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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT

TO SECTIONS 13 OR 15(d) OF

THE SECURITIES
EXCHANGE ACT OF 1934



(Mark One)

|x |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2002.



or



| ̈ |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee required]
|- |  | ----------------------------------------------------------------------------------------------------------

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.)



|600 301 Blvd West, Suite 202             |  |           
|---------------------------------------- |  | ----------
|Bradenton, FL                            |  | 34205     
|(Address of principal executive offices) |  | (Zip Code)



(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)



Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. Yes  x    No ̈



Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ̈No  x



The aggregate market value of the voting stock of Gevity HR, Inc. held by non-affiliates (based upon the
March 19, 2003, $5.82 closing sale price for the Common Stock on the Nasdaq National Market) was approximately $78.5 million.



The number of shares of the Registrants common stock, $.01 par value per share outstanding as of March 19, 2003 was 20,901,224.



DOCUMENTS INCORPORATED BY REFERENCE



PART III  Portions of
Registrants Proxy Statement relating to the annual meeting of shareholders to be held May 22, 2003, are incorporated by reference in Part III.

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TABLE OF CONTENTS



|PART I.   |  |                                                                                      
|--------- |  | -------------------------------------------------------------------------------------
|ITEM 1.   |  | Business                                                                             
|ITEM 2.   |  | Properties                                                                           
|ITEM 3.   |  | Legal Proceedings                                                                    
|ITEM 4.   |  | Submission of Matters to a Vote of Security-Holders                                  
|         
|PART II.  |  |                                                                                      
|ITEM 5.   |  | Market for Registrants Common Equity and Related Stockholder Matters                
|ITEM 6.   |  | Selected Financial Data                                                              
|ITEM 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|ITEM 7A.  |  | Quantitative and Qualitative Disclosures about Market Risk                           
|ITEM 8.   |  | Financial Statements and Supplementary Data                                          
|ITEM 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|         
|PART III. |  |                                                                                      
|ITEM 10.  |  | Directors and Executive Offices of the Registrant                                    
|ITEM 11.  |  | Executive Compensation                                                               
|ITEM 12.  |  | Security Ownership of Certain Beneficial Owners and Management                       
|ITEM 13.  |  | Certain Relationships and Related Transactions                                       
|ITEM 14.  |  | Controls and Procedures                                                              
|ITEM 15.  |  | Principal Accountant Fees and Services                                               
|         
|PART IV.  |  |                                                                                      
|ITEM 16.  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                      



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PART I



Cautionary Note Regarding
Forward-Looking Statements



In connection
with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the Reform Act), Gevity HR, Inc. (Gevity or the Company) is hereby providing cautionary statements identifying important
factors that could cause the Companys actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of the Company herein, in other filings made by the
Company with the Securities and Exchange Commission, in press releases or other writings, or orally, whether in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as will result, are expected to, anticipated, plans, intends,
will continue, estimated, and projection) are not historical facts and may be forward-looking and, accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such known and unknown risks, uncertainties and other factors
include, but are not limited to, the following:



| | (i) |  | volatility of costs of workers compensation insurance coverage and profits generated from the workers composition component of the Companys service
offering under the Companys loss sensitive workers compensation programs;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | volatility of state unemployment taxes;
| | ---- |  | ---------------------------------------



| | (iii) |  | the uncertainties relating to the collateralization requirements related to as well as availability and renewal of the Companys medical benefit plans, general
insurance and workers compensation insurance programs for the worksite employees;
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) |  | uncertainties as to the amount the company will pay to subsidize the costs of medical benefit plans;
| | ---- |  | ----------------------------------------------------------------------------------------------------



| | (v) |  | possible adverse application of certain federal and state laws and the possible enactment of unfavorable laws or regulation;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------



| | (vi) |  | litigation and other claims against the Company and its clients including the impact of such claims on the cost, availability and retention of the Companys
insurance coverage programs;
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) |  | impact of competition from existing and new businesses offering human resources outsourcing services;
| | ----- |  | -----------------------------------------------------------------------------------------------------



| | (viii) |  | risks associated with expansion into additional markets where the Company does not have a presence or significant market penetration;
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------



| | (ix) |  | risks associated with the Companys dependence on key vendors and the ability to obtain or renew benefit contracts and general insurance policies at rates and
with retention amounts acceptable to the Company;
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (x) |  | an unfavorable determination by the Internal Revenue Service or Department of Labor regarding the status of the Company as an employer;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| | (xi) |  | the possibility of client attrition due to the Companys decision to increase the price of its services, including medical benefits;
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------



| | (xii) |  | risks associated with geographic market concentration;
| | ----- |  | ------------------------------------------------------



| | (xiii) |  | the financial condition of clients;
| | ------ |  | -----------------------------------



| | (xiv) |  | the effect of economic conditions in the United States generally on the Companys business;
| | ----- |  | -------------------------------------------------------------------------------------------



| | (xv) |  | the failure to properly manage growth and successfully integrate acquired companies and operations;
| | ---- |  | ---------------------------------------------------------------------------------------------------



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| | (xvi) |  | risks associated with providing new service offerings to clients;
| | ----- |  | -----------------------------------------------------------------



| | (xvii) |  | the ability to secure outside financing at rates acceptable to the Company;
| | ------ |  | ---------------------------------------------------------------------------



| | (xviii) |  | risks associated with third party claims related to the acts, errors or omissions of the worksite employees; and
| | ------- |  | ----------------------------------------------------------------------------------------------------------------



| | (xix) |  | other factors which are described in further detail in this Annual Report on Form 10-K and in other filings by the Company with the Securities and Exchange
Commission.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



ITEM 1.    BUSINESS



General



Gevity is a
leading United States provider of human capital management solutions. The Company offers its clients, which are typically small to medium-sized businesses with between five and one hundred employees, a broad range of products and services that
provide a complete solution for the clients human resources (HR) outsourcing needs. As of December 31, 2002, the Company served more than 6,600 clients, as measured by individual client Federal Employer Identification Numbers
(FEIN), with approximately 100,000 active worksite employees, and maintained offices in Florida, Texas, Georgia, Arizona, Minnesota, North Carolina, Tennessee, Alabama, Colorado, California and New York. The Companys products and
services include assistance with employee recruiting, performance management, training and development, benefits administration, payroll administration, governmental compliance, risk management, unemployment administration, and health, welfare and
retirement benefits.



The Companys services
are designed to improve the productivity and profitability of its clients businesses by:



| |  |  | allowing managers of these businesses to focus on revenue-producing activities by relieving them of the time-consuming and complex burdens associated with employee
administration;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enabling these businesses to attract and retain employees by providing health and retirement benefits to worksite employees on a cost-effective and convenient basis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | improving the cash management of these businesses with respect to payroll-related expenses; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | helping these businesses to better manage certain employment-related risks, including those associated with workers compensation and state unemployment taxes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



In order to utilize the
Companys products and services, the client transfers certain employment-related risks and liabilities to the Company and retains other risks and liabilities. In this context, the client and the Company are each viewed as and become a
co-employer of the clients worksite employees. In order to enter into a co-employer relationship, the Company operates as a Professional Employer Organization (PEO).



As a co-employer, employment-related liabilities are
contractually allocated between the Company and the client under a written Professional Services Agreement. Under the Professional Services Agreement, the Company assumes responsibility for and manages the risks associated with each clients
worksite employee payroll obligations, including the liability for payment of salaries and wages (including payroll taxes) to each worksite employee and, at the clients option, responsibility for providing group health, welfare and retirement
benefits to such individuals. These obligations of the Company are fixed, whether or not the client makes timely



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payment of the associated service fee. In this regard, it is important to understand that, unlike payroll processing service providers, the
Company issues to each of the clients worksite employees Company payroll checks drawn on the Company bank accounts. The Company also reports and remits all required employment information and taxes to the Internal Revenue Service
(IRS) and issues a Federal Form W-2 to each worksite employee under the appropriate Company FEIN. The Company assumes the responsibility for compliance with those employment-related governmental regulations that can be effectively
managed away from the clients worksite. The Company provides to each worksite employee workers compensation insurance coverage under the Companys insurance policy. The client, on the other hand, contractually retains the general
day-to-day responsibility to direct, control, hire, terminate and manage each of the clients worksite employees. The worksite employee services are performed for the exclusive benefit of the clients business. The client also remains
responsible for compliance with those employment-related governmental regulations that are more closely related to the day-to-day management of worksite employees.



The Company charges its clients a service fee that is designed to yield a profit to the Company and to cover
the cost of certain employment-related taxes, workers compensation insurance coverage and administrative and field services provided by the Company to the client. The component of the service fee related to administration varies according to
the size of the client, the amount and frequency of the payroll payments and the method of delivery of such payments. The component of the service fee related to workers compensation and unemployment insurance is based, in part, on the
clients historical claims experience. In addition, the client may choose to offer certain health, welfare and retirement benefits to its worksite employees. The cost of the selected plans is billed separately from the service fee. In addition
to the service fee and cost of selected benefit plans, billings to each client also include the wages and other employment related taxes of each worksite employee. The gross billings are invoiced at the time of delivery of each periodic payroll
delivered to the client.



The Company contracts
with a licensed insurance carrier for workers compensation insurance coverage for its worksite employees. In 2002, CNA Financial Corporation (CNA) was the provider of such insurance, and in 2003, member insurance companies of
American International Group, Inc. (AIG) will provide such insurance. The Company pays the premiums for this coverage and passes along to its clients some or all of the costs attributable to the coverage for their respective worksite
employees. The Company does not act as an insurance company and is not licensed in any state as an insurance company. However, as part of managing its workers compensation programs in 2003 the Company will operate a wholly owned Bermuda based
insurance company. The Company does assume certain workers compensation risk as a result of providing its services. For a more detailed analysis of the CNA and AIG programs, see Workers Compensation Plans beginning on page 10.



The Company has an incentive to minimize its
workers compensation and unemployment tax costs because the Company bears the risk that its actual costs will exceed those billed to clients, and conversely, the Company profits on these components of its service offerings in the event that it
effectively manages such costs.



The Company also
provides on a very limited basis HR products and services to small and medium-sized businesses without entering into a co-employer relationship. These products and services range from basic payroll processing to payroll processing and HR management
solutions that include most of the Companys product offerings. These services have not been actively marketed to new clients and revenues generated from such services are not significant.



References in this report to the Company or
Gevity include Gevity HR, Inc. and its consolidated wholly-owned subsidiaries unless the context indicates otherwise. The Company was originally organized in 1993 as a limited partnership (the Partnership) to acquire the
assets of a PEO business that had operated since 1984. Gevity HR, Inc. (formerly known as Staff Leasing, Inc.) was formed in 1997 to acquire all of the limited partnership interests in the Partnership held by various investors, including certain
executive officers, directors, and employees of the Company, pursuant to a reorganization (the Reorganization). In the Reorganization, which was concluded in July 1997 simultaneously with the Companys initial public offering,
Gevity acquired all of the limited partnership interests in the Partnership, becoming the sole limited partner and



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in effect incorporating the business of the Company. In September 1997 as part of the Reorganization, all of the issued and outstanding
capital stock of Staff Acquisition, Inc., the general partner of the Partnership, was acquired from Charles S. Craig.



On August 3, 2001 the Company began doing business using the name Gevity HR. The new identity was intended to (i) emphasize
that the Company provides a broad range of HR solutions to its clients; (ii) confirm the Companys objective of building long-term relationships with its clients; and (iii) avoid the connotation that the Company is a staffing firm. At its 2002
Annual Meeting of Shareholders, the Companys shareholders voted to amend the Companys Articles of Incorporation to change the name of the Company to Gevity HR, Inc.



Recent Events



On March 6, 2003, the Company announced that it executed a letter of intent on March 5, 2003 for the sale of its convertible preferred
stock to an affiliate of Frontenac Company LLC (Frontenac) in a private placement for a purchase price of $30 million. Frontenac is a Chicago-based private equity investment firm with over $1 billion under active management.



The Company also announced on March 6, 2003 that
it executed a letter of intent with Charles S. Craig on March 5, 2003, to purchase 3.1 million shares of Gevity common stock held by Mr. Craig, at a per share price of $5.44 less $.06 per share to reimburse the Company for related expenses. The
price of $5.44 per share is the average of the closing prices of the Companys common stock for the five business days preceding the execution of such letter of intent. Mr. Craigs holdings in the Company will be reduced from 4.9 million
shares to 1.8 million shares (or 9.9% of the Companys outstanding shares of common stock as of March 5, 2003) after the purchase is completed.



Proceeds from the sale of the convertible preferred stock will provide additional capital to the Company to enable it to pursue its growth
strategy, including possible acquisitions. In addition, $16.6 million of the proceeds will be used by the Company to fund the purchase of Mr. Craigs shares of common stock.



Under the terms of the agreement with Frontenac, dividends will accrue on the convertible preferred stock at
the greater of (i) 4% of its stated value or (ii) on an as converted basis, the amount declared on the Companys common stock on a per share basis. The convertible preferred stock will be convertible into common stock at a per share price of
$5.44 which is average of the closing prices of the Companys common stock for the five business days preceding the execution of this letter of intent. This could result in the issuance of up to 5.5 million shares of common stock upon
conversion, or approximately 23.6% of the outstanding shares of common stock as of March 5, 2003, on an as-converted basis, after the repurchase of Mr. Craigs shares.



As part of the financing, two representatives of Frontenac will join the Board of Directors of the Company.
The closing of the private placement with Frontenac is subject to the Company and Frontenac entering into a definitive agreement, approval of the Companys Board of Directors, shareholder approval and other customary conditions. Such
shareholder approval will be sought at the Annual Meeting of Shareholders to be held on May 22, 2003. The closing of the private placement and the repurchase of Mr. Craigs shares will occur promptly after such shareholder approval is received.



HR Outsourcing Industry



The HR outsourcing industry began to evolve in the early
1980s, largely in response to the difficulties faced by small to medium-sized businesses in procuring workers compensation and group health insurance coverage on a cost-effective basis and operating in an increasingly complex legal and
regulatory environment. While various service providers, such as payroll processing firms, benefits and safety consultants and temporary staffing firms, were available to assist these businesses with specific tasks, PEOs began to emerge as providers
of a more comprehensive outsourcing solution to these burdens. PEOs combined the employees of a large number of clients and leveraged their purchasing power to obtain discounted workers compensation and group health insurance policies.



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The Company
believes that the key factors driving demand for HR outsourcing services include:



| |  |  | the increasing acceptance in the small to medium-sized business community of outsourcing certain non-core business functions such as those offered by the Company;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the increasing complexity of employment-related governmental regulations and the related costs of compliance;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the size and growth of the small to medium-sized business community in the United States;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the need of businesses to manage the cash expenditures associated with payroll and payroll-related expenses, including workers compensation insurance; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the need to provide competitive health, welfare and retirement benefits on a cost-effective and convenient basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------



Another factor affecting the HR outsourcing industry has been
the increasing recognition and acceptance by regulatory authorities of PEOs and the co-employer relationship created by PEOs, with the development of licensing or registration requirements at the state level. The Company and other industry leaders,
in concert with the National Association of Professional Employer Organizations (NAPEO), have worked with the relevant government entities for the establishment of a regulatory framework that would clarify the roles and obligations of
the PEO and the client in the co-employer relationship. This framework generally imposes financial responsibility on the PEO in order to promote the increased acceptance and further development of the industry. See Industry
Regulation  State Regulation beginning on page 16.



Twenty-two states, including five states where the Company has offices (Florida, New York, Texas, Colorado, Tennessee and Minnesota), have passed laws that have licensing, registration or other regulatory requirements for PEOs and
several states are considering such regulation. Such laws vary from state to state, but generally codify the requirements that the PEO must reserve the right to hire, terminate and discipline worksite employees and secure workers compensation
insurance coverage. In certain instances, the Company delegates or assigns such rights to the client. The laws also generally provide for monitoring the fiscal responsibility of PEOs and, in many cases, the licensure of the controlling officers of
the PEO.



Since the late 1990s, due to
changes in the workers compensation and the group health insurance markets, many PEOs have encountered significant difficulties in obtaining workers compensation and group health benefit insurance policies. Many PEOs have exited the
industry due to the lack of available workers compensation and group health benefit insurance programs or due to their inability to provide the financing security required by insurance companies in order to obtain insurance coverage.



Many of the surviving PEOs, especially the
larger ones, are capitalizing on the co-employment model and transforming their businesses into full-service HR outsourcing companies while still offering workers compensation and group health benefit insurance programs.



Products and Services



The Company provides a broad range of products and services
to its clients. These products and services are primarily offered to the Companys clients on a bundled or all inclusive basis. Health, welfare and retirement programs may be elected to be offered to worksite employees at the option
of each client. The Company provides these products and services to its clients through the following core activities:



Find the Right People.    The Company assists its clients in finding the right people for their businesses by
providing:



|      recruiting process best
practices   |  |       candidate assessment           
|------------------------------------------ |  | --------------------------------------
|      job description development         |  |   resume screening                   
|      new hire salary information         |  |   pre-employment assessment          
|      recruitment advertising
services    |  |   background screening               
|      interview guidelines and
assistance |  |   drug screening                     
|                                           |  |       new hire forms                 
|                                           |  |       employee orientation
guidelines



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Develop and
Manage People.    The Company assists its clients in developing and managing their people by providing:



|      employee development best practices
      employee information management       employee skills assessment       performance management solutions |  |       development and training   employee orientation programs   Gevity eLearning   HR video
library   custom employee development programs
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



Retain the Best Employees.    The Company assists its clients in retaining the best employees for their businesses by providing:



|      health benefits (medical, dental and
vision)       retirement plans  401(k) and IRAs       welfare benefits (voluntary life insurance, AD&D, short-term and long-term
disability) |  |       flexible spending accounts       employee assistance programs       employee retention best practices       employee discounts       reward and recognition programs
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Manage the Paperwork.    The Company assists its clients in managing employment related paperwork by providing the following services:



|      401(k) plan administration       Section 125, FMLA and COBRA administration       time and attendance systems       payroll processing, employment related tax filings and
administration |  |       Form W-2 preparation       unemployment claims administration       benefits annual enrollment administration       benefits claims processing (health, disability and workers
compensation)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Protect our clients business.    The Company assists its clients in protecting their businesses by providing:



|      HR policies forms and best
practices       regulatory compliance and guidance       wage and hour guidance       employee progressive counseling process       employee hiring and termination guidelines |  |       employee exit interview guidelines and
forms       workers compensation insurance       workplace safety guidance       re-employment toolkit
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



Clients



Overview.    As
of December 31, 2002, the Companys customer base consisted of over 6,600 client companies with an average of 15.0 employees.



The Company had clients classified in over 500 Standard Industrial Classification (SIC) codes. The following table shows the
Companys client distribution by major SIC code industry grouping for the years indicated, ranked as a percentage of gross billings to clients:



|Client Billings               |  | 2000  |   |  | 2001  |   |  | 2002  |  
|----------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|Services(1)                   |  | 24.4  | % |  | 28.2  | % |  | 34.8  | %
|Construction                  |  | 30.4  |   |  | 26.1  |   |  | 17.5  |  
|Manufacturing                 |  | 12.4  |   |  | 12.6  |   |  | 12.9  |  
|Retail Trade                  |  | 8.8   |   |  | 9.2   |   |  | 10.3  |  
|Restaurants                   |  | 7.5   |   |  | 6.3   |   |  | 4.5   |  
|Finance/Insurance/Real Estate |  | 4.1   |   |  | 5.1   |   |  | 7.8   |  
|Agriculture                   |  | 4.9   |   |  | 4.1   |   |  | 3.0   |  
|Wholesale Trade               |  | 3.9   |   |  | 4.7   |   |  | 6.8   |  
|Transportation                |  | 3.2   |   |  | 3.4   |   |  | 2.1   |  
|Other                         |  | 0.4   |   |  | 0.3   |   |  | 0.3   |  
|                              |  |       |   |  |       |   |  |       |  
|Total                         |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
|                              |  |       |   |  |       |   |  |       |  

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|(1) |  | The Services category consist principally of clients in the following industries: 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Company
delivers its services through a combination of dedicated client services professionals located in the field offices and at the Companys headquarters, as well as through the Gevity HR Central portal. In order to provide proactive client
relationship management, each of the Companys clients has been assigned a single client services professional to serve as the client relationship manager. This allows the client to interface with the Company through a single point of contact.



Client Selection and Retention
Strategy.    Historically, the Companys sales force sold its services to all businesses within an established client selection criteria. As a result, the Companys client base has contained significant segments of
businesses with fewer than five employees, start-up businesses and small construction businesses that tend to be volatile and less likely to succeed than larger businesses with longer operating histories in less cyclical industries.



During 2000, the Company modified its selection criteria for
new clients to restrict the solicitation of businesses with fewer than five employees and those paying wages substantially below the average for their trade or business. At that time, the Company modified its pricing model to take into account
factors such as the size of the client based on worksite employee count, competitiveness of wages and payroll volume, and the length of time the client has been in business. Additionally, the Company decided to exit certain high-risk industry
segments and terminated all clients within those segments. In 2001, the Company further refined its client selection criteria for new business by targeting clients with a lower-risk profile. The Company considers industries to be high-risk if there
is a likelihood of a high frequency of on-the-job accidents involving worksite employees or a likelihood that any such accidents will be severe.



By no longer selling its services to high-risk clients, the Company believes that it will reduce the volatility of its earnings that are
attributable to the cost of its workers compensation programs. Volatility in workers compensation costs arises due to the complexity in projecting the number of accidents, the ultimate severity of such accidents, and the time over which
claims must be paid.



As part of its current
client selection strategy, the Company offers its services to businesses within specified SIC codes. All prospective clients are also evaluated individually on the basis of total predicted profitability. This analysis takes into account
workers compensation risk and claims history, unemployment claims history, payroll adequacy, and credit status. With respect to potential clients operating in certain industries believed by the Company to present a level of risk exceeding
industry norms, more rigorous approval requirements must be met before the Company agrees to provide services to the client. This process may include an on-site inspection and review of workers compensation and unemployment claims experience
for the last three years. In addition, under the terms of the Companys workers compensation agreement, prospective clients operating in certain industries or with historically high workers compensation insurance claims experience
must also be approved by the Companys insurance carrier before the Company enters into a contract to provide services.



The Company maintains a client review program that includes a detailed profitability and risk analysis of all its clients. Based on the
results of these analyses, the Company may modify its pricing, or if necessary, terminate certain clients that the Company believes would otherwise be detrimental or not contribute to its long-term profitability. For example, in February 2002, the
Company reduced its overall risk profile by terminating all clients in the roofing and trucking industries.



Due to general market increases in the costs of insurance related to workers compensation and health benefits, the Company
implemented a general price increase as of January 1, 2002 and 2003 for most of its clients.



The Companys client retention rate for 2002 was 74.4% The Company uses the NAPEO standard for measuring client retention, which is computed by dividing the number of clients at the end of the
period by the sum of the number of clients at the beginning of the period plus the number of clients added during the period. The client retention rate is affected by a number of factors including the natural instability of the small to



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medium-sized business market and clients that were terminated by the Company for reasons that include unacceptable risk and low profitability
to the Company.



In order to increase retention
of desired clients, the Company implemented several client care initiatives focused on improving client service. For example, each client has been assigned a single relationship manager with proactive responsibility to enrich and broaden the client
experience through a single point of contact with the Company. In addition, the Company has fully deployed the Oracle Customer Relationship Management System that allows the Company to quickly respond to and monitor client issues, track response
time of client service professionals, and provide better overall client service. The Company also contracts with outside consultants to perform customer satisfaction surveys to gain a better understanding of the reasons that may cause clients to
terminate their business relationship with the Company.



Professional Services Agreement.    All clients are required to enter into the Companys Professional Services Agreement. The Professional Services Agreement provides for an initial one-year term,
subject to termination by the Company or the client at any time upon 30 days prior written notice. After the initial term the contract may be renewed, terminated or continued on a month-to-month basis. Following the initial term, most contracts are
continued on a month-to-month basis. Based on the results of a financial review, the Company may require the owners of client companies to personally guarantee the clients obligations under the Professional Services Agreement.



The Company retains the ability to terminate the Professional
Services Agreement as well as its co-employment relationship with the worksite employees immediately upon non-payment by a client. The Company manages its credit risk through the periodic nature of payroll, client credit checks, owner guarantees,
the Companys client selection process and its right to terminate the Professional Services Agreement and the co-employment relationship with the worksite employees.



Employment-related liabilities are generally allocated between the Company and the client pursuant to the
Professional Services Agreement, with the Company assuming responsibility for worksite employee payroll obligations and for compliance with certain employment-related governmental regulations. On the other hand, the client remains responsible for
compliance with the employment-related governmental regulations that are more closely related to the daily supervision, direction and control of worksite employees. In some cases, employment-related liabilities are shared between the Company and the
client. The following table summarizes



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the general division of responsibilities for employment related regulatory compliance under the Professional Services Agreement:



|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 withholding provisions of the Internal Revenue Code; (ii) state and/or local income tax withholding provisions; (iii) FICA; (iv) 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; (iii) claims processing        COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986) continuation
coverage for employees covered under health plans sponsored by Gevity        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 worksite employee        Fair Labor Standards Act and the Family and Medical Leave Act of 1993* |  |       Worksite and employee safety under the
Occupational Safety and Health Act (OSHA) and related or similar Federal, state or local 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 similar, related or like Federal, state or local laws, regulations, ordinances and statutes        Professional licensing and liability        Internal Revenue Code Sections 414(m), (n) and (o) relating to client maintained benefit plans        Laws affecting the assignment and ownership of intellectual property rights
including, but not limited to, inventions, whether patentable or not, any patents resulting therefrom, copyrights and trade secrets        Worker Adjustment and Retraining Notification Act        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 (including provisions thereunder relating to clients premises)        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 and the Family and Medical Leave Act of 1993*

---

|* |  | Gevity and the client are each responsible for certain provisions under the terms of each Act.
|- |  | ----------------------------------------------------------------------------------------------



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Sales and Marketing



The Company markets its services through a
direct sales force, which as of December 31, 2002 consisted of approximately 160 sales associates. In order to exercise more control over the client selection process, the Company uses a direct sales force rather than selling through agents. The
Companys sales force is distributed throughout its branch offices. The Company plans to expand its national coverage and add sales offices in major metropolitan areas over the next few years as it targets higher wage employees in white-collar
businesses. The Companys sales associates are compensated by a combination of salary and commission that has, for top producers, generated annual earnings in excess of $250,000.



As the Companys focus has shifted to selling its services to lower-risk, higher paying clients, an
associated change has been required in the composition of the sales force. As a result, the Company has revised the profile of its targeted sales candidates and has also restructured its hiring practices.



In addition, the Company expanded and improved its training
and orientation programs. For many years, the Company provided a formal one-week training program for new sales hires, together with on-the-job training. In the fourth quarter of 2002, the Company implemented a comprehensive four-week training
program for all new sales associates and also designed a new one-week training program for all existing sales associates. Both training courses emphasize the benefits available to clients through the Companys expansive technology-based service
delivery model and also analyzes the Companys sales process.



The Company also restructured the compensation system of its sales force, effective January 1, 2003. Historically, sales associates had no defined sales territory and earned commissions based entirely on their individual
production levels. In certain instances, this led to internal competition as multiple sales associates competed against each other for the same potential clients. The new sales model subdivides all markets into individually assigned and identified
sales territories. The new compensation structure pays a higher base salary to attract more qualified sales candidates and provides an incentive based on the output of the full market, thus facilitating a collaborative environment between sales
associates.



The Company generates sales leads
from various sources as well as from direct sales efforts and inquiries. Each sales associate visits his or her clients periodically in order to maintain an ongoing relationship and to seek new business referrals. The Company also generates sales
leads from referral relationship partners and an information database of small businesses. The Company uses a referral incentive program with its relationship partners to encourage increased referral activity. Further, the Company generates sales
leads through contacts produced by its telesales group, which makes calls to prospective clients identified from industry data, purchased lists and other sources.



Vendor Relationships



The Company provides benefits to its worksite employees under arrangements with a number of vendors. The maintenance of insurance plans
including workers compensation plans and health benefit plans that cover worksite employees is a significant part of the Companys business. If the Company were required to obtain replacement contracts, such replacement could cause a
significant disruption to the Companys business and possible dissatisfaction with the Companys service offering leading to a decrease in client retention and an adverse effect on the Companys future results of operations or
financial condition.



Workers Compensation Plans



The Companys workers
compensation carrier in 2001 and 2002 was CNA. For 2000, the Companys workers compensation carriers were CNA and, for coverage in the State of Texas, the Texas Workers Compensation Fund (the Texas Fund). In states where
private insurance is not permitted, worksite employees are covered by state insurance funds. Commencing with the policy year which began on January 1, 2003, AIG became the Companys workers compensation carrier under a one-year agreement.



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The CNA
arrangement is an insured loss sensitive program that provides insurance coverage for claims incurred in each plan year but which will be paid out over future periods. Under the CNA program the Company has individual stop loss coverage at $1 million
per occurrence and aggregate stop loss coverage for individual claims that in total exceed the aggregate stop loss amount of 130% of expected losses as determined by CNA. The actual premium payable to CNA is determined based on the industries
serviced by the Company and the losses incurred under the program. The Company retains liability for claims paid during the first year of each program. For the 2000 and 2001 CNA programs, the Company guarantees that the premiums paid to CNA during
the 2000 and 2001 plan years will earn an annual rate of return equal to seven percent. For the 2002 program the guaranteed rate of return on paid premiums is four and one-quarter percent. The Company is required to pay additional premiums to CNA if
the actual return earned by the paid premiums is less than the guaranteed rate of return applicable to each CNA program. The Company has made guaranteed payments in prior years and expects to do so in the future. Additional premium calls may be made
by CNA in later years if the premiums paid by the Company in the first year of each program are not sufficient to fund all claims to be paid under such program, subject to the aggregate stop loss coverage amount and the per accident stop loss
coverage amount.



The Company is required to
provide collateral to CNA based on CNAs total projected claims covered under each program. The payment of first year claims by the Company and premium payments to fund claims to be paid by CNA in later years reduce the total collateral
required to be provided by the Company. The required collateral can be provided in the form of deposits paid to CNA, cash and short-term investments placed into a trust account, letters of credit, and surety bond collateral provided by independent
surety bond providers.



The following table
summarizes the adjusted specific financial provisions related to the CNA workers compensation program for the 2000, 2001 and 2002 program years:



|Year Ended              |  | 2000 Program Year |            | 2001 Program Year |   | 2002 Program Year
|----------------------- |  | ----------------- | ---------- | ----------------- | - | -----------------
|First Year Paid Losses  |  | $                 | 26,000,000 |                   | $ | 24,945,600       
|Insurance Premiums Paid |  |                   | 49,000,000 |                   |   | 47,800,000       
|Collateral Requirements |  |                   | 34,000,000 |                   |   | 23,998,000       



The 2002
program year is subject to final audit in 2003, and may be subject to further collateral adjustments at that time.



For 2000, the Texas Fund was the provider of workers compensation insurance for worksite employees based in Texas. The Texas Fund
program was a guaranteed cost insurance arrangement that expired on December 31, 2000. The agreement with the Texas Fund was not renewed beyond the original one-year term. The Company has no workers compensation liability with respect to
claims by Texas based employees that arose in 2000 for amounts in excess of those paid to the Texas Fund.



Prior to January 1, 2000, the Companys workers compensation coverage was provided by Liberty Mutual Insurance on a guaranteed
cost basis. Amounts due under this program were a fixed percentage of the Companys workers compensation payroll and were paid on a monthly basis. The Company has no liability in excess of such amounts paid, for periods prior to January
1, 2000.



Health Benefit Plans



The Company partners with premier managed care companies to
provide health insurance to its worksite employees. Blue Cross Blue Shield of Florida (BCBS) is the primary partner delivering health care to Florida worksite employees, although Capital Health Plans provides HMO coverage to worksite
employees in the Tallahassee, Florida region. The Companys policy with BCBS is a three-year minimum premium arrangement entered into as of January 1, 2000. The Company renewed its policy with BCBS as of January 1, 2003 for an additional
three-year term. Pursuant to this arrangement, the Company is obligated to reimburse BCBS for the



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cost of the claims incurred by participants under the plan, plus the cost of plan administration. The administrative costs per covered
worksite employee associated with this policy are specified by year and the stop loss coverage is provided at the level of 115% of projected claims. The Companys obligation to BCBS is secured by letters of credit. As of December 31, 2002, the
letter of credit for BCBS was $6,000,000. The $6,000,000 approximated one months claims payments. The new three-year policy, effective January 1, 2003 allows for an adjustment to the letter of credit amounts based on premium volume and
increases claims payment factor to maximum of two months of expected claims run-out.



As of December 31, 2002, BCBS no longer covers clients based in Alabama. Worksite employees of Alabama-based clients are now covered by client sponsored plans.



In Minnesota, HealthPartners (Minnesota) provides health
coverage to Minnesota worksite employees.



Aetna
U. S. Healthcare (Aetna) is the primary health care provider for worksite employees throughout the remainder of the country. Under the Aetna health plan, worksite employees must work a minimum of 25 hours per week to be eligible for
coverage. Additional eligibility criteria may be established in each clients benefits contract. With respect to the Aetna health plan, the Company requires each client that elects health coverage to meet minimum contribution and worksite
employee participation rates. The Aetna 2002 health plan is subject to a guaranteed cost contract that caps the Companys annual liability.



The Companys dental plans, which include both a PPO and HMO offering, are provided by Aetna for all worksite employees who elect
coverage. The Aetna dental plan is subject to a guaranteed cost contract that caps the Companys annual liability.



In addition to health and dental coverage, the Company offers various other insurance programs to worksite employees such as vision care,
life, accidental death and dismemberment, short-term disability and long-term disability.



Information Technology



The Company has invested approximately $48 million and is continuing to invest capital resources in the development and enhancement of its information and technology infrastructure, including computer hardware and software and
telephony. This investment is intended to better serve the Companys client base, achieve a high level of client satisfaction and to allow the Company to improve efficiencies in its operations.



These computer systems provide the Company with the capability
to promptly and accurately deliver payroll and related services and generate comprehensive management reports. The Companys information systems manage all data relating to worksite employee enrollment, payroll processing, benefits
administration, management information and other requirements of the Companys operations. The current systems have high-volume payroll processing capabilities that allow the Company to produce and deliver weekly payrolls to its clients, each
customized to the needs of such clients. In 2002, the Company processed approximately 74,000 payroll checks per week.



The Company processes payroll for all of its worksite employees using Oracles Human Resource Management System (HRMS)
and payroll processing application. The Oracle system enables the Company to effectively manage its existing operations and maintain appropriate controls.



The Company provides client services through the use of the Oracle Customer Relationship Management (CRM) system. The CRM
system allows the Company to more quickly respond to and monitor client issues, track response time of customer service representatives, and provide clients with a better overall customer service experience.



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The Company
has continued its development and deployment of Gevity HR Central, an online client and employee portal. Gevity HR Central allows clients to input their payroll data directly into the Companys payroll applications via the Internet. Clients can
regularly add or delete employees, view reports, and change payroll information. Gevity HR Central provides real time access to Gevitys entire suite of HR products and services. Gevity HR Central is fully integrated with the companys
HRMS and payroll engines, CRM solution and financial suite, as well as the Companys comprehensive line of online products and services. This full integration results in improved client satisfaction, as well as improved operating margins.
Oracles Portal software provides the foundation, enabling a robust, client configurable portal, while Gevitys custom developed software provides additional ease of use and service capabilities.



Gevity HR Central allows the Company to service its clients 24
hours a day with increased accuracy and efficiency. Gevity HR Central is updated regularly to increase its functionality. Gevity HR Central is intended to serve as a human resource information portal for clients providing a variety of payroll and
human resource tools, templates and information. At the end of 2002, payroll information for approximately 70% of the Companys worksite employees was submitted over the Internet. Usage of this technology is expected to increase in 2003 as
almost 80% of new clients obtained in 2002 opted to use Gevity HR Central when reporting payroll information to the Company.



The combination of the Oracle systems for access and functionality and the Gevity HR Central online capabilities, creates a unique
solution capable of growing and adapting to the evolving needs of clients.



The Companys information technology staff consisted of 57 associates at December 31, 2002. The Company believes the development of its information technology is an integral part of achieving its
growth objectives and intends to continue to invest in its technology infrastructure.



Competition



The
HR consulting industry is highly fragmented. The Company believes that it is one of the largest co-employers of worksite employees in the United States in terms of active worksite employees and revenues. The Company considers its primary competition
to be PEOs, insurance agents, and fee-for-service providers, such as payroll processors and HR consultants. The market for human resource consulting services is expected to become increasingly competitive as larger companies, some of which have
greater financial resources than the Company and which have not traditionally operated in this industry, enter the market.



The key competitive factors in the human resource consulting industry are breadth and quality of services, price, reputation, financial
stability, and choice, quality and cost of benefits. The Company seeks to compete through its ability to provide a full-service HR solution to its clients through its advanced information technology solutions.



The Company believes that some smaller PEOs are exiting the
PEO industry due to increased collateral required by providers of workers compensation and health benefits insurance. In addition, an increase in costs and a lack of available workers compensation and health benefits insurance programs
is impacting these PEOs.



Internal Company Employees



As of December 31, 2002, the Company had
901 internal employees of whom 471 were located at the Companys headquarters in Bradenton, Florida. The remaining employees were located in the Companys branch offices. None of the Companys internal employees is covered by a
collective bargaining agreement.



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Industry Regulation



Numerous federal and state laws and
regulations relating to employment matters, benefit plans and employment taxes affect the operations of the Company. By entering into a co-employer relationship with its clients, the Company assumes certain obligations and responsibilities as an
employer under these laws. Because many of these federal and state laws were enacted before the development of non-traditional employment relationships, such as PEOs, temporary employment and other employment-related outsourcing arrangements, many
of these laws do not specifically address the obligations and responsibilities of non-traditional employers. In addition, the definition of employer under these laws is not uniform.



Some governmental agencies that regulate employment have
developed rules that specifically address issues raised by the relationship among PEOs, clients and worksite employees. Such regulations are relatively new and, therefore, their interpretation and application of these regulations by administrative
agencies and Federal and state courts are limited or non-existent. The development of additional regulations and interpretation of existing regulations can be expected to evolve over time. In addition, from time to time, states have considered, and
may in the future consider, imposing certain taxes on gross revenues or service fees of the Company and its competitors.



The Company believes that its operations are currently in compliance in all material respects with applicable Federal and state statutes
and regulations.



Employee Benefit Plans



Effective April 1, 1997, the Company began to offer a 401(k)
retirement plan, designed to be a multiple employer plan under the Internal Revenue Code of 1986, as amended (the Code) Section 413(c). This plan design enables owners of clients and highly compensated worksite employees, as
well as highly compensated internal employees of the Company, to participate. These persons were excluded from the single employer 401(k) retirement plan offered by the Company prior to April 1, 1997, in order to avoid issues of discrimination in
favor of highly compensated employees. Generally, employee benefit plans are subject to provisions of both the Code and the Employee Retirement Income Security Act (ERISA).



Employer Status.    In order to qualify for favorable tax treatment under the
Code, the plans must be established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an employer of certain workers for federal employment tax purposes if an employment relationship exists
between the entity and the workers under the common law test of employment. In addition, the officers of a corporation are deemed to be employees of that corporation for federal employment tax purposes. The common law test of employment, as applied
by the Internal Revenue Service (IRS) involves an examination of many factors to ascertain whether an employment relationship exists between a worker and a purported employer. Such a test is generally applied to determine whether an
individual is an independent contractor or an employee for federal employment tax purposes and not to determine whether each of two or more companies is a co-employer. Substantial weight is typically given to the question of whether the
purported employer has the right to direct and control the details of an individuals work. The courts have provided that the common law employer test applied to determine the existence of an employer-employee relationship for federal
employment tax purposes can be different than the common law test applied to determine employer status for other federal tax purposes. In addition, control and supervision have been held to be less important factors when determining employer status
for ERISA purposes.



On May 13, 2002, the IRS
released guidance applicable solely to the tax-qualified status of defined contribution retirement plans maintained by PEOs. In that guidance, the IRS declared that it would not assert a violation of the exclusive benefit rule under Section 401(a)
of the Code if a PEO that maintains a single employer 401(k) retirement plan for worksite employees takes certain remedial action by the last day of the first plan year beginning on or after January 1, 2003.



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The Company
maintains a frozen single employer 401(k) retirement plan benefiting certain worksite employees and intends to take remedial action to qualify for the relief provided under the IRS guidance within the applicable deadline. Since the plan has been
frozen since April 1, 1997, and the assets in the plan are less than $4 million, this change is not expected to have a material effect on the Companys financial condition and the future results of operations.



The status of the active multiple employer 401(k) retirement
plan maintained by the Company is unaffected by the recent IRS guidance.



ERISA Requirements.    Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines employer as any person acting directly as an employer, or indirectly in
the interest of an employer, in relation to an employee benefit plan. ERISA defines the term employee as any individual employed by an employer. The courts have held that the common law test of employment must be
applied to determine whether an individual is an employee or an independent contractor under ERISA. However, in applying that test, control and supervision are less important for ERISA purposes when determining whether an employer has assumed
responsibility for an individuals benefits status. A definitive judicial interpretation of employer in the context of a PEO or employee leasing arrangement has not been established.



If the Company were found not to be an employer for ERISA
purposes, its former 401(k) retirement plan would not comply with ERISA and could be subject to retroactive disqualification by the IRS. Further, the Company would be subject to liabilities, including penalties, with respect to its cafeteria plan
for the failure to withhold and pay taxes applicable to salary deferral contributions by its worksite employees. In addition, as a result of such finding the Company and its plans would not enjoy, with respect to worksite employees, the preemption
of state laws provided by ERISA and could be subject to varying state laws and regulation, as well as to claims based upon state common laws.



Federal Employment Taxes



As an employer, the Company assumes responsibility and liability for the payment of Federal and state employment taxes with respect to
wages and salaries paid to worksite employees. There are essentially three types of Federal employment tax obligations:(i) withholding of income tax governed by Code Section 3401, et seq.; (ii) obligations under the Federal Income Contributions Act
(FICA), governed by Code Section 3101, et seq.; and (iii) obligations under the Federal Unemployment Tax Act (FUTA), governed by Code Section 3101, et seq. Under these Code sections, employers have the obligation to withhold
and remit the employer portion and, where applicable, the employee portion of these taxes.



Among other employment tax issues related to whether PEOs are employers of worksite employees are issues under the Code provisions applicable to Federal employment taxes. The issue arises as to whether
the Company is responsible for payment of employment taxes on wages and salaries paid to such worksite employees. Code Section 3401(d)(1), which applies to Federal income tax withholding requirements, contains an exception to the general common law
test applied to determine whether an entity is an employer for purposes of Federal income tax withholding. The courts have extended this common law employer exception to apply for both FICA and FUTA tax purposes. Code Section 3401(d)(1)
states that if the person for whom services are rendered does not have control of the payment of wages, the employer for this purpose is the person having control of the payment of wages. The Treasury Regulations issued under Code
Section 3401(d)(1) state that a third party can be deemed to be the employer of workers under this Section for income tax withholding purposes where the person for whom services are rendered does not have legal control of the payment of wages.
Although several courts have examined Code section 3401(d)(1) with regard to PEOs its ultimate scope has not been delineated. Moreover, the IRS has to date relied extensively on the common law test of employment in determining liability for failure
to comply with Federal income tax withholding requirements.



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Accordingly,
while the Company believes that it can assume the withholding obligations for worksite employees, if the Company fails to meet these obligations, the client may be held jointly and severally liable. While this interpretive issue has not, to the
Companys knowledge, discouraged clients from utilizing the Companys services, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future.



State Regulation



While many states do not explicitly regulate PEOs, 22 states
including five states where the Company has offices (Florida, Colorado, Tennessee, Texas and Minnesota) have passed laws that have licensing, registration or other compliance requirements for PEOs and several states are considering such regulation.
Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. The Company holds licenses, is registered or otherwise compliant in all 22 states. Whether or not a state has licensing, registration or other
compliance requirements, the Company faces a number of other state and local regulations that could impact its operations.



EXECUTIVE OFFICERS OF THE REGISTRANT



The following table sets forth certain information with respect to each person who is an executive officer of the Company as indicated
below.



|Name               |  | Age |  | Position                                                               
|------------------ |  | --- |  | -----------------------------------------------------------------------
|Erik Vonk          |  | 50  |  | Chairman of the Board and Chief Executive Officer                      
|James F. Manning   |  | 73  |  | Chairman of the Board and Chief Executive Officer (resigned April 2002)
|John E. Panning    |  | 52  |  | Chief Financial Officer and Director                                   
|Lisa J. Harris     |  | 42  |  | Senior Vice President, Client Services and Chief Information Officer   
|Robert Minkhorst   |  | 56  |  | Senior Vice President, Marketing and Sales                             
|Gregory M. Nichols |  | 49  |  | Senior Vice President, General Counsel                                 



Erik
Vonk has served as Chairman of the Board of Directors and Chief Executive Officer since April 2002. He was retired from February 2001 to April 2002. Mr. Vonk was formerly President and Chief Executive Officer of Randstad North America from 1992
through 2001, a subsidiary of Randstad Holding NV, a worldwide staffing services provider, where he was responsible for organizing the North American operations. In addition, Mr. Vonk served as a member of the Executive Board of Bank Cantrade AG
from 1989 to 1992.



James F. Manningserved as Chairman of the Board of Directors and Chief Executive Officer from October 2001 until his resignation as Chairman and Chief Executive Officer in April 2002. He continued to provide services to the Company through June 7, 2002, when he
resigned from the employment of the Company. He was retired from May 1998 through October 2001. Mr. Manning was formerly with the Company from 1995 through 1998, serving as President of the Company from July 1995 to December 1996, as Vice Chairman
of the Board of Directors from January 1997 to May 1998. Mr Manning continues to serve as member of the Board of Directors of the Company.



John E. Panning has served as a director of the Company since May 1998. He has served as Chief Financial Officer since January
1997. In addition, he also served as Chief Operating Officer from May 2001 through May 2002. He served as a member of the Office of the Chairman from January 1997 until December 1999 at which time the Office of the Chairman was disbanded. Mr.
Panning was then appointed as a member of the Office of Chief Executive and served until July 1, 2000. From August 1996 to December 1996, he served as Senior Vice President of Finance of the Company; and from January 1995 to July 1996 he served as
Senior Vice President of Sales of the Company.



Lisa Harris has served as Senior Vice President, Client Services and Chief Information Officer since January 1999. Before joining the Company, she was Vice President, Information Services of Precision Response Corporation from
March 1996 to December 1998.



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Robert
Minkhorsthas served as Senior Vice President, Marketing and Sales since December 2002. From October 2002 to the commencement of his full-time position with the Company, he served as a consultant to Gevity. Before joining Gevity, Mr. Minkhorst
was with Royal Philips Electronics N. V. where he served from February 1994 to December 2000 as Chief Executive Officer of Philips Consumer Electronics North America. Prior to this, Mr. Minkhorst served as the Chief Executive Officer of Philips
Lighting for North and South America from February 1991 to February 1994.



Gregory M. Nicholsserved as Senior Vice President, Human Resources and General Counsel from January 2001 through October 2002, at which time Mr. Nichols focused his role with the Company as Senior Vice President and
General Counsel and continues to serve in such position. Before joining Gevity, Mr. Nichols served as Vice President of Human Resources and General Counsel of Starboard Cruise Services, Inc. from 1999 to 2000, and as Corporate Counsel for G. Neil
Companies from 1994 to 1998. Mr. Nichols is a member of the Florida Bar Association.



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SEC REPORTS



The Company is subject to the informational
requirements of the United States Securities Exchange Act of 1934, as amended (the Exchange Act), and in accordance therewith files reports and other information with the SEC. Such reports and information can be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, DC 20549, and at the SECs regional offices in New York, New York and Chicago, Illinois. In addition, the Companys common stock is quoted on the
NASDAQ National Market (NASDAQ) and the aforementioned material may also be inspected at the offices of NASDAQ.



The Companys annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on the Companys website at www.gevityhr.com, as soon as reasonably practicable after electronically filing such reports with the
SEC.



ITEM 2.    PROPERTIES



The Companys operations are conducted from its 107,511 square foot corporate headquarters located in Bradenton, Florida. The Company leases this facility under a lease which expires in November 2005, but which can be
renewed, at the option of the Company, for two additional five-year periods.



As of December 31, 2002 the Company leased space for its 40 offices located in Florida, Georgia, Texas, Arizona, Minnesota, North Carolina, Tennessee, Alabama, Colorado, California and New York. The
Company believes that its branch office leases, which generally have terms of one to five years, can either be renewed on acceptable terms or that other, comparable space can be located upon the expiration of any branch office lease without
significant additional cost to the Company. The Company considers its facilities to be adequate for its current and prospective operations.



ITEM 3.    LEGAL PROCEEDINGS



Lawrence E. Egle v. Gevity HR, Inc., et al. On April 30, 1999, a shareholder of the Company, brought a class action in the Twelfth Judicial Division, Manatee County, Florida against the
Company and certain of its directors alleging that the directors and senior officers of the Company, in order to entrench themselves in the management of the Company, breached their fiduciary duty to shareholders by failing to pursue a proposal from
Paribas Principal Partners to acquire the Company. Plaintiffs seek injunctive relief and unspecified damages including attorneys and experts fees. Negotiations continue between the Company and counsel for the putative plaintiff class in
an effort to finalize a definitive settlement agreement. Once finalized, any agreed upon settlement is subject to court approval following notice to the putative class. Management does not expect any settlement to have a material effect on the
Companys financial position.



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



From time to time the Company is made a party to claims based upon the acts or omissions of its clients
worksite employees. Some states, such as Florida, limit the liability of PEOs for the acts or omissions of worksite employees, other states do not provide a specific limitation. The Company believes that the client should retain liability and be
responsible for the acts or omissions of worksite employees and vigorously defends against such claims.



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



None.



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Part II.



ITEM 5.    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Market Information.    The Companys common stock is traded on NASDAQ under the ticker symbol
GVHR. The following table sets forth the high and low stock prices of the Common Stock as reported on NASDAQ and dividends for the last two fiscal years:



|Fiscal Year Ended December 31, 2001                       |  | High    |                         | Low |         | Dividends              
|--------------------------------------------------------- |  | ------- | ----------------------- | --- | ------- | -----------------------
|First Quarter Second Quarter Third Quarter Fourth Quarter |  | $ $ $ $ | 4.000 4.000 4.000 2.550 |     | $ $ $ $ | 2.625 2.563 0.890 1.050
|                                                         
|Fiscal Year Ended December 31, 2002                       |  | High    |                         | Low |         | Dividends              
|First Quarter Second Quarter Third Quarter Fourth Quarter |  | $ $ $ $ | 3.400 4.700 4.030 4.240 |     | $ $ $ $ | 1.660 2.850 2.560 2.890



Dividends.    The Company did not pay any cash dividends prior to March 14, 2001. The Board of Directors declared a cash dividend on November 22, 2002 of $0.05 per share of common stock, payable on January
31, 2003 to holders of record on January 15, 2003. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Companys operating results, financial
condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant.



Holders.As of March 19, 2003, there were 392 shareholders of record of the Companys common stock.
This number does not include beneficial owners of the common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.



SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS



|Plan category                                          |  | Number of securities to be issued upon exercise of outstanding
options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |      | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------------
|                                                       |  | (a)                                                                                         |  | (b)                                                                         |      | (c)                                                                                                                                        
|Equity compensation plans approved by security holders |  | 6,500,000                                                                                   |  | $                                                                           | 4.61 |                                                                                                                                            



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ITEM 6.    SELECTED FINANCIAL DATA



The following table sets forth certain selected historical financial and operating data of the Company as of the dates and for the periods indicated. The following selected financial data are qualified
by reference to, and should be read in conjunction with, the consolidated financial statements, related notes and other financial information included as Part II, Item 8 of this Form 10-K, as well as Managements Discussion and Analysis
of Financial Condition and Results of Operations beginning on page 21.



|                                                                |  | FOR THE YEARS ENDED DECEMBER 31,             
|--------------------------------------------------------------- |  | ---------------------------------------------
|                                                                |  | 1998                                         
|                                                                |  | (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|STATEMENT OF OPERATIONS DATA:                                  
|Revenues(1)                                                     |  | $                                            
|Gross profit                                                    |  | $                                            
|Operating income (loss)                                         |  | $                                            
|Net income (loss)                                               |  | $                                            
|Net income (loss) attributable to common shareholders           |  | $                                            
|Net income (loss) per share attributable to common shareholders |  |                                              
|Basic                                                          |  | $                                            
|Diluted                                                        |  | $                                            
|Weighted average common shares (in 000s)                       |  |                                              
|Basic                                                          |  |                                              
|Diluted                                                        |  |                                              
|STATISTICAL AND OPERATING DATA:                                
|Worksite employees at period end                                |  |                                              
|Clients at period end                                           |  |                                              
|Average number of worksite employees per client at period end   |  |                                              
|Capital expenditures                                            |  | $                                            
|BALANCE SHEET DATA:                                            
|Total assets                                                    |  | $                                            
|Long-term accrued workers compensation and health reserves     |  | $                                            
|Total shareholders equity                                      |  | $                                            

---

|(1) |  | Prior to December 31, 2002, the Company reported revenue on a gross basis rather than a net revenue basis. For a more detailed discussion of this accounting change,
please refer to the sections of item 7 captioned Revenue Recognition, beginning on page 23 and Accounting Change for Reporting Revenue, beginning on page 24.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 7.



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS



The following discussion contains forward-looking statements. The Companys actual results could differ materially from those
discussed in such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Form 10-K. See Cautionary Note Regarding Forward-Looking Statements beginning on
page 1. The following discussion should be read in conjunction with the Companys Consolidated Financial Statements and Notes thereto included elsewhere in this filing. Historical results are not necessarily indicative of trends in operating
results for any future period.



Overview



The Company is a leading United States provider of human
capital management solutions. The Company offers its clients, which are typically small to medium-sized businesses with between five and one hundred employees, a broad range of products and services that provide a complete solution for the clients
HR outsourcing needs. As of December 31, 2002, the Company served over 6,600 clients as measured by each clients FEIN and 7,200 as measured by separate client payroll cycles, with approximately 100,000 active, worksite employees. The company
operates branch offices in Florida, Texas, Georgia, Arizona, Minnesota, North Carolina, Tennessee, Alabama, Colorado, California and New York. The Companys products and services include assistance with recruiting, performance management,
training and development, benefits administration, payroll administration, governmental compliance, risk management, unemployment administration, and health, welfare and retirement benefits.



Revenues.    Revenues consist of
service fees charged by the Company to cover the costs of certain employment-related taxes, workers compensation insurance coverage and administrative and field services provided by the Company to its clients. The service fee charged by the
Company is invoiced along with each periodic payroll delivered to the client. The clients portion of health plan costs is charged separately and is not included in the service fee. Service revenues are recognized in the period in which the
worksite employee works. Under this accrual method of accounting, service fees relating to worksite employees with earned but unpaid wages at the end of each period are recognized as unbilled revenues and the related payroll costs for such wages are
accrued as a liability during the period in which the worksite employee earns wages. Subsequent to the end of each period, such wages are paid and the related service fees are billed.



Cost of Services.    Cost of services includes all direct costs associated with
the Companys revenue generating activities as well as employee benefit costs, workers compensation insurance and state unemployment taxes.



Employee benefit costs are comprised primarily of medical benefit costs, but also include costs of other employee benefits such as dental,
disability and group life insurance. Benefit claims incurred by worksite employees under the benefit plans are expensed as incurred according to the terms of each contract. Worksite employee participation and the clients contribution towards
the cost of the Companys health benefit plans are at an established minimum.



In certain instances, the Company opts to make a contribution toward the cost of the worksite employees medical benefit costs. In most small group health markets, medical benefit plan rates vary
based on the medical participants demographics. In order to offer a competitively priced business solution, the Company may offer reduced medical benefit plan rates to worksite employees with positive risk characteristics. The addition of
these selected worksite employees offsets potential adverse selection and helps to stabilize the overall medical benefit plan risk to the Company.



In addition, a medical benefit plan price subsidy may be used to mitigate medical benefit plan renewal rate increases in a particular
state or region of the country.



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The amount of
the Companys contribution toward medical benefit plan costs is determined as part of the annual enrollment pricing process. A health benefit plan subsidy in excess of a planned amount may occur when medical benefit cost inflation exceeds
expected inflation levels or when medical benefit plan enrollment in subsidized states is greater than anticipated.



The Company offers its medical benefit plans through partnerships with premier health care companies. See Health Benefit Plans
beginning on page 11. These companies have extensive provider networks and strong reputations in the markets in which the Company operates.



All of the Companys health care providers offer health maintenance organization (HMO) coverage. In Florida, preferred
provider organization (PPO) coverage is also provided. In the Aetna markets, PPO coverage was offered in 2002 where an HMO offering was not reasonably available. The Company believes that managed care services provided by an HMO are more
cost-effective to the Company and participants than those provided by a PPO. At the end of 2002, in excess of 70% of the Companys health plan participants received their coverage through an HMO.



The Companys workers compensation program from
January 1, 2000 through December 31, 2002 was with CNA except with respect to locations in states where private insurance is not permitted and which are covered by state insurance funds. Commencing with the 2003 policy year which began on January 1,
2003, AIG became the Companys provider of workers compensation insurance. The Companys workers compensation program is a loss sensitive program under which workers compensation costs and the accrual rate are based upon
payroll dollars paid to worksite employees, the specific risks associated with the work performed by worksite employees, the administrative costs of the program, the return on investment premium dollars paid as part of the program and the discount
rate used in determining the present value of future payments to be made under the program. The Company reviews the current program year claims information with its independent actuaries. The current accrual rate is adjusted based on current and
historical loss trends, fluctuations in the administrative costs associated with the program, actual returns on investment earned with respect to premium dollars paid and changes in the discount rate used to determine the present value of future
payments to be made under the program. In addition, each year, the Company evaluates its historical accruals based on an actuarially developed estimate of the ultimate cost to the Company for each open policy year and adjusts such accruals as
necessary. These adjustments could be either increases or decreases to workers compensation costs, depending upon the actual loss experience of the Company. The final costs of coverage will be determined by the actual claims experience over
time as claims close, by the final administrative costs of the program and by the final return on investment earned with respect to premium dollars paid. See Workers Compensation Plans beginning on page 10.



State unemployment tax rates vary from state to state and are
based upon the employers claims history. The Company aggressively manages its state unemployment tax exposure by contesting unwarranted claims.



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



Income Taxes.    The Company records income tax expense using the asset and liability method of accounting for
deferred income taxes. The Companys effective tax rate for 2002 was 33.2%. Such effective tax rate differed from the statutory federal tax rate primarily because of state taxes and federal tax credits. The Company has recorded a tax benefit in
2001 primarily as a result of the loss from operations and Federal tax credits, and in 2000, the Company recorded a tax benefit primarily as a result of tax-exempt income earned and Federal tax credits.





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



Table of Contractual Arrangements



|                            |  | Payment due by period
|--------------------------- |  | ---------------------
|Contractual Obligations     |  | Total                
|Long-Term Debt Obligations  |  | None                 
|Capital Lease Obligations   |  | None                 
|Operating Lease Obligations |  | $9,509,000           
|Purchase Obligations        |  | None                 
|Total                       |  | $9,509,000           



Off-balance Sheet
Arrangements



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



Critical Accounting
Policies



The accounting policies described
below are those that the Company considers critical in preparing its financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below,
these estimates could change materially if different information or assumptions were used. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by the
Company in preparing its financial statements is included in Note 1 of Notes to the Consolidated Financial Statements and in Item 1 of this Form 10-K.



Revenue Recognition.    The gross billings that the Company charges its clients under its Professional Services
Agreement include each worksite employees gross wages, a service fee and, to the extent elected by the clients, health and welfare benefit plan costs. The Companys service fee, which is computed as a percentage of gross wages, is
intended to yield a profit to the Company and cover the cost of certain employment-related taxes, workers compensation insurance coverage, and administrative and field services provided by the Company to the client, including payroll
administration, record keeping, and safety, human resources, and regulatory compliance consultation. The component of the service fee related to administration varies according to the size of the client, the amount and frequency of payroll payments
and the method of delivery of such payments. The component of the service fee related to workers compensation and unemployment insurance is based, in part, on the clients historical claims experience. All charges by the Company are
invoiced along with each periodic payroll delivered to the client.



Historically the Company reported the full amount of its gross billings, including the portion that represents the gross wages of its worksite employees, as revenue. As described below, the Company changed from gross revenue
reporting to net revenue reporting for worksite employee salaries, wages and certain payroll taxes effective for the fourth quarter of 2002.



The Company reports revenues from service fees in accordance with Emerging Issues Task Force (EITF) No. 99-19, Reporting
Revenue Gross as a Principal versus Net as an Agent. The Company reports as revenues,



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on a gross basis, the total amount billed to clients for service fees, health and welfare benefit plan fees, workers compensation and
unemployment insurance fees. The Company reports revenues on a gross basis for these fees because the Company is the primary obligor and deemed to be the principal in these transactions under EITF No. 99-19. The Company now reports revenues on a net
basis for the amount billed to clients for worksite employee salaries, wages and certain payroll-related taxes less amounts paid to worksite employees and taxing authorities for these salaries, wages and taxes. The Company accounts for its revenues
using the accrual method of accounting. Under the accrual method of accounting, the Company recognizes its revenues in the period in which the worksite employee performs work. The Company accrues revenues and unbilled receivables for service fees
relating to work performed by worksite employees but unpaid at the end of each period. In addition, the related costs of services are accrued as a liability for the same period. Subsequent to the end of each period, such costs are paid and the
related PEO service fees are billed.



Accounting Change For Reporting Revenue.    During the quarter ended December 31, 2002, the Company changed from gross revenue reporting to net revenue reporting for worksite employee salaries, wages and
payroll-related taxes. Based on the criteria established by EITF No. 99-19, the Company determined that this change better recognizes the substance of the transactions between the Company and its clients. In addition, the change will better focus
the Company on, and allow investors to better understand, the financial results of the Companys core business. This change to a more preferable accounting method resulted in no effect on net income or earnings per share. Because of the
significance of this reclassification of revenue and expense components to the income statement, the Company has reflected the change as if it had occurred on January 1, 2000 in the accompanying financial statements. The table presented below
reflects the effect of the change on the amounts previously reported for 2001 and 2000 and the amounts that would have been reported for 2002 under the gross revenue reporting method.



For the year ended December 31, 2002 (in thousands):



|                   |  | Gross Revenue Reporting Method |           | Reclassification |   |            | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | --------- | ---------------- | - | ---------- | ----------------------------
|Revenues           |  | $                              | 3,404,279 |                  | $ | (3,029,625 | )                           
|Cost of services   |  |                                | 3,313,755 |                  |   | (3,029,625 | )                           
|Gross profit       |  |                                | 90,524    |                  |   |           |                             
|Operating expenses |  |                                | 85,548    |                  |   |           |                             
|Net income (loss)  |  | $                              | 4,737     |                  | $ |           |                             



For the year ended
December 31, 2001 (in thousands):



|                   |  | Gross Revenue Reporting Method |           |   | Reclassification |   |            | Net Revenue Reporting Method | 
|------------------ |  | ------------------------------ | --------- | - | ---------------- | - | ---------- | ---------------------------- | 
|Revenues           |  | $                              | 3,180,003 |   |                  | $ | (2,847,175 | )                            | 
|Cost of services   |  |                                | 3,109,018 |   |                  |   | (2,847,175 | )                            | 
|Gross profit       |  |                                | 70,985    |   |                  |   |           |                              | 
|Operating expenses |  |                                | 100,273   |   |                  |   |           |                              | 
|Net income (loss)  |  | $                              | (15,603   | ) |                  | $ |           |                              | 



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For the year ended December 31, 2000 (in thousands):



|                   |  | Gross Revenue Reporting Method |           | Reclassification |   |            | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | --------- | ---------------- | - | ---------- | ----------------------------
|Revenues           |  | $                              | 3,104,240 |                  | $ | (2,781,906 | )                           
|Cost of services   |  |                                | 3,008,675 |                  |   | (2,781,906 | )                           
|Gross profit       |  |                                | 95,565    |                  |   |           |                             
|Operating expenses |  |                                | 99,349    |                  |   |           |                             
|Net income (loss)  |  | $                              | 604       |                  | $ |           |                             



Medical Benefit Plan Liabilities.    The Company provides medical benefit plans to its worksite employees through several medical benefits plan providers.



With respect to these medical benefit plans, the Company
establishes medical benefit plan liabilities for benefit claims that have been reported but not paid and claims that have been incurred but not reported. These reserves and the related health benefit plan subsidy are developed using actuarial
principles and assumptions which consider a number of factors, including historical claim payment patterns and expected rates of increase in medical care costs. The factor that has the greatest impact on the Companys financial results is the
medical cost trend, which is the rate of increase in health care costs.



In certain instances, the Company decides to make a contribution to the medical benefit plan providers toward the cost of the worksite employees medical benefit plan costs. Such contribution together with higher than
anticipated medical cost trend may result in what the Company has designated to be a health benefit plan subsidy.



For each period, the Company estimates the relevant factors, based primarily on historical data and uses this information to determine the
assumptions underlying the reserve calculations. An extensive degree of judgment is used in this estimation process. Due to the considerable variability of health care costs and adjustments to health reserves, the health benefit plan subsidy is paid
by the Company and is sometimes significant.



The
following tables provides the amount of the health benefit plan subsidy by year and the amount of the medical benefit plan liabilities for benefit claims that have been reported but not paid and claims that have been incurred but not reported:



HEALTH BENEFIT PLAN SUBSIDY



|Year Ended                  |  | December 31, 2000 |           | December 31, 2001 |   | December 31, 2002
|--------------------------- |  | ----------------- | --------- | ----------------- | - | -----------------
|Health Benefit Plan Subsidy |  | $                 | 3,275,000 |                   | $ | 9,283,000        



MEDICAL BENEFIT PLAN LIABILITIES



|Year Ended                       |  | December 31, 2001 |            | December 31, 2002
|-------------------------------- |  | ----------------- | ---------- | -----------------
|Medical Benefit Plan Liabilities |  | $                 | 16,071,000 |                  



If the
actual amount of the Companys medical benefit plan liabilities at the end of each period were to increase from the estimates used by the Company, then the Company would have an increase in the amount of its future period Health Benefit Plan
Subsidy.



The Companys financial statements
reflect the estimates made within the Cost Of Services on the Companys Income Statement and within the accrued insurance premiums, health and workers compensation reserves on the Companys Balance Sheet.



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In order to
give recognition to the medical benefit plan liabilities that are not expected to be paid in the following year, the Company includes a portion of the obligation as a long-term liability.



Workers Compensation Plan Liabilities.    The Company had an insured loss
sensitive workers compensation program with CNA for 2000, 2001 and 2002. As part of such program the Company has individual stop loss coverage at $1 million per occurrence and aggregate stop loss coverage for individual claims that in total
exceed the aggregate stop loss amount of 130% of expected losses as determined by CNA.



Commencing with the policy year which began on January 1, 2003, AIG became the Companys workers compensation carrier under a one-year agreement. Such workers compensation program is
loss sensitive and will provide the Company with individual stop loss coverage at $1 million per occurrence and aggregate stop loss coverage for individual claims that in total exceed the aggregate stop loss amount of 175% of expected losses as
determined by AIG.



At least annually, the
Company obtains an independent actuarially determined calculation of the estimated costs of claims incurred based on the Companys historical loss development trends. The estimated costs of the claims calculated may be subsequently revised by
the independent actuary based on developments relating to the actual claims incurred. A certain amount of judgment is used in this estimation process by both the independent actuary and the Company.



The following loss reserve development table illustrates the
change over time of reserves established for workers compensation claims and claims adjustment expenses at the end of the preceding three calendar years for the Company. This table excludes the 2000 program year for the Texas Workers
Compensation Insurance Fund, which was a guarantee cost program. The second section, reading down, shows the number of claims reported. The third section, reading down, shows the cumulative amounts paid as of the end of successive years with respect
to the originally reported reserve liability. The last section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of the Companys expanded awareness of additional
facts and circumstances that pertain to the unsettled claims.



|Year Ended                                                                                                |  | December 31, 2000 |             | December 31, 2001 |   | December 31, 2002
|--------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | ----------------- | - | -----------------
|Originally reported reserves for unpaid Claims and Claims expenses limited to $1.0
million per occurrence |  | $                 | 109,000,000 |                   | $ | 103,000,000      
|Number of claims reported as of:                                                                          |  |                   |             |                   |   |                  
|End of initial year                                                                                       |  |                   | 11,888      |                   |   | 10,195           
|One year later                                                                                            |  |                   | 12,088      |                   |   | 10,475           
|Two years later                                                                                           |  |                   | 12,114      |                   |   |                 
|Cumulative net paid claims as of:                                                                         |  |                   |             |                   |   |                  
|End of initial year                                                                                       |  | $                 | 22,688,384  |                   | $ | 21,344,707       
|One year later                                                                                            |  |                   | 50,523,541  |                   |   | 47,460,874       
|Two years later                                                                                           |  |                   | 69,250,856  |                   |   |                 
|Undiscounted reserves re-estimated as of:                                                                 |  |                   |             |                   |   |                  
|End of initial year                                                                                       |  | $                 | 109,000,000 |                   | $ | 103,000,000      
|One year later                                                                                            |  |                   | 109,000,000 |                   |   | 98,000,000       
|Two years later                                                                                           |  |                   | 108,400,000 |                   |   |                 



The loss
reserve development table for workers compensation claims is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years.





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The Companys financial statements reflect the estimates made by the independent
actuaries as well as other factors related to the CNA workers compensation program within the Cost of Services on the Companys Income Statement and within the accrued insurance premiums, health and workers compensation insurance
reserves on the Companys Balance Sheet.



If
the actual cost of the claims incurred is higher than the estimates determined by the independent actuaries, then the accrual rate used to determine workers compensation costs could increase. If the actual cost of the claims incurred is lower
than the estimates determined by the independent actuaries, then the accrual rate used to determine workers compensation costs could decrease.



Such increase or decrease to the accrual rate is reflected in the accounting period that the change in the amount of workers
compensation claims is calculated. Due to the considerable variability in the estimate of the amount of workers compensation claims, adjustments to workers compensation costs are sometimes significant.



In order to give recognition to these workers
compensation cost obligations that are not expected to be paid in the following year, the Company includes a portion of the obligation as a long-term liability.



Deferred Taxes.    The Company recognizes deferred tax assets and liabilities
based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and if necessary, establishes a valuation allowance based
on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If the Company were to operate at a loss or is unable to generate sufficient future taxable income, or if
there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, then the Company could be required to establish a valuation allowance against all or a
significant portion of the deferred tax assets resulting in a substantial increase in the Companys effective tax rate.



Results of Operations



The following table presents the Companys results of operations for the years ended December 31, 2000, 2001 and 2002, expressed as a
percentage of revenues:



|Year Ended                        |  | December 31, 2000 |   |  | December 31, 2001 |    |  | December 31, 2002 |  
|--------------------------------- |  | ----------------- | - |  | ----------------- | -- |  | ----------------- | -
|Revenues                          |  | 100.0             | % |  | 100.0             | %  |  | 100.0             | %
|Cost of Services                  |  | 70.4              |   |  | 78.7              |    |  | 75.8              |  
|                                  |  |                   |   |  |                   |    |  |                   |  
|Gross Profit                      |  | 29.6              |   |  | 21.3              |    |  | 24.2              |  
|Operating Expenses:               |  |                   |   |  |                   |    |  |                   |  
|Salaries, wages and commissions   |  | 18.8              |   |  | 18.6              |    |  | 14.0              |  
|Other general and administrative  |  | 9.3               |   |  | 8.8               |    |  | 6.7               |  
|Depreciation and amortization     |  | 2.7               |   |  | 2.7               |    |  | 2.2               |  
|                                  |  |                   |   |  |                   |    |  |                   |  
|Total operating costs             |  | 30.8              |   |  | 30.1              |    |  | 22.9              |  
|                                  |  |                   |   |  |                   |    |  |                   |  
|Operating (loss) income           |  | (1.2              | ) |  | (8.8              | )  |  | 1.3               |  
|Interest income                   |  | 1.4               |   |  | 1.0               |    |  | 0.5               |  
|Interest expense                  |  | 0.0               |   |  | 0.0               |    |  | 0.0               |  
|Other non-operating expense       |  | (0.4              | ) |  | 0.0               |    |  | 0.0               |  
|                                  |  |                   |   |  |                   |    |  |                   |  
|(Loss) income before income taxes |  | (0.2              | ) |  | (7.8              | )  |  | 1.8               |  
|Income tax (benefit) provision    |  | (0.3              | ) |  | (3.1              | )  |  | 0.6               |  
|                                  |  |                   |   |  |                   |    |  |                   |  
|Net income (loss)                 |  | 0.1               | % |  | (4.7              | %) |  | 1.2               | %
|                                  |  |                   |   |  |                   |    |  |                   |  





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SIGNIFICANT TRENDS



Client Retention The Company decided in 2001 to target new clients with a lower risk profile and
to no longer service existing clients in certain high-risk industries. During the first quarter of 2002, all existing clients in certain high-risk industries such as roofing and trucking were terminated. However, the Company will continue to service
existing clients in other high-risk industries and intends to retain such clients for as long as they remain profitable to the Company. As a result, the percentage of total Company revenue earned from clients in high-risk industries is expected to
decrease over time as the revenue earned from new clients added from other industries increases.



The Company considers industries to be high-risk if there is a likelihood of a high frequency of on-the-job accidents involving worksite employees or likelihood that such accidents will be severe.



By no longer selling its services to new
high-risk clients, the Company believes that it will reduce the earnings volatility associated with the cost of its workers compensation insurance programs.



Volatility in the dollar amount of workers compensation costs arises when the number of accidents and
the severity of such accidents cannot be easily projected, thus resulting in a wide range of possible expected dollar losses for an insurance policy year. Such volatility in the projection of expected dollar losses caused by the number of claims and
the severity of such claims is more likely to be associated with industries that have a high-risk level associated with them (e.g., construction, roofing, trucking, etc.)



Since the Company has historically sold a significant amount of its services to clients in high-risk
industries, there is a degree of uncertainty as to whether it can be successful in selling services to clients in industries not previously focused upon. The Company has been selling to the new target market since the first quarter of 2001 and the
sales volume from new clients has been at a level that leads the Company to believe that the result of the transition is profitable.



Further, the Company has communicated to its existing clients that the comprehensive service fees, including the cost of medical benefits,
will increase in 2003 to more appropriately recognize the Companys cost of providing services and to decrease the health benefit subsidy. The repricing of the Companys services is consistent with its strategy to charge service fees that
more accurately reflect current competitive market rates for insurance and benefit related services. The Company is not able to predict the degree of client attrition that will result from the increased service fees.



Business InsuranceThe Company maintains a number
of corporate insurance policies, including automobile liability and general liability. For the program years of 2002 and prior, these insurance policies were on a guaranteed cost basis. For the 2003 program years, the automobile and general
liability insurance policies will be subject to a deductible amount per incident. In addition, the Company will provide AIG with $2,500,000 of collateral to protect against this exposure. The Company is continuing to seek insurance coverage with
lower deductible amounts for this exposure.



Surety BondsThrough 2002, the Company used surety bonds as collateral for its workers compensation insurance programs. As of January 1, 2003, surety bonds will no longer be used to collateralize workers
compensations programs. Collateral obligations will be met through the use of cash and cash equivalents.



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001



For the year ended December 31, 2002, revenues increased 12.5% over 2001, totaling $374.7 million, compared
to $332.8 million for 2001. Revenue growth was primarily due to the Companys strategy of emphasizing its human resources consulting services that it provides to its clients in order to increase the administrative fees that it earns. In
addition, revenues increased as the Company increased the charge for its health benefit plans offered to worksite employees and the number of worksite employees participating in the Companys health benefit plans increased.





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Charges to clients for workers compensation coverage as a percentage of worksite
employees salaries and wages for 2002 was 3.32%, compared to 4.36% for 2001, representing a decrease of 23.9%. Such decline is due to the continuing change in the risk profile of clients serviced. To the extent the Company continues to increase the
number of its low-risk clients, the Company expects such charges to continue to decrease.



From December 31, 2001 to December 31, 2002, the number of clients decreased 9.7% from 8,040 to 7,258 and the number of average paid worksite employees decreased 7.7% from 104,852 to 96,741. Such
declines are a result of the Companys decision to target new clients with a lower risk profile and to no longer service existing clients in certain high-risk industries. The Company counts the number of clients based on each unique account
number that the Company issues to identify each payroll cycle (e.g., weekly, bi-weekly, monthly, etc.) Accordingly, each business the Company services may have multiple payroll cycles and thereby represents more than one client. The number of unique
businesses serviced by the Company as measured by individualized federal identification numbers as of December 31, 2002 was equal to 6,624.



Cost of services which includes the cost of the Companys medical benefit plans, workers compensation insurance, state
unemployment taxes and other costs were $284.1 million for 2002, compared to $261.8 million for 2001, representing an increase of $22.3 million, or 8.5%.



The health benefit plan subsidy was $9.5 million in 2002, compared to $9.3 million in 2001. The health benefit plan subsidy in 2002 and in
2001 was primarily attributable to an increase in medical care costs. In addition, the 2001 health benefit plan subsidy was a result of internal collection and billing issues. During 2001, changes were made to the Companys billing practices to
more closely align collection of health care benefit premiums with the worksite employees period of coverage. The Companys collection processes were not adequately modified to collect on the new basis, resulting in a premium collections
shortfall and therefore an increased health benefit plan subsidy.



Workers compensation costs were $88.0 million for 2002, as compared to $115.8 million for 2001, representing a decrease of $27.8 million or 24.0%. Workers compensation costs decreased in 2002 due to the
Companys decision to sell to a target market with a lower risk client profile that pays worksite employees higher wages. Included in workers compensation costs for 2001 was an adjustment of $19.7 million. The adjustment was primarily
caused by: (i) a lower than expected rate of return on premium payments made to CNA that reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made
to CNA which resulted from the decrease in the interest rate environment, and (iii) a change, identified in a mid-year actuarial review by the Companys independent actuaries, in the estimate of the ultimate total workers compensation
claims for the 2000 policy year.



State
unemployment taxes were $6.2 million for 2002, compared to $6.7 million for 2001, representing a decrease of $0.5 million or 7.5%. This decrease was the result of the Company having fewer paid average worksite employees in 2002 subject to state
unemployment taxes.



Gross profit was $90.5
million for 2002, compared to $71.0 million for 2001, representing an increase of $19.5 million, or 27.5%. Gross profit margin increased as a percentage of revenues primarily due to higher workers compensation margin from clients in low risk
industries and decreased state unemployment taxes. Included in workers compensation costs for 2001 was an adjustment of $19.7 million. The adjustment was primarily caused by: (i) a lower than expected rate of return on premium payments made to
CNA that reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made to CNA which resulted from the decrease in the interest rate environment, and
(iii) a change, identified in a mid-year actuarial review by the Companys independent actuaries, in the estimate of the ultimate total workers compensation claims for the 2000 policy year.



Operating expenses were $85.5 million for 2002, compared to
$100.3 million for 2001, representing a decrease of $14.8 million, or 14.7%. The decrease in operating expenses was due to the implementation of various cost saving initiatives, including a reduction in the number of the Companys internal
employees.



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Salaries,
wages and commissions were $52.3 million for 2002, compared to $61.8 million for 2001, representing a decrease of $9.5 million, or 15.2%. This decrease was due primarily to a reduction in the number of employees during the fourth quarter of 2001 and
a continued decline in the number of employees throughout 2002.



Other general and administrative expenses were $25.1 million for 2002, compared to $29.3 million in 2001, representing a decrease of $4.2 million, or 14.2%. The decrease in general and administrative expenses was due to the
implementation of cost savings initiatives in areas related to services and outside fees during 2002. In addition, during 2001 the Company incurred marketing and advertising expenses related to the rebranding of the company name.



Depreciation and amortization expenses were $8.1 million for
2002 compared to $9.3 million for 2001. As of January 1, 2002 the Company adopted Financial Accounting Standard (SFAS) No. 142 that changes the accounting for goodwill from an amortization method to an impairment-only approach.
Application of the non-amortization provisions of SFAS 142 resulted in a decrease in amortization during 2002 of $0.7 million. The Company conducted an independent review of goodwill and other intangible assets as of January 1, 2002 and concluded
that there was no goodwill impairment. The Company has also determined that no subsequent events have taken place to change such conclusion.



Interest income was $2.0 million for 2002, compared to $3.3 million for 2001, representing a decrease of $1.3 million due to a general
decline in interest rates.



The Company had no
long-term debt obligations outstanding in 2002 and 2001 and accordingly incurred no interest expense.



Income taxes of $2.4 million for 2002 represented a provision at an effective tax rate of 33.2%. Such effective tax rate differed from the
statutory Federal tax rate primarily because of state taxes and Federal tax credits. Income tax benefit of $10.4 million for 2001 was primarily the result of recording the tax benefit from the loss from operations and income tax credits.



Net income was $4.7 million for 2002, compared
to a net loss of $15.6 million for 2001, representing an increase of $20.3 million.



Year Ended December 31, 2001 Compared to Year Ended December 31, 2000



For the year ended December 31, 2001, revenues increased 3.3% over 2000, totaling $332.8 million, compared to $322.3 million for 2000.
Revenue growth was slowed in 2001 as a result of the Companys decision to target new clients with a lower risk profile and to terminate clients in certain high-risk industries.



Charges to clients for workers compensation coverage as a percentage of worksite employees salaries and
wages for 2001 was 4.36%, compared to 5.33% for 2000, representing a decrease of 18.2%. Such decline is due to the continuing change in the risk profile of clients serviced. To the extent the Company continues to increase the number of its low-risk
clients, the Company expects such charges to continue to decrease.



From December 31, 2000 to December 31, 2001, the number of active worksite employees decreased 9.8% from 124,014 to 111,910. This decrease was primarily due to the Companys decision to discontinue marketing its
services to certain industries, and its termination of client relationships having an aggregate of approximately 5,800 employees that were unprofitable to the Company or were running low payroll volumes per employee.



Cost of services which includes the cost of the medical
benefit plans, workers compensation insurance, state unemployment taxes and other costs were $261.8 million for 2001, compared to $226.8 million for 2000, representing an increase of $35.0 million, or 15.5%.



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The health
benefit plan subsidy was $9.3 million in 2001, compared to $3.3 million in 2000. An unfavorable experience in the maturation or run-out of prior year health benefit plan claims increased this subsidy by $1.6 million in 2001 and by $1.3 million in
2000. The increase in the health benefit plan subsidy in 2001 was primarily attributable to an increase in medical care costs as well as a result of internal collection and billing issues. During 2001, changes were made to the Companys billing
practices to align collection of health care benefit premiums with the worksite employees period of coverage. The Companys collection processes were not adequately modified to collect on the new basis, resulting in a premium collections
shortfall and therefore an increased health benefit plan subsidy.



Workers compensation costs were $115.8 million for 2001, as compared to $117.5 million for 2000, representing a decrease of $1.7 million or 1.4%. Workers compensation costs decreased in 2001 due to the
Companys decision to sell to a target market with a lower risk client profile and that pays higher wages to employees. Included in workers compensation costs for 2001 was an adjustment of $19.7 million. The adjustment was primarily
caused by: (i) a lower than expected rate of return on premium payments made to CNA that reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made
to CNA which resulted from the decrease in the interest rate environment, and (iii) a change, identified in a mid-year actuarial review by the Companys independent actuaries, in the estimate of the ultimate total workers compensation
claims for the 2000 policy year.



State
unemployment taxes were $6.7 million for 2001, compared to $3.2 million for 2000, representing an increase of $3.5 million or 107.5%. This increase was the result of higher costs in Florida in 2001.



Gross profit was $71.0 million for 2001, compared to $95.6
million for 2000, representing a decrease of $24.6 million, or 25.7%. Gross profit margin decreased as a percentage of revenues primarily due to an adjustment of $19.7 million recorded in workers compensation costs in 2001, increased state
unemployment taxes and an increase in the health benefit plan subsidy. The adjustment of $19.7 million to workers compensation costs was primarily caused by: (i) a lower than expected rate of return on premium payments made to CNA that
reflected the decrease in the overall securities market, (ii) a higher discounted present value of the unfunded portion of expected premium payments to be made to CNA which resulted from the decrease in the interest rate environment, and (iii) a
change, identified in a mid-year actuarial review by the Companys independent actuaries, in the estimate of the ultimate total workers compensation claims for the 2000 policy year.



Operating expenses were $100.3 million for 2001, compared to
$99.3 million for 2000, representing an increase of $1.0 million, or 0.9%.



Included in operating expenses were salaries, wages and commissions of $61.8 million for 2001, compared to $60.6 million for 2000, representing an increase of $1.2 million, or 2.0%. Salaries, wages and
commissions for 2001 included $1.1 million related to management reorganization and severance payments related to reductions in the Companys internal employee base.



Other general and administrative expenses were $29.3 million for 2001, compared to $30.0 million in 2000,
representing a decrease of $0.7 million, or 2.3%. Other general and administrative expenses declined in 2001 primarily as a result of a reduction in the use of outside service providers.



Depreciation and amortization expenses increased by $0.5 million for 2001 compared to 2000, representing an
increase of 5.7%. This increase was primarily the result of the Companys investment in information technology systems.



Interest income was $3.3 million for 2001, compared to $4.8 million for 2000, representing a decrease of $1.5 million due to a decrease in
interest rates during 2001.



The Company had no
long-term debt obligations outstanding in 2001 and 2000 and accordingly incurred no interest expense.



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Other
non-operating expense was $0 in 2001 and $1.4 million in 2000. Other non-operating expense in 2000 was related to the conclusion of the strategic alternative process explored by the Company and to a management reorganization of the Company.



Income tax benefit of $10.4 million for 2001 was
primarily the result of recording the tax benefit from the loss from operations and income tax credits. Income tax benefit of $1.0 million for 2000 was the result of recording the tax benefit of tax-exempt income and income tax credits.



Net loss was $15.6 million for 2001, compared to
net income of $0.6 million for 2000, representing a decrease of $16.2 million.



Liquidity and Capital Resources



The Company had $126.2 million in cash and cash equivalents, restricted certificates of deposit and marketable securities at December 31, 2002. The Company is required to collateralize its obligations
under its workers compensation and health benefit plan coverages. The Company uses its cash and cash equivalents as well as surety bonds to collateralize these obligations as more fully described below.



At December 31, 2002, the Company had pledged $92.5 million of
restricted certificates of deposit and restricted marketable securities, with original maturities of less than one year, as collateral for certain standby letters of credit or in collateral trust arrangements issued in connection with the
Companys workers compensation and health benefit plans. During 2002, the Company replaced $40.2 million in net surety bonds related to its 2000 and 2001 workers compensation programs with CNA with other forms of collateral,
including cash and cash equivalents. The Company has no net surety bonds outstanding as of December 31, 2002.



The Companys workers compensation programs for the 2000 through 2002 program years are subject to further collateral
adjustments, depending upon the final audit of the 2002 program year and upon actual development of claims for all program years.



The Company has announced that AIG will provide workers compensation insurance in 2003 for all of its worksite employees. As part of
the AIG program, the Company anticipates that $28.5 million of cash and cash equivalents will be used as collateral during 2003. In addition, in connection with the Companys automobile and general liability insurance policy for 2003, $2.5
million of cash and cash equivalents will be provided as collateral to AIG. For more detailed information regarding the AIG program, please see the Companys Current Report on Form 8-K filed on October 23, 2002.



The Companys collateralization obligations under its
medical benefit plans are funded through 2002. The Company has announced that it has renewed its medical benefit plan with Aetna for 2003. The Company anticipates that $2.0 million of cash and cash equivalents will be used to collateralize the Aetna
program. The final amount of collateral is subject to determination based on the number of plan participants electing PPO coverage. The Company has also announced that it has renewed its medical benefit plan with Blue Cross Blue Shield of Florida
(BCBS). The amount of collateral required to be provided to BCBS is expected to increase over the three-year renewal term, based in part on the increase in plan participation.



The Company had no long-term debt as of December 31, 2002. In July 1999, the Company entered into an
agreement with Bank of America (formerly NationsBank) for a $10 million revolving line of credit to provide for intraday working capital needs. Borrowings under the credit facility bear interest at variable rates based on the lenders base rate
or LIBOR. No borrowings were made against the credit line and the credit line was not renewed upon its expiration in July 2001. At December 31, 2002, the Company had working capital of $89.6 million.



The Companys gross billings charged to its clients
include: (i) each worksite employees gross wages; (ii) a markup which is computed as a percentage of the gross wages; (iii) related payroll taxes; and (iv) the client companys portion of benefits, including medical and retirement
benefits, provided to the worksite employees based on elected coverage levels by the client and the worksite employee. Included in the Companys charges to its clients during 2002 were salaries, wages and payroll taxes of worksite employees of
$3,106.7 million.



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The charges to
clients by the Company derived from salaries, wages and payroll taxes is managed from a cash flow perspective so that a matching exists between the time that the funds are received from a client to the time that the funds are paid to the worksite
employees and to the appropriate tax jurisdictions. As a co-employer, and under the terms of the Professional Services Agreement, the Company is obligated to make certain wage, tax and regulatory payments. Because of this, the objective of the
Company is to minimize the credit risk associated with remitting the payroll and associated taxes before receiving from the client the service fees charged by the Company.



The Companys primary short-term capital requirements relate to the payment of accrued payroll and
payroll taxes of its internal and worksite employees, accounts payable for capital expenditures and the payment of accrued workers compensation expense and health benefit plan premiums.



Net cash provided from operations was $34.3 million for 2002.
In 2001, the Company invested $0.6 million in its facilities and technology infrastructure. For 2003, the Company anticipates total capital expenditures of $2.2 million.



The Company periodically evaluates its liquidity requirements, capital needs and availability of capital
resources in view of its plans for expansion, anticipated levels of health benefit plan subsidies, collateralization requirements for insurance coverages, and other operating cash needs. The Company believes that its current cash balances and cash
flow from operations will be sufficient to meet its requirements through 2003. On March 6, 2003 the Company announced that it executed on March 5, 2003 a Letter of Intent for a private placement of $30.0 million convertible preferred stock with
Frontenac Company LLC. Proceeds of the transaction will provide additional capital to the Company in order for it to pursue its growth strategy. A portion of the proceeds of the transaction will be used to repurchase 3.1 million shares of the
Company from Charles S. Craig for $16.6 million. Under the terms of the agreement with Frontenac Company LLC, the preferred shares will carry a greater of 4% or common dividend of 4% and will be convertible into common shares at a per share price of
$5.44. The closing of the private placement is subject to shareholder approval and other customary conditions. The closing of the private placement will occur promptly after shareholder approval is received at the Annual Meeting of Shareholders to
be held on May 22, 2003. If the Company does not achieve its profitability objectives in 2003, and its cash balances and cash flow from operations are inadequate to meet its operating and collateralization requirements as well as its long-term
capital needs, then the Company may explore additional external financing alternatives, including public or private debt and/or equity financing. However, there is no assurance that financing from other external sources will be available to the
Company at prevailing market rates.



In 2002, the
Company purchased 34,000 shares of the Companys stock at a cost of $135,750 for the Companys Employee Stock Purchase Plan that was approved at the Annual Shareholders meeting on May 24, 2001. Internal employees of the Company, who
regularly work more than 20 hours per week and have been employed with the Company for at least ninety days prior to the offering period, are eligible to participate in the Plan. Participants, through payroll deduction, may purchase a maximum of
five hundred shares during the offering period at a cost of 85% of the lower of the stock price as of the beginning or end of the offering period. Employees purchased 45,255 shares under this plan for the period ended December 31, 2002.



Inflation



The Company believes that inflation in salaries and wages of
worksite employees has a positive impact on its results of operations as its service fee is proportional to such changes in salaries and wages.



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company is subject to market risk from exposure to changes in interest rates based on its investing and cash management activities.
The Company utilizes U.S. government agency and other corporate debt with fixed rates and maturities of less than one year to manage its exposures to interest rates. (See Note 4 to the



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Consolidated Financial Statements appearing elsewhere in this Form 10-K). The Company is also subject to market risk from exposures to
changes in interest rates related to insurance premiums paid to CNA under its workers compensation programs for the policy years 2000 through 2002. The insurance premiums paid to CNA are invested in U. S. government agency and corporate debt
instruments with fixed rates. Prior to December 31, 2001 twenty percent of the insurance premiums paid to CNA were invested in equity instruments. Such equity investments have been liquidated and reinvested in fixed income instruments. No additional
investments in equity instruments with premium dollars paid to CNA were made. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 2003, although there can be no assurances that interest
rates will not change.



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The information required by this Item 8 is contained in a separate section of this Annual Report. See Index to Consolidated
Financial Statements and Financial Statement Schedule on Page F-1.



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



None.



PART III.



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICES OF THE REGISTRANT



The information regarding the Companys executive officers is included in Item 1 of Part I under Executive Officers of the
Registrant. Other information required by this Item 10 will be contained in the Companys Proxy Statement, relating to the 2003 Annual Meeting of Shareholders to be held on May 22, 2003 (the Proxy Statement) and is
incorporated herein by reference.



ITEM 11.    EXECUTIVE COMPENSATION



The information required by this Item 11 will be contained in the Proxy Statement and is incorporated herein by reference, provided that the Compensation Committee Report, the Audit Committee Report,
and Performance Graph contained in the Proxy Statement shall not be deemed to be incorporated herein by reference.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information required by this Item 12 will be contained in the Proxy Statement and is incorporated herein by reference.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this Item 13 will be contained in the Proxy Statement and is incorporated herein by reference.



ITEM 14.    CONTROLS AND PROCEDURES



Within 90 days prior to the date of this report, the Companys management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of
the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-14(c) of the Exchange Act. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of the date of the evaluation. There have been



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no significant changes in the Companys internal controls, or other factors that could significantly affect the Companys internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer carried out their evaluation, including any corrective actions taken with regard to significant deficiencies and material weaknesses.





ITEM 15.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this Item 15 will be contained in the Proxy Statement and is incorporated herein by reference.



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PART IV.



ITEM 16.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|         
|---------
|(a)    1.
|         
|2.       
|         
|3.       



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger by and among SLI Transitory, L.P., Staff Capital, L.P. and the Company (filed as Exhibit
4.3 to the Companys registration statement no. 333-22933 on Form S-1 filed March 7, 1997 and incorporated herein by reference).                      
|3.1         |  | Articles of Amendment and Restatement of the Articles of Incorporation (filed as Exhibit A to the Companys Proxy
Statement on Schedule 14A filed April 25, 2002 and incorporated herein by reference).                                                                     
|3.2         |  | Second Amended and Restated Bylaws.+                                                                                                                                                                                                                                        
|4.1         |  | Rights Agreement dated as of April 23, 2002 by and between the Company and American Stock Transfer & Trust
Company, and exhibits thereto (filed as Exhibit 1 to the Companys Registration Statement on Form 8-A dated April 25, 2002 and incorporated herein by reference).
|4.2         |  | Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Companys registration statement
no. 333-22933 on Form S-1 filed March 7, 1997 and incorporated herein by reference).                                                                                        
|10.1        |  | 2002 Stock Incentive Plan of the Company (filed as Exhibit B to the Companys Proxy Statement on Schedule 14A
filed April 25, 2002 and incorporated herein by reference).                                                                                                   
|10.2        |  | 1997 Stock Incentive Plan of the Company, as amended (filed as Exhibit 4.1 to the Companys Registration
Statement no. 333-68929 on Form S-1 filed December 15, 1998 and incorporated herein by reference).                                                                 
|10.3        |  | Annual Incentive Compensation Plan for Executive Officers (filed as Exhibit C to the Companys Proxy Statement on
Schedule 14A filed April 25, 2002 and incorporated herein by reference).                                                                                  
|10.4        |  | Employee Stock Purchase Plan (filed as Appendix B to the Companys Proxy Statement on Schedule 14A filed April
20, 2001 and incorporated herein by reference).                                                                                                              
|10.5        |  | Form of Indemnification Agreement between the Company and each of its directors and executive officers.*
+                                                                                                                                                                  
|10.6        |  | Employment offer letter dated December 9, 2002 from the Company, accepted by Robert Minkhorst (filed as Exhibit 99.2
to the Companys Current Report on Form 8-K dated December 13, 2002 and incorporated herein by reference).*                                            
|10.7        |  | Change in Control Severance Agreement by and between the Company and Robert Minkhorst, dated December 12, 2002 (filed
as Exhibit 99.2 to the Companys Current Report on Form 8-K dated December 13, 2002 and incorporated herein by reference).*                           
|10.8        |  | Employment Agreement by and 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 dated March 25, 2002 and incorporated herein by reference).*                                                         
|10.9        |  | Form of Securities Purchase Agreement by and between the Company and Erik Vonk (filed as Exhibit 99.3 to the
Companys Current Report on Form 8-K dated March 25, 2002 and incorporated herein by reference).*                                                              
|10.10       |  | Change in Control Severance Agreement by and between the Company and Erik Vonk, dated March 21, 2002(filed as Exhibit
99.4 to the Companys Current Report on Form 8-K dated March 25, 2002 and incorporated herein by reference).*                                         
|10.11       |  | Form of Executive Agreement by and between the Company and John E. Panning (filed as Exhibit 10.3 to the
Companys Registration Statement no. 333-22933 on Form S-1 filed March 7, 1997 and incorporated herein by reference).*                                             



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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12       |  | Executive Agreement by and between Lisa J. Harris and the Company, dated February 23, 2000, regarding change in
control severance agreement (filed as Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference).*                               
|10.13       |  | Employment offer letter dated August 18, 2000 from the Company, accepted by Michael Ehresman (filed as Exhibit 10.21
to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference).*                                                                          
|10.14       |  | Executive Agreement by and between Michael W. Ehresman and the Company, dated November 14, 2000, regarding change in
control severance agreement (filed as Exhibit 10.24 to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).*                             
|10.15       |  | Employment offer letter dated November 22, 2000 from the Company accepted by Gregory M. Nichols (filed as Exhibit
10.26 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference).*                                                                           
|10.16       |  | Executive Agreement by and between Gregory M. Nichols and the Company, dated February 16, 2001, regarding change of
control and severance (filed as Exhibit 10.18 to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). *                                   
|10.17       |  | Interim Service Agreement, by and between the Company and James F. Manning, dated October 10, 2001 (filed as Exhibit
10.19 to the Companys Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).*                                                                           
|10.18       |  | First Amendment to the Interim Service Agreement by and between the Company and James F. Manning, dated March 29,
2002.*+                                                                                                                                                                                                     
|10.19       |  | Agreement of Lease by and between Quixotic Investment Holdings, Inc. (Landlord) 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 and incorporated herein by reference).
|10.20       |  | Final Bound Proposal of AIG Risk Management, Inc. to be the carrier of the 2003 Workers Compensation Program of
the Company (filed as Exhibit 99.2 to the Companys Current Report on Form 8-K dated October 23, 2002 and incorporated herein by reference).                                                                 
|10.21       |  | Lease Agreement dated December 5, 1997, between Aldina, L.C. and Staff Capital, L.P. (filed as Exhibit 10.12 to the
Companys Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference).                                                                                          
|10.22       |  | 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 and incorporated herein by reference).            
|10.23       |  | Finance Agreement for Paid Loss Workers Compensation deductible dated as of January 1, 2000, between the Company
and Continental Casualty Company. (filed as Exhibit 10.14 to the Companys Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).                           
|10.24       |  | 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 and incorporated herein by reference).                                            
|10.25       |  | Finance Agreement for Paid Loss Workers Compensation deductible dated as of January 1, 2001, between the Company
and Continental Casualty Company (filed as Exhibit 10.25 to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).*                           
|10.26       |  | Finance Agreement for Paid Loss Workers Compensation deductible dated as of January 2, 2002, between the Company
and Continental Casualty Company (filed as Exhibit 10.20 to the Companys Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).                            
|18.1        |  | Independent Auditors letter regarding the Companys revenue reporting change from gross to net
revenues.+                                                                                                                                                                                                                    
|21.1        |  | List of Subsidiaries of the Company.+                                                                                                                                                                                                                                                                                         
|23.1        |  | Independent Auditors Consent to Form S-8 (filed as Exhibit 23.1 to the Companys Registration Statement No.
333-68929 and on Form S-1 Filed December 15, 1998 and incorporated herein by reference).                                                                                                                         



37



---

##### Table of Contents

|Exhibit No. |  | Description                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|23.2        |  | Independent Auditors Consent to Form 10-K.+                                                                                                                     
|99.1        |  | Certification of Erik Vonk, as Chief Executive Officer, Pursuant to 18 U.S.C. § 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.+      
|99.2        |  | Certification of John E. Panning, as Chief Financial Officer, Pursuant to 18 U.S.C. § 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.+

---

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

|+ |  | Filed electronically herewith.
|- |  | ------------------------------

|(b) |  | Current Reports on Form 8-K filed during the quarter ended December 31, 2002.
|--- |  | -----------------------------------------------------------------------------

|(1) |  | A Current Report on Form 8-K was filed on December 13, 2002 announcing the employment of Robert Minkhorst as the Companys Senior Vice President of Marketing
and Sales.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | A Current Report on Form 8-K was filed on December 3, 2002 announcing the declaration of a quarterly dividend of $.05 per share of Company common stock.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | A Current Report on Form 8-K was filed on October 23, 2002 announcing that member insurance companies of American International Group, Inc. agreed to provide
workers compensation insurance for all of Gevitys worksite employees effective January 1, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Gevity HR, Inc.
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



GEVITY HR, INC.



/s/    ERIK VONK

Dated: March 28, 2003



Erik Vonk

Chairman of the
Board, Chief Executive Officer (Principal Executive Officer)



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|Name                                        |  | Title                                                                      |  | Date          
|------------------------------------------- |  | -------------------------------------------------------------------------- |  | --------------
|                                           
|/s/    ERIK
VONKErik
Vonk                   |  | Chairman of the Board,Chief Executive Officer(Principal Executive
Officer) |  | March 28, 2003
|                                           
|/s/    JOHN E.
PANNINGJohn E. Panning       |  | Chief Financial Officer and a Director (Principal Financial Officer)       |  | March 28, 2003
|                                           
|/s/    PETER C.
GRABOWSKIPeter C. Grabowski |  | Chief Accounting Officer                                                   |  | March 28, 2003
|                                           
|/s/    GEORGE B.
BEITZELGeorge B. Beitzel   |  | Director                                                                   |  | March 28, 2003
|                                           
|/s/    DARCY E.
BRADBURYDarcy E. Bradbury   |  | Director                                                                   |  | March 28, 2003
|                                           
|/s/    CHARLES S.
CRAIGCharles S. Craig     |  | Director                                                                   |  | March 28, 2003
|                                           
|/s/    JONATHAN H.
KAGANJonathan H. Kagan   |  | Director                                                                   |  | March 28, 2003
|                                           
|/s/    JAMES F.
MANNINGJames F. Manning     |  | Director                                                                   |  | March 28, 2003
|                                           
|/s/    ELLIOT B.
ROSSElliot B. Ross         |  | Director                                                                   |  | March 28, 2003



39



---

##### Table of Contents

CERTIFICATIONS



I, Erik Vonk, Chief Executive Officer of Gevity HR, Inc., certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Gevity HR, Inc.;
|-- |  | -------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions);
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 28, 2003



/s/    ERIK VONK

---

Erik Vonk

Chief Executive Officer



40



---

##### Table of Contents

I, John E. Panning, Chief Financial Officer of Gevity HR, Inc., certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Gevity HR, Inc.;
|-- |  | -------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions);
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 28, 2003



/s/    JOHN E. PANNING

---

John E. Panning

Chief Financial Officer





41



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##### Table of Contents



GEVITY HR,
INC. AND SUBSIDIARIES



INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE



|                                                                                                                 |  | Page
|---------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                
|Independent Auditors Report                                                                                     |  | F-2 
|                                                                                                                
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                     |  | F-3 
|                                                                                                                
|Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001, and
2002                      |  | F-4 
|                                                                                                                
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended
December 31, 2000, 2001, and 2002 |  | F-5 
|                                                                                                                
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001, and
2002                      |  | F-6 
|                                                                                                                
|Notes to Consolidated Financial Statements                                                                       |  | F-7 
|                                                                                                                
|Financial Statement Schedule II  Valuation and Qualifying Accounts                                              |  | S-1 



F-1



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



Board of Directors

Gevity HR, Inc.

Bradenton, Florida



We have audited the accompanying consolidated financial statements and financial statement schedule of Gevity HR, Inc., and subsidiaries (the
Company) listed in the Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1 of the Annual Report on Form 10-K of the Company for the year ended December 31, 2002. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2002 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



As discussed in Note 1 to the consolidated financial statements, during the year ended December 31, 2002 the Company changed from gross revenue reporting
to net revenue reporting for worksite employee salaries, wages and payroll-related taxes.



As discussed in Note 1 to the consolidated financial statements, as of January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting
Standards No. 142.



DELOITTE &
TOUCHE LLP

CERTIFIED PUBLIC ACCOUNTANTS



Tampa, Florida

March 6, 2003





F-2



---

##### Table of Contents

|GEVITY HR, INC. AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS                  
|-------------------------------------------------------------------------------
|                                                                               
|                                                                               
|ASSETS                                                                         
|Current assets:                                                                
|Cash and cash equivalents                                                      
|Certificates of depositrestricted                                             
|Marketable securities                                                          
|Marketable securitiesrestricted                                               
|Accounts receivable, net                                                       
|Deferred tax asset                                                             
|Other current assets                                                           
|                                                                               
|Total current assets                                                           
|Property and equipment, net                                                    
|Goodwill, net of accumulated amortization of $5,979 and $5,979,
respectively   
|Deferred tax asset                                                             
|Other assets                                                                   
|                                                                               
|Total assets                                                                   
|                                                                               
|LIABILITIES AND SHAREHOLDERS
EQUITY                                           
|Current liabilities:                                                           
|Accrued insurance premiums, health and workers compensation insurance
reserves
|Accrued payroll and payroll taxes                                              
|Accounts payable and other accrued liabilities                                 
|Income taxes payable                                                           
|Customer deposits and prepayments                                              
|Dividends payable                                                              
|                                                                               
|Total current liabilities                                                      
|Long-term accrued health and workers compensation insurance
reserves          
|Other long-term liabilities                                                    
|Commitments and contingencies (See notes)                                      
|Shareholders equity:                                                          
|Common stock, $.01 par value                                                   
|Shares authorized: 100,000,000                                                 
|Shares issued and
outstanding:200120,562,562200220,760,040                   
|Additional paid in capital                                                     
|Retained earnings                                                              
|Other                                                                          
|                                                                               
|Total shareholders equity                                                     
|                                                                               
|Total liabilities and shareholders equity                                     
|                                                                               



See notes
to consolidated financial statements.



F-3



---

##### Table of Contents

|GEVITY HR, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS
|-----------------------------------------------------------------------
|                                                                       
|                                                                       
|                                                                       
|Revenues                                                               
|Cost of services                                                       
|                                                                       
|Gross profit                                                           
|Operating expenses:                                                    
|Salaries, wages and commissions                                        
|Other general and administrative                                       
|Depreciation and amortization                                          
|                                                                       
|Total operating expenses                                               
|                                                                       
|Operating (loss) income                                                
|Interest income, net                                                   
|Other (expense) income, net                                            
|                                                                       
|(Loss) income before income taxes                                      
|Income tax (benefit) provision                                         
|                                                                       
|Net income (loss) attributable to common shareholders                  
|                                                                       
|Net income (loss) per share                                            
|Basic                                                                 
|Diluted                                                               
|                                                                       
|Weighted average common shares outstanding                             
|Basic                                                                 
|Diluted                                                               
|                                                                       



See notes
to consolidated financial statements.





F-4



---

##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY

YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002



|                                             |  | Common Stock (shares)             |   |  | Common Stock |     |   | Additional Paid In Capital |   |        | Other |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | Retained Earnings |     |   | Total |  
|-------------------------------------------- |  | --------------------------------- | - |  | ------------ | --- | - | -------------------------- | - | ------ | ----- |  | - | --------------------------------------------- | - |  | ----------------- | --- | - | ----- | -
|                                             |  | (In $000s except for share data) |  
|Balance, December 31, 1999                   |  | 21,709,542                        |   |  | $            | 217 |   |                            | $ | 42,987 |       |  | $ | (109                                          | ) |  | $                 | (40 | ) |       | $
|Repurchase and retirement of common stock    |  | (1,058,435                        | ) |  |              | (10 | ) |                            |   | (4,082 | )     |  |   |                                               |   |  |                   |     |   |       |  
|Tax benefit of restricted stock plan vesting |  |                                   |   |  |              |     |   |                            |   | 55     |       |  |   |                                               |   |  |                   |     |   |       |  
|Other                                        |  |                                   |   |  |              |     |   |                            |   |        |       |  |   | 109                                           |   |  |                   |     |   |       |  
|Comprehensive Income:                        |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Unrealized gain on marketable securities     |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   | 28  |   |       |  
|Net income                                   |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Total comprehensive income                   |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|                                             |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Balance, December 31, 2000                   |  | 20,651,107                        |   |  |              | 207 |   |                            |   | 38,960 |       |  |   |                                              |   |  |                   | (12 | ) |       |  
|Repurchase and retirement of common stock    |  | (88,545                           | ) |  |              | (1  | ) |                            |   | (234   | )     |  |   |                                               |   |  |                   |     |   |       |  
|Dividends paid and payable                   |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Comprehensive Loss:                          |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Unrealized gain on marketable securities     |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   | 13  |   |       |  
|Net loss                                     |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Total comprehensive loss                     |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|                                             |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Balance, December 31, 2001                   |  | 20,562,562                        |   |  |              | 206 |   |                            |   | 38,726 |       |  |   |                                              |   |  |                   | 1   |   |       |  
|Repurchase and retirement of common stock    |  | (34,000                           | ) |  |              |     |   |                            |   | (136   | )     |  |   |                                               |   |  |                   |     |   |       |  
|Issuance of common stock                     |  | 231,478                           |   |  |              | 2   |   |                            |   | 638    |       |  |   |                                               |   |  |                   |     |   |       |  
|Tax benefit of stock option exercises        |  |                                   |   |  |              |     |   |                            |   | 10     |       |  |   |                                               |   |  |                   |     |   |       |  
|Dividends paid and payable                   |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Comprehensive Income:                        |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Net income                                   |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Total comprehensive income                   |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|                                             |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  
|Balance, December 31, 2002                   |  | 20,760,040                        |   |  | $            | 208 |   |                            | $ | 39,238 |       |  | $ |                                              |   |  | $                 | 1   |   |       | $
|                                             |  |                                   |   |  |              |     |   |                            |   |        |       |  |   |                                               |   |  |                   |     |   |       |  



See notes
to consolidated financial statements.



F-5



---

##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                         |  | Year Ended December 31, |         
|---------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                         |  | 2000                    |         
|                                                                                         |  | (in $000s)             |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                         |         
|Net income (loss)                                                                        |  | $                       | 604     
|Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |  |                         |         
|Depreciation and amortization                                                            |  |                         | 8,767   
|Deferred taxes (benefit) provision                                                       |  |                         | (2,166  
|Provision for bad debts                                                                  |  |                         | 258     
|Other                                                                                    |  |                         | (676    
|Changes in operating assets and liabilities:                                             |  |                         |         
|Certificates of depositrestricted                                                       |  |                         | (4      
|Accounts receivable                                                                      |  |                         | (29,970 
|Other current assets                                                                     |  |                         | 7,771   
|Accounts payable and other accrued liabilities                                           |  |                         | (5,431  
|Accrued payroll and payroll taxes                                                        |  |                         | 39,812  
|Accrued insurance premiums, workers compensation and health insurance
reserves          |  |                         | 1,432   
|Income taxes payable                                                                     |  |                         | 195     
|Customer deposits and prepayments                                                        |  |                         | (225    
|Other long-term assets                                                                   |  |                         | (1,211  
|Increase in long-term workers compensation and health insurance
reserves                |  |                         | 19,530  
|Other long-term obligations                                                              |  |                         | 60      
|                                                                                         |  |                         |         
|Net cash provided by operating activities                                                |  |                         | 38,746  
|                                                                                         |  |                         |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                         |         
|Marketable securities classified as available for sale:                                  |  |                         |         
|Purchases                                                                                |  |                         | (168,640
|Maturities                                                                               |  |                         | 166,299 
|Capital expenditures                                                                     |  |                         | (4,184  
|                                                                                         |  |                         |         
|Net cash (used in) provided by investing activities                                      |  |                         | (6,525  
|                                                                                         |  |                         |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                         |         
|Payment of cash dividend to shareholders                                                 |  |                         |        
|Repayment of shareholders notes receivable                                              |  |                         | 59      
|Proceeds from sales of common shares, net                                                |  |                         |        
|Repurchase of common shareholders interests                                             |  |                         | (4,092  
|                                                                                         |  |                         |         
|Net cash used in financing activities                                                    |  |                         | (4,033  
|                                                                                         |  |                         |         
|Net increase (decrease) in cash and cash equivalents                                     |  |                         | 28,188  
|Cash and cash equivalentsbeginning of year                                              |  |                         | 23,081  
|                                                                                         |  |                         |         
|Cash and cash equivalentsend of year                                                    |  | $                       | 51,269  
|                                                                                         |  |                         |         
|Supplemental disclosure of cash flow information:                                        |  |                         |         
|Income taxes paid                                                                        |  | $                       | 92      
|                                                                                         |  |                         |         







See notes to consolidated financial statements.



F-6



---

##### Table of Contents



GEVITY HR,
INC. AND SUBSIDIARIES



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

(in $000s, except per share data)



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of BusinessGevity
HR Inc. and subsidiaries, (the Company) is headquartered in Bradenton, Florida and operates as one business segment which provides human resource outsourcing services to small to medium-sized businesses primarily in the states of
Florida, Texas, Georgia, Arizona, Minnesota, North Carolina, Tennessee, Alabama, Colorado, California and New York. The Company, through its wholly-owned subsidiaries, provides products and services that include assistance with recruiting,
performance management, training and development, benefits administration, payroll administration, regulatory compliance, risk management, unemployment administration and health, welfare and retirement benefits. The Company is paid a service fee to
cover the cost of certain employment related taxes, workers compensation insurance coverage and administration and field services, plus a markup to cover overhead and to provide a profit. The clients portion of health and welfare plan
costs are charged if elected by the client. All fees charged by the Company are invoiced along with each periodic payroll delivered to the client. The component of the service fee related to administration varies according to the size of the client,
the amount and frequency of the payroll payments and the method of delivery of such payments. The component of the service fee related to workers compensation and unemployment insurance is based, in part, on the clients historical claims
experience. In order to utilize the Companys products and services, the client transfers certain employment-related risks and liabilities to the Company and retains other risks and liabilities. In this context, the client and the Company are
each viewed as and become a co-employer of the clients worksite employees.



Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Gevity HR, Inc. and all of its wholly-owned subsidiaries: Gevity HR, LLC; Staff
Insurance, Inc.; Staff Insurance Corp.; Concorda Insurance Company Limited; Jarvis Services Corp.; and the operating limited partnerships (OLPs) of Gevity HR, LP; Gevity HR II, LP; Gevity HR III, LP; Gevity HR IV, LP; Gevity HR V, LP;
Gevity HR VI, LP; Gevity HR VII, LP; Gevity HR VIII, LP; Gevity HR IX, LP; and Gevity HR X, LP (hereafter, collectively, the Company). All intercompany balances and transactions have been eliminated.



Use of EstimatesThe preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Companys most significant estimates relate to the reserve for health
benefit claims and workers compensation claims. Actual results could differ from those estimates.



Marketable SecuritiesThe Company accounts for marketable securities in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company determines the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading
at the time of purchase and re-evaluates such classification as of each balance sheet date. At December 31, 2002, all of the Companys investments in marketable securities, including restricted and unrestricted, are classified as
available-for-sale, and as a result, are reported at market value. Unrealized gains and losses, net of income taxes, are reported as a separate component of shareholders equity and comprehensive income. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. The cost of
investments sold is based on the average cost method, and realized gains and losses are included in other income (expense).



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





Property and EquipmentProperty and equipment are stated at cost. Depreciation is computed using the straight-line method over the lesser of the remaining estimated useful lives of the related assets or lease terms, as
follows:



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



GoodwillAs of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets, and no longer amortizes goodwill but
reviews goodwill for impairment annually, or more frequently if certain indicators arise.



Fair Value of Financial InstrumentsThe carrying values of cash and cash equivalents, marketable securities, accounts receivable, and accounts payable and other accrued liabilities
approximate fair value.



Valuation of
Long-Lived AssetsThe Company periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when indicators of impairment
are present and undiscounted cash flows estimated to be generated by the asset are less than the assets carrying amount. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.



Cash EquivalentsCash equivalents are defined as short-term investments with original maturities of three months or less.



Revenue RecognitionThe gross
billings that the Company charges its clients under its Professional Services Agreement include each worksite employees gross wages, a service fee and, to the extent elected by the clients, health and welfare benefit plan costs. The
Companys service fee, which is computed as a percentage of gross wages is intended to yield a profit to the Company and to cover the cost of certain employment-related taxes, workers compensation insurance coverage, and administrative
and field services provided by the Company to the client, including payroll administration, record keeping, and safety, HR, and regulatory compliance consultation. The component of the service fee related to administration varies according to the
size of the client, the amount and frequency of payroll payments and the method of delivery of such payments. The component of the service fee related to workers compensation and unemployment insurance is based, in part, on the clients
historical claims experience. All charges by the Company are invoiced along with each periodic payroll delivered to the client.



Historically the Company reported the full amount of its comprehensive service fees, including the portion that represents the gross wages
of its worksite employees, as revenue. As described below, the Company changed from gross revenue reporting to net revenue reporting for worksite employee salaries, wages and certain payroll taxes effective for the fourth quarter of 2002.



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





The
Company reports revenues from service fees in accordance with Emerging Issues Task Force (EITF) No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The Company reports as revenues, on a gross basis, the total
amount billed to clients for administration service fees, health and retirement plan fees, workers compensation and unemployment insurance fees. The Company reports revenues on the gross basis for these fees because the Company is the primary
obligor and deemed to be the principal in these transactions under EITF No. 99-19. The Company now reports revenues on a net basis for the amount billed to clients for worksite employee salaries, wages and payroll-related taxes less amounts paid to
worksite employees and taxing authorities for these salaries, wages and taxes. The Company accounts for its revenues using the accrual method of accounting. Under the accrual method of accounting, the Company recognizes its revenues in the period in
which the worksite employee performs work. The Company accrues revenues and unbilled receivables for service fees relating to work performed by worksite employees but unpaid at the end of each period. In addition, the related costs of services are
accrued as a liability for the same period. Subsequent to the end of each period, such costs are paid and the related PEO service fees are billed.



Accounting Change for Reporting Revenue



During the quarter ended December 31, 2002, the Company changed from gross revenue reporting to net revenue reporting for worksite
employee salaries, wages and payroll-related taxes. Based on the criteria established by EITF No. 99-19, the Company determined that this change better recognizes the substance of the transactions between the Company and its clients. In addition,
the change will better focus the Company on, and allow investors to better understand, the financial results of the Companys core business. This change to a more preferable accounting method resulted in no effect on net income or earnings per
share. Because of the significance of this reclassification of revenue and expense components to the income statement, the Company has reflected the change as if it had occurred on January 1, 2000 in the accompanying consolidated financial
statements. The table presented below reflects the effect of the change on the amounts previously reported for 2001 and 2000 and the amounts that would have been reported for 2002 under the gross revenue reporting method.



For the year ended December 31, 2002 (in thousands):



|                   |  | Gross Revenue Reporting Method |           | Reclassification |   |            | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | --------- | ---------------- | - | ---------- | ----------------------------
|Revenues           |  | $                              | 3,404,279 |                  | $ | (3,029,625 | )                           
|Cost of services   |  |                                | 3,313,755 |                  |   | (3,029,625 | )                           
|Gross profit       |  |                                | 90,524    |                  |   |           |                             
|Operating expenses |  |                                | 85,548    |                  |   |           |                             
|Net income (loss)  |  | $                              | 4,737     |                  | $ |           |                             



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





For the year ended
December 31, 2001 (in thousands):



|                   |  | Gross Revenue Reporting Method |           |   | Reclassification |   |            | Net Revenue Reporting Method | 
|------------------ |  | ------------------------------ | --------- | - | ---------------- | - | ---------- | ---------------------------- | 
|Revenues           |  | $                              | 3,180,003 |   |                  | $ | (2,847,175 | )                            | 
|Cost of services   |  |                                | 3,109,018 |   |                  |   | (2,847,175 | )                            | 
|Gross profit       |  |                                | 70,985    |   |                  |   |           |                              | 
|Operating expenses |  |                                | 100,273   |   |                  |   |           |                              | 
|Net income (loss)  |  | $                              | (15,603   | ) |                  | $ |           |                              | 



For the year ended
December 31, 2000 (in thousands):



|                   |  | Gross Revenue Reporting Method |           | Reclassification |   |            | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | --------- | ---------------- | - | ---------- | ----------------------------
|Revenues           |  | $                              | 3,104,240 |                  | $ | (2,781,906 | )                           
|Cost of services   |  |                                | 3,008,675 |                  |   | (2,781,906 | )                           
|Gross profit       |  |                                | 95,565    |                  |   |           |                             
|Operating expenses |  |                                | 99,349    |                  |   |           |                             
|Net income (loss)  |  | $                              | 604       |                  | $ |           |                             



Sales
and Marketing Commissions and Client Referral FeesSales and marketing commissions and client referral fees are expensed as incurred. Such expenses are classified as salaries, wages and commissions in the consolidated statements of
operations.



Workers Compensation
CostsIn 2000, except for worksite employees in Texas, workers compensation claims incurred by worksite employees were insured through a loss sensitive program with CNA. For workers compensation claims incurred in 2000 by
worksite employees located in Texas, the Texas Fund provided a fully insured guaranteed cost arrangement based on a percentage of manual premium. In 2001 and 2002, the workers compensation plan for claims incurred by all worksite employees was a
loss sensitive program with CNA. At least annually, the Company obtains an independent actuarially determined calculation of the estimated costs of claims incurred based on the Companys historical loss development trends. The estimated costs
of the claims calculated may be subsequently revised by the independent actuary based on developments relating to such claims. In order to give recognition to obligations associated with the Companys CNA workers compensation program that
are not expected to be paid in the following fiscal year, the Company has included $47,049 and $60,672 as a long-term liability at December 31, 2001 and 2002, respectively. Such balance reflects a discounted amount of the liability using a rate of
4.0% at December 31, 2001 and 2002, respectively. (See Note 10)



Health BenefitsHealth benefit claims incurred by worksite employees under the health benefit plans are expensed as incurred according to the terms of each contract (See Note 9).



Stock-Based CompensationThe Company has adopted
only the pro forma disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages, but does not require companies to record at fair value compensation cost for stock-based employee compensation
plans. The Company accounts for equity-based compensation arrangements in accordance with the intrinsic value method



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Intrinsic value per share is the amount by which the market price of the underlying stock exceeds the exercise price of the stock option or award on the measurement date, generally the date of grant. The Company implemented SFAS No. 148 effective
January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. The Company has not yet determined whether it will change to the fair-market method of accounting for stock-based employee compensation.



In accordance with Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model for proforma footnote purposes with
the following weighted-average assumptions:



|                                |  | Year Ended December 31, |  
|------------------------------- |  | ----------------------- | -
|                                |  | 2001                    |  
|Risk-free interest rate         |  | 5.40                    | %
|Expected dividend yield         |  | 8.85                    | %
|Expected volatility             |  | 81.49                   | %
|Expected option life (in years) |  | 6.4                     |  



Using
the Black-Scholes option-pricing model, the weighted-average fair value was calculated to be $.76 as of December 31, 2001 and $1.90 as of December 31, 2002 for all options granted during each year.



As permitted by SFAS No. 123, the Company has elected to
continue to account for the Plan in accordance with the intrinsic value method prescribed by APB Opinion 25 and related interpretations. Accordingly, no compensation cost has been recognized for the Plan. Had compensation cost for the options
granted under the Plan been determined based on the fair value at the grant date consistent with the method prescribed by SFAS No. 123, the Companys net income (loss) and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:



|                                                      |  | 2001 |         |   | 2002
|----------------------------------------------------- |  | ---- | ------- | - | ----
|Net (loss) income attributable to common shareholders |  |      |         |   |     
|As reported                                           |  | $    | (15,603 | ) |     
|Pro forma                                             |  | $    | (17,798 | ) |     
|Basic earnings (loss) per share                       |  |      |         |   |     
|As reported                                           |  | $    | (.76    | ) |     
|Pro forma                                             |  | $    | (.86    | ) |     
|Diluted earnings (loss) per share                     |  |      |         |   |     
|As reported                                           |  | $    | (.76    | ) |     
|Pro forma                                             |  | $    | (.86    | ) |     



Income TaxesThe Company records income tax expense using the asset and liability method of accounting for deferred income taxes. Under such method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial statement carrying values and the income tax bases of the Companys assets and liabilities.



Earnings Per ShareThe Company computes and discloses earnings per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share.



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





Comprehensive Income (Loss)SFAS No. 130, Reporting Comprehensive Income was adopted by the Company in the first quarter of 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components. It requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in financial statements or financial statement footnotes. Comprehensive income (loss) is
defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. The only source of other comprehensive income (loss) was an unrealized loss of $12.0, net of tax
effect of $7.0 at December 31, 2000, an unrealized gain of $1.0, net of tax effect of $0.5 at December 31, 2001 and an unrealized gain of $1.0, net of tax effect of $0.5 at December 31, 2002 resulting from changes in market value of marketable
securities, which is reflected in the Consolidated Statements of Changes in Shareholders Equity.



New Accounting PronouncementsIn June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,
Business Combinations and SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company
adopted this accounting standard as of July 1, 2001. The Company did not initiate any business combinations after June 30, 2001; therefore, there is no effect on the Companys financial position or operations related to SFAS No. 141. SFAS No.
142 changes the accounting for goodwill from an amortization method to an impairment-only approach. The Company adopted this standard effective January 1, 2002 and ceased amortization of goodwill in the first quarter of 2002. Application of the
non-amortization provisions of the statement resulted in a decrease in annual amortization of $733 in 2002. In accordance with SFAS No. 142, the Company has determined it has one reporting unit. The Company has conducted a review of goodwill and
other intangible assets as of January 1, 2002 and concluded that there is no goodwill impairment. Subsequent goodwill impairment losses, if any, will be reflected in operating income in the income statement. Pro forma net income (loss) and earnings
per share for the year ended December 31, 2000 and 2001 adjusted to eliminate historical amortization of goodwill and related tax effect follows:



|                                      |  | December 31, 2000 |       | December 31, 2001 |  
|------------------------------------- |  | ----------------- | ----- | ----------------- | -
|Previously reported net income (loss) |  | $                 | 604   |                   | $
|Goodwill amortization, net of tax     |  |                   | 458   |                   |  
|                                      |  |                   |       |                   |  
|Pro forma net income (loss)           |  | $                 | 1,062 |                   | $
|                                      |  |                   |       |                   |  
|Previously reported EPS               |  |                   |       |                   |  
|Basic                                |  | $                 | .03   |                   | $
|Diluted                              |  | $                 | .03   |                   | $
|Pro forma EPS                         |  |                   |       |                   |  
|Basic                                |  | $                 | .05   |                   | $
|Diluted                              |  | $                 | .05   |                   | $



In June
2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The purpose of this statement is to develop consistent accounting of asset retirement obligations and related costs in financial statements and provide more information about future cash outflows, leverage and liquidity
regarding retirement obligations and the gross investment in long-lived assets. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not evaluated the effect, if any, that the
adoption of SFAS No. 143 will have on the Companys consolidated financial statements.



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





In August
2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 replaces SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions
of APB Opinion No. 30, Reporting Results of OperationsReporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. SFAS No. 144 requires that the long-lived assets be measured at the
lower of carrying amount or fair value less costs to sell, whether reported in continued operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating
losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company has evaluated the provisions of this statement and determined that it does not have any material impact on the Companys consolidated financial statements.



In April 2002, the FASB issued SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, and Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers and amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified, as an extraordinary item, in prior periods presented that does not meet the
criteria in APB Opinion 30 for classification as an extraordinary item shall be reclassified. All other provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002. The Company has evaluated the
provisions of this statement and determined that it does not have any material impact on the Companys condensed consolidated financial statements.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is
effective for exit or disposal activities that are initiated after December 31, 2002. The Statement nullifies EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Under Issue 94-3, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. The principal difference between Issue 94-3 and SFAS No. 146 is the
requirement to recognize a liability associated with an exit or disposal activity when the liability is incurred. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The Company has evaluated the
provisions of this statement and determined that it does not have any material impact on the Companys consolidated financial statements.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of SFAS No. 123. This statement provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. This statement also amends the disclosure
requirements of SFAS No. 123 and APB Opinion



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



No. 28, Interim Financial Reporting, to require prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements
for interim periods. The Company has not yet determined whether it will change to the fair-market method of accounting for stock-based employee compensation.



In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, including Direct Guarantees of Indebtedness of Others. Provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. This statement requires the Company to
record, at the inception of a guarantee, the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. Funding under the guarantee are to be recorded as a
reduction of the liability. After funding has ceased, the remaining liability is recognized in the income statement on a straight-line basis over the remaining term of the guarantee. The Company has evaluated the provisions of this interpretation
and determined that it does not have any material impact on the Companys consolidated financial statements.



2.    SEGMENT REPORTING



The Company operates in one reportable segment under SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, due to its centralized structure and the single bundled service offering that it provides to its clients. The Chief Operating Decision Maker of the Company as defined in SFAS 131 reviews financial information on a Company-wide
basis.



3.    CERTIFICATES OF
DEPOSIT  RESTRICTED:



As of
December 31, 2002, the Company had certificates of deposit, with original maturities of less than one year, that serve as collateral for certain standby letters of credit issued in connection with the Companys workers compensation and
health benefit plans. Due to the short maturity of these instruments, the carrying amount approximates fair value. These interest-bearing certificates of deposit have been classified as restricted in the accompanying consolidated balance sheets. The
interest earned on these certificates is recognized as interest income on the Companys consolidated statements of operations.



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





4.    MARKETABLE SECURITIES:



As of December 31, 2002, the Company had marketable securities with contractual maturities of less than one year from the date of purchase. All of the Companys investments in marketable securities are classified as
available-for-sale and are summarized as follows:



|                                                       |  | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Fair Value
|------------------------------------------------------ |  | -------------- | ------ | ---------------------- | - | ----------------------- |  | --------------------
|As of December 31, 2001:                               |  |                |        |                        |   |                         |  |                     
|Obligations of U.S. Government Agencies  Unrestricted |  | $              | 2,701  |                        | $ |                        |  | $                   
|Obligations of U.S. Government Agencies  Restricted   |  |                | 24,078 |                        |   | 1                       |  |                     
|                                                       |  |                |        |                        |   |                         |  |                     
|                                                       |  | $              | 26,779 |                        | $ | 1                       |  | $                   
|                                                       |  |                |        |                        |   |                         |  |                     
|As of December 31, 2002:                               |  |                |        |                        |   |                         |  |                     
|Preferred Convertible Securities  Restricted          |  | $              | 8,200  |                        |   |                        |  |                     
|Commercial Paper  Restricted                          |  |                | 3,500  |                        |   |                        |  |                     
|Municipal Bonds  Restricted                           |  |                | 57,800 |                        |   |                        |  |                     
|Money Market  Restricted                              |  |                | 9,523  |                        |   |                        |  |                     
|                                                       |  |                |        |                        |   |                         |  |                     
|                                                       |  | $              | 79,023 |                        | $ |                        |  | $                   
|                                                       |  |                |        |                        |   |                         |  |                     



The
unrealized gains and losses shown at December 31, 2001 and 2002, net of tax effect of $0.5 and $0.5, respectively, are reflected as other comprehensive income (loss) in the Consolidated Statements of Changes in Shareholders Equity. For the
years ended December 31, 2001 and 2002, there were no gross realized gains or losses on sales of available-for-sale securities.



At December 31, 2001 and 2002, the Companys marketable securities included unamortized premiums of $0 and $0, respectively. At
December 31, 2001 and 2002, the Companys marketable securities included unamortized discounts of $12 and $0, respectively. During the year ended December 31, 2001, premium amortization of $52 and discount accretion of $302 were included in
interest income. During the year ended December 31, 2002, premium amortization of $0 and discount accretion of $47 were included in interest income.



5.    ACCOUNTS RECEIVABLE



At December 31, 2001 and 2002, accounts receivable consisted of the following:



|                                      |  | 2001 |        |   | 2002 |  
|------------------------------------- |  | ---- | ------ | - | ---- | -
|Billed to clients                     |  | $    | 10,678 |   |      | $
|Unbilled revenues                     |  |      | 69,145 |   |      |  
|                                      |  |      |        |   |      |  
|                                      |  |      | 79,823 |   |      |  
|Less: Allowance for doubtful accounts |  |      | (747   | ) |      |  
|                                      |  |      |        |   |      |  
|                                      |  | $    | 79,076 |   |      | $
|                                      |  |      |        |   |      |  



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





6.    PROPERTY AND EQUIPMENT



At December 31, 2001 and 2002, property and equipment consisted of the following:



|                               |  | 2001 |         |   | 2002 |  
|------------------------------ |  | ---- | ------- | - | ---- | -
|Leasehold improvements         |  | $    | 2,388   |   |      | $
|Furniture and fixtures         |  |      | 3,473   |   |      |  
|Vehicles                       |  |      | 25      |   |      |  
|Equipment                      |  |      | 2,044   |   |      |  
|Computer hardware and software |  |      | 47,376  |   |      |  
|                               |  |      |         |   |      |  
|Total property and equipment   |  |      | 55,306  |   |      |  
|Less accumulated depreciation  |  |      | (31,660 | ) |      |  
|                               |  |      |         |   |      |  
|                               |  | $    | 23,646  |   |      | $
|                               |  |      |         |   |      |  



For the
years ended December 31, 2000, 2001, and 2002 depreciation expense was $8,034, $8,475, and $7,783, respectively.



7.    OTHER ASSETS AND AMORTIZATION



Included in other current assets as of December 31, 2001 and 2002 were prepaid employment taxes of $1,061 and $805, respectively. Also
included in other current assets were miscellaneous receivables, prepaid expenses, and short-term deposits.



For the years ended December 31, 2000, 2001 and 2002, total amortization expense, including annual amortization of goodwill of $733 per
year during 2000 and 2001, was $733, $787, and $333, respectively. The Company adopted SFAS No. 142 effective January 1, 2002 and ceased amortization of goodwill.



8.    LONG-TERM DEBT



The Company had no long-term debt as of December 31, 2002. In July 1999, the Company entered into an
agreement with Bank of America (formerly NationsBank) for a $10 million revolving line of credit to provide for daily working capital needs. Since its inception no borrowings were made against the credit line. The Company did not renew the agreement
when it expired in July 2001.



The Company had
$10,183 and $13,431 in standby letters of credit at December 31, 2001 and 2002, respectively. These letters of credit were issued in conjunction with the Companys CNA workers compensation programs and the Companys health benefit
plans. In addition, the Company held $24,079 and $79,023 in restricted marketable securities at December 31, 2001 and 2002 as collateral for the Companys CNA workers compensation programs. Finally, net surety bonds of $40,200 and $0 at
December 31, 2001 and 2002, respectively, were outstanding related to the Companys CNA workers compensation plan (see Note 10).



9.    HEALTH BENEFITS



Employee benefit costs are comprised primarily of medical benefit plan costs, but also include the costs of other employee benefits such
as dental, vision, disability and group life insurance. With respect to medical



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



benefit plans, the Company will continue to enforce minimum rates that apply to worksite employee participation and the amount each client
contributes toward the cost of providing the Companys health benefit plans to its worksite employees.



Blue Cross Blue Shield of Florida (BCBS) is the primary managed care company providing health insurance to Florida worksite
employees, although Capital Health Plans provides HMO coverage to worksite employees in the Tallahassee, Florida region. The Companys policy with BCBS is a three-year minimum premium arrangement entered into as of January 1, 2000. The Company
renewed its policy with BCBS as of January 1, 2003 for an additional three year term. Pursuant to this arrangement, the Company is obligated to reimburse BCBS for the cost of the claims incurred by participants under the plan, plus the cost of plan
administration. The administrative costs per covered worksite employee associated with this policy are specified for each plan year and includes the cost of aggregate stop loss coverage at the level of 115% of projected claims. The Companys
obligations to BCBS are secured by letters of credit. As of December 31, 2001 and 2002, the letter of credit for BCBS was $6,000. The $6,000 approximated one months claims payments. The new three-year policy, effective January 1, 2003 adjusts
the letter of credit amounts based on premium volume and increases the claims payment factor to a maximum of two months.



As of December 31, 2002, BCBS no longer covers clients based in Alabama. Worksite employees of Alabama-based clients are now covered by
client sponsored plans.



In Minnesota,
HealthPartners (Minnesota) provides health coverage to Minnesota worksite employees.



Aetna U. S. Healthcare (Aetna) is the primary health care provider for worksite employees throughout the remainder of the country. Under the Aetna health plan, worksite employees must work
a minimum of 25 hours per week to be eligible for coverage. Additional eligibility criteria may be established in each clients benefits contract. With respect to the Aetna health plan, the Company requires each client that elects health
coverage to meet minimum contribution and worksite employee participation rates. The Aetna 2002 health plan is subject to a guaranteed cost contract that caps the Companys annual liability.



The Companys dental plans, which include both a PPO and
HMO offering, are provided by Aetna for all worksite employees who elect coverage. The Aetna dental plan is subject to a guaranteed cost contract that caps the Companys annual liability.



In certain instances, the Company opts to make a contribution
toward the worksite employees medical benefit plan costs. This contribution is referred to as a health plan subsidy. The addition of these selected worksite employees as participants in the Companys medical benefit plans helps to
stabilize the risk associated with those plans.



The amount of the Companys contribution toward medical benefit plan costs is determined as part of the annual enrollment pricing process that usually takes place during the third quarter of each year. A health benefit plan
subsidy in excess of a planned amount may occur when medical cost inflation exceeds expected inflation levels or when medical benefit plan enrollment of those who qualify for a subsidy is greater than anticipated.



In 2002, the Company recorded a health benefit subsidy of
$9,500 for the 2002 plan. In 2001, the health benefit plan subsidy was $9,283. Unfavorable experience on the maturation or run-out of health benefit plan claims for the 2000 year and internal premium billing and collection issues in 2001 resulted in
the Company



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



increasing its health benefit plan subsidy in 2001. The Company has significantly reduced the internal premium billing and collection issues.



For 2001 and 2002, year-end liabilities for
health benefit loss reserves were based upon actuarial estimates of claims incurred but not reported under the health plans at December 31, 2001 and 2002, respectively. The accrual for these reserves and for claims reported but not paid at December
31, 2001 and 2002, totaled $16,071 and $20,988, respectively, of which $1,000 was classified as long-term for each year.



The Companys collateralization obligations under its medical benefit plans are funded through 2002. The Company has announced that
it has renewed its medical benefit plan with Aetna for 2003. The Company anticipates that $2,000 of cash and cash equivalents will be used to collateralize the Aetna program. The final amount of collateral is subject to determination based on the
number of plan participants electing PPO coverage. The Company has also announced that it has renewed its medical benefit plan with Blue Cross Blue Shield of Florida (BCBS). The amount of collateral that is required to be provided to
BCBS is expected to increase over the three-year renewal term, based in part on the increase in plan participation, the increases in claim costs and an increase in the expected percentage of the incurred but not reported claims that the Company will
be required to collateralize.



10.    WORKERS COMPENSATION COSTS



The Company has had a loss sensitive workers compensation insurance program with CNA since January 1, 2000. An annual insurance policy has been written by CNA for the Company for each calendar
year since the inception of the program as of January 1, 2000.



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



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



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



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



With respect to the claim payment
timing risk, the Company pays premiums to CNA and guarantees a specific investment return on those premium payments. If the premium payments plus the guaranteed investment



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



returns are not adequate to fund a specific amount of claims due to the payment pattern of those claims being faster than expected, then CNA
is required to fund the additional amounts required.



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



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



The Company accrues for workers compensation costs under the CNA program based upon payroll dollars paid to worksite employees, the
specific risks associated with the type of work performed by the worksite employees, the administrative costs of the program, the expected rate of return earned by premium dollars paid to CNA as part of the program and the discount rate used to
determine the present value of future payments to be made under the program. Total liabilities for workers compensation costs at December 31, 2001 and December 31, 2002, respectively, were $61,918 and $74,397 of which $47,048 and $60,672,
respectively, were classified as long-term. Included in the total liabilities for workers compensation costs is the liability related to the expected payment for the investment guarantee provided by the Company to CNA.



The Company had issued $3,750 and $7,000 in standby letters of
credit at December 31, 2001 and December 31, 2002, respectively, in conjunction with the Companys CNA workers compensation programs. In addition, the Company had pledged $24,079 and $79,023 in restricted marketable securities at December
31, 2001 and December 31, 2002, respectively, as collateral for the Companys CNA workers compensation programs. Finally, net surety bonds of $40,200 and $0 at December 31, 2001 and December 31, 2002, respectively, were outstanding
related to the CNA workers compensation programs.



11.    COMMITMENTS AND CONTINGENCIES



Operating LeasesThe Company occupies office facilities and leases office equipment under operating leases which expire in various years through 2007. Rent expense was $4,885, $5,040, and
$5,015 for the years



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



ended December 31, 2000, 2001, and 2002, respectively. Future minimum payments under non-cancelable operating leases as of December 31, 2002
are as follows:



|Year Ending December 31, |  | Amount
|------------------------ |  | ------
|2003                     |  | $     
|2004                     |  |       
|2005                     |  |       
|2006                     |  |       
|2007                     |  |       
|Thereafter               |  |       
|                         |  |       
|                         |  | $     
|                         |  |       



LitigationOn April 30, 1999, a shareholder of the Company brought a class action in the Twelfth Judicial Division, Manatee County, Florida against the Company and certain of its directors alleging that the directors and
senior officers of the Company breached their fiduciary duty to shareholders by failing to pursue a proposal from Paribas Principal Partners to acquire the Company in order to entrench themselves in the management of the Company. Plaintiff seeks
injunctive relief and unspecified damages including attorneys and experts fees. Negotiations continue between defendants and counsel for the putative plaintiff class in an effort to finalize a definitive settlement agreement. Once
finalized, any agreed upon settlement is subject to court approval following notice to the putative class. Management does not expect any settlement to have a material effect on the Companys financial position or results of operations.



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



Regulatory MattersThe Companys employer and health care operations are subject to numerous federal, state and local
laws related to employment, taxes and benefit plan matters. Generally, these rules affect all companies in the U.S. However, the rules that govern PEOs constitute an evolving area due to uncertainties resulting from the non-traditional employment
relationship between the PEO, the client and the worksite employees. Many federal and state laws relating to tax and employment matters were enacted before the widespread existence of PEOs and do not specifically address the obligations and
responsibilities of these PEO relationships. If the IRS concludes that PEOs are not employers of certain worksite employees for purposes of the Internal Revenue Code of 1986, as amended (the Code), the tax qualified status of
the Companys defined contribution retirement plan as in effect prior to April 1, 1997 could be revoked, its cafeteria plan may lose its favorable tax status and the Company, as defined, may no longer be able to assume the clients federal
employment tax withholding obligations and certain defined employee benefit plans maintained by the Company may be denied the ability to deliver benefits on a tax-favored basis as intended. On May 13, 2002, the IRS released guidance applicable
solely to the tax-qualified status of defined contribution retirement plans maintained by PEOs. In that guidance, the IRS declared that it would not assert a violation of the exclusive benefit rule under Section 401(a) of the Internal Revenue Code
if a PEO that maintains a single employer defined contribution retirement plan for worksite employees takes certain remedial action by the last day of the first plan year beginning on or after January 1, 2003. The Company maintains a frozen single
employer defined contribution retirement plan benefiting certain worksite employees and intends to take remedial action to qualify for the relief



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



provided under the IRS guidance within the applicable deadline. Since the plan has been frozen since April 1, 1997 and the assets in the plan
are less than $4 million, this change is not expected to have a material effect on the Companys financial condition and future results of operations. The Company also maintains an active defined contribution retirement plan with participants
that include worksite employees. The active plan is designed as a multiple employer plan and, as such, its status is unaffected by the recent IRS guidance. Any other adverse developments in the above noted areas could have a material effect on the
Companys financial condition and future results of operations.



12.    RELATED PARTIES



In 2001, two members of the Board of Directors utilized the services of the Company with respect to themselves and their companies. The amount of service fees paid by the two members was equal to $66.



In 2002, three members of the Board of Directors utilized the
services of the Company with respect to themselves and their companies. The amount of service fees paid by the three members was equal to $60.



On December 28, 2000, the Company purchased 25,000 shares of its Common Stock from John E. Panning, the Companys CFO, for its stock
repurchase program. The purchase of such shares was at a price of $3.156 a share, which represented the average closing price of the stock for the ten business-day period beginning December 13, 2000.



13.    RETIREMENT PLAN



The Company offers a defined contribution 401(k) retirement
plan to its internal employees as well as its external worksite employees. For years prior to 2001 and in 2002, the Company did not match any portion of internal employees elective contributions. In 2001, the Company matched 50% of internal
employees contributions up to a maximum of 2% of employees compensation. The Company had 401(k) retirement matching expense of $0, $464 and $0, for the years 2000, 2001 and 2002, respectively. The Companys 401(k) plan is designed
to be a multiple employer plan under the Internal Revenue Code Section 413(c). This multiple employer plan enables employee-owners, as well as highly compensated internal and external employees of the Company, to participate.



14.    GEOGRAPHIC MARKET CONCENTRATION
AND DEPENDENCE ON KEY VENDORS



Geographic
Market ConcentrationAs of December 31, 2002, the Company had offices in ten states and worksite employees in 49 states. The Companys Florida client billings accounted for 71%, 68% and 74% of the Companys total client billings
in 2000, 2001 and 2002, respectively. As a result of the size of the Companys base of worksite employees in Florida and continued growth from its Florida operations, the Companys profitability over the next several years is expected to
be largely dependent on economic and regulatory conditions in Florida. Any adverse change in either of these conditions could have a material adverse effect on the Companys future profitability and growth prospects.



Dependence on Key VendorsThe maintenance of insurance
plans including workers compensation and health that cover worksite employees is a significant part of the Companys business. The current contracts are provided by vendors on terms that the Company believes to be favorable. While the
Company believes that replacement contracts could be obtained on competitive terms with other carriers, such replacement could cause a



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



significant disruption to the Companys business resulting in a decrease in client retention and general dissatisfaction with the
Companys service offering. This, in turn, could have a material adverse effect on the Companys future results of operations or financial condition.



15.    EQUITY



Stock Repurchase Program



In August 1998, the Companys Board of Directors approved a program to repurchase up to two million shares of the Companys
common stock. In January 1999, the Companys Board of Directors amended this share repurchase plan to cover up to three million shares. Purchases were made from time to time depending upon the Companys stock price, and were purchased
primarily in the open market, but could be made through privately negotiated transactions. In 2000, the Company repurchased for retirement 1,058,435 shares of its common stock for a total cost of approximately $4,100. Another 38,545 shares were
repurchased and retired by the Company in the first quarter of 2001 at a cost of $135.



Restricted Stock Plan



Certain members of the Companys management purchased common shares from the Company at prices based upon a formula derived from the original acquisition price of the entities acquired by Staff Capital, L.P. in November 1993.
Before July 1995, such common shares could only be sold to the Company and were not freely transferable. The sales price that the Company would pay was based upon the same formula used to derive the original purchase price. In July 1995 the Company
enacted a vesting schedule whereby the above-noted restrictions generally would lapse over a four-year vesting period commencing with the first anniversary subsequent to the date of purchase. Accordingly, the Company obtained appraisals in order to
derive estimated fair values of the purchased common shares then owned as of July 1995 and subsequently purchased and recorded deferred compensation expense to the extent that the estimated fair values exceeded the purchase prices. Deferred
compensation was amortized on a straight-line basis over the vesting period. Compensation expense recorded for the years ended December 31, 2000, 2001, and 2002 was $37, $0 and $0, respectively. Deferred compensation was $0 at December 31, 2001 and
2002. The Company ceased further grants under this plan in 1997.



Warrants



Warrants to
purchase 1,352,253 shares of common stock at the exercise price of $7.24 per share were issued to redeem certain preferred limited partnership interests in July 1997. These warrants were exercisable beginning June 25, 1997. In April 1998, 177,709 of
these warrants were exercised as part of the Companys secondary offering. Proceeds from this exercise, net of expenses of $450, totaled $837. As of December 31, 1999, and 2000, 1,174,544 of these warrants remained outstanding. An equivalent
number of shares of stock were being held in reserve as of December 31, 2001 to meet this contractual commitment. The exercise period for the 1,174,544 warrants expired on March 31, 2001.



Employee Stock Option Plan



In 1997, the Company adopted the 1997 Stock Incentive Plan
(the 1997 Plan). The Plan provides for options to be granted to key employees, officers, and directors of Gevity HR, Inc. for the purchase of up to



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



2,500,000 shares of common stock. Options granted under the Plan generally have a vesting period of 4 years and may not be exercised more
than 10 years from the date of the grant, except as noted below. In May of 2000, shareholders approved an amendment to the plan that increased the number of shares reserved for issuance under the plan by 2,000,000 shares.



Due to the decline in the market price of the Companys
common stock in the third and fourth quarters of 1998, the Company took steps to ensure that the options previously granted under the Plan would continue to provide a meaningful incentive to its grantees. On August 19, 1998, the Company cancelled
59,000 options which had been granted to certain employees during the previous twelve months, and reissued them at an exercise price equal to $18.0625, with all other option terms and conditions remaining the same as those originally granted.



On December 14, 1998, the Company approved an
option reissuance grant for all non-executive employees currently participating in the Plan. The Companys Directors and senior management, holding 158,500 options, were excluded from this reissuance grant. Under the terms of the reissuance
grant, employees were offered the right to receive, in exchange for the surrender of their existing options, nonqualified stock options with an exercise price equal to that days closing market price per common share of $11.625. The ratio for
the exchange of options was 110 new shares for each 100 existing shares surrendered. This ratio was determined using the Black-Scholes option pricing model. The expiration date for all new options issued under this reissuance grant is December 14,
2003. In addition, previous vesting restrictions based on stock price performance were removed. A total of 430,946 options were subject to this reissuance grant.



On June 15, 2000, as part of an employment agreement, the Company issued 400,000 options to Michael K.
Phippen, the Companys CEO, of which 150,000 options were to vest when the Companys stock price reached specific target market prices. As a result of the resignation of Mr. Phippen in October 2001, 295,814 of these options expired in
October 2001. All remaining options expired in January 2003.



In May 2002, the shareholders approved a new stock option plan the 2002 (the 2002 plan). The Plan provides for options to be granted to key employees, officers and directors of Gevity HR, Inc. for the purchase of up to
2,000,000 shares of common stock. Options granted under the 2002 plan generally have a vesting period of 4 years and may not be exercised more than 10 years from the date of grant.



The following table summarizes the activity in the Plan for the years ended December 31, 2001 and 2002:



|                                   |  | Number of Shares |  | Weighted-Average Price
|---------------------------------- |  | ---------------- |  | ----------------------
|2001:                              |  |                  |  |                       
|Granted                            |  | 1,398,500        |  | $                     
|Exercised                          |  |                 |  |                       
|Cancelled                          |  | 697,120          |  | $                     
|Options outstanding at end of year |  | 3,534,233        |  | $                     
|Options exercisable at end of year |  | 1,289,020        |  | $                     
|                                  
|2002:                              |  |                  |  |                       
|Granted                            |  | 2,277,000        |  | $                     
|Exercised                          |  | 8,750            |  | $                     
|Cancelled                          |  | 585,050          |  | $                     
|Options outstanding at end of year |  | 5,217,433        |  | $                     
|Options exercisable at end of year |  | 1,910,717        |  | $                     



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GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





Components
of stock options under this Plan as of December 31, 2002 are as follows:



|Options Outstanding |  | Options Exercisable                        
|------------------- |  | -------------------------------------------
|Number of Shares    |  | Weighted-Average Remaining Contractual Life
|1,036,375           |  | 8.9 Years                                  
|3,372,433           |  | 8.8 Years                                  
|226,126             |  | 6.4 Years                                  
|416,299             |  | 2.9 Years                                  
|55,000              |  | 6.0 Years                                  
|58,700              |  | 4.5 Years                                  
|52,500              |  | 5.0 Years                                  
|                    |  |                                            
|5,217,433           |  | 8.2 Years                                  
|                    |  |                                            



Employee Stock
Purchase Plan



On May 24, 2001, the
Companys shareholders approved a new employee stock purchase plan. The first offering period of the plan was from July 1 through December 31, 2001. Internal employees of the Company, who regularly work more than 20 hours per week and have been
employed with the Company for at least ninety days prior to the offering period, are eligible to participate in the plan. Participants, through payroll deduction, may purchase a maximum of 500 shares during the offering period at a cost of 85% of
the lower of the stock price as of the beginning and ending of the stock offering period. During 2001 and 2002, the Company purchased in the open market 50,000 shares and 34,000 shares of stock at a cost of $100 and $136, respectively to be held for
the employee stock purchase plan. Employees purchased 33,823 shares and 45,255 shares under this plan for the periods ending December 31, 2001 and 2002, respectively.



Prior to June 30, 2001, all full-time employees were eligible to participate in an employee stock purchase
plan that had been in effect since January 1, 1998. Under the terms of this plan, after 90 days of employment, employees could choose each year to have up to 100% of their annual base earnings withheld to purchase the Companys common stock on
the open market. The Company absorbed all transaction costs and administrative fees associated with stock purchases through this plan. This plan was terminated as of June 30, 2001 after approval of the new employee stock purchase plan.



Subsequent Events:



On March 6, 2003, the Company announced that it executed a
letter of intent on March 5, 2003 for the sale of its convertible preferred stock to an affiliate of Frontenac Company LLC (Frontenac) in a private placement for a purchase price of $30 million. Frontenac is a Chicago-based private
equity investment firm with over $1 billion under active management.



The Company also announced on March 6, 2003, that it executed a letter of intent with Charles S. Craig on March 5, 2003, to purchase 3.1 million shares of Gevity common stock held by Mr. Craig, at a per share price of $5.44
less $.06 per share to reimburse the Company for related expenses. The price of $5.44 is the average of the closing prices of the Companys common stock for the five business days preceding the execution of such letter



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)



of intent. Mr. Craigs holding in the Company will be reduced from 4.9 million shares to 1.8 million shares (or 9.9% of the
Companys outstanding shares of common stock as of March 5, 2003) after the purchase is completed.



Proceeds from the sale of the convertible preferred stock will provide additional capital to the Company to enable it to pursue its growth
strategy, including possible acquisitions. In addition, $16.6 million of the proceeds will be used by the Company to fund the purchase of Mr. Craigs shares of common stock.



Under the terms of the agreement with Frontenac, dividends will accrue on the convertible preferred stock at
the greater of (i) 4% of its stated value or (ii) on an as converted basis, the amount declared on the Companys common stock on a per share basis. The convertible preferred stock will be convertible into common stock at a per share price of
$5.44 which is the average of the closing prices of the Companys common stock for the five business days preceding the execution of this letter of intent. This could result in the issuance of up to 5.5 million shares of common stock upon
conversion, or approximately 23.6% of the outstanding shares of common stock as of March 5, 2003, on an as-converted basis, after the repurchase of Mr. Craigs shares.



As part of the financing, two representatives of Frontenac will join the Board of Directors of the Company.
The closing of the private placement with Frontenac is subject to the Company and Frontenac entering into a definitive agreement, approval of the Companys Board of Directors, shareholder approval and other customary conditions. Such
shareholder approval will be sought at the Annual Meeting of Shareholders to be held on May 22, 2003. The closing of the private placement and the repurchase of Mr. Craigs shares will occur promptly after such shareholder approval is received.



16.    EARNINGS PER SHARE



The number of common stock equivalents
included in weighted average shares outstanding, for the twelve months ended December 31, 2000, 2001 and 2002, related to the options granted in connection with the Companys stock option plan was 12,084, 5,821, and 351,834 respectively, for
the diluted earnings per share calculation.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





The
reconciliation of net income (loss) attributable to common stock and shares outstanding for the purposes of calculating basic and diluted earnings (loss) per share for the three years ended December 31, 2000, 2001 and 2002 is as follows:



|                                                                       |  | Income (Loss) (Numerator) |         |   | Shares (Denominator) |        | Per Share Amount |  
|---------------------------------------------------------------------- |  | ------------------------- | ------- | - | -------------------- | ------ | ---------------- | -
|                                                                       |  | (in $000s)               |         |   | (in 000s)           |        |                  |  
|For the Year Ended 2000:                                               |  |                           |         |   |                      |        |                  |  
|Basic EPS                                                              |  |                           |         |   |                      |        |                  |  
|Net income                                                             |  | $                         | 604     |   |                      | 21,361 |                  | $
|                                                                       |  |                           |         |   |                      |        |                  |  
|Effect of dilutive securities:                                         |  |                           |         |   |                      |        |                  |  
|Options                                                                |  |                           |         |   |                      | 12     |                  |  
|                                                                       |  |                           |         |   |                      |        |                  |  
|Diluted EPS                                                            |  |                           |         |   |                      |        |                  |  
|Net income attributable to common shareholders and assumed conversions |  | $                         | 604     |   |                      | 21,373 |                  | $
|                                                                       |  |                           |         |   |                      |        |                  |  
|For the Year Ended 2001:                                               |  |                           |         |   |                      |        |                  |  
|Basic EPS                                                              |  |                           |         |   |                      |        |                  |  
|Net loss                                                               |  | $                         | (15,603 | ) |                      | 20,606 |                  | $
|                                                                       |  |                           |         |   |                      |        |                  |  
|Effect of dilutive securities:                                         |  |                           |         |   |                      |        |                  |  
|Options                                                                |  |                           |         |   |                      | 6      |                  |  
|                                                                       |  |                           |         |   |                      |        |                  |  
|Diluted EPS                                                            |  |                           |         |   |                      |        |                  |  
|Net loss attributable to common shareholders and assumed conversions   |  | $                         | (15,603 | ) |                      | 20,612 |                  | $
|                                                                       |  |                           |         |   |                      |        |                  |  
|For the Year Ended 2002:                                               |  |                           |         |   |                      |        |                  |  
|Basic EPS                                                              |  |                           |         |   |                      |        |                  |  
|Net income                                                             |  | $                         | 4,737   |   |                      | 20,722 |                  | $
|                                                                       |  |                           |         |   |                      |        |                  |  
|Effect of dilutive securities:                                         |  |                           |         |   |                      |        |                  |  
|Options                                                                |  |                           |         |   |                      | 352    |                  |  
|                                                                       |  |                           |         |   |                      |        |                  |  
|Diluted EPS                                                            |  |                           |         |   |                      |        |                  |  
|Net income attributable to common shareholders and assumed conversions |  | $                         | 4,737   |   |                      | 21,074 |                  | $
|                                                                       |  |                           |         |   |                      |        |                  |  



F-26



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##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





The
following table represents the number and range of exercise prices of the options which were not included in the computation of diluted EPS by quarter for 2000 because the options exercise prices were greater than the average market price:



|                  |  | Antidilutive Options Outstanding at End
Of Period Shown |  | Range of Exercise Prices |             | Average Stock Price
|----------------- |  | ------------------------------------------------------- |  | ------------------------ | ----------- | -------------------
|1st Quarter, 2000 |  | 1,140,068                                               |  | $                        | 8.44$18.06 |                    
|2nd Quarter, 2000 |  | 2,166,287                                               |  | $                        | 3.88$18.06 |                    
|3rd Quarter, 2000 |  | 1,164,919                                               |  | $                        | 4.00$18.06 |                    
|4th Quarter, 2000 |  | 2,494,853                                               |  | $                        | 3.68$18.06 |                    
|                  |  |                                                         |  |                          |             |                    
|                  |  |                                                         |  |                          |             |                    
|                  |  |                                                         |  |                          |             |                    



The
following table represents the number and range of exercise prices of the options which were not included in the computation of diluted EPS by quarter for 2001 because the options exercise prices were greater than the average market price:



|                  |  | Antidilutive Options Outstanding at End Of Period Shown |  | Range of Exercise Prices |             | Average Stock Price
|----------------- |  | ------------------------------------------------------- |  | ------------------------ | ----------- | -------------------
|1st Quarter, 2001 |  | 2,523,401                                               |  | $                        | 3.63$18.06 |                    
|2nd Quarter, 2001 |  | 2,531,259                                               |  | $                        | 3.63$18.06 |                    
|3rd Quarter, 2001 |  | 2,641,679                                               |  | $                        | 3.38$18.06 |                    
|4th Quarter, 2001 |  | 3,534,233                                               |  | $                        | 1.17$18.06 |                    
|                  |  |                                                         |  |                          |             |                    
|                  |  |                                                         |  |                          |             |                    
|                  |  |                                                         |  |                          |             |                    



The
following table represents the number and range of exercise prices of the options that were not included in the computation of diluted EPS by quarter for 2002 because the options exercise prices were greater than the average market price:



|                  |  | Antidilutive Options Outstanding at End Of Period
Shown |  | Range of Exercise Prices |  | Average Stock Price
|----------------- |  | ------------------------------------------------------- |  | ------------------------ |  | -------------------
|1st Quarter, 2002 |  | 2,395,462                                               |  | $2.93$18.06             |  | $                  
|2nd Quarter, 2002 |  | 1,092,592                                               |  | $4.00$18.06             |  |                    
|3rd Quarter, 2002 |  | 2,960,377                                               |  | $3.35$18.06             |  |                    
|4th Quarter, 2002 |  | 3,449,400                                               |  | $3.77$18.06             |  |                    
|                  |  |                                                         |  |                          |  |                    
|                  |  |                                                         |  |                          |  | $                  
|                  |  |                                                         |  |                          |  |                    



17.    INCOME TAXES



The Company records income tax expense using the asset and liability method of accounting for deferred income taxes. Under such method, deferred tax assets and liabilities are recognized for the expected future tax consequences of
temporary differences between the financial statement carrying values and the income tax bases of the Companys assets and liabilities. A valuation allowance is recorded when it is more likely than not that any or all of a deferred tax asset
will not be realized. The provision for income taxes includes taxes currently payable plus the net change during the year in deferred tax assets and liabilities recorded by the Company.



F-27



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##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





The
provision (benefit) for income taxes for the year ended December 31, 2000 is as follows:



|                    |  | Current |       | Deferred |   |        | Total | 
|------------------- |  | ------- | ----- | -------- | - | ------ | ----- | 
|U.S. Federal tax    |  | $       | 1,070 |          | $ | (2,064 | )     | 
|State and local tax |  |         | 171   |          |   | (207   | )     | 
|                    |  |         |       |          |   |        |       | 
|Total provision     |  | $       | 1,241 |          | $ | (2,271 | )     | 
|                    |  |         |       |          |   |        |       | 





The provision (benefit) for income taxes for the year ended December 31, 2001 is as follows:



|                          |  | Current |       |   | Deferred |   |         | Total | 
|------------------------- |  | ------- | ----- | - | -------- | - | ------- | ----- | 
|U.S. Federal tax          |  | $       | 1,024 |   |          | $ | (10,413 | )     | 
|State and local tax       |  |         | (39   | ) |          |   | (974    | )     | 
|                          |  |         |       |   |          |   |         |       | 
|Total provision (benefit) |  | $       | 985   |   |          | $ | (11,387 | )     | 
|                          |  |         |       |   |          |   |         |       | 



The
provision (benefit) for income taxes for the year ended December 31, 2002 is as follows:



|                          |  | Current |       | Deferred |   |        | Total
|------------------------- |  | ------- | ----- | -------- | - | ------ | -----
|U.S. Federal tax          |  | $       | 3,939 |          | $ | (1,851 | )    
|State and local tax       |  |         | 669   |          |   | (406   | )    
|                          |  |         |       |          |   |        |      
|Total provision (benefit) |  | $       | 4,608 |          | $ | (2,257 | )    
|                          |  |         |       |          |   |        |      



The
reconciliation of the income tax amounts based on the statutory U.S. Federal rate to the amounts based on the effective tax rate for the years ended December 31, 2000, 2001 and 2002 is as follows:



|                                          |  | 2000 |        |    | 2001 |   |         | 2002 | 
|----------------------------------------- |  | ---- | ------ | -- | ---- | - | ------- | ---- | 
|Statutory U.S. Federal tax at 34%         |  | $    | (145   | )  |      | $ | (8,842  | )    | 
|Increase (reduction) from:                |  |      |        |    |      |   |         |      | 
|State income taxes, less Federal benefit  |  |      | 26     |    |      |   | (1,013  | )    | 
|Interest income exempt from Federal taxes |  |      | (352   | )  |      |   |        |      | 
|Tax credits                               |  |      | (660   | )  |      |   | (660    | )    | 
|Other, net                                |  |      | 101    |    |      |   | 113     |      | 
|                                          |  |      |        |    |      |   |         |      | 
|Income tax provision (benefit)            |  | $    | (1,030 | )  |      | $ | (10,402 | )    | 
|                                          |  |      |        |    |      |   |         |      | 
|Effective tax rate                        |  |      | (241.8 | %) |      |   | (40.0   | %)   | 
|                                          |  |      |        |    |      |   |         |      | 



F-28



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##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





The
components of deferred tax assets and liabilities included on the balance sheet at December 31, 2001 and 2002 are as follows:



|                                                       |  | 2001 |        | 2002
|------------------------------------------------------ |  | ---- | ------ | ----
|Deferred Tax Assets:                                   |  |      |        |     
|Tax basis in excess of book basis of intangible assets |  | $    | 3,469  |     
|Reserves not currently deductible                      |  |      | 30,414 |     
|Tax credit carryover                                   |  |      | 1,525  |     
|                                                       |  |      |        |     
|Total deferred tax assets                              |  |      | 35,408 |     
|Deferred Tax Liabilities:                              |  |      |        |     
|Unearned revenue                                       |  |      | 26,020 |     
|Depreciation                                           |  |      | 2,566  |     
|                                                       |  |      |        |     
|Total deferred tax liabilities                         |  |      | 28,586 |     
|Net deferred tax asset                                 |  | $    | 6,822  |     
|                                                       |  |      |        |     
|Balance Sheet Classification:                          |  |      |        |     
|Current assets:                                        |  |      |        |     
|Net current deferred tax asset                         |  |      | 5,920  |     
|Non-current assets:                                    |  |      |        |     
|Non-current deferred taxes                             |  |      | 902    |     
|                                                       |  |      |        |     
|Net non-current deferred tax asset                     |  |      |        |     
|Net deferred tax asset                                 |  | $    | 6,822  |     
|                                                       |  |      |        |     



The
Company paid $92 of income taxes in 2000 and paid $1,747 of income taxes in 2002. The Company received income tax refunds, net of tax credits of $902 in 2001. In 2002, the Company generated $961 of tax credits, resulting in a credit carry forward of
$364. As of December 31, 2002 the Company has not reduced the net deferred tax asset recorded by a valuation allowance. Management has determined that based upon the weight of current available evidence, it is more likely than not that all of the
net deferred tax asset will be realized.



18.    QUARTERLY FINANCIAL DATA (UNAUDITED):



The following table presents certain unaudited results of operations data for the interim quarterly periods during the years ended December 31, 2001 and 2002. The Company believes that all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the results of operations in accordance with accounting principles generally accepted in the United States of America, have been made. The results of operations for any
interim period are not necessarily indicative of the operating results for a full year or any future period.



F-29



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##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





During the
quarter ended September 30, 2001 the Company recorded an additional $19.7 million in workers compensation expense and $2.5 million in a health benefit plan subsidy to increase reserves to pay estimated future claims.



|                        |  | Quarter Ended                                 |       
|----------------------- |  | --------------------------------------------- | ------
|                        |  | 2001                                          |       
|                        |  | March 31                                      |       
|                        |  | (Dollars in thousands, except per share data) |       
|Revenues                |  | $                                             | 82,365
|Gross Profit            |  | $                                             | 23,656
|Gross Profit margin     |  |                                               | 28.7  
|Operating (loss) income |  | $                                             | (1,173
|Net income (loss)       |  | $                                             | 95    
|Earnings per share      |  |                                               |       
|Basic                  |  | $                                             | 0.00  
|Diluted                |  | $                                             | 0.00  



During
the quarter ended December 31, 2002, the Company changed from gross revenue reporting to net revenue reporting for worksite employee salaries, wages and payroll-related taxes. (See Accounting Change for Reporting Revenue on page F-9. The table
presented below reflects the effect of the change on the amounts previously reported for each quarter of 2001 and 2002.



For the quarter ended March 31, 2002 (in thousands):



|                   |  | Gross Revenue Reporting Method |         | Reclassification |   |          | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | ------- | ---------------- | - | -------- | ----------------------------
|Revenues           |  | $                              | 786,896 |                  | $ | (695,763 | )                           
|Cost of Services   |  |                                | 763,846 |                  |   | (695,763 | )                           
|Gross Profit       |  |                                | 23,050  |                  |   |         |                             
|Operating Expenses |  |                                | 22,058  |                  |   |         |                             
|Net Income (Loss)  |  |                                | 990     |                  |   |         |                             



For the quarter ended
June 30, 2002 (in thousands):



|                   |  | Gross Revenue Reporting Method |         | Reclassification |   |          | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | ------- | ---------------- | - | -------- | ----------------------------
|Revenues           |  | $                              | 831,852 |                  | $ | (738,951 | )                           
|Cost of Services   |  |                                | 809,281 |                  |   | (738,951 | )                           
|Gross Profit       |  |                                | 22,571  |                  |   |         |                             
|Operating Expenses |  |                                | 21,409  |                  |   |         |                             
|Net Income (Loss)  |  |                                | 1,109   |                  |   |         |                             



F-30



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##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





For the quarter ended
September 30, 2002 (in thousands):



|                   |  | Gross Revenue Reporting Method |         | Reclassification |   |          | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | ------- | ---------------- | - | -------- | ----------------------------
|Revenues           |  | $                              | 864,448 |                  | $ | (770,031 | )                           
|Cost of Services   |  |                                | 842,246 |                  |   | (770,031 | )                           
|Gross Profit       |  |                                | 22,202  |                  |   |         |                             
|Operating Expenses |  |                                | 20,779  |                  |   |         |                             
|Net Income (Loss)  |  |                                | 1,311   |                  |   |         |                             



For the
quarter ended December 31, 2002 (in thousands):



|                   |  | Gross Revenue Reporting Method |         | Reclassification |   |          | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | ------- | ---------------- | - | -------- | ----------------------------
|Revenues           |  | $                              | 921,083 |                  | $ | (824,880 | )                           
|Cost of Services   |  |                                | 898,383 |                  |   | (824,880 | )                           
|Gross Profit       |  |                                | 22,700  |                  |   |         |                             
|Operating Expenses |  |                                | 21,302  |                  |   |         |                             
|Net Income (Loss)  |  |                                | 1,326   |                  |   |         |                             





For the quarter ended March 31, 2001 (in thousands):



|                   |  | Gross Revenue Reporting Method |         | Reclassification |   |          | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | ------- | ---------------- | - | -------- | ----------------------------
|Revenues           |  | $                              | 752,298 |                  | $ | (669,933 | )                           
|Cost of Services   |  |                                | 728,642 |                  |   | (669,933 | )                           
|Gross Profit       |  |                                | 23,656  |                  |   |         |                             
|Operating Expenses |  |                                | 24,829  |                  |   |         |                             
|Net Income (Loss)  |  |                                | 95      |                  |   |         |                             



For the quarter ended
June 30, 2001 (in thousands):



|                   |  | Gross Revenue Reporting Method |         | Reclassification |   |          | Net Revenue Reporting Method
|------------------ |  | ------------------------------ | ------- | ---------------- | - | -------- | ----------------------------
|Revenues           |  | $                              | 787,042 |                  | $ | (704,618 | )                           
|Cost of Services   |  |                                | 763,996 |                  |   | (704,618 | )                           
|Gross Profit       |  |                                | 23,046  |                  |   |         |                             
|Operating Expenses |  |                                | 23,975  |                  |   |         |                             
|Net Income (Loss)  |  |                                | 109     |                  |   |         |                             



F-31



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##### Table of Contents

GEVITY HR, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(in $000s, except per share data)





For the quarter ended
September 30, 2001 (in thousands):



|                   |  | Gross Revenue Reporting Method |         |   | Reclassification |   |          | Net Revenue Reporting Method | 
|------------------ |  | ------------------------------ | ------- | - | ---------------- | - | -------- | ---------------------------- | 
|Revenues           |  | $                              | 798,533 |   |                  | $ | (716,000 | )                            | 
|Cost of Services   |  |                                | 798,279 |   |                  |   | (716,000 | )                            | 
|Gross Profit       |  |                                | 254     |   |                  |   |         |                              | 
|Operating Expenses |  |                                | 24,771  |   |                  |   |         |                              | 
|Net Income (Loss)  |  |                                | (14,504 | ) |                  |   |         |                              | 



For the quarter ended
December 31, 2001 (in thousands):



|                   |  | Gross Revenue Reporting Method |         |   | Reclassification |   |          | Net Revenue Reporting Method | 
|------------------ |  | ------------------------------ | ------- | - | ---------------- | - | -------- | ---------------------------- | 
|Revenues           |  | $                              | 842,130 |   |                  | $ | (756,624 | )                            | 
|Cost of Services   |  |                                | 818,100 |   |                  |   | (756,624 | )                            | 
|Gross Profit       |  |                                | 24,030  |   |                  |   |         |                              | 
|Operating Expenses |  |                                | 26,698  |   |                  |   |         |                              | 
|Net Income (Loss)  |  |                                | (1,303  | ) |                  |   |         |                              | 



F-32



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##### Table of Contents

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



ALLOWANCE FOR DOUBTFUL ACCOUNTS



|(IN THOUSANDS OF DOLLARS)
|-------------------------
|Balance,January 1,2002   
|$747                     
|                         
|Balance,January 1,2001   
|$640                     
|                         
|Balance,January 1,2000   
|$740                     



S-1