect of the EPIX acquisition for the quarter
ended March 31, 2005, an increase in marketing costs and consulting fees associated with
strategic initiatives and an increase in accounting fees related to the first year of
internal control work under Section 404 of the Sarbanes-Oxley Act of 2002.

Depreciation
and amortization expenses were $3.8 million for the three months ended March 31, 2005
compared to $2.2 million for the three months ended March 31, 2004. The increase is
primarily attributable to the amortization of the intangible assets associated with the
EPIX acquisition.

# Income Taxes

Income
taxes were $4.0 million for the three months ended March 31, 2005 compared to $3.1 million
for the three months ended March 31, 2004. The increase is primarily due to an increase in
taxable income for the first three months of 2005 compared to the first three months of
2004. The Companys effective tax rate for the three months ended March 31, 2005 and
2004 was 33.0%. The Companys effective tax rates differed from the statutory federal
tax rates primarily because of state taxes and federal tax credits.

# LIQUIDITY AND CASH FLOWS

# Cash Flow

General

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

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

The
Companys primary short-term liquidity requirements relate to the payment of accrued
payroll and payroll taxes of its internal and client employees, accounts payable for
capital expenditures, the payment of workers compensation premiums and medical
benefit plan premiums. The Companys billings to its clients include: (i) each client
employees gross wages; (ii) a professional service fee which is primarily computed
as a percentage of 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 three months of 2005
were salaries, wages and payroll taxes of client employees of $1.175 billion. The billings
to clients are managed from a cash flow perspective so that a matching exists between the
time that the funds are received from a client to the time that the funds are paid to the
client employees and to the appropriate tax jurisdictions. As a co-employer, and under the
terms of each of the Companys professional services agreements, the Company is
obligated to make certain wage, tax and regulatory payments. Therefore, the objective of
the Company is to minimize the credit risk associated with remitting the payroll and
associated taxes before receiving the reimbursement from the client. To the extent this
objective is not achieved, short-term cash requirements can be significant. In addition,
the timing and amount of payments for payroll, payroll taxes and benefit premiums can vary
significantly based on various factors, including the day of the week on which a payroll
period ends and the existence of holidays at or immediately following a payroll
period-end.

22


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Restricted
Cash

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
certificates of deposit and marketable securities to collateralize these obligations as
more fully described below. Certificates of deposit and marketable securities used to
collateralize these obligations are designated as restricted in the Companys
condensed consolidated financial statements.

At
March 31, 2005, the Company had $84.9 million in total cash and cash equivalents,
restricted certificates of deposit and restricted marketable securities, of which $66.8
million was unrestricted. At March 31, 2005, the Company had pledged $18.2 million of
restricted certificates of deposit and restricted marketable securities as collateral for
certain standby letters of credit, in collateral trust arrangements issued in connection
with the Companys workers compensation and health benefit plans, and in a
rabbi trust in connection with a deferred compensation plan assumed in the EPIX
acquisition as follows:

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

The
amount of collateral required to be provided to Blue Cross/Blue Shield of Florida
(BCBSFL) may increase based in part on the increase in plan participation and
the requirement by BCBSFL 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 2005 and 2004.

As
of March 31, 2005, the Company has recorded a $126.8 million receivable from AIG
representing premium payments made to AIG in excess of the present value of the estimated
claims liability. This receivable represents a significant concentration of credit risk
for the Company.

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

Cash
Flows from Operating Activities

At
March 31, 2005, the Company had net working capital of $25.8 million, including restricted
funds classified as short-term of $10.2 million, as compared to $23.3 million in net
working capital as of December 31, 2004, including $10.2 million of restricted funds
classified as short-term.

23


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Net
cash provided by operating activities was $27.9 million for the three months ended March
31, 2005 as compared to net cash provided by operating activities of $6.9 million for the
three months ended March 31, 2004, representing an increase of $20.9 million. The overall
increase in cash provided by operating activities is primarily attributable to the
favorable timing of the receipts of customer payments and tax payments at March 31, 2005
as well as the increase in net income during the three months ended March 31, 2005
compared to the three months ended March 31, 2004. There were also other net changes in
working capital items, including accounts receivable, accrued insurance premiums and
income taxes payable.

If
current workers compensation trends continue, the Company expects to receive
approximately $39.1 million from AIG during the third quarter of 2005 as a return premium
from AIG in connection with the annual premium adjustment related to the 2003 and 2004
program years. Additional releases of premium by AIG are also anticipated in future years
if such trends continue. The Company believes that it has provided AIG a sufficient amount
of cash to cover its short-term and long-term workers compensation obligations related to
open policy years.

Cash
Flow from Investing Activities

Cash
used in investing activities for the three months ended March 31, 2005 of $1.1 million,
primarily relates to capital expenditures for technology-related items. Cash used in
investing activities for the three months ended March 31, 2004 of $39.0 million primarily
related to the $37.3 million used in the acquisitions of client servicing portfolios and
$1.2 million used for capital expenditures. The Company plans to spend approximately $2.7
million on capital expenditures (primarily technology related) during 2005.

Cash
Flow from Financing Activities

Cash used by financing activities for the three months ended March 31, 2005 of $0.8
million was a result of the net effect of $1.6 million of cash dividends paid and cash
received of approximately $0.8 million from directors, officers and employees of the
Company upon the exercise of 203,488 stock options and the purchase of 10,679 shares of
common stock under the Companys employee stock purchase plan. Cash provided from
financing activities during the three months ended March 31, 2004 of $19.7 million was
primarily a result of $20.0 million proceeds received under the credit agreement with Bank
of America, N.A. used to partially fund the EPIX acquisition, $1.2 million in proceeds
from issuance of common stock, less $1.3 million of cash dividends paid.

# Commitments and
Contractual Obligations

Off-Balance
Sheet Arrangements

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

Contractual
Obligations

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

# CRITICAL ACCOUNTING
ESTIMATES

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

24


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# NEW ACCOUNTING
PRONOUCEMENTS

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

# CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS

The
statements contained in this form 10-Q, under Item 2  Managements
Discussion and Analysis of Financial Condition and Results of Operations, and
elsewhere in this Form 10-Q 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;
| | - | ---------------------------------------------------------------------------------------------------------

25


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| |  | 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 or          less notice;
| | - | --------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

The
Company cautions that the factors described above could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made by or on
behalf of the Company. Any forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to predict all of
such factors. Further, management cannot assess the impact of each such factor on the
business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements.

26


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# ITEM 3.       Quantitative and
Qualitative Disclosures about Market Risk

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

# ITEM 4.       Controls and
Procedures

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

# PART II. OTHER
INFORMATION

# ITEM 1.       Legal Proceedings

See
Note 8 to the condensed consolidated financial statements for information concerning the
Companys legal proceedings.

# ITEM 6.       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.
| | -- | ----------------------------------------------------------------------------------

27


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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.                                                                               
|Date: May 9, 2005 |  | /s/ Peter  C. GrabowskiPeter C. Grabowski Chief Financial Officer(Principal Financial Officer)
|                  |  |                                                                                               

28


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