##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 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                                                            |  | 65-0735612                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|9000 Town Center Parkway
     Bradenton, Florida                   |  | 34202(Zip Code)                         
|(Address of principal executive offices)                           |  |                                         

(Registrants Telephone Number, Including Area Code):


(941) 741-4300


Securities Registered Pursuant to Section 12(b) of the
Act:


None


Securities Registered Pursuant to Section 12(g) of the
Act:


Common Stock, par value $0.01 per share


(title of class)


Common Stock Purchase Rights


(title of class)


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2).


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE












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##### 



TABLE OF CONTENTS







|                                                                                                                                   |          |    |                                                                                                                      |  |   
|---------------------------------------------------------------------------------------------------------------------------------- | -------- | -- | -------------------------------------------------------------------------------------------------------------------- |  | --
|PART I                                                                                                                             |          | 1 
|                                                                                                                                   | ITEM 1.  |    | Business                                                                                                             |  | 1 
|                                                                                                                                   | ITEM 1A. |    | Risk Factors                                                                                                         |  | 17
|                                                                                                                                   | ITEM 1B. |    | Unresolved Staff Comments                                                                                            |  | 23
|                                                                                                                                   | ITEM 2.  |    | Properties                                                                                                           |  | 23
|                                                                                                                                   | ITEM 3.  |    | Legal Proceedings                                                                                                    |  | 23
|                                                                                                                                   | ITEM 4.  |    | Submission of Matters to a Vote of
    Security Holders                                                              |  | 24
|                                                                                                                                  
|PART II                                                                                                                            |          | 24
|                                                                                                                                   | ITEM 5.  |    | Market for Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |  | 24
|                                                                                                                                   | ITEM 6.  |    | Selected Financial Data                                                                                              |  | 26
|                                                                                                                                   | ITEM 7.  |    | Managements Discussion and
    Analysis of Financial Condition and Results of Operations                            |  | 27
|                                                                                                                                   | ITEM 7A. |    | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |  | 50
|                                                                                                                                   | ITEM 8   |    | Financial Statements and Supplementary
    Data                                                                      |  | 51
|                                                                                                                                   | ITEM 9.  |    | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  | 51
|                                                                                                                                   | ITEM 9A  |    | Controls and Procedures                                                                                              |  | 51
|                                                                                                                                   | ITEM 9B. |    | Other Information                                                                                                    |  | 54
|                                                                                                                                  
|PART III                                                                                                                           |          | 54
|                                                                                                                                   | ITEM 10. |    | Directors and Executive Officers of the
    Registrant                                                               |  | 54
|                                                                                                                                   | ITEM 11. |    | Executive Compensation                                                                                               |  | 54
|                                                                                                                                   | ITEM 12. |    | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  | 54
|                                                                                                                                   | ITEM 13. |    | Certain Relationships and Related
    Transactions                                                                   |  | 54
|                                                                                                                                   | ITEM 14. |    | Principal Accounting Fees and
    Services                                                                           |  | 54
|                                                                                                                                  
|PART IV                                                                                                                            |          | 54
|                                                                                                                                   | ITEM 15. |    | Exhibits, Financial Statement
    Schedules                                                                          |  | 54
|EX-10.39 AIG RISK MANAGEMENT, INC. 1/1/06-07 WORKERS COMPENSATION/EMPLOYERS LIABILITY FINAL BOUND PROPOSAL DATED DECEMBER 21, 2005
|EX-21.1 LIST OF SUBSIDIARIES OF THE COMPANY                                                                                       
|EX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                  
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO                                                                                      
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO                                                                                      
|EX-32.1 SECTION 906, CERTIFICATION OF THE CEO AND CFO                                                                             





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##### Table of Contents






PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS

General






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Workforce alignment is the term used by the Company to refer to
    the engagement of the right people in the right place at the
    right time doing the right things. The Company assists its
    clients in achieving workforce alignment by helping them find
    exceptional talent, implement formal human resource 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.                                                                                                                                                                            
|
| |  | The Company provides business protection by helping clients
    ensure employment-related regulatory compliance and sound risk
    management practices. The Company also provides
    up-to-date regulatory
    compliance and access to cost-effective risk management
    practices and insurance programs.                                                                                                                             





| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | Increasing clients productivity by improving employee
    satisfaction and generating greater employee retention.                      
|
| |  | Allowing clients and their employees to focus on revenue
    producing activities rather than human resource matters.                   
|
| |  | Reducing clients exposure to liabilities associated with
    non-compliance with human resource-related regulatory and tax
    matters.









1



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##### Table of Contents



co-employment end-to




Human Resource Outsourcing Industry








| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | This segment is large and has a low penetration rate of
    outsourced comprehensive human resource services.                                                                                             
|
| |  | Small- and medium-sized businesses typically have fewer in-house
    resources than larger businesses and, as a result, are generally
    more dependent on their outsourced service providers.           
|
| |  | Businesses of this size select service providers primarily based
    upon the quality of service, ease of use, and responsiveness to
    clients needs.                                                  
|
| |  | Businesses of this size generally do not require customized
    solutions, enabling service providers to obtain significant
    scale advantages if they operate on an integrated technology
    platform.
|
| |  | This segment is characterized by a relatively short sales cycle
    and lower client acquisition cost as compared to the large
    business market.                                                       



Professional Services Provided by the Company




Workforce Alignment Engage the
right people in the right place at the right time doing the
right things.


Find
Exceptional Talent




| |   |                                 
| | - | --------------------------------
| |  | New hire forms kit              
|
| |  | Interview process and procedures
|
| |  | Candidate background screening  
|
| |  | Candidate drug testing          

2



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##### Table of Contents





| |   |                                              
| | - | ---------------------------------------------
| |  | Essentials management training  interviewing

Formal
Human Resource Processes and Professional Management
Standards




| |   |                                  
| | - | ---------------------------------
| |  | Employee handbook                
|
| |  | Human resource forms library     
|
| |  | Performance management process   
|
| |  | Progressive counseling procedures

Employee
Motivation and Retention Practices




| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | Benefit and insurance plan options                                  
|
| |  | Retirement plan options                                             
|
| |  | Employee relations consultations                                    
|
| |  | Employee reward and recognition program                             
|
| |  | Employee assistance program                                         
|
| |  | Essentials management training  managing and engaging
    employees

Administrative Relief  Manage
employee administration


Processing
of Payroll, Taxes and Premiums




| |   |                           
| | - | --------------------------
| |  | Administrative processing:



| |   |                                   
| | - | ----------------------------------
| |  | Payroll processing                
|
| |  | Paid time off processing          
|
| |  | Tax processing and payment        
|
| |  | W-2 preparation and delivery      
|
| |  | Health and welfare plan processing



| |   |                            
| | - | ---------------------------
| |  | Unemployment claims support

Comprehensive
Record Keeping and Technology




| |   |                                             
| | - | --------------------------------------------
| |  | gevity.com  self-service web site and tools



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | Web access to human resource management system, including
    account information, employee data and reports                  
|
| |  | Web access for employees to personal information and paycheck
    history                                                     
|
| |  | Searchable database for human resource fast answers, law
    summaries, model documents, news and trends, and company policies
|
| |  | Job description creation tool                                                                                                 
|
| |  | Salary survey tool                                                                                                            
|
| |  | Performance appraisal tool                                                                                                    
|
| |  | Virtual intranet  capability to post human resource
    documents, company-specific information and related links            



| |   |                                           
| | - | ------------------------------------------
| |  | Payroll and human resource-related reports

3



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##### Table of Contents



Business Protection  Help ensure
employment-related regulatory compliance and sound risk
management practices


Up-to-Date
Regulatory Compliance




| |   |                                           
| | - | ------------------------------------------
| |  | Policy and procedure audit                
|
| |  | Separation counseling procedures          
|
| |  | Harassment prevention program and training
|
| |  | Labor law posters                         

Cost-Effective
Risk Management Practices and Insurance Programs




| |   |                                                
| | - | -----------------------------------------------
| |  | Workers compensation insurance options        
|
| |  | Risk assessment                                
|
| |  | Employment Practices Liability Insurance (EPLI)

Gevity Institute
















| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased use of human resource practices leads to higher levels
    of positive employee outcomes, including effort and involvement,
    commitment, trust in management, cooperation with co-workers,
    and lower turnover intentions.
|
| |  | In turn, positive employee outcomes lead to higher levels of
    financial and operational performance.                                                                                                                                   



4



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Clients




|                                          |  |                         |       |   |      |  |       |      |  |  |       |  
|----------------------------------------- |  | ----------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                          |  | Year Ended December 31, |      
|                                          |  |                         |      
|Percentage of Client Billings by Industry |  | 2005                    |       |   | 2004 |  |       | 2003 | 
|                                          |  |                         |       |   |      |  |       |      | 
|Services(1)                               |  |                         | 39.5  | % |      |  | 38.5  | %    |  |  | 37.7  | %
|Finance/ Insurance/ Real Estate           |  |                         | 16.4  |   |      |  | 14.7  |      |  |  | 11.6  |  
|Manufacturing                             |  |                         | 12.0  |   |      |  | 12.6  |      |  |  | 12.6  |  
|Construction(2)                           |  |                         | 9.9   |   |      |  | 11.0  |      |  |  | 14.6  |  
|Retail Trade                              |  |                         | 9.4   |   |      |  | 8.9   |      |  |  | 9.1   |  
|Wholesale Trade                           |  |                         | 7.3   |   |      |  | 7.5   |      |  |  | 7.1   |  
|Transportation                            |  |                         | 2.0   |   |      |  | 2.0   |      |  |  | 2.0   |  
|Restaurants                               |  |                         | 1.9   |   |      |  | 2.1   |      |  |  | 2.9   |  
|Agriculture                               |  |                         | 1.5   |   |      |  | 1.8   |      |  |  | 2.4   |  
|Other                                     |  |                         | 0.1   |   |      |  | 0.9   |      |  |  |      |  
|                                          |  |                         |       |   |      |  |       |      | 
|Total                                     |  |                         | 100.0 | % |      |  | 100.0 | %    |  |  | 100.0 | %
|                                          |  |                         |       |   |      |  |       |      | 






|    |                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Services category consists principally of health services,
    business services, personal services (e.g., laundry and dry
    cleaning, beauty and barber shops), hotel and lodging services,
    computer services, legal services, building maintenance, social
    services and miscellaneous repair services.
|   
|(2) | The Construction category consists principally of general
    contracting and other trade work, such as heating, ventilation,
    air-conditioning, plumbing, electrical and flooring. This
    category does not include workers engaged in roofing or other
    high-elevation exposure risk activities.            



on-site


on-the


5



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month-to co-employer








day-to day-to




|                                                                                                                                                                  |  |                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Gevity                                                                                                                                                            |  | Client                                                                                                                                   
|                                                                                                                                                                  |  |                                                                                                                                          
| All rules and regulations governing the reporting,
    collection and payment of federal and state payroll taxes on
    wages, including:(i) federal income tax |  |  Worksite and employee safety under the Occupational
    Safety and Health Act (OSHA) and related or similar federal,
    state or local

6



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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Gevity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Client                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|withholding provisions of the Internal Revenue Code;
    (ii) state and/or local income tax withholding provisions;
    (iii) Federal Income Contributions Act (FICA);
    (iv) Federal Unemployment Tax Act (FUTA);
    and(v) applicable state unemployment tax provisions,
    including managing claims
     Applicable workers compensation laws that
    cover:(i) procuring workers compensation insurance;
    (ii) completing and filing all required reports; and
    (iii) claims processing |  | regulations
     Government contracting requirements as regulated by,
    including, but not limited to: (i) Executive Order 11246;
    (ii) Vocational Rehabilitation Act of 1973;
    (iii) Vietnam Era Veterans Readjustment Assistance
    Act of 1974; (iv) Walsh-Healy Public Contracts Act; (v)
    Davis-Bacon Act; (vi) the Service Contract Act of 1965; and
    (vii) any and all related or similar federal, state or
    localC laws, regulations, ordinances and statutes                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| COBRA (Consolidated Omnibus Budget Reconciliation
    Act of 1986) continuation coverage for employees covered under
    health plans sponsored by Gevity                                                                                                                                                                                                                                                                                                                                                |  |  Professional licensing and liability
     Internal Revenue Code Sections 414 (m), (n)
    and (o) relating to client maintained benefit plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| Laws governing the garnishment of wages, including
    Title III of the Consumer Credit Protection Act
     All rules and regulations governing administration,
    procurement and payment of all Company sponsored employee
    benefit plans elected by the client or client employee
     Fair Labor Standards Act (FLSA) and the Family
    and Medical Leave Act of 1993 (FMLA)*                                                                                                                 |  |  Laws affecting the assignment and ownership of
    intellectual property rights
     Worker Adjustment and Retraining Notification Act
    (WARN)
     Laws affecting the maintenance, storage and disposal
    of hazardous materials
     Title VII (Civil Rights Act of 1964, as amended),
    Immigration Reform and Control Act, the Americans with
    Disabilities Act, the Age Discrimination in Employment Act,
    Older Workers Benefit Protection Act
     All other federal, state, county or local laws,
    regulations, ordinances and statutes which regulate
    employees wage and hour matters, prohibit discrimination
    in the workplace or govern the employer/employee relationship
     Fair Labor Standards Act (FLSA) and the Family and
    Medical Leave Act of 1993 (FMLA)*






|  |                                                                                                        
|- | -------------------------------------------------------------------------------------------------------
|* | The Company and the client are each responsible for certain
    provisions under the terms of each act.





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Service Delivery and Information Technology


on-site














8



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Sales and Marketing






on-site


Competition










9



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Vendor Relationships






| |                                
| | -------------------------------
| | Workers Compensation Insurance











10



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|             |  |                   |         |   |                     |                 |      |                     |  |  |          | 
|------------ |  | ----------------- | ------- | - | ------------------- | --------------- | ---- | ------------------- |  |  | -------- | 
|             |  |                   |         |   |                     | Minimum Program |     
|             |  | Initial Loss Fund |         |   | Guaranteed Interest |                 |      | Life for Guaranteed | 
|Program Year |  | Premiums          |         |   | Rate                |                 |      | Interest Rate       | 
|             |  |                   |         |   |                     |                 |      |                     | 
|2003         |  | $                 | 73,500  | * |                     |                 | 2.42 | %                   |  |  | 7 years  | 
|2003         |  | $                 | 11,500  | * |                     |                 | 1.85 | %                   |  |  | 7 years  | 
|2004         |  | $                 | 111,400 |   |                     |                 | 2.92 | %                   |  |  | 10 years | 
|2005         |  | $                 | 100,000 |   |                     |                 | 3.75 | %                   |  |  | 10 years | 






|  |                                                                       
|- | ----------------------------------------------------------------------
|* | The 2003 program year consists of two loss funds totaling
    $85,000.

true-up true-up true-up








| |                       
| | ----------------------
| | Employee Benefit Plans



Blue Cross and Blue Shield of Florida


Aetna Health, Inc.


11



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Other Medical Benefit Plans


Other Health Benefit Plans










| |             
| | ------------
| | 401(k) Plans

multiple
employer




Internal Company Employees




Industry Regulation




| |        
| | -------
| | General







12



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| |             
| | ------------
| | 401(k) Plans









13



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| |                   
| | ------------------
| | ERISA Requirements







| |                         
| | ------------------------
| | Federal Employment Taxes







14



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Significant Transactions in 2005




Executive Officers of the Registrant




|                     |  |     |    |  |          |                                                       
|-------------------- |  | --- | -- |  | -------- | ------------------------------------------------------
|Name                 |  | Age |    |  | Position
|                     |  |     |    |  |         
|Erik Vonk            |  |     | 52 |  |          | Chairman of the Board and Chief Executive Officer     
|Roy C. King          |  |     | 52 |  |          | President and Chief Operating Officer                 
|Peter C. Grabowski   |  |     | 43 |  |          | Chief Financial Officer                               
|Lisa J. Harris       |  |     | 45 |  |          | Chief Information Officer                             
|Clifford M. Sladnick |  |     | 49 |  |          | Chief Administrative Officer                          
|Sal J. Uglietta      |  |     | 53 |  |          | Senior Vice President, Benefits and Insurance Programs

Erik Vonk


Roy C. King


Peter C. Grabowski


Lisa J. Harris


Clifford M. Sladnick


15



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Sal J. Uglietta


Available Information


1-800-SEC-0330 www.sec.gov


10-K, 10-Q, 8-K, www.gevity.com


www.gevity.com


1-800 www.gevity.com




16



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|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS





| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent upon technology services and any damage,
    interruptions or failures in our computer and telecommunications
    systems could adversely affect our existing client relationships
    and our ability to attract new clients.





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our insurance-related loss reserves may be inadequate to
    cover our ultimate liability for losses and as a result our
    financial results could be harmed.





| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our results of operations may be adversely affected if
    insurance coverage for workers compensation or medical
    benefits is not available or if we lose relationships with our
    key providers.



17



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| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our headquarters, many of our clients headquarters,
    and the facilities of many of the third parties on which we rely
    to provide us and our clients with critical services are located
    in an area of the United States that is susceptible to hurricane
    damage and other natural disasters.



Our acquisition strategy
subjects us to numerous risks.




Integration & Operational Risks.


Financial Risks.


Legal Risks.






| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on the technology of third parties licensed to
    us, and the loss or inability to maintain these licenses or
    errors in the software we license could result in increased
    costs, reduced service levels or delayed sales of our products
    and services.



18



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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | We are dependent upon key personnel, and the recruitment
    and retention of key employees may be difficult and
    expensive.





| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | We depend on attracting and retaining qualified service
    consultants and sales associates.





| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly revenues may fluctuate, and we may not be
    able to sustain our level of total revenue or our historical
    rate of revenue growth.





| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | changes to our reserves for workers compensation, medical
    benefit plans, and state unemployment taxes;
|
| |  | new product introductions or announcements by us or our
    competitors;                                   
|
| |  | market acceptance of new services;                                                                         
|
| |  | pricing changes or increases;                                                                              
|
| |  | the hiring and training of additional staff; and                                                           
|
| |  | general economic conditions.                                                                               



19



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| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our short-term results may be impacted due to changes in
    health insurance claims, state unemployment tax rates and
    workers compensation rates, which we may not be able to
    immediately pass through to our clients.





| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of our co-employment relationship with our
    clients and client employees, we may be subject to liabilities
    as a result of their acts or omissions.





| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we assume the obligation to make wage, tax and
    regulatory payments of behalf of our clients, we are exposed to
    certain credit risks with respect to our larger clients.





| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our professional services agreement allows clients to
    terminate their relationship with us upon either 30 or
    45 days notice, and as a result, we could lose a
    significant number of customers in a short period of
    time.

month-to


20



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| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Our business is subject to risks associated with
    geographic market concentration.





| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be required to provide significant collateral for
    our obligations to our insurance providers and the amount of
    cash necessary to provide that collateral may increase in the
    future.





| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in a complex regulatory environment and failure
    to comply with applicable laws and regulations could adversely
    affect our business.





| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The market for our services and our revenue growth depends
    on our ability to use the Internet as a means of delivering
    human resource services and this exposes us to various security
    risks.



21



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| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are determined not to be an employer
    pursuant to applicable ERISA and IRS rules and regulations, we
    may be subject to additional regulations and liabilities.





| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We may face increased litigation risk if we are determined
    to be an employer for employment and discrimination
    law purposes.

on-site




| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may find it difficult to expand our business into
    additional states due to varying state regulatory requirements
    and the existing competitive environment.





| |                                                                                 
| | --------------------------------------------------------------------------------
| | We face direct and overlapping competition from a number
    of other companies.



22



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| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain of our competitors may have greater financial,
    technical and marketing resources, larger customer bases,
    greater name recognition and more established relationships with
    their clients and suppliers than we do, which could adversely
    affect our ability to attain new clients.








|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES












|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS





23



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






Part II.







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES

Market Information




|                                    |  |      |       |  |     |   |       |           |  |   |      | 
|----------------------------------- |  | ---- | ----- |  | --- | - | ----- | --------- |  | - | ---- | 
|Fiscal Year Ended December 31, 2005 |  | High |       |  | Low |   |       | Dividends | 
|                                    |  |      |       |  |     |   |       |           | 
|Fourth Quarter                      |  | $    | 29.00 |  |     | $ | 24.00 |           |  | $ | 0.07 | 
|Third Quarter                       |  | $    | 27.92 |  |     | $ | 19.69 |           |  | $ | 0.07 | 
|Second Quarter                      |  | $    | 20.59 |  |     | $ | 15.45 |           |  | $ | 0.07 | 
|First Quarter                       |  | $    | 22.60 |  |     | $ | 17.25 |           |  | $ | 0.06 | 

|                                    |  |      |       |  |     |   |       |           |  |   |      | 
|----------------------------------- |  | ---- | ----- |  | --- | - | ----- | --------- |  | - | ---- | 
|Fiscal Year Ended December 31, 2004 |  | High |       |  | Low |   |       | Dividends | 
|                                    |  |      |       |  |     |   |       |           | 
|Fourth Quarter                      |  | $    | 21.34 |  |     | $ | 13.56 |           |  | $ | 0.06 | 
|Third Quarter                       |  | $    | 26.73 |  |     | $ | 14.90 |           |  | $ | 0.06 | 
|Second Quarter                      |  | $    | 30.70 |  |     | $ | 19.24 |           |  | $ | 0.06 | 
|First Quarter                       |  | $    | 29.50 |  |     | $ | 20.10 |           |  | $ | 0.05 | 

Dividends




Holders




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Issuer Purchases of Equity Securities




|             |  |                 |         |  |                    |                  |                     |                   |                      |                      |                   |  |  |   |        | 
|------------ |  | --------------- | ------- |  | ------------------ | ---------------- | ------------------- | ----------------- | -------------------- | -------------------- | ----------------- |  |  | - | ------ | 
|             |  |                 |         |  |                    | Total Number of  |                     |                   | Approximate Dollar   |                     
|             |  |                 |         |  |                    | Shares Purchased |                     |                   | Value of Shares That |                     
|             |  | Total Number of |         |  |                    |                  | as Part of Publicly |                   |                      | May yet be Purchased |                  
|             |  | Shares          |         |  | Average Price Paid |                  |                     | Announced Program |                      |                      | Under the Program | 
|Period       |  | Purchased(1)    |         |  | per Share          |                  |                     | (1)               |                      |                      | ($000s)(2)       | 
|             |  |                 |         |  |                    |                  |                     |                   |                      |                      |                   | 
|10/01/2005  |  |                 |         |  |                    |                  |                     |                   |                      |                      |                   |  |  |   |        | 
|10/31/2005   |  |                 | 377,338 |  |                    | $                | 26.17               |                   |                      |                      | 377,338           |  |  | $ | 37,890 | 
|11/01/2005  |  |                 |         |  |                    |                  |                     |                   |                      |                      |                   |  |  |   |        | 
|11/30/2005   |  |                 | 584,701 |  |                    | $                | 27.26               |                   |                      |                      | 584,701           |  |  | $ | 21,929 | 
|12/01/2005  |  |                 |         |  |                    |                  |                     |                   |                      |                      |                   |  |  |   |        | 
|12/31/2005   |  |                 | 772,930 |  |                    | $                | 27.55               |                   |                      |                      | 772,930           |  |  | $ | 600    | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On September 28, 2005, the Company announced that the board
    of directors authorized the repurchase of up to
    $50.0 million of the Companys common stock effective
    immediately. Stock repurchases under this program were to be
    made at such times and in such amounts as the Company deemed
    appropriate, based on a variety of factors including price,
    corporate and regulatory requirements and overall market
    conditions.
|   
|(2) | The Company completed its share repurchase program in January
    2006 with the purchase of 23,933 shares for
    $0.6 million. In total, the Company repurchased
    1,840,802 shares as part of this share repurchase program
    during 2005 and 2006 at a total cost of $50.0 million.                                                                                                                                                              



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|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

10-K,


|                                                                                                     |                                                       |                                      |                |         |         |         |         |         |         |         |         |         |         |         |         |        |         |         |         |         |         |         | 
|---------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------ | -------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                                     |                                                       | For the Years Ended December 31,     |               
|                                                                                                     |                                                       |                                      |               
|                                                                                                     |                                                       | 2005                                 |                |         | 2004    |         |         | 2003    |         |         | 2002    |         |         | 2001    |        
|                                                                                                     |                                                       |                                      |                |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                     |                                                       | (In thousands except per share data) |               
|Statement of Operations Data:                                                                        |                                                       |                                      |                |         |         |         |         |         |         |         |         |         |         |         |         |        |         |         |         |        
|                                                                                                     | Revenues                                              |                                      |                |         |         |         |         |         |         |         |         |         |         |         |         |        |         |         |         |         |        
|                                                                                                     |                                                       | Professional service fees            |                | $       | 140,698 |         |         | $       | 134,781 |         |         | $       | 97,376  |         |         | $      | 89,563  |         |         | $       | 75,704  |        
|                                                                                                     |                                                       | Employee health and welfare benefits |                |         | 331,215 |         |         |         | 314,494 |         |         |         | 214,701 |         |         |        | 180,203 |         |         |         | 129,243 |        
|                                                                                                     |                                                       | Workers compensation                |                |         | 114,778 |         |         |         | 117,669 |         |         |         | 104,225 |         |         |        | 95,977  |         |         |         | 117,895 |        
|                                                                                                     |                                                       | State unemployment taxes and other   |                |         | 22,106  |         |         |         | 18,537  |         |         |         | 9,525   |         |         |        | 8,911   |         |         |         | 9,986   |        
|                                                                                                     |                                                       |                                      |                |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                     |                                                       |                                      | Total revenues |         | $       | 608,797 |         |         | $       | 585,481 |         |         | $       | 425,827 |         |        | $       | 374,654 |         |         | $       | 332,828 | 
|                                                                                                     | Gross profit                                          |                                      | $              | 194,990 |         |         | $       | 179,341 |         |         | $       | 115,718 |         |         | $       | 90,524 |         |         | $       | 70,985  |        
|                                                                                                     | Operating income (loss)                               |                                      | $              | 55,010  |         |         | $       | 51,561  |         |         | $       | 21,585  |         |         | $       | 4,976  |         |         | $       | (29,288 | )      
|                                                                                                     | Net income (loss)                                     |                                      | $              | 37,378  |         |         | $       | 34,618  |         |         | $       | 15,391  |         |         | $       | 4,737  |         |         | $       | (15,603 | )      
|                                                                                                     | Net income (loss) attributable to common shareholders |                                      | $              | 37,378  |         |         | $       | 4,738   |         |         | $       | 13,005  |         |         | $       | 4,737  |         |         | $       | (15,603 | )      
|                                                                                                     | Net income (loss) per share:                          |                                      |                |         |         |         |         |         |         |         |         |         |         |         |         |        |         |         |         |         |        
|                                                                                                     |  Basic                                               |                                      | $              | 1.36    |         |         | $       | 0.20    |         |         | $       | 0.66    |         |         | $       | 0.23   |         |         | $       | (0.76   | )      
|                                                                                                     |  Diluted                                             |                                      | $              | 1.31    |         |         | $       | 0.18    |         |         | $       | 0.62    |         |         | $       | 0.22   |         |         | $       | (0.76   | )      
|Weighted average common shares:                                                                      |                                                       |                                      |                |         |         |         |         |         |         |         |         |         |         |         |         |        |         |         |         |        
|                                                                                                     |  Basic                                               |                                      |                | 27,452  |         |         |         | 24,125  |         |         |         | 19,686  |         |         |         | 20,722 |         |         |         | 20,606  |        
|                                                                                                     |  Diluted                                             |                                      |                | 28,534  |         |         |         | 25,735  |         |         |         | 24,649  |         |         |         | 21,074 |         |         |         | 20,606  |        
|Dividends declared per common share                                                                  |                                                       | $                                    | 0.28           |         |         | $       | 0.24    |         |         | $       | 0.20    |         |         | $       | 0.20    |        |         | $       | 0.20    |        
|Statistical And Operating Data:                                                                      |                                                       |                                      |                |         |         |         |         |         |         |         |         |         |         |         |         |        |         |         |         |        
|Client employees at period end                                                                       |                                                       |                                      | 136,687        |         |         |         | 129,876 |         |         |         | 106,452 |         |         |         | 99,408  |        |         |         | 111,910 |        
|Average wage per average number of client employees paid by month                                    |                                                       | $                                    | 39,040         |         |         | $       | 35,953  |         |         | $       | 33,569  |         |         | $       | 29,924  |        |         | $       | 25,761  |        
|Professional service fees per average number of client employees
    paid by month                   |                                                       | $                                    | 1,150          |         |         | $       | 1,125   |         |         | $       | 1,109   |         |         | $       | 926     |        |         | $       | 722     |        
|Internal employees at period end                                                                     |                                                       |                                      | 1,050          |         |         |         | 993     |         |         |         | 954     |         |         |         | 901     |        |         |         | 1,018   |        
|Number of workers compensation claims(1)                                                            |                                                       |                                      | 6,232          |         |         |         | 6,489   |         |         |         | 5,765   |         |         |         | 7,701   |        |         |         | 10,195  |        
|Frequency of workers compensation claims per one million
    dollars of workers compensation wages |                                                       |                                      | 1.42           | x       |         |         | 1.59    | x       |         |         | 2.00    | x       |         |         | 2.74    | x      |         |         | 3.90x   |        
|Balance Sheet Data:                                                                                  |                                                       |                                      |                |         |         |         |         |         |         |         |         |         |         |         |         |        |         |         |         |        
|Cash, cash equivalents and investments(2)                                                            |                                                       | $                                    | 64,730         |         |         | $       | 59,412  |         |         | $       | 152,008 |         |         | $       | 126,223 |        |         | $       | 92,892  |        
|Workers compensation receivable                                                                     |                                                       | $                                    | 128,318        |         |         | $       | 112,715 |         |         | $       | 24,355  |         |         |         |        |        |         |         |        |        
|Total assets                                                                                         |                                                       | $                                    | 387,869        |         |         | $       | 339,587 |         |         | $       | 321,564 |         |         | $       | 265,535 |        |         | $       | 219,903 |        
|Long-term accrued workers compensation and health reserves                                          |                                                       | $                                    | 242            |         |         | $       | 700     |         |         | $       | 59,280  |         |         | $       | 61,672  |        |         | $       | 48,049  |        
|Total shareholders equity                                                                           |                                                       | $                                    | 155,415        |         |         | $       | 165,174 |         |         | $       | 92,380  |         |         | $       | 58,605  |        |         | $       | 57,511  |        

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The number of workers compensation claims reflects the
    number of claims reported by the end of the respective year and
    does not include any claims with respect to a specific policy
    year that are reported subsequent to the end of such year. For
    information regarding claims reported after the end of each
    respective year from 2000  2004, see the first table
    set forth in Item 7. Managements Discussion and
    Analysis of Financial Condition and Results of
    Operations  Critical Accounting Estimates 
    Workers Compensation Receivable/ Reserves.
|   
|(2) | $12,205, $18,636, $107,326, $92,454 and $34,262 of the cash,
    cash equivalents and investments (which consist of certificates
    of deposit-restricted and marketable securities-restricted, both
    long and short term) as of December 31, 2005, 2004, 2003,
    2002, and 2001, respectively, have been utilized to
    collateralize the Companys obligations under its
    workers compensation, health benefit plans and certain
    general insurance contracts. These amounts are considered
    restricted and are not available for general
    corporate purposes.               






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

10-K.




Overview and Introduction










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|                                                                                   |  |                                  |         |  |      |   |         |          |  |  |      |   
|---------------------------------------------------------------------------------- |  | -------------------------------- | ------- |  | ---- | - | ------- | -------- |  |  | ---- | --
|                                                                                   |  | For the Years Ended December 31, |        
|                                                                                   |  |                                  |        
|                                                                                   |  | 2005                             |         |  | 2004 |   |         | % Change | 
|                                                                                   |  |                                  |         |  |      |   |         |          | 
|Statistical data:                                                                  |  |                                  |         |  |      |   |         |          |  |  |      |   
|Client employees at period end                                                     |  |                                  | 136,687 |  |      |   | 129,876 |          |  |  | 5.2  | % 
|Clients at period end(1)                                                           |  |                                  | 8,226   |  |      |   | 8,539   |          |  |  | (3.7 | )%
|Average number of client employees at period end/clients at
    period end         |  |                                  | 16.62   |  |      |   | 15.21   |          |  |  | 9.3  | % 
|Average number of client employees paid by month(2)                                |  |                                  | 122,356 |  |      |   | 119,857 |          |  |  | 2.1  | % 
|Average wage per average number of client employees paid by month                  |  | $                                | 39,040  |  |      | $ | 35,953  |          |  |  | 8.6  | % 
|Professional service fees per average number of client employees
    paid by month |  | $                                | 1,150   |  |      | $ | 1,125   |          |  |  | 2.2  | % 
|Gross profit per average number of client employees paid by month                  |  | $                                | 1,594   |  |      | $ | 1,496   |          |  |  | 6.6  | % 
|Operating income per average number of client employees paid by
    month          |  | $                                | 450     |  |      | $ | 430     |          |  |  | 4.7  | % 






|    |                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Number of clients measured by individual client 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 in the year divided by
    12 months. All other statistical information above is based
    upon actual
    year-to-date amounts
    divided by the average number of client employees paid by month.





| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the amount of time required for sales personnel to begin to
    acquire new client employees may be longer than anticipated;                                       
|
| |  | the current client employee retention levels may decrease if
    clients decide to use alternative providers to service their
    human resource outsourcing needs;
|
| |  | other human resource outsourcing client employee portfolios or
    service providers may not be available for acquisition due to
    price or quality;             

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| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; and
|
| |  | the time to achieve acceptance by prospective clients of the
    Companys new business model may be longer than anticipated.                                                                                            

Acquisitions


EPIX Acquisition.


TeamStaff Acquisition.


Revenues






Reporting Revenue Gross as a Principal versus
Net as an Agent.




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Cost of Services
















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| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys Claims Administration Department actively
    reviews unemployment claims, and if warranted, contests claims
    it believes are improper.
|
| |  | Many states allow the Company to avoid unemployment tax rate
    increases through the use of voluntary contributions.                                  
|
| |  | Where allowed, the Company uses multiple state accounts for the
    classification of its workers.                                                      
|
| |  | In certain states, the Company elects to report under its
    clients rates.                                                                           
|
| |  | The Company utilizes state successorship rules for its
    acquisitions of client portfolios of other companies.                                        

Operating Expenses




Income Taxes




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RESULTS OF OPERATIONS




|                                                                       | 
|---------------------------------------------------------------------- | 
|Year Ended December 31, 2005 Compared to Year Ended December 31, 2004. | 



| |         
| | --------
| | Revenues



|                  |                                                                                                        |                                         |         |           |              |   |         |           |   |  |     |      |   
|----------------- | ------------------------------------------------------------------------------------------------------ | --------------------------------------- | ------- | --------- | ------------ | - | ------- | --------- | - |  | --- | ---- | --
|                  |                                                                                                        | December 31,                            |         |           | December 31, |   |         |          
|                  |                                                                                                        | 2005                                    |         |           | 2004         |   |         | % Change  |  
|                  |                                                                                                        |                                         |         |           |              |   |         |           |  
|                  |                                                                                                        | (In thousands, except statistical data) |        
|Revenues:         |                                                                                                        |                                         |         |           |              |   |         |           |   |  |     |     
|                  | Professional service fees                                                                              |                                         | $       | 140,698   |              |   | $       | 134,781   |   |  |     | 4.4  | % 
|                  | Employee health and welfare benefits                                                                   |                                         |         | 331,215   |              |   |         | 314,494   |   |  |     | 5.3  | % 
|                  | Workers compensation                                                                                  |                                         |         | 114,778   |              |   |         | 117,669   |   |  |     | (2.5 | )%
|                  | State unemployment taxes and other                                                                     |                                         |         | 22,106    |              |   |         | 18,537    |   |  |     | 19.3 | % 
|                  |                                                                                                        |                                         |         |           |              |   |         |           |  
|Total revenues    |                                                                                                        | $                                       | 608,797 |           |              | $ | 585,481 |           |   |  | 4.0 | %   
|                  |                                                                                                        |                                         |         |           |              |   |         |           |  
|Statistical data: |                                                                                                        |                                         |         |           |              |   |         |           |   |  |     |     
|                  | Gross salaries and wages (in thousands)                                                                |                                         | $       | 4,776,770 |              |   | $       | 4,309,260 |   |  |     | 10.8 | % 
|                  | Average number of client employees paid by month(1)                                                    |                                         |         | 122,356   |              |   |         | 119,857   |   |  |     | 2.1  | % 
|                  | Average wage per average number of client employees paid by month                                      |                                         | $       | 39,040    |              |   | $       | 35,953    |   |  |     | 8.6  | % 
|                  | Workers compensation billing per one hundred dollars of
    workers compensation wages(2)            |                                         | $       | 2.62      |              |   | $       | 2.88      |   |  |     | (9.0 | )%
|                  | Workers compensation manual premium per one hundred
    dollars of workers compensation wages(2),(3) |                                         | $       | 3.22      |              |   | $       | 3.50      |   |  |     | (8.0 | )%
|                  | Professional service fees per average number of client employees
    paid by month                     |                                         | $       | 1,150     |              |   | $       | 1,125     |   |  |     | 2.2  | % 
|                  | Client employee health benefits plan participation                                                     |                                         |         | 38        | %            |   |         | 38        | % |  |     |     | % 






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





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Cost of Services




|                       |                                                                                                         |                                         |         |           |              |   |         |           |   |  |     |       |   
|---------------------- | ------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------- | --------- | ------------ | - | ------- | --------- | - |  | --- | ----- | --
|                       |                                                                                                         | December 31,                            |         |           | December 31, |   |         |          
|                       |                                                                                                         | 2005                                    |         |           | 2004         |   |         | % Change  |  
|                       |                                                                                                         |                                         |         |           |              |   |         |           |  
|                       |                                                                                                         | (In thousands, except statistical data) |        
|Cost of services:      |                                                                                                         |                                         |         |           |              |   |         |           |   |  |     |      
|                       | Employee health and welfare benefits                                                                    |                                         | $       | 326,932   |              |   | $       | 307,662   |   |  |     | 6.3   | % 
|                       | Workers compensation                                                                                   |                                         |         | 60,071    |              |   |         | 77,806    |   |  |     | (22.8 | )%
|                       | State unemployment taxes and other                                                                      |                                         |         | 26,804    |              |   |         | 20,672    |   |  |     | 29.7  | % 
|                       |                                                                                                         |                                         |         |           |              |   |         |           |  
|Total cost of services |                                                                                                         | $                                       | 413,807 |           |              | $ | 406,140 |           |   |  | 1.9 | %    
|                       |                                                                                                         |                                         |         |           |              |   |         |           |  
|Statistical data:      |                                                                                                         |                                         |         |           |              |   |         |           |   |  |     |      
|                       | Gross salaries and wages (in thousands)                                                                 |                                         | $       | 4,776,770 |              |   | $       | 4,309,260 |   |  |     | 10.8  | % 
|                       | Average number of client employees paid by month(1)                                                     |                                         |         | 122,356   |              |   |         | 119,857   |   |  |     | 2.1   | % 
|                       | Workers compensation cost rate per one hundred dollars of
    workers compensation wages(2)            |                                         | $       | 1.37      |              |   | $       | 1.91      |   |  |     | (28.3 | )%
|                       | Number of workers compensation claims(3)                                                               |                                         |         | 6,232     |              |   |         | 6,489     |   |  |     | (4.0  | )%
|                       | Frequency of workers compensation claims per one million
    dollars of workers compensation wages(2) |                                         |         | 1.42      | x            |   |         | 1.59      | x |  |     | (10.7 | )%






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 year and
    does not include claims with respect to a specific policy year
    that are reported subsequent to the end of such year. For
    information regarding claims reported after the end of each
    respective year, see the first table set forth below in this
    Item 7 under Critical Accounting Estimates.



true-up




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Operating Expenses




|                         |                                  |                                         |         |        |              |   |         |          |  |  |     |      |  
|------------------------ | -------------------------------- | --------------------------------------- | ------- | ------ | ------------ | - | ------- | -------- |  |  | --- | ---- | -
|                         |                                  | December 31,                            |         |        | December 31, |   |         |         
|                         |                                  | 2005                                    |         |        | 2004         |   |         | % Change | 
|                         |                                  |                                         |         |        |              |   |         |          | 
|                         |                                  | (In thousands, except statistical data) |        
|Operating expenses:      |                                  |                                         |         |        |              |   |         |          |  |  |     |     
|                         | Salaries, wages and commissions  |                                         | $       | 76,033 |              |   | $       | 71,803   |  |  |     | 5.9  | %
|                         | Other general and administrative |                                         |         | 49,312 |              |   |         | 41,809   |  |  |     | 17.9 | %
|                         | Depreciation and amortization    |                                         |         | 14,635 |              |   |         | 14,168   |  |  |     | 3.3  | %
|                         |                                  |                                         |         |        |              |   |         |          | 
|Total operating expenses |                                  | $                                       | 139,980 |        |              | $ | 127,780 |          |  |  | 9.5 | %   
|                         |                                  |                                         |         |        |              |   |         |          | 
|Statistical data:        |                                  |                                         |         |        |              |   |         |          |  |  |     |     
|                         | Internal employees at year end   |                                         |         | 1,050  |              |   |         | 993      |  |  |     | 5.7  | %









Income Taxes




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Net Income and Diluted Earnings Per Share






| |                                                    
| | ---------------------------------------------------
| | Preferred Stock Conversion and Accounting Treatment



in-the paid-in




36



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| |                                                                           
| | --------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003.



| |         
| | --------
| | Revenues



|                  |                                                                                                        |                                         |         |           |              |   |         |           |   |  |      |       |   
|----------------- | ------------------------------------------------------------------------------------------------------ | --------------------------------------- | ------- | --------- | ------------ | - | ------- | --------- | - |  | ---- | ----- | --
|                  |                                                                                                        | December 31,                            |         |           | December 31, |   |         |          
|                  |                                                                                                        | 2004                                    |         |           | 2003         |   |         | % Change  |  
|                  |                                                                                                        |                                         |         |           |              |   |         |           |  
|                  |                                                                                                        | (In thousands, except statistical data) |        
|Revenues:         |                                                                                                        |                                         |         |           |              |   |         |           |   |  |      |      
|                  | Professional service fees                                                                              |                                         | $       | 134,781   |              |   | $       | 97,376    |   |  |      | 38.4  | % 
|                  | Employee health and welfare benefits                                                                   |                                         |         | 314,494   |              |   |         | 214,701   |   |  |      | 46.5  | % 
|                  | Workers compensation                                                                                  |                                         |         | 117,669   |              |   |         | 104,225   |   |  |      | 12.9  | % 
|                  | State unemployment taxes and other                                                                     |                                         |         | 18,537    |              |   |         | 9,525     |   |  |      | 94.6  | % 
|                  |                                                                                                        |                                         |         |           |              |   |         |           |  
|Total revenues    |                                                                                                        | $                                       | 585,481 |           |              | $ | 425,827 |           |   |  | 37.5 | %    
|                  |                                                                                                        |                                         |         |           |              |   |         |           |  
|Statistical data: |                                                                                                        |                                         |         |           |              |   |         |           |   |  |      |      
|                  | Gross salaries and wages (in thousands)                                                                |                                         | $       | 4,309,260 |              |   | $       | 2,948,005 |   |  |      | 46.2  | % 
|                  | Average number of client employees paid by month(1)                                                    |                                         |         | 119,857   |              |   |         | 87,819    |   |  |      | 36.5  | % 
|                  | Average wage per average number of client employees paid by month                                      |                                         | $       | 35,953    |              |   | $       | 33,569    |   |  |      | 7.1   | % 
|                  | Workers compensation billing per one hundred dollars of
    workers compensation wages(2)            |                                         | $       | 2.88      |              |   | $       | 3.70      |   |  |      | (22.2 | )%
|                  | Workers compensation manual premium per one hundred
    dollars of workers compensation wages(2),(3) |                                         | $       | 3.50      |              |   | $       | 4.27      |   |  |      | (18.0 | )%
|                  | Professional service fees per average number of client employees
    paid by month                     |                                         | $       | 1,125     |              |   | $       | 1,109     |   |  |      | 1.4   | % 
|                  | Client employee health benefits plan participation                                                     |                                         |         | 38        | %            |   |         | 36        | % |  |      | 5.6   | % 






|    |                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Manual premium rate data is derived from tables of AIG in effect
    for 2004 and 2003, respectively.                                                                                                           







37



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Cost of Services




|                       |                                                                                                         |                                         |         |           |              |   |         |           |   |  |      |       |   
|---------------------- | ------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------- | --------- | ------------ | - | ------- | --------- | - |  | ---- | ----- | --
|                       |                                                                                                         | December 31,                            |         |           | December 31, |   |         |          
|                       |                                                                                                         | 2004                                    |         |           | 2003         |   |         | % Change  |  
|                       |                                                                                                         |                                         |         |           |              |   |         |           |  
|                       |                                                                                                         | (In thousands, except statistical data) |        
|Cost of services:      |                                                                                                         |                                         |         |           |              |   |         |           |   |  |      |      
|                       | Employee health and welfare benefits                                                                    |                                         | $       | 307,662   |              |   | $       | 212,081   |   |  |      | 45.1  | % 
|                       | Workers compensation                                                                                   |                                         |         | 77,806    |              |   |         | 90,305    |   |  |      | (13.8 | )%
|                       | State unemployment taxes and other                                                                      |                                         |         | 20,672    |              |   |         | 7,723     |   |  |      | 167.7 | % 
|                       |                                                                                                         |                                         |         |           |              |   |         |           |  
|Total cost of services |                                                                                                         | $                                       | 406,140 |           |              | $ | 310,109 |           |   |  | 31.0 | %    
|                       |                                                                                                         |                                         |         |           |              |   |         |           |  
|Statistical data:      |                                                                                                         |                                         |         |           |              |   |         |           |   |  |      |      
|                       | Gross salaries and wages (in thousands)                                                                 |                                         | $       | 4,309,260 |              |   | $       | 2,948,005 |   |  |      | 46.2  | % 
|                       | Average number of client employees paid by month(1)                                                     |                                         |         | 119,857   |              |   |         | 87,819    |   |  |      | 36.5  | % 
|                       | Workers compensation cost rate per one hundred dollars of
    workers compensation wages(2)            |                                         | $       | 1.91      |              |   | $       | 3.20      |   |  |      | (40.3 | )%
|                       | Number of workers compensation claims(3)                                                               |                                         |         | 6,489     |              |   |         | 5,765     |   |  |      | 12.6  | % 
|                       | Frequency of workers compensation claims per one million
    dollars of workers compensation wages(2) |                                         |         | 1.59      | x            |   |         | 2.00      | x |  |      | (20.5 | )%






|    |                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 year and
    does not include claims with respect to a specific policy year
    that are reported subsequent to the end of such year. For
    information regarding claims reported after the end of each
    respective year, see the first table set forth below in this
    Item 7 under Critical Accounting
    Estimates  Workers Compensation Receivable/
    Reserves.









Operating Expenses




|                         |                                  |                                         |         |        |              |   |        |          |  |  |      |      |  
|------------------------ | -------------------------------- | --------------------------------------- | ------- | ------ | ------------ | - | ------ | -------- |  |  | ---- | ---- | -
|                         |                                  | December 31,                            |         |        | December 31, |   |        |         
|                         |                                  | 2004                                    |         |        | 2003         |   |        | % Change | 
|                         |                                  |                                         |         |        |              |   |        |          | 
|                         |                                  | (In thousands, except statistical data) |        
|Operating expenses:      |                                  |                                         |         |        |              |   |        |          |  |  |      |     
|                         | Salaries, wages and commissions  |                                         | $       | 71,803 |              |   | $      | 55,287   |  |  |      | 29.9 | %
|                         | Other general and administrative |                                         |         | 41,809 |              |   |        | 31,476   |  |  |      | 32.8 | %
|                         | Depreciation and amortization    |                                         |         | 14,168 |              |   |        | 7,370    |  |  |      | 92.2 | %
|                         |                                  |                                         |         |        |              |   |        |          | 
|Total operating expenses |                                  | $                                       | 127,780 |        |              | $ | 94,133 |          |  |  | 35.7 | %   
|                         |                                  |                                         |         |        |              |   |        |          | 
|Statistical data:        |                                  |                                         |         |        |              |   |        |          |  |  |      |     
|                         | Internal employees at year end   |                                         |         | 993    |              |   |        | 954      |  |  |      | 4.1  | %

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Income Taxes




Net Income and Diluted Earnings Per Share




LIQUIDITY AND CASH FLOWS


Cash Flow




| |        
| | -------
| | General







40



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| |                
| | ---------------
| | Restricted Cash





|                                                    |                                                |                |        |       |              |   |        |       | 
|--------------------------------------------------- | ---------------------------------------------- | -------------- | ------ | ----- | ------------ | - | ------ | ----- | 
|                                                    |                                                | December 31,   |        |       | December 31, |  
|                                                    |                                                | 2005           |        |       | 2004         |  
|                                                    |                                                |                |        |       |              |  
|                                                    |                                                | (In thousands) |       
|Certificates of deposit  restricted:               |                                                |                |        |       |              |   |        |      
|                                                    | BCBSFL standby letter of credit                |                | $      |      |              |   | $      | 6,000 | 
|                                                    | Other                                          |                |        | 33    |              |   |        | 33    | 
|                                                    |                                                |                |        |       |              |  
|Total certificates of deposit  restricted          |                                                |                | 33     |       |              |   | 6,033  |      
|                                                    |                                                |                |        |       |              |  
|Short-term marketable securities  restricted:      |                                                |                |        |       |              |   |        |      
|                                                    | General insurance collateral obligations  AIG |                |        | 4,281 |              |   |        | 4,168 | 
|                                                    |                                                |                |        |       |              |  
|Total short-term marketable securities  restricted |                                                |                | 4,281  |       |              |   | 4,168  |      
|                                                    |                                                |                |        |       |              |  
|Long-term marketable securities restricted:         |                                                |                |        |       |              |   |        |      
|                                                    | Workers compensation collateral  AIG         |                |        | 3,582 |              |   |        | 3,488 | 
|                                                    | Rabbi trust                                    |                |        | 4,309 |              |   |        | 4,947 | 
|                                                    |                                                |                |        |       |              |  
|Total long-term marketable securities  restricted  |                                                |                | 7,891  |       |              |   | 8,435  |      
|                                                    |                                                |                |        |       |              |  
|Total restricted assets                             |                                                | $              | 12,205 |       |              | $ | 18,636 |      
|                                                    |                                                |                |        |       |              |  



41



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| |                                     
| | ------------------------------------
| | Cash Flows from Operating Activities









| |                                     
| | ------------------------------------
| | Cash Flows from Investing Activities



42



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| |                                     
| | ------------------------------------
| | Cash Flows from Financing Activities





Inflation




Commitments and Contractual Obligations


Off-Balance Sheet Arrangements


Table Of Contractual Arrangements


|                            |  |                       |        |        |      |   |       |       |      |     |        |  |      |         |       |  |  |   |        | 
|--------------------------- |  | --------------------- | ------ | ------ | ---- | - | ----- | ----- | ---- | --- | ------ |  | ---- | ------- | ----- |  |  | - | ------ | 
|                            |  | Payment Due by Period |       
|                            |  |                       |       
|                            |  |                       |        | Less   |      |   |       |       | More |    
|                            |  |                       |        | Than 1 |      |   | 1-3   |       |      | 4-5 |        |  | Than |        
|Contractual Obligations     |  | Total                 |        |        | Year |   |       | Years |      |     | Years  |  |      | 5 Years |      
|                            |  |                       |        |        |      |   |       |       |      |     |        |  |      |         |      
|Long-term debt obligations  |  |                       | None   |        |      |   | None  |       |      |     | None   |  |      |         | None  |  |  |   | None   | 
|Capital lease obligations   |  |                       | None   |        |      |   | None  |       |      |     | None   |  |      |         | None  |  |  |   | None   | 
|Operating lease obligations |  | $                     | 42,348 |        |      | $ | 7,735 |       |      | $   | 11,745 |  |      | $       | 8,225 |  |  | $ | 14,643 | 
|Purchase obligations        |  |                       | None   |        |      |   | None  |       |      |     | None   |  |      |         | None  |  |  |   | None   | 
|Other                       |  |                       | None   |        |      |   | None  |       |      |     | None   |  |      |         | None  |  |  |   | None   | 
|                            |  |                       |        |        |      |   |       |       |      |     |        |  |      |         |      
|Total                       |  | $                     | 42,348 |        |      | $ | 7,735 |       |      | $   | 11,745 |  |      | $       | 8,225 |  |  | $ | 14,643 | 
|                            |  |                       |        |        |      |   |       |       |      |     |        |  |      |         |      

CRITICAL ACCOUNTING ESTIMATES




43



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Workers Compensation Receivable/ Reserves












44



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45



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|                                                                                                                         |                     |                          |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |         |         |  |   |         |         | 
|------------------------------------------------------------------------------------------------------------------------ | ------------------- | ------------------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | ---- | ------ | ------ | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                                         |                     | Years Ended December 31, |       
|                                                                                                                         |                     |                          |       
|                                                                                                                         |                     | 2005                     |        |        | 2004 |   |        | 2003   |  |   | 2002   |        |  | 2001 |        |        | 2000 |  
|                                                                                                                         |                     |                          |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |  
|                                                                                                                         |                     | (Dollars in thousands)   |       
|Originally reported reserves for unpaid claims and claims
    expenses limited to the Companys liability per occurrence |                     | $                        | 64,000 |        |      | $ | 73,000 |        |  | $ | 65,000 |        |  | $    | 76,200 |        |      | $ | 103,000 |         |  | $ | 109,000 |        
|Number of claims reported as of:                                                                                         |                     |                          |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |         |         |  |   |         |        
|                                                                                                                         | End of initial year |                          |        | 6,232  |      |   |        | 6,489  |  |   |        | 5,765  |  |      |        | 7,701  |      |   |         | 10,195  |  |   |         | 11,888  | 
|                                                                                                                         | One year later      |                          |        |       |      |   |        | 6,665  |  |   |        | 5,916  |  |      |        | 7,856  |      |   |         | 10,475  |  |   |         | 12,088  | 
|                                                                                                                         | Two years later     |                          |        |       |      |   |        |       |  |   |        | 5,961  |  |      |        | 7,873  |      |   |         | 10,495  |  |   |         | 12,114  | 
|                                                                                                                         | Three years later   |                          |        |       |      |   |        |       |  |   |        |       |  |      |        | 7,872  |      |   |         | 10,500  |  |   |         | 12,118  | 
|                                                                                                                         | Four years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   |         | 10,500  |  |   |         | 12,119  | 
|                                                                                                                         | Five years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   |         |        |  |   |         | 12,119  | 
|Number of open claims reported as of:                                                                                    |                     |                          |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |         |         |  |   |         |        
|                                                                                                                         | End of initial year |                          |        | 1,628  |      |   |        | 2,045  |  |   |        | 1,604  |  |      |        | 1,632  |      |   |         | 2,632   |  |   |         | 3,077   | 
|                                                                                                                         | One year later      |                          |        |       |      |   |        | 388    |  |   |        | 333    |  |      |        | 462    |      |   |         | 791     |  |   |         | 965     | 
|                                                                                                                         | Two years later     |                          |        |       |      |   |        |       |  |   |        | 121    |  |      |        | 251    |      |   |         | 286     |  |   |         | 532     | 
|                                                                                                                         | Three years later   |                          |        |       |      |   |        |       |  |   |        |       |  |      |        | 126    |      |   |         | 156     |  |   |         | 148     | 
|                                                                                                                         | Four years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   |         | 84      |  |   |         | 84      | 
|                                                                                                                         | Five years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   |         |        |  |   |         | 54      | 
|Insurance carrier open case reserve amount as of:                                                                        |                     |                          |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |         |         |  |   |         |        
|                                                                                                                         | End of initial year |                          | $      | 15,028 |      |   | $      | 15,339 |  |   | $      | 12,444 |  |      | $      | 15,272 |      |   | $       | 23,087  |  |   | $       | 22,315  | 
|                                                                                                                         | One year later      |                          |        |       |      |   | $      | 10,825 |  |   | $      | 9,253  |  |      | $      | 11,249 |      |   | $       | 14,086  |  |   | $       | 16,796  | 
|                                                                                                                         | Two years later     |                          |        |       |      |   |        |       |  |   | $      | 4,381  |  |      | $      | 6,579  |      |   | $       | 8,223   |  |   | $       | 12,105  | 
|                                                                                                                         | Three years later   |                          |        |       |      |   |        |       |  |   |        |       |  |      | $      | 4,697  |      |   | $       | 4,814   |  |   | $       | 5,533   | 
|                                                                                                                         | Four years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   | $       | 2,960   |  |   | $       | 3,639   | 
|                                                                                                                         | Five years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   |         |        |  |   | $       | 2,665   | 
|Cumulative net paid claims by insurance carrier as of:                                                                   |                     |                          |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |         |         |  |   |         |        
|                                                                                                                         | End of initial year |                          | $      | 14,647 |      |   | $      | 13,876 |  |   | $      | 14,502 |  |      | $      | 16,859 |      |   | $       | 21,345  |  |   | $       | 22,688  | 
|                                                                                                                         | One year later      |                          |        |       |      |   | $      | 31,488 |  |   | $      | 30,790 |  |      | $      | 38,006 |      |   | $       | 47,461  |  |   | $       | 50,524  | 
|                                                                                                                         | Two years later     |                          |        |       |      |   |        |       |  |   | $      | 40,343 |  |      | $      | 50,182 |      |   | $       | 65,925  |  |   | $       | 69,251  | 
|                                                                                                                         | Three years later   |                          |        |       |      |   |        |       |  |   |        |       |  |      | $      | 56,292 |      |   | $       | 72,457  |  |   | $       | 81,033  | 
|                                                                                                                         | Four years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   | $       | 76,740  |  |   | $       | 85,241  | 
|                                                                                                                         | Five years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   |         |        |  |   | $       | 88,084  | 
|Undiscounted reserves re-estimated as of:                                                                                |                     |                          |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |         |         |  |   |         |        
|                                                                                                                         | End of initial year |                          | $      | 64,000 |      |   | $      | 73,000 |  |   | $      | 65,000 |  |      | $      | 76,200 |      |   | $       | 103,000 |  |   | $       | 109,000 | 
|                                                                                                                         | One year later      |                          |        |       |      |   | $      | 63,000 |  |   | $      | 63,000 |  |      | $      | 78,000 |      |   | $       | 98,000  |  |   | $       | 109,000 | 
|                                                                                                                         | Two years later     |                          |        |       |      |   |        |       |  |   | $      | 56,000 |  |      | $      | 71,000 |      |   | $       | 99,000  |  |   | $       | 108,400 | 
|                                                                                                                         | Three years later   |                          |        |       |      |   |        |       |  |   |        |       |  |      | $      | 69,000 |      |   | $       | 93,000  |  |   | $       | 105,000 | 
|                                                                                                                         | Four years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   | $       | 90,000  |  |   | $       | 104,000 | 
|                                                                                                                         | Five years later    |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |      |   |         |        |  |   | $       | 100,000 | 

46



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|                                                                                       |  |                                         |         |   |      |   |         |      |  |   |           |   |  |   |          |  
|-------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | --------- | - |  | - | -------- | -
|                                                                                       |  | For the Policy Years Ended December 31, |        
|                                                                                       |  |                                         |        
|                                                                                       |  | 2005                                    |         |   | 2004 |   |         | 2003 |  |   | 2000-2002 |  
|                                                                                       |  |                                         |         |   |      |   |         |      |  |   |           |  
|                                                                                       |  | (In thousands)                          |        
|Initial premium/collateral payments to carriers                                        |  | $                                       | 100,000 |   |      | $ | 111,402 |      |  | $ | 85,000    |   |  | $ | 293,720  |  
|Premium/collateral refunds received                                                    |  |                                         | (6,357  | ) |      |   | (34,984 | )    |  |   | (12,563   | ) |  |   |         |  
|                                                                                       |  |                                         |         |   |      |   |         |      |  |   |           |  
|Net premiums/collateral held by carriers                                               |  |                                         | 93,643  |   |      |   | 76,418  |      |  |   | 72,437    |   |  |   | 293,720  |  
|                                                                                       |  |                                         |         |   |      |   |         |      |  |   |           |  
|Paid claims by insurance carrier                                                       |  |                                         | (14,647 | ) |      |   | (31,488 | )    |  |   | (40,343   | ) |  |   | (221,116 | )
|Estimated future claims covered by premium/collateral                                  |  |                                         | (49,353 | ) |      |   | (31,512 | )    |  |   | (15,657   | ) |  |   | (37,884  | )
|                                                                                       |  |                                         |         |   |      |   |         |      |  |   |           |  
|Total estimated ultimate claims                                                        |  |                                         | (64,000 | ) |      |   | (63,000 | )    |  |   | (56,000   | ) |  |   | (259,000 | )
|Estimated interest on premium/collateral payments earned through
    December 31, 2005 |  |                                         | 1,755   |   |      |   | 3,793   |      |  |   | 3,426     |   |  |   | 3,053    |  
|                                                                                       |  |                                         |         |   |      |   |         |      |  |   |           |  
|Estimated return of premium/collateral (undiscounted)                                  |  | $                                       | 31,398  |   |      | $ | 17,211  |      |  | $ | 19,863    |   |  | $ | 37,773   |  
|                                                                                       |  |                                         |         |   |      |   |         |      |  |   |           |  



Intangible Assets


5-year




Medical Benefit Plan Liabilities






47



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##### Table of Contents











|                                                          |  |              |        |  |      |   |        | 
|--------------------------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                                                          |  | Year Ended   |       
|                                                          |  | December 31, |       
|                                                          |  |              |       
|                                                          |  | 2005         |        |  | 2004 |  
|                                                          |  |              |        |  |      |  
|Incurred but not reported claims                          |  | $            | 13,333 |  |      | $ | 14,580 | 
|Other health plan liabilities (including recall premiums) |  |              | 1,709  |  |      |   | 4,251  | 
|                                                          |  |              |        |  |      |  
|Total medical benefit plan liabilities                    |  | $            | 15,042 |  |      | $ | 18,831 | 
|                                                          |  |              |        |  |      |  





State Unemployment Taxes




48



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##### Table of Contents



Allowance for Doubtful Accounts






| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company is at risk for the payment of its direct costs and
    client employee payroll costs regardless of whether the clients
    pay their fees;
|
| |  | the large volume and dollar amount of transactions processed by
    the Company; and                                                                  
|
| |  | the periodic and recurring nature of payroll, upon which the
    fees are based.                                                                      



Deferred Taxes




NEW ACCOUNTING PRONOUNCEMENTS




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS




49



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##### Table of Contents





Non-GAAP Financial Information






|                                                                                                               |                                                                                                                                                                                           |                              |   |            |        | 
|-------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | - | ---------- | ------ | 
|                                                                                                               |                                                                                                                                                                                           | Year Ended December 31, 2004
|                                                                                                               |                                                                                                                                                                                           |                             
|                                                                                                               |                                                                                                                                                                                           | (In thousands, except share 
|                                                                                                               |                                                                                                                                                                                           | and per share data)         
|Net income attributable to common shareholders for purposes of
    computing diluted earnings per share (GAAP) |                                                                                                                                                                                           |                              | $ | 4,738      |       
|Pro forma adjustments:                                                                                         |                                                                                                                                                                                           |                              |   |            |       
|                                                                                                               | Non-recurring, non-cash charge attributable to the acceleration
    of the unamortized discount associated with the conversion into
    common stock of all shares of the Preferred Stock |                              |   |            | 29,317 | 
|                                                                                                               | Non-cash charges attributable to beneficial conversion feature
    and accretion of redemption value of Preferred Stock                                                                   |                              |   |            | 129    | 
|                                                                                                               | Preferred Stock dividends                                                                                                                                                                 |                              |   |            | 434    | 
|                                                                                                               |                                                                                                                                                                                           |                              |   |           
|Pro forma net income for diluted earnings per share calculation
    (non-GAAP)                                 |                                                                                                                                                                                           |                              | $ | 34,618     |       
|                                                                                                               |                                                                                                                                                                                           |                              |   |           
|Diluted earnings per share (GAAP)                                                                              |                                                                                                                                                                                           |                              | $ | 0.18       |       
|                                                                                                               |                                                                                                                                                                                           |                              |   |           
|Pro forma diluted earnings per share (non-GAAP)                                                                |                                                                                                                                                                                           |                              | $ | 1.24       |       
|                                                                                                               |                                                                                                                                                                                           |                              |   |           
|Diluted weighted average shares outstanding (GAAP)                                                             |                                                                                                                                                                                           |                              |   | 25,734,515 |       
|Pro forma effect of dilutive securities:                                                                       |                                                                                                                                                                                           |                              |   |            |       
|Preferred Stock                                                                                                |                                                                                                                                                                                           |                              |   | 2,094,383  |       
|                                                                                                               |                                                                                                                                                                                           |                              |   |           
|Pro forma diluted weighted average shares outstanding (non-GAAP)                                               |                                                                                                                                                                                           |                              |   | 27,828,898 |       
|                                                                                                               |                                                                                                                                                                                           |                              |   |           






|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK



50



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##### Table of Contents










|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Evaluation of Disclosure Controls and Procedures; Changes
    in Internal Control over Financial Reporting

10-K, 13a-15


10-K


Internal Control Over Financial Reporting




| |                                                                     
| | --------------------------------------------------------------------
| | Managements Report On Internal Control Over
    Financial Reporting

13a-15(f) 15d-15(f)


51



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##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of assets of the Company;                                                                                                                                                                                              
|
| |  | provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the Company are being made
    only in accordance with authorizations of management and
    directors of the Company; and
|
| |  | provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    Companys assets that could have a material effect on the
    financial statements.                                                                                                                                       







Report of Independent Registered Public Accounting firm on
Managements Assessment of Internal Control


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Internal Control 
Integrated Framework




52



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##### Table of Contents







Internal
Control  Integrated Framework Internal Control  Integrated
Framework












53



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##### Table of Contents








|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION






PART III.







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT








|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS








|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES






PART IV.







|         |                                        
|-------- | ---------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES



Financial Statement Schedule:




| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | See Schedule II  Valuation and Qualifying
    Accounts  Allowance for Doubtful Accounts on
    Page S-1                                                                     
|
| | All other schedules are omitted as the required information is
    inapplicable or the information is presented in the consolidated
    financial statements or related notes.

54



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Exhibit Index:


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1          |  | Third Articles of Amendment and Restatement of the Articles of
    Incorporation, as filed with the Secretary of State of the State
    of Florida on August 12, 2004 (filed as Exhibit 3.1 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2004 filed November 9,
    2004 and incorporated herein by reference).
|        | 3  | .2          |  | Third Amended and Restated Bylaws, dated February 16, 2005
    (filed as Exhibit 3.01 to the Companys Current Report
    on Form 8-K filed February 22, 2005 and incorporated
    herein by reference).                                                                                                                                                     
|        | 4  | .1          |  | Rights Agreement dated as of April 23, 2002 between the
    Company and American Stock Transfer & Trust Company,
    and Exhibits thereto (filed as Exhibit 1 to the
    Companys Registration Statement of Form 8-A filed
    April 25, 2002 and incorporated herein by reference).                                                                        
|        | 4  | .2          |  | First Amendment and Supplement to the Rights Agreement between
    the Company and American Stock Transfer & Trust
    Company, dated March 5, 2003 (filed as Exhibit 99.4 to
    the Companys Current Report on Form 8-K filed
    March 6, 2003 and incorporated herein by reference).                                                                    
|        | 4  | .3          |  | Second Amendment and Supplement to the Rights Agreement between
    the Company and American Stock Transfer & Trust
    Company, dated June 6, 2003 (filed as Exhibit 99.7 to
    the Companys Current Report on Form 8-K filed
    June 10, 2003 and incorporated herein by reference).                                                                    
|        | 4  | .4          |  | Specimen Common Stock Certificate (filed as Exhibit 4.1 to
    the Companys Registration Statement No. 333-22933 on
    Form S-1/ A filed May 30, 1997 and incorporated herein
    by reference).                                                                                                                                                           
|        | 10 | .1          |  | Gevity HR, Inc. 2002 Stock Incentive Plan (filed as
    Exhibit B to the Companys Definitive Proxy Statement
    on Schedule 14A filed April 25, 2002 and incorporated
    herein by reference).*                                                                                                                                                           
|        | 10 | .2          |  | Form of Employee Vesting Schedule pursuant to the Gevity HR,
    Inc. 2002 Stock Incentive Plan (filed as Exhibit 10.4 to
    the Companys Current Report on Form 8-K filed
    February 15, 2005 and incorporated herein by reference).*                                                                                                                   
|        | 10 | .3          |  | Form of Director Vesting Schedule pursuant to the Gevity HR,
    Inc. 2002 Stock Incentive Plan (filed as Exhibit 10.5 to
    the Companys Current Report on Form 8-K filed
    February 15, 2005 and incorporated herein by reference).*                                                                                                                   
|        | 10 | .4          |  | Form of Terms and Conditions to the Non-Qualified Stock Option
    Award pursuant to the Gevity HR, Inc. 2002 Stock Incentive Plan
    (filed as Exhibit 10.6 to the Companys Current Report
    on Form 8-K filed February 15, 2005 and incorporated
    herein by reference).*                                                                            
|        | 10 | .5          |  | Gevity HR, Inc. 1997 Stock Incentive Plan, as amended and
    restated (filed as Exhibit 4.1 to the Companys
    Registration Statement No. 333-68929 on Form S-8,
    Amendment No. 1 filed September 30, 2003 and
    incorporated herein by reference).*                                                                                                 
|        | 10 | .6          |  | Form of Employee Vesting Schedule pursuant to the Gevity HR,
    Inc. 1997 Stock Incentive Plan (filed as Exhibit 10.1 to
    the Companys Current Report on Form 8-K filed
    February 15, 2005 and incorporated herein by reference).*                                                                                                                   
|        | 10 | .7          |  | Form of Director Vesting Schedule pursuant to the Gevity HR,
    Inc. 1997 Stock Incentive Plan (filed as Exhibit 10.2 to
    the Companys Current Report on Form 8-K filed
    February 15, 2005 and incorporated herein by reference).*                                                                                                                   
|        | 10 | .8          |  | Form of Terms and Conditions to the Non-Qualified Stock Option
    Award pursuant to the Gevity HR, Inc. 1997 Stock Incentive Plan
    (filed as Exhibit 10.3 to the Companys Current Report
    on Form 8-K filed February 15, 2005 and incorporated
    herein by reference).*                                                                            
|        | 10 | .9          |  | Gevity HR, Inc. 2005 Equity Incentive Plan, (filed as
    Exhibit B to the Companys Definitive Proxy Statement
    on Schedule 14A filed April 8, 2005 and incorporated
    here by reference).*                                                                                                                                                            
|        | 10 | .10         |  | Gevity HR, Inc. 2005 Executive Incentive Compensation Plan,
    (filed as Exhibit B to the Companys Definitive Proxy
    Statement on Schedule 14A filed April 8, 2005 and
    incorporated here by reference).*                                                                                                                                            
|        | 10 | .11         |  | Form of Employee Option Award under Gevity HR, 2005 Equity
    Incentive Plan (filed as Exhibit 10.1 to the Companys
    Current Report on Form 8-K filed November 14, 2005 and
    incorporated herein by reference).*                                                                                                                                     

55



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .12         |  | Form of Employee Restricted Stock Award under Gevity HR, 2005
    Equity Incentive Plan (filed as Exhibit 10.2 to the
    Companys Current Report on Form 8-K filed
    November 14, 2005 and incorporated herein by reference).*                                                     
|        | 10 | .13         |  | Form of Executive Stock Option Award under Gevity HR, 2005
    Equity Incentive Plan (filed as Exhibit 10.3 to the
    Companys Current Report on Form 8-K filed
    November 14, 2005 and incorporated herein by reference).*                                                        
|        | 10 | .14         |  | Form of Executive Restricted Stock Award under Gevity HR, 2005
    Equity Incentive Plan (filed as Exhibit 10.4 to the
    Companys Current Report on Form 8-K filed
    November 14, 2005 and incorporated herein by reference).*                                                    
|        | 10 | .15         |  | Form of Non-employee Director Stock Option Award under Gevity
    HR, 2005 Equity Incentive Plan (filed as Exhibit 10.5 to
    the Companys Current Report on Form 8-K filed
    November 14, 2005 and incorporated herein by reference).*                                            
|        | 10 | .16         |  | Form of Non-employee Director Restricted Stock Award under
    Gevity HR, 2005 Equity Incentive Plan (filed as
    Exhibit 10.6 to the Companys Current Report on
    Form 8-K filed November 14, 2005 and incorporated
    herein by reference).*                                    
|        | 10 | .17         |  | Gevity HR, Inc. Employee Stock Purchase Plan (filed as
    Appendix B to the Companys Definitive Proxy Statement
    on Schedule 14A filed April 20, 2001 and incorporated
    herein by reference).*                                                                                 
|        | 10 | .18         |  | Employment Agreement between the Company and Erik Vonk, dated
    March 21, 2002 (filed as Exhibit 99.2 to the
    Companys Current Report on Form 8-K filed
    March 25, 2002 and incorporated herein by reference).*                                                               
|        | 10 | .19         |  | Form of Securities Purchase Agreement between the Company and
    Erik Vonk (filed as Exhibit 99.3 to the Companys
    Current Report on Form 8-K filed March 25, 2002 and
    incorporated herein by reference).*                                                                    
|        | 10 | .20         |  | Change in Control Severance Agreement between the Company and
    Erik Vonk, dated September 21, 2004 (filed as
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K filed September 24, 2004 and incorporated
    herein by reference).*                                  
|        | 10 | .21         |  | 2005 Compensation Plan for Erik Vonk, Chairman and Executive
    Officer of Gevity HR, Inc (filed as exhibit 99.1 to the
    Companys Current Report on Form 8-K filed
    March 25, 2005 and incorporated herein by reference).*                                                     
|        | 10 | .22         |  | Promotion Letter from the Company accepted by Peter C.
    Grabowski, dated April 23, 2003 (filed as Exhibit 99.3
    to the Companys Current Report on Form 8-K filed
    April 24, 2003 and incorporated herein by reference).*                                                     
|        | 10 | .23         |  | Change in Control Severance Agreement between the Company and
    Peter C. Grabowski, dated September 21, 2004 (filed as
    Exhibit 10.2 to the Companys Current Report on
    Form 8-K filed September 24, 2004 and incorporated
    herein by reference).*                         
|        | 10 | .24         |  | Change in Control Severance Agreement between the Company and
    Lisa J. Harris, dated September 21, 2004 (filed as
    Exhibit 10.3 to the Companys Current Report on
    Form 8-K filed September 24, 2004 and incorporated
    herein by reference).*                             
|        | 10 | .25         |  | Employment Offer Letter from the Company to Sal J. Uglietta,
    dated September 24, 2003 (filed as Exhibit 99.2 to the
    Companys Current Report on Form 8-K filed
    September 29, 2003 and incorporated herein by reference).*                                                  
|        | 10 | .26         |  | Non-Solicitation, Non-Compete and Confidentiality Agreement
    between the Company and Sal J. Uglietta, dated
    September 24, 2003 (filed as Exhibit 99.3 to the
    Companys Current Report on Form 8-K filed
    September 29, 2003 and incorporated herein by reference).*      
|        | 10 | .27         |  | Change in Control Severance Agreement between the Company and
    Sal J. Uglietta, dated September 21, 2004 (filed as
    Exhibit 10.6 to the Companys Current Report on
    Form 8-K filed September 24, 2004 and incorporated
    herein by reference).*                            
|        | 10 | .28         |  | Employment offer letter from the Company accepted by Gregory M.
    Nichols, dated November 22, 2000 (filed as
    Exhibit 10.26 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001 filed
    May 15, 2001 and incorporated herein by reference).*

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .29         |  | Change in Control Severance Agreement between the Company and
    Gregory M. Nichols, dated September 21, 2004 (filed as
    Exhibit 10.5 to the Companys Current Report on
    Form 8-K filed September 24, 2004 and incorporated
    herein by reference).*                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .30         |  | Employment offer letter from the Company accepted by Clifford M.
    Sladnick, dated June 6, 2005 (filed as Exhibit 10.1 to
    the Companys Current Report on Form 8-K filed
    July 1, 2005 and incorporated herein by reference).*                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .31         |  | Change in Control Severance Agreement between the Company and
    Clifford M. Sladnick, dated July 22, 2005 (filed as
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2005 filed
    July 28, 2005 and incorporated herein by reference).*                                                                                                                                                                                                                                                                                                                            
|        | 10 | .32         |  | Employment offer letter from the Company accepted by Roy C.
    King, dated December 15, 2005 (filed as Exhibit 10.1
    to the Companys Current Report on Form 8-K filed
    December 20, 2005 and incorporated herein by reference).*                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .33         |  | Employment Agreement between the Company and Roy C. King, dated
    December 15, 2005 (filed as Exhibit 10.2 to the
    Companys Current Report on Form 8-K filed
    December 20, 2002 and incorporated herein by reference).*                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .34         |  | Form of Indemnification Agreement between the Company and each
    of its directors and executive officers (filed as
    Exhibit 10.5 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002 filed
    March 31, 2003, and incorporated herein by reference).*                                                                                                                                                                                                                                                                                                                             
|        | 10 | .35         |  | Agreement of Lease between Quixotic Investment Holdings, Inc.
    and the Company, dated March 27, 1995, for premises located
    at 600 301 Boulevard West, Suite 202, Bradenton, Florida
    34205 (filed as Exhibit 10.7 to the Companys
    Registration Statement No. 333-22933 on Form S-1 filed
    March 7, 1997 and incorporated herein by reference).                                                                                                                                                                                                                                                         
|        | 10 | .36         |  | Agreement of Lease between Osprey-Lakewood Ranch Properties,
    LLC. and the Company, dated June 6, 2005, for premises
    located at 9000 Town Center Parkway, Bradenton, Florida 34202
    (certain confidential information contained in this document,
    marked by asterisks and brackets, has been omitted and filed
    separately with the Securities and Exchange Commission pursuant
    to Rule 24b-2 of the Securities Exchange Act of 1934, as
    amended) (filed as Exhibit 10.1 to the Companys
    Current Report on Form 8-K filed June 10, 2005 and
    incorporated herein by reference).         
|        | 10 | .37         |  | Healthcare Benefits Contract Among Blue Cross/ Blue Shield of
    Florida, Inc., Health Options, Inc., and the Company, effective
    October 1, 2005 (certain confidential information contained
    in this document, marked by asterisks and brackets, has been
    omitted and filed separately with the Securities and Exchange
    Commission pursuant to Rule 24b-2 of the Securities
    Exchange Act of 1934, as amended) (filed as Exhibit 10 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2005 filed October 27,
    2005 and incorporated herein by reference).
|        | 10 | .38         |  | Aetna, Inc. Financial Conditions related to the Group Master
    Policy for the Company, effective January 1, 2003 (filed as
    Exhibit 10.20 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2003 filed
    March 15, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                      
|        | 10 | .39         |  | AIG Risk Management, Inc. 1/1/06-07 Workers Compensation/
    Employers Liability Final Bound Proposal, dated
    December 21, 2005 (certain confidential information
    contained in this document, marked by asterisks and brackets,
    has been omitted and filed separately with the Securities and
    Exchange Commission pursuant to Rule 24b-2 of the
    Securities Exchange Act of 1934, as amended).+                                                                                                                                                                                                       
|        | 10 | .40         |  | AIG Risk Management, Inc. 1/1/05-06 Workers Compensation/
    Employers Liability Final Bound Proposal, dated
    December 16, 2004 (certain confidential information
    contained in this document, marked by asterisks and brackets,
    has been omitted and filed separately with the Securities and
    Exchange Commission pursuant to Rule 24b-2 of the
    Securities Exchange Act of 1934, as amended) (filed as
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K filed December 22, 2004 and incorporated
    herein by reference).                                                           

57



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .41         |  | AIG Risk Management, Inc. 1/1/04-05 Workers Compensation/
    Employers Liability Final Bound Proposal, dated
    December 31, 2003 (certain confidential information in this
    document, marked by an asterisk and brackets, has been omitted
    and filed separately with the Securities and Exchange Commission
    pursuant to Rule 24b-2 of the Securities Exchange Act of
    1934, as amended) (filed as Exhibit 10.21 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2003 filed March 15, 2004 and
    incorporated herein by reference).                                                                                                                           
|        | 10 | .42         |  | AIG Risk Management, Inc. 1/1/03-04 Workers Compensation/
    Employers Liability Final Bound Proposal, dated October 22,
    2002 (filed as Exhibit 99.2 to the Companys Current
    Report on Form 8-K filed October 23, 2002 and
    incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .43         |  | Finance Agreement for Paid Loss Workers Compensation
    Deductible between the Company and Continental Casualty Company,
    effective as of January 1, 2002 (filed as
    Exhibit 10.20 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001 filed
    April 1, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .44         |  | Finance Agreement for Paid Loss Workers Compensation
    deductible between the Company and Continental Casualty Company,
    effective as of January 1, 2001 (filed as
    Exhibit 10.25 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000 filed
    March 29, 2001 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .45         |  | Finance Agreement for Paid Loss Workers Compensation
    Deductible between the Company and Continental Casualty Company,
    effective as of January 1, 2000 (filed as
    Exhibit 10.14 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 1999 filed
    April 3, 2000 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .46         |  | Workers Compensation and Employers Liability Policy
    issued by Texas Workers Compensation Insurance Fund to
    Gevity HR of Texas, L.P., effective January 1, 2000 (filed
    as Exhibit 10.13 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 1999 filed
    April 3, 2000 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .47         |  | Workers Compensation and Employers Liability Policy issued
    by Continental Casualty Co. to the Company, effective
    January 1, 2000 (filed as Exhibit 10.15 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 1999 filed April 3, 2000 and
    incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .48         |  | Final Binder prepared by National Union Fire Insurance Company
    of Vermont (a member insurance company of American International
    Group, Inc.) for the Company related to the Deductible Liability
    Protection Policy covering workers compensation claims up
    to $1.0 million per occurrence for the program years 2000,
    2001 and 2002, dated September 30, 2004 (filed as
    Exhibit 10.8 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2004
    filed November 9, 2004 and incorporated herein by
    reference).                                                                                                                                     
|        | 10 | .49         |  | Final Binder prepared by Continental Casualty Company, National
    Fire Insurance Company and Transportation Insurance Company
    (collectively, CNA) and National Union Fire
    Insurance Company of Vermont (a member insurance company of
    American International Group, Inc.) for the Company related to
    the Deductible Liability Protection Policy covering
    workers compensation claims up to $1.0 million per
    occurrence for the program years 2000, 2001 and 2002, dated
    September 30, 2004 (filed as Exhibit 10.9 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2004 filed November 9,
    2004 and incorporated herein by reference).
|        | 10 | .50         |  | Assignment of Deductible Liability Protection Policy Proceeds
    from the Company to CNA related to coverage for workers
    compensation claims up to $1.0 million per occurrence for
    program years 2000, 2001 and 2002, dated October 20, 2004
    (filed as Exhibit 10.10 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2004 filed November 9, 2004 and
    incorporated herein by reference).                                                                                                                                                                                                                                                                
|        | 10 | .51         |  | Collateral Addendum to January 1, 2002 Paid Loss
    Workers Compensation Deductible Finance Agreement between
    the Company and CNA, dated October 11, 2004 (filed as
    Exhibit 10.11 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2004
    filed November 9, 2004 and incorporated herein by
    reference).                                                                                                                                                                                                                                                                                                                                                       

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .52         |  | Credit Agreement among the Company as the Borrower, the
    subsidiaries of the Borrower named therein as the Guarantors,
    and Bank of America, N.A. as the Lender, dated March 26,
    2004 (schedules and exhibits omitted, except for Exhibit A
    the Form of Loan Notice and Exhibit B the Form of Revolving
    Note, but copies of the omitted items will be furnished
    supplementally to the Securities and Exchange Commission upon
    request; provided, however, that Gevity HR, Inc. may request
    confidential treatment of the omitted items) (filed as
    Exhibit 10.1 to the Companys Current Report
    on 8-K filed April 9, 2004 and incorporated herein by
    reference).
|        | 10 | .53         |  | First Amendment to Credit Agreement among the Company as the
    Borrower, the subsidiaries of the Borrower named therein as the
    Guarantors, and Bank of America, N.A. as the Lender, dated
    September 22, 2004 (filed as Exhibit 10.7 to the
    Companys Current Report on 8-K filed
    September 24, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .54         |  | Second Amendment to Credit Agreement among the Company as the
    Borrower, the subsidiaries of the Borrower named therein as the
    Guarantors, and Bank of America, N.A. as the Lender, dated
    December 16, 2005 (filed as Exhibit 10.3 to the
    Companys Current Report on 8-K filed
    December 20, 2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                               
|        | 18 | .1          |  | Independent Auditors letter regarding the Companys
    revenue reporting change from gross to net revenues (filed as
    Exhibit 18.1 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002 filed
    March 31, 2003 and incorporated by reference).                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 21 | .1          |  | List of Subsidiaries of the Company.+                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 23 | .1          |  | Consent of Independent Registered Public Accounting Firm to
    Annual Report on Form 10-K for the year ended
    December 31, 2005.+                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 31 | .1          |  | Certification of Erik Vonk, as Chief Executive Officer, pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 31 | .2          |  | Certification of Peter C. Grabowski, as Chief Financial Officer,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 32 | .1          |  | Certification furnished pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   






|  |                                                         
|- | --------------------------------------------------------
|* | Management contract or compensatory plan or arrangement.



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SIGNATURES




|                     |  |                                                                           
|-------------------- |  | --------------------------------------------------------------------------
|                     |  | GEVITY HR, INC.                                                           
|Dated: March 8, 2006 |  | /s/ Erik VonkErik Vonk, Chairman of the Board,
    Chief Executive Officer



|                     |  |                                                                                                                      
|-------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|Dated: March 8, 2006 |  | /s/ Erik VonkErik Vonk
    Chairman of the Board, Chief Executive Officer
    (Principal Executive Officer)          
|                    
|Dated: March 8, 2006 |  | /s/ Peter C. GrabowskiPeter C. Grabowski
    Chief Financial Officer
    (Principal Financial and Accounting Officer)
|                    
|Dated: March 8, 2006 |  | /s/ George B. BeitzelGeorge B. Beitzel
    Director                                                                  
|                    
|Dated: March 8, 2006 |  | /s/ Darcy E. BradburyDarcy E. Bradbury
    Director                                                                  
|                    
|Dated: March 8, 2006 |  | /s/ James E. CowieJames E. Cowie
    Director                                                                        
|                    
|Dated: March 8, 2006 |  | /s/ A. D. Frazier, Jr.A. D. Frazier, Jr.
    Director                                                                
|                    
|Dated: March 8, 2006 |  | /s/ Jonathan H. KaganJonathan H. Kagan
    Director                                                                  

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|                     |  |                                                            
|-------------------- |  | -----------------------------------------------------------
|                    
|Dated: March 8, 2006 |  | /s/ David S. KatzDavid S. Katz
    Director                
|                    
|Dated: March 8, 2006 |  | /s/ James F. ManningJames F. Manning
    Director          
|                    
|Dated: March 8, 2006 |  | /s/ Jeffrey A. SonnenfeldJeffrey A. Sonnenfeld
    Director

61



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GEVITY HR, INC. AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND


FINANCIAL STATEMENT SCHEDULE


|                                                                                                                         |  |      |     | 
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                                                                         |  | Page |    
|                                                                                                                         |  |      |    
|Report of Independent Registered Public
    Accounting Firm                                                              |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                                         |  |      | F-3 | 
|Consolidated Statements of Operations for
    the Years Ended December 31, 2005, 2004, and 2003                          |  |      | F-4 | 
|Consolidated Statements of Changes in
    Shareholders Equity for the Years Ended December 31,
    2005, 2004, and 2003 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2005, 2004, and 2003                          |  |      | F-6 | 
|Notes to Consolidated Financial
    Statements                                                                           |  |      | F-8 | 
|Financial Statement
    Schedule II  Valuation and Qualifying
    Accounts                                              |  |      | S-1 | 



F-1



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














Internal Control 
Integrated Framework










F-2



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##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


|                                                           |                                                                                                                                                                      |                                            |        |         |              |  |        |         |         | 
|---------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------------ |  | ------ | ------- | ------- | 
|                                                           |                                                                                                                                                                      | December 31,                               |        |         | December 31, | 
|                                                           |                                                                                                                                                                      | 2005                                       |        |         | 2004         | 
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|                                                           |                                                                                                                                                                      | (In $000s, except share and               |       
|                                                           |                                                                                                                                                                      | per share data)                            |       
|ASSETS                                                    
|Current assets:                                            |                                                                                                                                                                      |                                            |        |         |              |  |        |        
|                                                           | Cash and cash equivalents                                                                                                                                            |                                            | $      | 52,525  |              |  | $      | 40,776  |        
|                                                           | Certificates of deposit  restricted                                                                                                                                 |                                            |        | 33      |              |  |        | 6,033   |        
|                                                           | Marketable securities  restricted                                                                                                                                   |                                            |        | 4,281   |              |  |        | 4,168   |        
|                                                           | Accounts receivable, net                                                                                                                                             |                                            |        | 113,864 |              |  |        | 99,790  |        
|                                                           | Short-term workers compensation receivable, net                                                                                                                     |                                            |        | 32,552  |              |  |        | 33,405  |        
|                                                           | Other current assets                                                                                                                                                 |                                            |        | 15,713  |              |  |        | 5,982   |        
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|                                                           |                                                                                                                                                                      | Total current assets                       |        |         | 218,968      |  |        |         | 190,154 | 
|Property and equipment, net                                |                                                                                                                                                                      |                                            | 13,810 |         |              |  | 10,079 |        
|Long-term marketable securities  restricted               |                                                                                                                                                                      |                                            | 7,891  |         |              |  | 8,435  |        
|Long-term workers compensation receivable, net            |                                                                                                                                                                      |                                            | 95,766 |         |              |  | 79,310 |        
|Intangible assets, net                                     |                                                                                                                                                                      |                                            | 30,494 |         |              |  | 40,133 |        
|Goodwill                                                   |                                                                                                                                                                      |                                            | 8,692  |         |              |  | 8,692  |        
|Deferred tax asset, net                                    |                                                                                                                                                                      |                                            | 11,678 |         |              |  | 2,380  |        
|Other assets                                               |                                                                                                                                                                      |                                            | 570    |         |              |  | 404    |        
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|                                                           |                                                                                                                                                                      | Total assets                               |        | $       | 387,869      |  |        | $       | 339,587 | 
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|LIABILITIES AND SHAREHOLDERS EQUITY                      
|Current liabilities:                                       |                                                                                                                                                                      |                                            |        |         |              |  |        |        
|                                                           | Accrued payroll and payroll taxes                                                                                                                                    |                                            | $      | 152,940 |              |  | $      | 111,687 |        
|                                                           | Accrued insurance premiums, health and workers
    compensation insurance reserves                                                                                  |                                            |        | 20,536  |              |  |        | 23,191  |        
|                                                           | Customer deposits and prepayments                                                                                                                                    |                                            |        | 8,315   |              |  |        | 11,897  |        
|                                                           | Accounts payable and other accrued liabilities                                                                                                                       |                                            |        | 9,995   |              |  |        | 4,907   |        
|                                                           | Income taxes payable                                                                                                                                                 |                                            |        |        |              |  |        | 11,786  |        
|                                                           | Deferred tax liability, net                                                                                                                                          |                                            |        | 31,567  |              |  |        | 1,718   |        
|                                                           | Dividends payable                                                                                                                                                    |                                            |        | 1,846   |              |  |        | 1,642   |        
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|                                                           |                                                                                                                                                                      | Total current liabilities                  |        |         | 225,199      |  |        |         | 166,828 | 
|Long-term accrued workers compensation insurance reserves |                                                                                                                                                                      |                                            | 242    |         |              |  | 700    |        
|Other long-term liabilities                                |                                                                                                                                                                      |                                            | 7,013  |         |              |  | 6,885  |        
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|                                                           |                                                                                                                                                                      | Total liabilities                          |        |         | 232,454      |  |        |         | 174,413 | 
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|Commitments and contingencies (see notes)                  |                                                                                                                                                                      |                                            |        |         |              |  |        |        
|Shareholders equity:                                      |                                                                                                                                                                      |                                            |        |         |              |  |        |        
|                                                           | Common stock, $.01 par value, 100,000,000 shares
    authorized, 31,237,453 and 30,408,220 issued and outstanding as
    of December 31, 2005 and 2004, respectively |                                            |        | 312     |              |  |        | 304     |        
|                                                           | Additional paid-in capital                                                                                                                                           |                                            |        | 165,876 |              |  |        | 152,670 |        
|                                                           | Retained earnings                                                                                                                                                    |                                            |        | 58,137  |              |  |        | 28,417  |        
|                                                           | Treasury stock (4,863,098 and 3,034,974 shares at cost,
    respectively)                                                                                            |                                            |        | (66,367 | )            |  |        | (16,217 | )      
|                                                           | Deferred compensation                                                                                                                                                |                                            |        | (2,543  | )            |  |        |        |        
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|                                                           |                                                                                                                                                                      | Total shareholders equity                 |        |         | 155,415      |  |        |         | 165,174 | 
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 
|                                                           |                                                                                                                                                                      | Total liabilities and shareholders equity |        | $       | 387,869      |  |        | $       | 339,587 | 
|                                                           |                                                                                                                                                                      |                                            |        |         |              | 



F-3



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##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            |  |   |         |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------- | ---------- | ---- | - | ------- | ---------- |  | - | ------- | ---------- | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          | Year Ended December 31,                      |        
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |        
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          | 2005                                         |         |            | 2004 |   |         | 2003       | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          | (In $000s, except share and per share data) |        
|Revenues                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                          | $                                            | 608,797 |            |      | $ | 585,481 |            |  | $ | 425,827 |           
|Cost of services                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              | 413,807 |            |      |   | 406,140 |            |  |   | 310,109 |           
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Gross profit                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                          |                                              | 194,990 |            |      |   | 179,341 |            |  |   | 115,718 |           
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Operating expenses:                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            |  |   |         |           
|                                                                                                                                                                                                                               | Salaries, wages and commissions                                                                                                                                                                                                                                                                                                                                                          |                                              |         | 76,033     |      |   |         | 71,803     |  |   |         | 55,287     | 
|                                                                                                                                                                                                                               | Other general and administrative                                                                                                                                                                                                                                                                                                                                                         |                                              |         | 49,312     |      |   |         | 41,809     |  |   |         | 31,476     | 
|                                                                                                                                                                                                                               | Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                            |                                              |         | 14,635     |      |   |         | 14,168     |  |   |         | 7,370      | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|                                                                                                                                                                                                                               | Total operating expenses                                                                                                                                                                                                                                                                                                                                                                 |                                              |         | 139,980    |      |   |         | 127,780    |  |   |         | 94,133     | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Operating income                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              | 55,010  |            |      |   | 51,561  |            |  |   | 21,585  |           
|Interest income, net                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                          |                                              | 978     |            |      |   | 833     |            |  |   | 1,515   |           
|Other expense, net                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |        |            |      |   | (101    | )          |  |   | (128    | )         
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Income before income taxes                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                          |                                              | 55,988  |            |      |   | 52,293  |            |  |   | 22,972  |           
|Income tax provision                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                          |                                              | 18,610  |            |      |   | 17,675  |            |  |   | 7,581   |           
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Net income                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                          |                                              | 37,378  |            |      |   | 34,618  |            |  |   | 15,391  |           
|Non-recurring, non-cash charge attributable to the acceleration
    of the unamortized discount associated with the conversion into
    common stock of all shares of the Series A convertible,
    redeemable preferred stock |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |        |            |      |   | 29,317  |            |  |   |        |           
|Non-cash charges attributable to beneficial conversion feature
    and accretion of redemption value of the Series A
    convertible, redeemable preferred stock                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |        |            |      |   | 129     |            |  |   | 166     |           
|Series A convertible, redeemable preferred stock dividends                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |        |            |      |   | 434     |            |  |   | 781     |           
|Assumed Series A convertible, redeemable preferred stock
    dividend (assuming full distribution of net income)                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |        |            |      |   |        |            |  |   | 1,439   |           
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Net income attributable to common shareholders                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                          | $                                            | 37,378  |            |      | $ | 4,738   |            |  | $ | 13,005  |           
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Net income per common share                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            |  |   |         |           
|                                                                                                                                                                                                                               |  Basic                                                                                                                                                                                                                                                                                                                                                                                  |                                              | $       | 1.36       |      |   | $       | 0.20       |  |   | $       | 0.66       | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|                                                                                                                                                                                                                               |  Diluted (Reported earnings per common share includes
    adjustments per share of ($1.06) for 2004, substantially all
    attributable to the non-recurring, non-cash charge related to
    the acceleration of the unamortized discount associated with the
    conversion into common stock of all shares of the Series A
    convertible, redeemable preferred stock, see Note 13.) |                                              | $       | 1.31       |      |   | $       | 0.18       |  |   | $       | 0.62       | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|Weighted average common shares outstanding                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            |  |   |         |           
|                                                                                                                                                                                                                               |  Basic                                                                                                                                                                                                                                                                                                                                                                                  |                                              |         | 27,451,834 |      |   |         | 24,124,803 |  |   |         | 19,686,185 | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 
|                                                                                                                                                                                                                               |  Diluted                                                                                                                                                                                                                                                                                                                                                                                |                                              |         | 28,534,440 |      |   |         | 25,734,515 |  |   |         | 24,649,119 | 
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                          |                                              |         |            |      |   |         |            | 



F-4



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##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


Years Ended December 31, 2005, 2004 and 2003


|                                                                                                   |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |   |  |   |        |   |  |   |         |        | 
|-------------------------------------------------------------------------------------------------- | -------------------------- | ---------------------------------- | ---------- | - | ------ | - | ---------- | ------- |  | ----------- | -------- | ------------- |  | ------ | ------- | ------ | -------- | - | -- | ------------ |  | - | ------- | - |  | - | ------ | - |  | - | ------- | ------ | 
|                                                                                                   |                            |                                    |            |   |        |   |            |         |  | Accumulated |          |               |  |        |         |        |         
|                                                                                                   |                            |                                    |            |   |        |   |            |         |  | Other       |          |               |  |        |         |        |         
|                                                                                                   |                            | Common                             |            |   |        |   | Additional |         |  |             |          | Comprehensive |  |        |         |        |          |   |   
|                                                                                                   |                            | Stock                              |            |   | Common |   |            | Paid-in |  |             | Retained |               |  | Income |         |        | Treasury |   |    | Deferred     |  |   |        
|                                                                                                   |                            | (Shares)                           |            |   | Stock  |   |            | Capital |  |             | Earnings |               |  | (Loss) |         |        | Stock    |   |    | Compensation |  |   | Total   |  
|                                                                                                   |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |  
|                                                                                                   |                            | (In $000s, except for share data) |           
|Balance, December 31, 2002                                                                         |                            |                                    | 20,810,557 |   |        | $ | 208        |         |  | $           | 39,398   |               |  | $      | 19,158  |        |          | $ | 1  |              |  | $ | (160    | ) |  | $ |       |   |  | $ | 58,605  |       
|Purchase of treasury stock                                                                         |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        |        |        |          |   |   |              |  |   | (16,272 | ) |  |   |       |   |  |   | (16,272 | )     
|Issuance of common stock                                                                           |                            |                                    | 1,440,920  |   |        |   | 15         |         |  |             | 7,365    |               |  |        |        |        |          |   |   |              |  |   | 140     |   |  |   |       |   |  |   | 7,520   |       
|Tax benefit of stock option exercises                                                              |                            |                                    |           |   |        |   |           |         |  |             | 4,654    |               |  |        |        |        |          |   |   |              |  |   |        |   |  |   |       |   |  |   | 4,654   |       
|Beneficial conversion discount on Series A convertible,
    redeemable preferred stock             |                            |                                    |           |   |        |   |           |         |  |             | 27,298   |               |  |        |        |        |          |   |   |              |  |   |        |   |  |   |       |   |  |   | 27,298  |       
|Accretion of beneficial conversion feature on Series A
    convertible, redeemable preferred stock |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        | (166    | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | (166    | )     
|Series A convertible, redeemable preferred stock dividends
    paid and payable                    |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        | (781    | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | (781    | )     
|Common stock dividends paid and payable                                                            |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        | (3,868  | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | (3,868  | )     
|Comprehensive income:                                                                              |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |   |  |   |        |   |  |   |         |       
|Unrealized loss on marketable securities                                                           |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        |        |        |          |   | (1 | )            |  |   |        |   |  |   |       |   |  |   |         |       
|                                                                                                   | Net income                 |                                    |            |  |        |   |            |        |  |             |          |              |  |        |         | 15,391 |          |   |    |             |  |   |         |  |  |   |        |  |  |   |         |        | 
|                                                                                                   | Total comprehensive income |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |   |  |   |        |   |  |   |         | 15,390 | 
|                                                                                                   |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |  
|Balance, December 31, 2003                                                                         |                            |                                    | 22,251,477 |   |        |   | 223        |         |  |             | 78,715   |               |  |        | 29,734  |        |          |   |   |              |  |   | (16,292 | ) |  |   |       |   |  |   | 92,380  |       
|Issuance of common stock                                                                           |                            |                                    | 892,038    |   |        |   | 8          |         |  |             | 3,488    |               |  |        |        |        |          |   |   |              |  |   | 75      |   |  |   |       |   |  |   | 3,571   |       
|Tax benefit of stock option exercises                                                              |                            |                                    |           |   |        |   |           |         |  |             | 5,813    |               |  |        |        |        |          |   |   |              |  |   |        |   |  |   |       |   |  |   | 5,813   |       
|Accretion of beneficial conversion feature on Series A
    convertible, redeemable preferred stock |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        | (129    | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | (129    | )     
|Conversion of Series A convertible, redeemable preferred
    stock to common stock                 |                            |                                    | 5,514,705  |   |        |   | 55         |         |  |             | 29,945   |               |  |        | (29,317 | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | 683     |       
|Public stock offering                                                                              |                            |                                    | 1,750,000  |   |        |   | 18         |         |  |             | 34,709   |               |  |        |        |        |          |   |   |              |  |   |        |   |  |   |       |   |  |   | 34,727  |       
|Series A convertible, redeemable preferred stock dividends
    paid                                |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        | (434    | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | (434    | )     
|Common stock dividends paid and payable                                                            |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        | (6,055  | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | (6,055  | )     
|Comprehensive income:                                                                              |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |   |  |   |        |   |  |   |         |       
|                                                                                                   | Net income                 |                                    |            |  |        |   |            |        |  |             |          |              |  |        |         | 34,618 |          |   |    |             |  |   |         |  |  |   |        |  |  |   |         |        | 
|                                                                                                   | Total comprehensive income |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |   |  |   |        |   |  |   |         | 34,618 | 
|                                                                                                   |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |  
|Balance, December 31, 2004                                                                         |                            |                                    | 30,408,220 |   |        |   | 304        |         |  |             | 152,670  |               |  |        | 28,417  |        |          |   |   |              |  |   | (16,217 | ) |  |   |       |   |  |   | 165,174 |       
|Issuance of common stock                                                                           |                            |                                    | 829,233    |   |        |   | 8          |         |  |             | 9,032    |               |  |        |        |        |          |   |   |              |  |   | (751    | ) |  |   | (2,543 | ) |  |   | 5,746   |       
|Tax benefit of stock option exercises                                                              |                            |                                    |           |   |        |   |           |         |  |             | 4,174    |               |  |        |        |        |          |   |   |              |  |   |        |   |  |   |       |   |  |   | 4,174   |       
|Common stock dividends paid and payable                                                            |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        | (7,658  | )      |          |   |   |              |  |   |        |   |  |   |       |   |  |   | (7,658  | )     
|Purchase of treasury stock                                                                         |                            |                                    |           |   |        |   |           |         |  |             |         |               |  |        |        |        |          |   |   |              |  |   | (49,399 | ) |  |   |       |   |  |   | (49,399 | )     
|Comprehensive income:                                                                              |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |   |  |   |        |   |  |   |         |       
|                                                                                                   | Net income                 |                                    |            |  |        |   |            |        |  |             |          |              |  |        |         | 37,378 |          |   |    |             |  |   |         |  |  |   |        |  |  |   |         |        | 
|Total comprehensive income                                                                         |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |   |  |   |        |   |  |   | 37,378  |       
|                                                                                                   |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |  
|Balance, December 31, 2005                                                                         |                            |                                    | 31,237,453 |   |        | $ | 312        |         |  | $           | 165,876  |               |  | $      | 58,137  |        |          | $ |   |              |  | $ | (66,367 | ) |  | $ | (2,543 | ) |  | $ | 155,415 |       
|                                                                                                   |                            |                                    |            |   |        |   |            |         |  |             |          |               |  |        |         |        |          |   |    |              |  |   |         |  



F-5



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##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |         |         |        |         |         |         |  
|------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------------------------------------- | ------- | ------- | ------- | ------ | -------- | ------- | ------- | ------ | ------- | ------- | ------- | -
|                                                  |                                                                                                      | Years Ended December 31,                            |                                                                                    
|                                                  |                                                                                                      |                                                     |                                                                                    
|                                                  |                                                                                                      | 2005                                                |                                                                                     |         | 2004    |         |        | 2003     |        
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|                                                  |                                                                                                      | (In $000s)                                         |                                                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |         |         |        |        
|                                                  | Net income                                                                                           |                                                     | $                                                                                   | 37,378  |         |         | $      | 34,618   |         |         | $      | 15,391  |        
|                                                  | Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:      |                                                     |                                                                                     |         |         |         |        |          |         |         |        |         |        
|                                                  |                                                                                                      | Depreciation and amortization                       |                                                                                     |         | 14,635  |         |        |          | 14,168  |         |        |         | 7,370   |        
|                                                  |                                                                                                      | Deferred tax provision, net                         |                                                                                     |         | 10,428  |         |        |          | 1,452   |         |        |         | 2,951   |        
|                                                  |                                                                                                      | Provision for bad debts                             |                                                                                     |         | 598     |         |        |          | 348     |         |        |         | 305     |        
|                                                  |                                                                                                      | Other                                               |                                                                                     |         | 647     |         |        |          | 195     |         |        |         | 87      |        
|                                                  |                                                                                                      | Changes in operating working capital:               |                                                                                     |         |         |         |        |          |         |         |        |         |         |        
|                                                  |                                                                                                      |                                                     | Accounts receivable, net                                                            |         |         | (14,672 | )      |          |         | 691     |        |         |         | (13,832 | )
|                                                  |                                                                                                      |                                                     | Other current assets                                                                |         |         | (9,731  | )      |          |         | 2,299   |        |         |         | 4,787   |  
|                                                  |                                                                                                      |                                                     | Workers compensation receivable, net                                               |         |         | (15,603 | )      |          |         | (88,360 | )      |         |         | (24,355 | )
|                                                  |                                                                                                      |                                                     | Other assets                                                                        |         |         | (168    | )      |          |         | 5,394   |        |         |         | 135     |  
|                                                  |                                                                                                      |                                                     | Accrued insurance premiums, health and workers
    compensation insurance reserves |         |         | (2,655  | )      |          |         | (8,880  | )      |         |         | (1,928  | )
|                                                  |                                                                                                      |                                                     | Accrued payroll and payroll taxes                                                   |         |         | 41,253  |        |          |         | (7,745  | )      |         |         | 26,053  |  
|                                                  |                                                                                                      |                                                     | Accounts payable and other accrued liabilities                                      |         |         | 182     |        |          |         | 600     |        |         |         | (101    | )
|                                                  |                                                                                                      |                                                     | Income taxes payable                                                                |         |         | 2,510   |        |          |         | 15,766  |        |         |         | 5,558   |  
|                                                  |                                                                                                      |                                                     | Customer deposits and prepayments                                                   |         |         | (3,582  | )      |          |         | 2,561   |        |         |         | 1,186   |  
|                                                  |                                                                                                      |                                                     | Long-term accrued workers compensation insurance reserves                          |         |         | (458    | )      |          |         | (58,580 | )      |         |         | (2,392  | )
|                                                  |                                                                                                      |                                                     | Other long-term liabilities                                                         |         |         | (236    | )      |          |         | 1,024   |        |         |         | 604     |  
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|                                                  |                                                                                                      | Net cash provided by (used in) operating activities |                                                                                     |         | 60,526  |         |        |          | (84,449 | )       |        |         | 21,819  |        
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |         |         |        |        
|                                                  | Purchases of marketable securities and certificates of deposit                                       |                                                     |                                                                                     | (5,293  | )       |         |        | (133,878 | )       |         |        | (85,307 | )      
|                                                  | Maturities of marketable securities and certificates of deposit                                      |                                                     |                                                                                     | 11,085  |         |         |        | 227,515  |         |         |        | 70,435  |        
|                                                  | Assets acquired in business acquisitions                                                             |                                                     |                                                                                     |        |         |         |        | (40,617  | )       |         |        | (7,312  | )      
|                                                  | Capital expenditures                                                                                 |                                                     |                                                                                     | (6,240  | )       |         |        | (4,575   | )       |         |        | (3,127  | )      
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|                                                  |                                                                                                      | Net cash (used in) provided by investing activities |                                                                                     |         | (448    | )       |        |          | 48,445  |         |        |         | (25,311 | )      
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |         |         |        |        
|                                                  | Proceeds from credit line borrowing                                                                  |                                                     |                                                                                     | 1,297   |         |         |        | 27,000   |         |         |        |        |        
|                                                  | Payments on credit line borrowing                                                                    |                                                     |                                                                                     | (1,297  | )       |         |        | (27,000  | )       |         |        |        |        
|                                                  | Debt issuance costs                                                                                  |                                                     |                                                                                     |        |         |         |        | (192     | )       |         |        |        |        
|                                                  | Proceeds from exercise of stock options                                                              |                                                     |                                                                                     | 5,154   |         |         |        | 3,571    |         |         |        | 7,520   |        
|                                                  | Proceeds from stock offering, net of issuance costs                                                  |                                                     |                                                                                     |        |         |         |        | 34,727   |         |         |        |        |        
|                                                  | Proceeds from issuance of Series A convertible redeemable
    preferred stock, net of issuance costs |                                                     |                                                                                     |        |         |         |        |         |         |         |        | 27,686  |        
|                                                  | Dividends paid                                                                                       |                                                     |                                                                                     | (7,454  | )       |         |        | (6,008   | )       |         |        | (4,529  | )      
|                                                  | Purchase of treasury stock                                                                           |                                                     |                                                                                     | (46,029 | )       |         |        |         |         |         |        | (16,272 | )      
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|                                                  |                                                                                                      | Net cash (used in) provided by financing activities |                                                                                     |         | (48,329 | )       |        |          | 32,098  |         |        |         | 14,405  |        
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|                                                  | Net increase (decrease) in cash and cash equivalents                                                 |                                                     |                                                                                     | 11,749  |         |         |        | (3,906   | )       |         |        | 10,913  |        
|Cash and cash equivalents  beginning of year     |                                                                                                      |                                                     | 40,776                                                                              |         |         |         | 44,682 |          |         |         | 33,769 |        
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|Cash and cash equivalents  end of year           |                                                                                                      | $                                                   | 52,525                                                                              |         |         | $       | 40,776 |          |         | $       | 44,682 |        
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|Supplemental disclosure of cash flow information: |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |         |         |        |        
|                                                  | Income taxes paid (refund)                                                                           |                                                     | $                                                                                   | 10,237  |         |         | $      | 458      |         |         | $      | (930    | )      
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        
|                                                  | Interest paid                                                                                        |                                                     | $                                                                                   | 176     |         |         | $      | 228      |         |         | $      |        |        
|                                                  |                                                                                                      |                                                     |                                                                                     |         |         |         |        |          |        

F-6



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##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in $000s)


Continued








| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | approximately $1,425 of capital items purchased by the Company
    in 2005 and paid for in 2006;                            
|
| |  | approximately $703 of landlord incentives related to leasehold
    improvements at the Companys corporate facility;        
|
| |  | approximately $411 of capitalized rent related to the rent-free
    construction period at the Companys corporate facility.







F-7



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##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in $000s, except share and per share data)




|   |                                           
|-- | ------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Workforce alignment is the term used by the Company to refer to
    the engagement of the right people in the right place at the
    right time doing the right things. The Company assists its
    clients in achieving workforce alignment by helping them find
    exceptional talent, implement formal human resource 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.                                                                                                                                                                            
|
| |  | The Company provides business protection by helping clients
    ensure employment-related regulatory compliance and sound risk
    management practices. The Company also provides
    up-to-date regulatory
    compliance and access to cost-effective risk management
    practices and insurance programs.                                                                                                                             



Principles of Consolidation


Use of Estimates


Cash Equivalents


Marketable Securities Accounting for Certain Investments in Debt and Equity
Securities. held-to


F-8



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##### Table of Contents





Property and Equipment


|                               |  |       |               | 
|------------------------------ |  | ----- | ------------- | 
|                               |  | Years |              
|                               |  |       |              
|Automobiles                    |  |       | 5             | 
|Computer hardware and software |  |       | 3 to 7        | 
|Furniture and equipment        |  |       | 5 to 7        | 
|Leasehold improvements         |  |       | Life of lease | 



Internal Use Software


Goodwill


Intangible Assets


Fair Value of Financial Instruments


Revenue Recognition


F-9



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##### Table of Contents





Reporting Revenue Gross as a Principal versus
Net as an Agent.


Sales and Marketing Commissions and Client Referral
Fees


Workers Compensation Costs






Health Benefits


Stock-Based Compensation Accounting for Stock
Issued to Employees


F-10



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##### Table of Contents



Accounting for Stock Based
Compensation


|                                                                                                                        |  |  |             |                                  |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  |  | ----------- | -------------------------------- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                        |  |  |             | For the Years Ended December 31, | 
|                                                                                                                        |  |  |             |                                  | 
|                                                                                                                        |  |  |             | 2005                             |  |   | 2004   |   |  | 2003 |       
|                                                                                                                        |  |  |             |                                  |  |   |        |   |  |      |       
|Net income                                                                                                              |  |  | As reported |                                  |  | $ | 37,378 |   |  | $    | 34,618 |   |  | $ | 15,391 |  
|Add: total stock-based compensation included in net income, net
    of tax                                              |  |  | As reported |                                  |  | $ | 396    |   |  |      |       |   |  |   |       |  
|Less: total stock-based employee compensation expense determined
    under fair value method for all awards, net of tax |  |  | Pro forma   |                                  |  |   | (3,452 | ) |  |      | (3,264 | ) |  |   | (2,454 | )
|                                                                                                                        |  |  |             |                                  |  |   |        |   |  |      |        |  
|Net income                                                                                                              |  |  | Pro forma   |                                  |  | $ | 34,322 |   |  | $    | 31,354 |   |  | $ | 12,937 |  
|                                                                                                                        |  |  |             |                                  |  |   |        |   |  |      |        |  
|Basic earnings per share                                                                                                |  |  | As reported |                                  |  | $ | 1.36   |   |  | $    | 0.20   |   |  | $ | 0.66   |  
|                                                                                                                        |  |  | Pro forma   |                                  |  | $ | 1.25   |   |  | $    | 0.06   |   |  | $ | 0.54   |  
|Diluted earnings per share                                                                                              |  |  | As reported |                                  |  | $ | 1.31   |   |  | $    | 0.18   |   |  | $ | 0.62   |  
|                                                                                                                        |  |  | Pro forma   |                                  |  | $ | 1.20   |   |  | $    | 0.06   |   |  | $ | 0.52   |  

Income Taxes


Earnings Per Share Earnings Per
Share


03-6, Participating Securities and the Two Class Method under
FASB Statement No. 128.


Comprehensive Income (Loss) Reporting Comprehensive Income,


New Accounting Pronouncements Share-Based Payment Accounting for Stock-Based
Compensation-Transition and Disclosure-An Amendment of
SFAS No. 123


F-11



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##### Table of Contents







Accounting
Changes and Error Corrections  a replacement of APB
Opinion No. 20 and FASB Statement No. 3




|   |                  
|-- | -----------------
|2. | SEGMENT REPORTING

Disclosures about Segments of an
Enterprise and Related Information




|   |                                     
|-- | ------------------------------------
|3. | CERTIFICATES OF DEPOSIT  RESTRICTED





|   |                                   
|-- | ----------------------------------
|4. | MARKETABLE SECURITIES  RESTRICTED







F-12



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##### Table of Contents







|                         |            |                                                     |  |       |            |  |            |   |   |  |  |   |       | 
|------------------------ | ---------- | --------------------------------------------------- |  | ----- | ---------- |  | ---------- | - | - |  |  | - | ----- | 
|                         |            |                                                     |  | Gross |            | 
|                         |            | Amortized                                           |  |       | Unrealized |  | Estimated  |  
|                         |            | Cost                                                |  |       | Gain       |  | Fair Value |  
|                         |            |                                                     |  |       |            |  |            |  
|As of December 31, 2005: |            |                                                     |  |       |            |  |            |   |   |  |  |  
|                         | Short-term |                                                     |  |       |            |  |            |   |   |  |  |   |      
|                         |            | Money market  restricted                           |  | $     | 4,281      |  |            | $ |  |  |  | $ | 4,281 | 
|                         |            |                                                     |  |       |            |  |            |   |  
|                         |            | Total short-term marketable securities  restricted |  | $     | 4,281      |  |            | $ |  |  |  | $ | 4,281 | 
|                         |            |                                                     |  |       |            |  |            |   |  
|                         | Long-term  |                                                     |  |       |            |  |            |   |   |  |  |   |      
|                         |            | Money market  restricted                           |  | $     | 3,582      |  |            | $ |  |  |  | $ | 3,582 | 
|                         |            | Mutual funds  trading                              |  |       | 4,309      |  |            |   |  |  |  |   | 4,309 | 
|                         |            |                                                     |  |       |            |  |            |   |  
|                         |            | Total long-term marketable securities               |  | $     | 7,891      |  |            | $ |  |  |  | $ | 7,891 | 
|                         |            |                                                     |  |       |            |  |            |   |  
|As of December 31, 2004: |            |                                                     |  |       |            |  |            |   |   |  |  |  
|                         | Short-term |                                                     |  |       |            |  |            |   |   |  |  |   |      
|                         |            | Money market  restricted                           |  | $     | 4,168      |  |            | $ |  |  |  | $ | 4,168 | 
|                         |            |                                                     |  |       |            |  |            |   |  
|                         |            | Total short-term marketable securities  restricted |  | $     | 4,168      |  |            | $ |  |  |  | $ | 4,168 | 
|                         |            |                                                     |  |       |            |  |            |   |  
|                         | Long-term  |                                                     |  |       |            |  |            |   |   |  |  |   |      
|                         |            | Money market  restricted                           |  | $     | 3,488      |  |            | $ |  |  |  | $ | 3,488 | 
|                         |            | Mutual funds  trading                              |  |       | 4,947      |  |            |   |  |  |  |   | 4,947 | 
|                         |            |                                                     |  |       |            |  |            |   |  
|                         |            | Total long-term marketable securities               |  | $     | 8,435      |  |            | $ |  |  |  | $ | 8,435 | 
|                         |            |                                                     |  |       |            |  |            |   |  







|   |                    
|-- | -------------------
|5. | ACCOUNTS RECEIVABLE



|                                      |       |              |         |         |              |   |         |        | 
|------------------------------------- | ----- | ------------ | ------- | ------- | ------------ | - | ------- | ------ | 
|                                      |       | December 31, |         |         | December 31, |  
|                                      |       | 2005         |         |         | 2004         |  
|                                      |       |              |         |         |              |  
|Billed to clients                     |       | $            | 10,090  |         |              | $ | 17,886  |       
|Unbilled revenues                     |       |              | 104,280 |         |              |   | 82,709  |       
|                                      |       |              |         |         |              |  
|                                      |       |              | 114,370 |         |              |   | 100,595 |       
|Less: Allowance for doubtful accounts |       |              | (506    | )       |              |   | (805    | )     
|                                      |       |              |         |         |              |  
|                                      | Total |              | $       | 113,864 |              |   | $       | 99,790 | 
|                                      |       |              |         |         |              |  





|   |                                           
|-- | ------------------------------------------
|6. | WORKERS COMPENSATION RECEIVABLE/ RESERVES



F-13



---



##### Table of Contents











F-14



---



##### Table of Contents





|             |  |                   |         |   |               |                 |       |                     |  |  |          | 
|------------ |  | ----------------- | ------- | - | ------------- | --------------- | ----- | ------------------- |  |  | -------- | 
|             |  |                   |         |   |               | Minimum Program |      
|             |  | Initial Loss Fund |         |   | Guaranteed    |                 |       | Life for Guaranteed | 
|Program Year |  | Premiums          |         |   | Interest Rate |                 |       | Interest Rate       | 
|             |  |                   |         |   |               |                 |       |                     | 
|2003         |  | $                 | 73,500  | * |               |                 | 2.42% |                     |  |  | 7 years  | 
|2003         |  | $                 | 11,500  | * |               |                 | 1.85% |                     |  |  | 7 years  | 
|2004         |  | $                 | 111,400 |   |               |                 | 2.92% |                     |  |  | 10 years | 
|2005         |  | $                 | 100,000 |   |               |                 | 3.75% |                     |  |  | 10 years | 






|  |                                                                       
|- | ----------------------------------------------------------------------
|* | The 2003 program year consists of two loss funds totaling
    $85,000.

true-up true-up true-up


true-up












F-15



---



##### Table of Contents







|                                           |                                                  |              |          |        |              |   |          |        | 
|------------------------------------------ | ------------------------------------------------ | ------------ | -------- | ------ | ------------ | - | -------- | ------ | 
|                                           |                                                  | December 31, |          |        | December 31, |  
|                                           |                                                  | 2005         |          |        | 2004         |  
|                                           |                                                  |              |          |        |              |  
|Loss fund premium payments to AIG          |                                                  | $            | 390,803  |        |              | $ | 290,803  |       
|Loss fund premium refunds                  |                                                  |              | (53,904  | )      |              |   |         |       
|Interest receivable on premium payments    |                                                  |              | 12,027   |        |              |   | 4,498    |       
|Estimated premium expense refund due       |                                                  |              | 5,542    |        |              |   | 3,839    |       
|Claims paid by AIG                         |                                                  |              | (108,275 | )      |              |   | (53,226  | )     
|Present value of future claims liabilities |                                                  |              | (117,875 | )      |              |   | (133,199 | )     
|                                           |                                                  |              |          |        |              |  
|Total workers compensation receivable     |                                                  |              | 128,318  |        |              |   | 112,715  |       
|                                           | Short-term workers compensation receivable, net |              |          | 32,552 |              |   |          | 33,405 | 
|                                           |                                                  |              |          |        |              |  
|                                           | Long-term workers compensation receivable, net  |              | $        | 95,766 |              |   | $        | 79,310 | 
|                                           |                                                  |              |          |        |              |  





|   |                       
|-- | ----------------------
|7. | PROPERTY AND EQUIPMENT



|                               |  |              |         |   |              |   |         |  
|------------------------------ |  | ------------ | ------- | - | ------------ | - | ------- | -
|                               |  | December 31, |         |   | December 31, |  
|                               |  | 2005         |         |   | 2004         |  
|                               |  |              |         |   |              |  
|Leasehold improvements         |  | $            | 2,603   |   |              | $ | 2,690   |  
|Furniture and fixtures         |  |              | 3,570   |   |              |   | 3,476   |  
|Equipment                      |  |              | 2,345   |   |              |   | 2,366   |  
|Computer hardware and software |  |              | 37,879  |   |              |   | 43,380  |  
|Construction in progress       |  |              | 6,715   |   |              |   | 208     |  
|                               |  |              |         |   |              |  
|Total property and equipment   |  |              | 53,112  |   |              |   | 52,120  |  
|Less accumulated depreciation  |  |              | (39,302 | ) |              |   | (42,041 | )
|                               |  |              |         |   |              |  
|                               |  | $            | 13,810  |   |              | $ | 10,079  |  
|                               |  |              |         |   |              |  





|   |                  
|-- | -----------------
|8. | INTANGIBLE ASSETS



| |                 
| | ----------------
| | EPIX Acquisition



F-16



---



##### Table of Contents





Business
Combinations.






F-17



---



##### Table of Contents





|                              |           |                         |         |      |      |   |         |      | 
|----------------------------- | --------- | ----------------------- | ------- | ---- | ---- | - | ------- | ---- | 
|                              |           | Year Ended December 31, |        
|                              |           |                         |        
|                              |           | 2004                    |         |      | 2003 |  
|                              |           |                         |         |      |      |  
|Pro forma revenues            |           | $                       | 617,777 |      |      | $ | 562,969 |     
|Pro forma net income          |           | $                       | 33,605  |      |      | $ | 14,587  |     
|Pro forma earnings per share: |           |                         |         |      |      |   |         |     
|                              |  Basic   |                         | $       | 0.15 |      |   | $       | 0.62 | 
|                              |  Diluted |                         | $       | 0.14 |      |   | $       | 0.59 | 



| |                      
| | ---------------------
| | TeamStaff Acquisition



Business
Combinations.






| |      
| | -----
| | Other



F-18



---



##### Table of Contents





| |                             
| | ----------------------------
| | Summary of Intangible Assets



|                          |  |              |         |   |              |   |        |  
|------------------------- |  | ------------ | ------- | - | ------------ | - | ------ | -
|                          |  | December 31, |         |   | December 31, |  
|                          |  | 2005         |         |   | 2004         |  
|                          |  |              |         |   |              |  
|Client service agreements |  | $            | 47,929  |   |              | $ | 47,929 |  
|Accumulated amortization  |  |              | (17,435 | ) |              |   | (7,796 | )
|                          |  |              |         |   |              |  
|Intangible assets, net    |  | $            | 30,494  |   |              | $ | 40,133 |  
|                          |  |              |         |   |              |  







|   |             
|-- | ------------
|9. | OTHER ASSETS



|                           |  |              |        |  |              |   |       | 
|-------------------------- |  | ------------ | ------ |  | ------------ | - | ----- | 
|                           |  | December 31, |        |  | December 31, |  
|                           |  | 2005         |        |  | 2004         |  
|                           |  |              |        |  |              |  
|Employee receivables       |  | $            | 2,099  |  |              | $ | 1,732 | 
|Prepaid employment taxes   |  |              | 2,058  |  |              |   | 1,251 | 
|Other prepaid expenses     |  |              | 7,367  |  |              |   | 1,776 | 
|Other receivables          |  |              | 3,821  |  |              |   | 397   | 
|Prepaid insurance          |  |              | 280    |  |              |   | 90    | 
|Short-term deposits        |  |              | 88     |  |              |   | 106   | 
|Due from EPIX              |  |              |       |  |              |   | 630   | 
|                           |  |              |        |  |              |  
|Total other current assets |  | $            | 15,713 |  |              | $ | 5,982 | 
|                           |  |              |        |  |              |  





|         |  |              |     |  |              |   |     | 
|-------- |  | ------------ | --- |  | ------------ | - | --- | 
|         |  | December 31, |     |  | December 31, |  
|         |  | 2005         |     |  | 2004         |  
|         |  |              |     |  |              |  
|Deposits |  | $            | 454 |  |              | $ | 223 | 
|Other    |  |              | 116 |  |              |   | 181 | 
|         |  |              |     |  |              |  
|         |  | $            | 570 |  |              | $ | 404 | 
|         |  |              |     |  |              |  





|    |                
|--- | ---------------
|10. | HEALTH BENEFITS



F-19



---



##### Table of Contents





















|    |                          
|--- | -------------------------
|11. | REVOLVING CREDIT FACILITY

30-day


F-20



---



##### Table of Contents









|    |                              
|--- | -----------------------------
|12. | COMMITMENTS AND CONTINGENCIES



| |                 
| | ----------------
| | Operating Leases



|                         |  |        |        | 
|------------------------ |  | ------ | ------ | 
|Year Ending December 31, |  | Amount |       
|                         |  |        |       
|2006                     |  | $      | 7,735  | 
|2007                     |  |        | 5,912  | 
|2008                     |  |        | 5,833  | 
|2009                     |  |        | 4,582  | 
|2010                     |  |        | 3,643  | 
|Thereafter               |  |        | 14,643 | 
|                         |  |        |       
|                         |  | $      | 42,348 | 
|                         |  |        |       



| |           
| | ----------
| | Litigation





| |                   
| | ------------------
| | Regulatory Matters



F-21



---



##### Table of Contents













|    |                                       
|--- | --------------------------------------
|13. | CONVERTIBLE REDEEMABLE PREFERRED STOCK







F-22



---



##### Table of Contents



in-the






|    |                
|--- | ---------------
|14. | RELATED PARTIES





|    |                
|--- | ---------------
|15. | RETIREMENT PLAN





|    |                                                                  
|--- | -----------------------------------------------------------------
|16. | GEOGRAPHIC MARKET CONCENTRATION AND DEPENDENCE ON KEY
    VENDORS





F-23



---



##### Table of Contents







|    |       
|--- | ------
|17. | EQUITY



| |                         
| | ------------------------
| | Stock Repurchase Program





| |                      
| | ---------------------
| | Public Stock Offering







| |                              
| | -----------------------------
| | Employee Stock Incentive Plan







F-24



---



##### Table of Contents







| |                    
| | -------------------
| | Stock Option Awards



|                                |  |                         |       |   |      |  |       |      |  |  |       |  
|------------------------------- |  | ----------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                |  | Year Ended December 31, |      
|                                |  |                         |      
|                                |  | 2005                    |       |   | 2004 |  |       | 2003 | 
|                                |  |                         |       |   |      |  |       |      | 
|Risk-free interest rate         |  |                         | 3.60  | % |      |  | 4.46  | %    |  |  | 4.61  | %
|Expected dividend yield         |  |                         | 1.24  | % |      |  | 1.01  | %    |  |  | 1.10  | %
|Expected volatility             |  |                         | 56.19 | % |      |  | 76.68 | %    |  |  | 77.18 | %
|Expected option life (in years) |  |                         | 3.1   |   |      |  | 6.6   |      |  |  | 7.0   |  





|                                 |  |        |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       |  |            |   |  |   |       | 
|-------------------------------- |  | ------ | --------- | -------- | ----- | - | ----- | ------ | -------- |  | --------- | - |  | -------- | ----- |  | ----- |  | ---------- | - |  | - | ----- | 
|                                 |  | 2005   |           |          | 2004  |   |       | 2003   |         
|                                 |  |        |           |          |       |   |       |        |         
|                                 |  |        |           | Weighted |       |   |       |        | Weighted |  |           |   |  | Weighted |      
|                                 |  |        |           | Average  |       |   |       |        | Average  |  |           |   |  | Average  |      
|                                 |  |        |           | Exercise |       |   |       |        | Exercise |  |           |   |  | Exercise |      
|                                 |  | Shares |           |          | Price |   |       | Shares |          |  | Price     |   |  | Shares   |       |  | Price | 
|                                 |  |        |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       | 
|Outstanding at beginning of year |  |        | 3,231,263 |          |       | $ | 9.56  |        |          |  | 4,495,928 |   |  | $        | 7.83  |  |       |  | 5,217,433  |   |  | $ | 4.61  | 
|Granted                          |  |        | 581,423   |          |       | $ | 22.78 |        |          |  | 217,332   |   |  | $        | 23.63 |  |       |  | 1,164,239  |   |  | $ | 17.95 | 
|Exercised                        |  |        | (684,139  | )        |       | $ | 7.85  |        |          |  | (892,038  | ) |  | $        | 3.59  |  |       |  | (1,440,920 | ) |  | $ | 5.23  | 
|Forfeited                        |  |        | (237,003  | )        |       | $ | 16.34 |        |          |  | (589,959  | ) |  | $        | 10.61 |  |       |  | (444,824   | ) |  | $ | 4.93  | 
|                                 |  |        |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       | 
|Outstanding at end of year       |  |        | 2,891,544 |          |       | $ | 12.02 |        |          |  | 3,231,263 |   |  | $        | 9.56  |  |       |  | 4,495,928  |   |  | $ | 7.83  | 
|                                 |  |        |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       | 
|Exercisable at end of year       |  |        | 1,567,726 |          |       | $ | 8.30  |        |          |  | 1,528,626 |   |  | $        | 8.62  |  |       |  | 1,526,714  |   |  | $ | 6.34  | 
|                                 |  |        |           |          |       |   |       |        |          |  |           |   |  |          |       |  |       | 

F-25



---



##### Table of Contents





|                         |  |                     |           |  |                     |  |     |                  |  |   |           |  |  |                  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- |  | ------------------- |  | --- | ---------------- |  | - | --------- |  |  | ---------------- | --------- |  |  | - | ----- | 
|                         |  | Options Outstanding |           |  | Options Exercisable | 
|                         |  |                     |           |  |                     | 
|                         |  | Number of           |           |  | Remaining           |  |     | Weighted-Average |  |   | Number of |  |  | Weighted-Average |          
|Range of Exercise Prices |  | Shares              |           |  | Contractual Life    |  |     | Exercise Price   |  |   | Shares    |  |  | Exercise Price   |          
|                         |  |                     |           |  |                     |  |     |                  |  |   |           |  |  |                  |          
|$ 0.01 - $ 3.00          |  |                     | 109,364   |  |                     |  | 5.7 |                  |  | $ | 1.85      |  |  |                  | 97,364    |  |  | $ | 1.75  | 
|$ 3.01 - $ 6.00          |  |                     | 1,329,200 |  |                     |  | 6.4 |                  |  | $ | 3.84      |  |  |                  | 965,200   |  |  | $ | 3.83  | 
|$ 6.01 - $ 9.00          |  |                     | 67,584    |  |                     |  | 4.2 |                  |  | $ | 8.33      |  |  |                  | 60,584    |  |  | $ | 8.37  | 
|$ 9.01 - $12.00          |  |                     | 38,000    |  |                     |  | 5.7 |                  |  | $ | 10.44     |  |  |                  | 24,500    |  |  | $ | 10.76 | 
|$12.01 - $15.00          |  |                     | 58,700    |  |                     |  | 3.3 |                  |  | $ | 12.46     |  |  |                  | 55,000    |  |  | $ | 12.38 | 
|$15.01 - $18.00          |  |                     | 214,200   |  |                     |  | 7.7 |                  |  | $ | 16.72     |  |  |                  | 61,200    |  |  | $ | 16.69 | 
|$18.01 - $21.00          |  |                     | 39,600    |  |                     |  | 8.6 |                  |  | $ | 19.38     |  |  |                  | 3,800     |  |  | $ | 19.68 | 
|$21.01 - $24.00          |  |                     | 843,896   |  |                     |  | 8.5 |                  |  | $ | 21.53     |  |  |                  | 284,578   |  |  | $ | 21.72 | 
|$24.01 - $27.00          |  |                     | 54,600    |  |                     |  | 9.2 |                  |  | $ | 26.23     |  |  |                  | 5,300     |  |  | $ | 26.50 | 
|$27.01 - $30.00          |  |                     | 136,400   |  |                     |  | 9.8 |                  |  | $ | 27.93     |  |  |                  | 10,200    |  |  | $ | 27.25 | 
|                         |  |                     |           |  |                     |  |     |                  |  |   |           |  |  |                  |          
|                         |  |                     | 2,891,544 |  |                     |  | 7.2 |                  |  | $ | 12.02     |  |  |                  | 1,567,726 |  |  | $ | 8.30  | 
|                         |  |                     |           |  |                     |  |     |                  |  |   |           |  |  |                  |          





| |                        
| | -----------------------
| | Restricted Stock Awards





| |                             
| | ----------------------------
| | Employee Stock Purchase Plan



F-26



---



##### Table of Contents





|    |                   
|--- | ------------------
|18. | EARNINGS PER SHARE



|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |      | 
|------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | -------- | ------------- |  |  | ---------- |  |  | - | ---- | 
|                               |                                                                                                                                                                                           | Net Income  |   |          | Shares        |  |  | Per Share  | 
|                               |                                                                                                                                                                                           | (Numerator) |   |          | (Denominator) |  |  | Amount     | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|For the year ended 2005:       |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|Basic EPS:                     |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Net income                                                                                                                                                                                |             | $ | 37,378   |               |  |  | 27,451,834 |  |  | $ | 1.36 | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|Effect of dilutive securities: |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Options to purchase common stock                                                                                                                                                          |             |   |          |               |  |  | 1,062,633  |  |  |   |      | 
|                               | Restricted stock                                                                                                                                                                          |             |   |          |               |  |  | 19,973     |  |  |   |      | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|Diluted EPS:                   |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Net income                                                                                                                                                                                |             | $ | 37,378   |               |  |  | 28,534,440 |  |  | $ | 1.31 | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|For the year ended 2004:       |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|Basic EPS:                     |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Net income                                                                                                                                                                                |             | $ | 34,618   |               |  |  |            |  |  |   |      | 
|                               | Non-recurring, non-cash charge attributable to the acceleration
    of the unamortized discount associated with the conversion into
    common stock of all shares of the Preferred Stock |             |   | ( 29,317 | )             |  |  |            |  |  |   |      | 
|                               | Non-cash charges attributable to beneficial conversion feature
    and accretion of redemption value of the Preferred Stock                                                               |             |   | (129     | )             |  |  |            |  |  |   |      | 
|                               | Preferred Stock dividends                                                                                                                                                                 |             |   | (434     | )             |  |  |            |  |  |   |      | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|                               | Net income attributable to common shareholders                                                                                                                                            |             |   | 4,738    |               |  |  | 24,124,803 |  |  | $ | 0.20 | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|Effect of dilutive securities: |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Options to purchase common stock                                                                                                                                                          |             |   |          |               |  |  | 1,609,712  |  |  |   |      | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|Diluted EPS:                   |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Net income attributable to common shareholders                                                                                                                                            |             | $ | 4,738    |               |  |  | 25,734,515 |  |  | $ | 0.18 | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|For the year ended 2003:       |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|Basic EPS:                     |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Net income                                                                                                                                                                                |             | $ | 15,391   |               |  |  |            |  |  |   |      | 
|                               | Non-cash charges attributable to beneficial conversion feature
    and accretion of redemption value of Preferred Stock                                                                   |             |   | (166     | )             |  |  |            |  |  |   |      | 
|                               | Preferred Stock dividends                                                                                                                                                                 |             |   | (781     | )             |  |  |            |  |  |   |      | 
|                               | Assumed Preferred Stock dividend (assuming full distribution of
    net income)                                                                                                           |             |   | (1,439   | )             |  |  |            |  |  |   |      | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|                               | Net income attributable to common shareholders                                                                                                                                            |             |   | 13,005   |               |  |  | 19,686,185 |  |  | $ | 0.66 | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|Effect of dilutive securities: |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Options                                                                                                                                                                                   |             |   |         |               |  |  | 1,805,199  |  |  |   |      | 
|                               | Preferred Stock                                                                                                                                                                           |             |   | 2,386    |               |  |  | 3,157,735  |  |  |   |      | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 
|Diluted EPS:                   |                                                                                                                                                                                           |             |   |          |               |  |  |            |  |  |   |     
|                               | Net income                                                                                                                                                                                |             | $ | 15,391   |               |  |  | 24,649,119 |  |  | $ | 0.62 | 
|                               |                                                                                                                                                                                           |             |   |          |               |  |  |            | 

F-27



---



##### Table of Contents







|    |             
|--- | ------------
|19. | INCOME TAXES



|                                          |                 |                         |        |       |      |   |        |        |  |   |       |       | 
|----------------------------------------- | --------------- | ----------------------- | ------ | ----- | ---- | - | ------ | ------ |  | - | ----- | ----- | 
|                                          |                 | Year Ended December 31, |       
|                                          |                 |                         |       
|                                          |                 | 2005                    |        |       | 2004 |   |        | 2003   | 
|                                          |                 |                         |        |       |      |   |        |        | 
|Current:                                  |                 |                         |        |       |      |   |        |        |  |   |       |      
|                                          | Federal         |                         | $      | 6,753 |      |   | $      | 13,705 |  |   | $     | 4,318 | 
|                                          | State and local |                         |        | 1,429 |      |   |        | 2,518  |  |   |       | 312   | 
|                                          |                 |                         |        |       |      |   |        |        | 
|Total current provision for income taxes  |                 |                         | 8,182  |       |      |   | 16,223 |        |  |   | 4,630 |      
|                                          |                 |                         |        |       |      |   |        |        | 
|Deferred:                                 |                 |                         |        |       |      |   |        |        |  |   |       |      
|                                          | Federal         |                         |        | 9,240 |      |   |        | 1,323  |  |   |       | 2,625 | 
|                                          | State and local |                         |        | 1,188 |      |   |        | 129    |  |   |       | 326   | 
|                                          |                 |                         |        |       |      |   |        |        | 
|Total deferred provision for income taxes |                 |                         | 10,428 |       |      |   | 1,452  |        |  |   | 2,951 |      
|                                          |                 |                         |        |       |      |   |        |        | 
|Total provision for income taxes          |                 | $                       | 18,610 |       |      | $ | 17,675 |        |  | $ | 7,581 |      
|                                          |                 |                         |        |       |      |   |        |        | 



|                                  |                                           |                         |        |        |      |   |        |        |   |   |       |        |  
|--------------------------------- | ----------------------------------------- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ | - | - | ----- | ------ | -
|                                  |                                           | Year Ended December 31, |       
|                                  |                                           |                         |       
|                                  |                                           | 2005                    |        |        | 2004 |   |        | 2003   |  
|                                  |                                           |                         |        |        |      |   |        |        |  
|Statutory U.S. Federal tax at 35% |                                           | $                       | 19,596 |        |      | $ | 18,303 |        |   | $ | 8,040 |       
|                                  | State and local tax, less Federal benefit |                         |        | 2,519  |      |   |        | 1,721  |   |   |       | 638    |  
|                                  | Adjustment to tax intangible assets       |                         |        | (2,445 | )    |   |        |       |   |   |       |       |  
|                                  | Change in tax reserves                    |                         |        | (301   | )    |   |        | (1,090 | ) |   |       |       |  
|                                  | Tax credits                               |                         |        | (1,451 | )    |   |        | (907   | ) |   |       | (1,108 | )
|                                  | Permanent differences                     |                         |        | 694    |      |   |        |       |   |   |       |       |  
|                                  | Other                                     |                         |        | (2     | )    |   |        | (352   | ) |   |       | 11     |  
|                                  |                                           |                         |        |        |      |   |        |        |  
|Total tax provision               |                                           | $                       | 18,610 |        |      | $ | 17,675 |        |   | $ | 7,581 |       
|                                  |                                           |                         |        |        |      |   |        |        |  
|                                  | Effective tax rate                        |                         |        | 33.2   | %    |   |        | 33.8   | % |   |       | 33.0   | %
|                                  |                                           |                         |        |        |      |   |        |        |  

F-28



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##### Table of Contents





|                                             |                                    |      |         |         |      |   |         |        |  
|-------------------------------------------- | ---------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------ | -
|                                             |                                    | 2005 |         |         | 2004 |  
|                                             |                                    |      |         |         |      |  
|Deferred Tax Assets:                         |                                    |      |         |         |      |   |         |       
|Accrued expenses                             |                                    | $    | 10,388  |         |      | $ | 30,042  |       
|Depreciation and amortization                |                                    |      | 7,613   |         |      |   | 3,965   |       
|Net operating loss and tax credit carryover  |                                    |      | 3,943   |         |      |   |        |       
|                                             |                                    |      |         |         |      |  
|                                             | Total deferred tax assets          |      |         | 21,944  |      |   |         | 34,007 |  
|                                             |                                    |      |         |         |      |  
|Deferred Tax Liabilities:                    |                                    |      |         |         |      |   |         |       
|Unearned revenue                             |                                    |      | (41,190 | )       |      |   | (31,760 | )     
|Amortization of intangibles and fixed assets |                                    |      | (643    | )       |      |   | (1,585  | )     
|                                             |                                    |      |         |         |      |  
|Total deferred tax liabilities               |                                    |      | (41,833 | )       |      |   | (33,345 | )     
|                                             |                                    |      |         |         |      |  
|Net deferred tax (liability) asset           |                                    | $    | (19,889 | )       |      | $ | 662     |       
|                                             |                                    |      |         |         |      |  
|Balance Sheet Classification:                |                                    |      |         |         |      |   |         |       
|Current:                                     |                                    |      |         |         |      |   |         |       
|                                             | Net current deferred tax liability |      | $       | (31,567 | )    |   | $       | (1,718 | )
|Non-current:                                 |                                    |      |         |         |      |   |         |       
|                                             | Net non-current deferred tax asset |      |         | 11,678  |      |   |         | 2,380  |  
|                                             |                                    |      |         |         |      |  
|Net deferred tax (liability) asset           |                                    | $    | (19,889 | )       |      | $ | 662     |       
|                                             |                                    |      |         |         |      |  



Accounting for Income Taxes




F-29



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##### Table of Contents





|    |                                      
|--- | -------------------------------------
|20. | QUARTERLY FINANCIAL DATA (UNAUDITED):



|                    |  |                                               |         |   |             |   |         |         |  |   |         |   |  |            |         |   |          |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|------------------- |  | --------------------------------------------- | ------- | - | ----------- | - | ------- | ------- |  | - | ------- | - |  | ---------- | ------- | - | -------- | - | ------- | ------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                    |  | Quarter Ended                                 |        
|                    |  |                                               |        
|                    |  | 2005                                          |         |   | 2004        |  
|                    |  |                                               |         |   |             |  
|                    |  | Dec. 31(1)                                    |         |   | Sept. 30(2) |   |         | June 30 |  |   | Mar. 31 |   |  | Dec. 31(3) |         |   | Sept. 30 |   |         | June 30 |  |   | Mar. 31 |  
|                    |  |                                               |         |   |             |   |         |         |  |   |         |   |  |            |         |   |          |   |         |         |  |   |         |  
|                    |  | (Dollars in thousands, except per share data) |        
|Revenues            |  | $                                             | 154,172 |   |             | $ | 152,896 |         |  | $ | 147,849 |   |  | $          | 153,880 |   |          | $ | 153,533 |         |  | $ | 147,969 |   |  | $ | 158,067 |   |  | $ | 125,912 |  
|Gross profit        |  | $                                             | 55,517  |   |             | $ | 50,508  |         |  | $ | 45,336  |   |  | $          | 43,629  |   |          | $ | 53,780  |         |  | $ | 44,102  |   |  | $ | 45,669  |   |  | $ | 35,790  |  
|Gross profit margin |  |                                               | 36.0    | % |             |   | 33.0    | %       |  |   | 30.7    | % |  |            | 28.4    | % |          |   | 35.0    | %       |  |   | 29.8    | % |  |   | 28.9    | % |  |   | 28.4    | %
|Operating income    |  | $                                             | 13,819  |   |             | $ | 16,510  |         |  | $ | 12,652  |   |  | $          | 12,029  |   |          | $ | 19,216  |         |  | $ | 11,811  |   |  | $ | 11,330  |   |  | $ | 9,204   |  
|Net income          |  | $                                             | 9,894   |   |             | $ | 10,699  |         |  | $ | 8,610   |   |  | $          | 8,175   |   |          | $ | 12,491  |         |  | $ | 8,131   |   |  | $ | 7,631   |   |  | $ | 6,365   |  
|Earnings per share: |  |                                               |         |   |             |   |         |         |  |   |         |   |  |            |         |   |          |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
| Basic             |  | $                                             | 0.37    |   |             | $ | 0.39    |         |  | $ | 0.31    |   |  | $          | 0.30    |   |          | $ | 0.46    |         |  | $ | 0.30    |   |  | $ | (0.95   | ) |  | $ | 0.31    |  
| Diluted           |  | $                                             | 0.35    |   |             | $ | 0.37    |         |  | $ | 0.30    |   |  | $          | 0.29    |   |          | $ | 0.44    |         |  | $ | 0.29    |   |  | $ | (0.95   | ) |  | $ | 0.24    |  






|    |                                                         
|--- | --------------------------------------------------------
|(1) | Included in the fourth quarter of 2005 is the impact of:



|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a $14,480 ($10,165 net of related income tax) reduction to
    previously estimated cost of workers compensation claims
    in recognition of continued favorable trends in the
    Companys insurance programs;
| 
| | a $3,565 ($2,503 net of related income tax) increase in
    incentive compensation expense attributable to the attainment of
    bonus targets in the fourth quarter of 2005; and                                 
| 
| | a $2,836 ($1,991 net of related income tax) increase in
    state unemployment tax expense due to fourth quarter state tax
    assessments.                                                                       



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Included in the third quarter of 2005 is the impact of a $7,777
    adjustment ($4,938 net of related income tax) to previously
    estimated cost of workers compensation claims in
    recognition of continued favorable trends in the Companys
    insurance programs.                                                                                                                                                                                                                                                                                              
|   
|(3) | Included in the fourth quarter of 2004 is the positive impact of
    an approximate $5,374 adjustment ($3,558 net of related
    income tax) to previously estimated cost of workers
    compensation claims in recognition of continued favorable trends
    in the Companys insurance programs. Also included is the
    positive impact of an approximate $5,463 adjustment ($3,616 net
    of related income tax) related to favorable medical benefit plan
    experience and the resulting adjustment to incurred by not
    reported claims at December 31, 2004.



|    |                 
|--- | ----------------
|21. | SUBSEQUENT EVENT





F-30



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##### Table of Contents



GEVITY HR, INC. AND SUBSIDIARIES





SCHEDULE II   VALUATION AND QUALIFYING
ACCOUNTS


ALLOWANCE FOR DOUBTFUL ACCOUNTS


(In thousands of dollars)


|           |  |           |     |               |  |            |        |              |  |   |     |  |  |   |     | 
|---------- |  | --------- | --- | ------------- |  | ---------- | ------ | ------------ |  | - | --- |  |  | - | --- | 
|Balance,   |  | Provision |     |               |  |            |        | Balance,    
|January 1, |  | for Bad   |     | Determined    |  | Account    |        | December 31,
|2005       |  | Debts     |     | Uncollectible |  | Recoveries |        | 2005        
|           |  |           |     |               |  |            |        |             
|$805       |  | $         | 598 |               |  | $          | (1,220 | )            |  | $ | 323 |  |  | $ | 506 | 

|           |  |           |     |               |  |            |      |              |  |   |     |  |  |   |     | 
|---------- |  | --------- | --- | ------------- |  | ---------- | ---- | ------------ |  | - | --- |  |  | - | --- | 
|Balance,   |  | Provision |     |               |  |            |      | Balance,    
|January 1, |  | for Bad   |     | Determined    |  | Account    |      | December 31,
|2004       |  | Debts     |     | Uncollectible |  | Recoveries |      | 2004        
|           |  |           |     |               |  |            |      |             
|$811       |  | $         | 348 |               |  | $          | (677 | )            |  | $ | 323 |  |  | $ | 805 | 

|           |  |           |     |               |  |            |      |              |  |   |     |  |  |   |     | 
|---------- |  | --------- | --- | ------------- |  | ---------- | ---- | ------------ |  | - | --- |  |  | - | --- | 
|Balance,   |  | Provision |     |               |  |            |      | Balance,    
|January 1, |  | for Bad   |     | Determined    |  | Account    |      | December 31,
|2003       |  | Debts     |     | Uncollectible |  | Recoveries |      | 2003        
|           |  |           |     |               |  |            |      |             
|$831       |  | $         | 305 |               |  | $          | (568 | )            |  | $ | 243 |  |  | $ | 811 | 

S-1