# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark
 One)

ý Annual
 Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal
 year ended December 31, 2003.

# or

o Transition
 Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For
 the transition period from ________________ to__________________

Commission File No. 0-22701

# GEVITY HR, INC.(exact name of registrant as specified in its charter)

|Florida(State or other jurisdiction of incorporation or organization)             |  | 65-0735612(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------------------- |  | ----------------------------------------------
|                                                                                  |  |                                               
|600 301 Blvd West, Suite 202Bradenton, FL(Address of principal executive offices) |  | 34205(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. Yesý   No
 o

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.ý

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

The
 aggregate market value of the voting stock of Gevity HR, Inc. held by non-affiliates (based upon the
 June 30, 2003, $11.78 closing sale price for the Common Stock on the Nasdaq National Market) was
 approximately $168.7 million.

The
 number of shares of the Registrants common stock, $.01 par value per share outstanding, as of February
 27, 2004 was 19,322,440.

# DOCUMENTS INCORPORATED BY REFERENCE

PART
 III  Portions of the Registrants definitive Proxy Statement relating to the annual meeting of shareholders to be
 held May 20, 2004, are incorporated herein by reference in Part III.




---

# TABLE OF CONTENTS

|         |          |                                                                                       |   
|-------- | -------- | ------------------------------------------------------------------------------------- | --
|PART I   |          |                                                                                       | 1 
|         | ITEM 1.  | BUSINESS                                                                              | 2 
|         | ITEM 2.  | PROPERTIES                                                                            | 19
|         | ITEM 3.  | LEGAL PROCEEDINGS                                                                     | 19
|         | ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   | 20
|PART II  |          |                                                                                       | 20
|         | ITEM 5.  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 | 20
|         | ITEM 6.  | SELECTED FINANCIAL DATA                                                               | 22
|         | ITEM 7.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 22
|         | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            | 43
|         | ITEM 8.  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           | 43
|         | ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  | 43
|         | ITEM 9A. | CONTROLS AND PROCEDURES                                                               | 43
|PART III |          |                                                                                       | 43
|         | ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    | 43
|         | ITEM 11. | EXECUTIVE COMPENSATION                                                                | 44
|         | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        | 44
|         | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        | 44
|         | ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                | 44
|PART IV  |          |                                                                                       | 44
|         | ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K                        | 44




---

# 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. (the Company) hereby
provides 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 profit
               generated from the workers compensation component of the Companys
               service offering under its loss sensitive workers compensation
programs;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (iii) | the
uncertainties relating to the collateralization, loss retention
               requirements, availability and renewal of the Companys healthcare
programs                and workers compensation insurance programs for client
employees and the                general insurance policies of the Company as such may be
affected, positively or                negatively, by various factors such as claims
development trends, projected                losses, claims paid and the Companys
credit risk;
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (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 amounts of the
               Companys general 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;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1


---

| | (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 increasing prices for client
               services, including healthcare programs;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------

| | (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, including particularly the risk of attrition of
               clients acquired in acquisitions;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | (xix) | other
factors which are described in further detail in the Companys Annual
               Report on this 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 provider of end to end human capital management solutions that create
business value and promote employee excellence by putting people first. The Companys
high-impact outsourcing services provide a competitive advantage to clients by helping
them to find, develop and retain talent, manage the paperwork, and protect their business.
Employee focused solutions are delivered by professionals in the Company's branch offices, supplemented by the
industrys leading Web-based technology. These solutions are provided to small and
medium-sized businesses in the United States. The Companys more than 900 company
employees are dedicated to providing businesses with typically between 5 and 100
employees, or larger employers with multiple locations, access to a broad range of
outsourced professional human resource services and to effectively become the
in-sourced human resources department for each such business. The Company has
assembled, developed and deployed a very capable team of human resource professionals who
have the human resource expertise necessary to deliver to the Companys clients and
their employees a comprehensive, fully integrated human resource solution that is
generally available only to larger businesses.

2


---

Delivered
through a combination of centralized and local human resource consultants, as well as
through leading edge, Oracle-based, web-enabled technology, the Companys tools and
services are designed to positively impact each clients business in two important
ways. First, the Company believes that its client and their employees benefit from the
Companys offering through increased work satisfaction that generally leads to higher
productivity. Second, the Company expects that the general profitability of client
businesses will be positively impacted since the Companys services allow their
clients managers to concentrate on revenue producing activities rather than having
to deal with the time consuming and increasingly complex burdens associated with employee
administration.

As
of December 31, 2003, the Company served more than 7,500 clients, as measured by
individual client Federal Employer Identification Numbers (FEIN), with
approximately 106,000 active client employees, and maintained offices in Alabama, Arizona,
California, Colorado, Florida, Georgia, Massachusetts, Minnesota, New Jersey, New York,
North Carolina, Tennessee and Texas.

The
Companys operations are currently conducted through a number of wholly-owned limited
partnerships and wholly-owned limited liability companies. The consolidated operations of
the Company exclude intercompany accounts and transactions that have been eliminated in
consolidation. Certain reclassifications have been made to the 2002 consolidated financial
statements to conform to the current period presentation.

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 incorporated in Florida and consummated its initial public offering in
1997 after acquiring all of the interest in a limited partnership originally organized in
1993 to acquire the assets of the Companys predecessor PEO business. In May 2002,
the Companys shareholders voted to change the Companys name from Staff
Leasing, Inc. to Gevity HR, Inc.

# HR OUTSOURCING INDUSTRY

# Human Resource
Departments in Small and Medium Sized Businesses

The
human resource outsourcing industry is rapidly growing in the United States. Gartner
Dataquest estimates the worldwide human resource outsourcing industry will grow from $50.6
billion in 2003 to $58.9 billion by 2005. This represents an approximate 7.9% percent
annual growth rate. Small and medium-sized employers, those with between 1 to 100
employees, are a large part of this market. According to Dun and Bradstreet, there are
over 10 million small and medium-sized businesses in the United States.

Many
small and medium-sized employers do not have sufficient internal resources to focus on
time consuming human resource activities. A typical small to medium-sized business may use
multiple vendors to provide employee administration services such as payroll and benefits
administration. As a result, there is little consistency or integration of these important
processes. Finally, few of these employee administration services include important
people-management activities such as recruiting and selection, employee training and
development, employee retention and workplace regulatory and safety compliance.

3


---

# The Emergence of Human
Resource Outsourcing

Many
small to medium-sized businesses outsource discrete, non-core functions of their
operations. The market for multi-process human resource outsourcing for small to
medium-sized businesses is relatively new. The Company believes there are approximately
300 territories available in its current markets where it has branch offices. The Company
also believes there are approximately 1,000 businesses with between 20 and 100 employees
in each territory that would qualify to become clients of the Company. Relatively few of
these businesses currently outsource their human resource functions. Comprehensive human
resource outsourcing for small to medium-sized businesses requires a well-developed
service delivery infrastructure and significant expertise in analyzing, providing and
managing human resource processes across many third party vendors, and the use of
policies, procedures, operations and technologies that yield superior performance as
measured by productivity, cost, quality and client satisfaction metrics.

# Gevity Institute

There
is a large body of study describing the positive impact of human resource practices on key
financial outcomes such as productivity, revenue growth and profitability. However, most
of the data concentrates on large employers. There is little study available regarding
this important topic that focuses on small and medium-sized employers.

As
a result, Gevity has established the Gevity Institute to identify and quantify the direct
correlation between human resource practices and the performance of small and medium-sized
businesses. The goal of the Gevity Institute is to become a unique and recognized
authority on how professional human resource management impacts small to medium-sized
business success, both financially and strategically.

The
Gevity Institute is currently working in collaboration with Cornell University on a study
that examines the financial impact of small-employer human resource practices.

# PROFESSIONAL SERVICES
PROVIDED BY THE COMPANY

The
Company provides a broad range of tools and services to its clients. These tools and
services are primarily offered to the Companys clients on a bundled or
all-inclusive basis. In addition to the Companys core services, clients may elect to
offer to their employees health and welfare and retirement programs. The Company provides
these tools and services to its clients through the following core activities:

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

| |  | recruitment
best practices
| | - | --------------------------

| |  | job
description development
| | - | ---------------------------

| |  | salary
information
| | - | ------------------

| |  | interview
guidelines and assistance
| | - | -----------------------------------

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

| |  | on-line
employee information management
| | - | ---------------------------------------

| |  | performance
management solutions
| | - | --------------------------------

4


---

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 account
| | - | -------------------------

| |  | employee
assistance programs
| | - | ----------------------------

Manage
the Paperwork.The Company assists its clients in managing employment related
paperworkby providing:

| |  | 401(k)
plan administration
| | - | --------------------------

| |  | Section
125, FMLA and COBRA administration
| | - | ------------------------------------------

| |  | payroll
processing, employment related tax               filings and administration
| | - | -----------------------------------------------------------------------------------

Protect
our  Clients'  Business.  The Company  assists its clients in  protecting  their
 businesses  from employment related claims by providing:

| |  | workers'
compensation insurance
| | - | -------------------------------

| |  | HR
policies forms and best practices
| | - | ------------------------------------

| |  | employment
related regulatory compliance and               guidance
| | - | -------------------------------------------------------------------

# CLIENTS

As
of December 31, 2003, the Companys client base consisted of over 7,500 client
companies, as measured by individual client FEINs, with an average of 14.1 employees
per client.

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:

|PERCENTAGE OF CLIENT BILLINGS BY INDUSTRY | 2003 | 2002  | 2001
|----------------------------------------- | ---- | ----- | ----
|Services(1)                               |      | 37.7  | %   
|Construction                              |      | 14.6  |     
|Manufacturing                             |      | 12.6  |     
|Finance/Insurance/Real Estate             |      | 11.6  |     
|Retail Trade                              |      | 9.1   |     
|Wholesale Trade                           |      | 7.1   |     
|Restaurants                               |      | 2.9   |     
|Agriculture                               |      | 2.4   |     
|Transportation                            |      | 2.0   |     
|Other                                     |      | -     |     
|                                          |      |       |     
|Total                                     |      | 100.0 | %   
|                                          |      |       |     

---

5


---

| | (1) | The
Services category consists 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
part of its current client selection strategy, the Company offers its services to
businesses within specified industry 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.

The
Companys client retention rate for 2003 was 80.0% 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
medium-sized business market and the number of clients that were terminated by the Company
for reasons that include unacceptable risk and low profitability to the Company.

# SERVICE DELIVERY AND
INFORMATION TECHNOLOGY

The
Company delivers its services through a combination of dedicated human resource
consultants located in the field offices and at the Companys headquarters, as well
as through Gevity Central, a proprietary web-based, self-service payroll and human
resource portal. In order to provide proactive client relationship management, each of the
Companys clients has been assigned a single human resource consultant to serve as
the client relationship manager. This allows the client to interface with the Company
through a single point of contact.

The
Company currently has 125 human resource consultants with an average of 8 years of
experience in the human resource industry. Additionally, human resource consultants hold
industry recognized certifications from such organizations as the Society of Human
Resource Management.

The
Company has invested approximately $44 million and is continuing to invest capital
resources in the development and enhancement of its information and technology
infrastructure. 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.

The
Company processes payroll for all of its client 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 Oracle HRMS and Payroll systems provide the Company
with the capability to promptly and accurately deliver HR services and generate
comprehensive management reports. The Companys information systems manage all data
relating to client employee enrollment, payroll processing, benefits administration,
management information and other requirements of the clients operations. The current
systems have high-volume processing capabilities that allow the Company to produce and
deliver payrolls to its clients, each customized to the needs of such clients.

6


---

The
Company continues its development and deployment of Gevity Central. Gevity 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 Central provides real time, 24x7 access to the Companys
entire suite of human resource tools and services. Gevity Central is fully integrated with
the Companys HRMS and Payroll applications, Customer Relationship Management
solution and financial suite, as well as the Companys comprehensive line of online
tools and services. This full integration results in improved client satisfaction, as well
as improved efficiencies and operating margins for the Company. Oracles portal
software provides the foundation, enabling a robust, client configurable portal, while the
Companys custom-developed software provides additional ease of use and service
capabilities.

At
the end of 2003, approximately 77% of the client employee base interacted with the Company
via Gevity Central. Usage of this technology is expected to increase in 2004 as over 95%
of new clients enrolled in 2003 registered to use Gevity Central.

The
combination of the Oracle systems for access and functionality and the Gevity Central
online capabilities provides a unique solution capable of growing and adapting to the
evolving needs of the Companys clients.

The
Companys information technology staff consisted of 64 associates at December 31,
2003. 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.

# SALES AND MARKETING

The
Company markets its services through a direct sales force which, as of December 31, 2003,
consisted of approximately 215 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
selected major metropolitan areas over the next few years. 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 human resource tools and services rather
than discounted insurance offerings, an associated change has been required in the profile
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.

The
new sales candidate profile typically includes attributes such as: strong analytical
skills; knowledge of technology; experience working with small business owners; good
business acumen; proven high performance and strong prospective sales skills. Generally
the candidate will also have prior employment experience in the field of outsourcing,
human resource consulting, benefits consulting or human resource information systems.

As
a result of the Companys aggressive sales associate hiring efforts during 2003, many
regions of the country have relatively inexperienced Company sales associates. For
example, the average tenure of the sales force in California, the Midwest and the
Northeast is less than 12 months. This group makes up more than one-third of the overall
sales force.

7


---

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
associate hires, together with on-the-job training. In 2003, the Company implemented a
comprehensive and expanded training program for all new sales associates and also designed
a new training program for all existing sales associates. Both training courses emphasize
the advantages available to clients through the Companys expansive technology-based
service delivery model and also include substantial focus on the Companys sales
process.

The
Company also restructured the compensation system of its sales force. 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
sales associates competed against each other for the same potential clients. The new
client acquisition model subdivides all markets into individually assigned and identified
sales territories and is intended to result in the development of market share by
territory. 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 external 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 independent 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.

# COMPETITION

The
human resource outsourcing industry is highly fragmented. The Company seeks to compete
through its ability to provide a full-service human resource solution to its clients
through its advanced information technology solutions. The Company believes its primary
competitors to be single point solution providers who offer segments of the entire service
offering that the Company provides to its clients in an all-inclusive offering. These
third parties include certain information technology outsourcers and broad-based
outsourcing and consultancy firms that are now providing or may seek to provide human
resource business process outsourcing services, companies that provide a discrete group of
transactional services, such as payroll or benefits administration and aspire to provide
additional services and other consulting companies that perform individual projects, such
as development of human resource strategy and human resource information systems.
Historically, most of these vendors have focused upon discrete processes, but many of them
are now promoting integrated process management offerings that may be viewed as
competitive with the Companys offerings. The Company expects competition to
increase, and competitors to develop broad service capabilities that match the
Companys.

The
Company believes that it is one of the largest co-employers of client employees in the
United States in terms of active client employees and revenues. Many of the businesses
that operate under the co-employment business model, especially the larger ones such as
Administaff and ADP Total Source, are capitalizing on the co-employment model and
transforming their businesses into full-service human resource outsourcing companies while
still offering workers compensation and group health benefit insurance programs.

8


---

# VENDOR RELATIONSHIPS

The
Company provides its services to its client employees under arrangements with a number of
partners. The maintenance of insurance plans, including workers compensation plans
and health benefit plans that cover client 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.

# EMPLOYEE BENEFIT PLANS

# Blue Cross Blue Shield
of Florida

Blue
Cross Blue Shield of Florida (BCBS) is the Companys primary partner in
Florida, delivering medical care benefits to approximately 22,000 Florida client
employees. The Companys policy with BCBS is a minimum premium policy expiring
September 30, 2005. Pursuant to this policy, the Company is obligated to reimburse BCBS
for the cost of the claims incurred by participants under the plan, plus the cost of plan
administration. The administrative costs per covered client employee associated with this
policy are specified by year and aggregate loss coverage is provided to the Company at the
level of 115% of projected claims. The Companys obligation to BCBS, related to
incurred but not reported claims, is secured by a letter of credit. As of December 31,
2003, the amount of the letter of credit for BCBS securing such obligations was $6.0
million. The amount of the letter of credit is intended to approximate one months
claims payments. The policy allows for an adjustment to the letter of credit amount based
on premium volume and for increases to the claims payment factor to a maximum of two
months of expected claims payments.

# Aetna

Aetna
is the Companys primary medical care benefits provider for approximately 16,000
client employees throughout the remainder of the country including client employees
acquired in the November 17, 2003 acquisition of the client service agreements of
TeamStaff, Inc. (see Recent Events  TeamStaff Acquisition).The
Companys 2004 policy with Aetna provides for an HMO and PPO offering to plan
participants. The Aetna HMO medical benefit plans are subject to a guaranteed cost
contract that caps the Companys annual liability. The Aetna PPO medical benefit plan
is a retrospective funding arrangement whereby the PPO plan is subject to a 7.5%
additional premium if actual claims are greater than projected at the inception of the
policy year. Client employees acquired in the TeamStaff acquisition continue to be
provided medical care benefits under existing Aetna medical benefit plan policies that are
subject to guaranteed cost contracts that cap the Companys annual liability.

# Other Medical Benefit
Plans

The
Company provides coverage under various regional medical benefit plans to approximately
1,000 client employees in various areas of the country. Included in the list of medical
benefit plan providers are Kaiser Foundation Health Plan, Inc. in California, Health
Partners (Minnesota) in Minnesota, Harvard Pilgrim Healthcare in Massachusetts and Capital
Health Plans in the Tallahassee, Florida region.

9


---

# Other Health Benefit
Plans

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

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

# 401(k) PLANS

The
Company offers 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 client
employees, as well as highly-compensated internal employees of the Company, to
participate. These persons were previously 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).

In
connection with the TeamStaff acquisition, the Company assumed certain of the TeamStaff
employee benefit plans, including a multiple employer 401(k) plan.

# WORKERS
COMPENSATION PLANS

The
Company has had a loss sensitive workers compensation insurance program since
January 1, 2000. The program was insured by CNA Financial Corporation (CNA)
through December 31, 2002 and is currently insured by member insurance companies of
American International Group, Inc. (AIG) effective January 1, 2003. The
insured loss sensitive programs provide insurance coverage for claims incurred in each
plan year but which will be paid out over future periods. In states where private
insurance is not permitted, client employees are covered by state insurance funds.

The
insured loss sensitive programs provide a sharing of risk between the Company and the
respective carriers. As part of these programs, the Company has individual stop loss
coverage at $1.0 million per occurrence. In addition, the Company has 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 for the 2003 policy year and 130% of expected
losses as determined by CNA for the policy years from January 1, 2000 through December 31,
2002. The actual premium payable is determined based on the industries serviced by the
Company, estimated wages and the losses incurred under the program

The
2003 AIG workers compensation insurance program provides for a sharing of risk
between the Company and AIG whereby AIG assumes risk in at least three areas within the
program: (i) individual claim stop loss insurance risk; (ii) aggregate claim stop loss
insurance risk; and (iii) premium payment credit risk.

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

With
respect to the individual claim stop loss insurance risk, the Company is responsible for
paying, through AIG, claim amounts related to the first $1 million per occurrence. Claim
amounts in excess of $1.0 million per occurrence are insured through the AIG program. The
Company, through its Bermuda-based insurance company, remits premiums to AIG to cover
AIGs estimate of claims related to the first $1.0 million per occurrence. Under the
2003 workers compensation insurance program, of the $85.0 million of such premiums
paid, the Company is guaranteed by AIG to receive a 2.42% per annum fixed return on $73.5
million and 1.85% on the remaining amount so long as the premiums remain with AIG for at
least 7 years. If excess premium payments are withdrawn prior to the 7-year period, the
interest rate is adjusted downward based upon a sliding scale.

10


---

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

Finally,
with respect to the premium payment credit risk, this program is a fully insured policy
written by AIG. If the Company were to fail to make premium payments to AIG as scheduled,
then AIG would be responsible for the payment of all losses under the terms of the policy.
AIG required the Company to provide $17.0 million of collateral related to premium payment
credit risk. The required collateral is provided in the form of cash and short-term
investments placed into a trust account. The Company has reached an agreement with AIG
whereby the $17.0 million of collateral related to premium payment credit risk for the
2003 plan year will serve as collateral for the 2004 plan year.

With
respect to the CNA programs, the Company retained liability for claims paid during the
first year of each program. For the 2000 and 2001 programs, the Company guarantees that
the premiums paid 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 may 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 occurrence stop loss coverage amount.

The
Company is required to provide collateral to each of the insurance carriers based on the
carrier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 the carriers
reduce the total collateral required to be provided by the Company. The required
collateral can be provided in the form of deposits paid to the carriers, cash and
short-term investments placed into a trust account, letters of credit, and surety bond
collateral provided by independent surety bond providers.

11


---

The
following table summarizes the adjusted specific financial provisions related to the
workers compensation program for the open program years and includes investment
guarantee payments paid to CNA which will ultimately be used to fund claims if needed:

|                | 2003 Program Year | 2002 Program Year | 2001 Program Year | 2000 Program Year
|--------------- | ----------------- | ----------------- | ----------------- | -----------------
|
|Retained losses |                   |                   |                   |                  
|and insurance   |                   |                  
|premiums paid   |                   |                   | $                 | 85,000           
|Collateral      |                   |                  
|requirements    |                   |                   | $                 | 17,000           

The
2003 program year is subject to final audit in 2004, and may be subject to further
collateral adjustments at that time.

Prior
to January 1, 2000, the Companys workers compensation coverage was provided on
a guaranteed cost basis. The Company has no liability for periods prior to January 1,
2000.

# INTERNAL COMPANY
EMPLOYEES

As
of December 31, 2003, the Company had 954 internal employees of whom 477 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.

# INDUSTRY REGULATION

In
order to utilize the Companys professional services, all clients are required to
enter into the Companys Professional Services Agreement (PSA). The PSA
generally 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. Following the initial term, the
contract may be renewed, terminated or continued on a month-to-month basis. In this
context, the client and the Company are each viewed as and become a
co-employer of the clients employees. In this regard, the Company
operates as a licensed Professional Employer Organization (PEO).

The
Company retains the ability to immediately terminate the client and co-employment
relationship 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 PSA and the co-employment
relationship with the client employees.

Under
the PSA, employment-related liabilities are contractually allocated between the Company
and the client. For instance, the Company assumes responsibility for, and manages the
risks associated with, each clients employee payroll obligations, including the
liability for payment of salaries and wages (including payroll taxes) to each client
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 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 employees Company payroll checks drawn
on the Companys 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 client 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 workers compensation insurance coverage to each
client employee under the Companys master 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 employees. The client 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 client
employees.

12


---

In
some cases, employment-related liabilities are shared between the Company and the client.
The following table summarizes the general division of responsibilities for employment
related regulatory compliance under the PSA:

| |  | 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  Appicable workers' compensation laws
   that cover: (i) procuring workers' compensation 
   insurance; (ii) completing and filing all 
   required reports; and (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 Standars 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  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  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.

13


---

The
Company charges its clients a professional service fee that is designed to yield a profit
and to cover the cost of certain employment-related taxes, workers compensation
insurance coverage and human resource services provided to the client. The component of
the professional service fee related to human resource management 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 client employees. The Company invoices each client for the
service fee and costs of selected benefit plans and the wages and other employment-related
taxes of each client employee. The gross billings are invoiced at the time that each
periodic payroll is delivered to the client.

Numerous
federal and state laws and regulations relating to employment matters, benefit plans and
employment taxes affect the operations of the Company or specifically address issues
associated with co-employment. 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 and, therefore, do not
specifically address the obligations and responsibilities of a PEO.

Furthermore,
because some of these regulations are relatively new, 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 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.

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 other states are currently considering
similar regulation. Such laws vary from state to state, but generally codify the
requirements that a PEO must reserve the right to hire, terminate and discipline client
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.

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

# EMPLOYER STATUS

# 401(k) Plans

In order to qualify for favorable tax treatment under the Code, 401(k) 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 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 directs and
controls 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.

14


---

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
client employees takes certain remedial action by the last day of the first plan year
beginning on or after January 1, 2003.

The
Company previously maintained a frozen single employer 401(k) retirement plan benefiting
certain client employees and took remedial action to qualify for the relief provided under
the IRS guidance within the applicable deadline. As part of the remedial action, all of
the plans assets (approximately $0.9 million) were transferred out of the plan, as
directed by participants, and the plan was terminated.

The
status of the active multiple employer 401(k) retirement plans maintained by the Company
are unaffected by the IRS guidance.

# ERISA Requirements

Employee
pension and welfare benefit plans are also governed by ERISA. ERISA defines an
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 benefits plan for failure to withhold
and pay taxes applicable to salary deferral contributions by its client employees. In
addition, as a result of such a finding, the Company and its plans would not enjoy, with
respect to client 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 client 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.

15


---

Among
other employment tax issues related to whether PEOs are employers of client 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 client 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.

Accordingly,
while the Company believes that it can assume the withholding obligations for client
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.

# RECENT EVENTS

# TeamStaff Acquisition

On
November 17, 2003, the Company acquired the human resource outsourcing client portfolio of
TeamStaff, Inc., a New Jersey corporation (TeamStaff) together with certain
other assets. The transaction was accomplished through an assignment by TeamStaff (and its
subsidiaries) to the Company of all of its client service agreements, which covered over
1,500 clients and over 16,000 client employees. The other assets acquired consisted
primarily of a proprietary benefits reconciliation software program and leases of certain
office space occupied by TeamStaff. In addition, approximately 70 internal employees of
TeamStaff became employees of the Company.

The
purchase price for the acquired assets was $9.7 million (including direct acquisition
costs of approximately $0.2 million), which the Company paid in cash from its internal
funds. Of this amount, $2.5 million is being held in an escrow account and will be
disbursed based upon the retention of clients acquired by the Company from TeamStaff and
new clients obtained by former sales personnel of TeamStaff. Retention will be measured by
the comparison of annualized professional service fees for the transferred clients as of
November 17, 2003, to the annualized professional service fees for the total of all former
TeamStaff clients and new clients obtained by former TeamStaff sales personnel that
process a payroll after February 14, 2004. To the extent that the annualized professional
fee for those client payrolls after February 14, 2004, is less than the November 17, 2003
annualized professional fee, the amount of such difference will be paid from the escrow
account (up to a maximum of $2.5 million) to the Company. The remaining escrow balance, if
any, will be paid to TeamStaff. The Company estimates that client retention during the
measurement period will be in excess of 90%. See the further discussion at Note 8 to the
Consolidated Financial Statements.

16


---

# Frontenac Transaction

On
June 6, 2003, the Company sold its Series A Convertible, Redeemable Preferred Stock (the
Series A Preferred Stock), to Frontenac VIII Limited Partnership and Frontenac
Masters VIII Limited Partnership, each a limited partnership and an affiliate of Frontenac
Company LLC (collectively, Frontenac), SunTrust Equity Funding, LLC d/b/a
SunTrust Equity Partners, BVCF IV, L.P., an affiliate of Adams Street Partners, LLC and
C&B Capital, L.P., (collectively, the Purchasers). The sale was pursuant
to the Preferred Stock Purchase Agreement dated as of April 24, 2003, as amended on June
3, 2003 (as amended, the Purchase Agreement). Under the terms of the Purchase
Agreement, the Company agreed to issue and sell to the Purchasers an aggregate of 30,000
shares of the Series A Preferred Stock, par value of $0.01, for a purchase price of $1,000
per share (the Liquidation Value). The Purchase Agreement was entered into
pursuant to a letter agreement dated March 5, 2003. Proceeds from the sale totaled $27.7
million, net of issuance costs of $2.3 million.

Proceeds
from the transaction totaling $16.3 million were used to purchase from Charles S. Craig, a
former director of the Company, 2,997,734 shares of the Companys common stock, $0.01
par value per share (the Common Stock), at a net price of $5.38 per share and
to purchase from him options to purchase 60,000 shares of Common Stock for an aggregate
price of $0.1 million (the aggregate difference between the exercise prices per share of
the purchased options and $5.38). The remaining proceeds were partially used to fund the
TeamStaff acquisition ($9.7 million) with the remaining balance added to the
Companys working capital.

See
further the discussion at Note 13 to the Consolidated Financial Statements.

# EXECUTIVE OFFICERS OF
THE COMPANY

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          |     | 51      
|Peter C. Grabowski |     | 41      
|Lisa J. Harris     |     | 43      
|Robert Minkhorst   |     | 57      
|Gregory M. Nichols |     | 50      
|Sal Uglietta       |     | 51      

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. From 1992 through 2001,
Mr. Vonk was President and Chief Executive Officer of Randstad North America, a subsidiary
of Randstad Holding NV, a worldwide staffing services provider, where he was responsible
for organizing the North American operations.

Peter
C. Grabowski has served as Senior Vice President and Chief Financial Officer since
June 2003. He has been employed by Company since 1997 and recently served as Vice
President of Finance and Taxation and Vice President  Taxes from August 1997 through
May 2003.

17


---

Lisa
J. 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.

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.

Gregory
M. Nicholshas served 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.

Sal
Ugliettahasserved as Senior Vice President, Benefits and Risk Management
since October 2003. Before joining Gevity, Mr. Uglietta was a management consultant in the
health care industry and an Adjunct Professor in the School of Business at Florida Gulf
Coast University. He previously spent seven years with Aetna, Inc. serving as Head of
Corporate Marketing and Product Management and as President of InteliHealth, a web-based
consumer and professional health information company.

# AVAILABLE INFORMATION

You
may read and copy any document the Company files with the Securities and Exchange
Commission (SEC) at the SECs public reference room located at 450 Fifth
Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 to obtain
information regarding the public reference room. The SEC also maintains an internet site
at www.sec.gov that contains periodic and current reports, proxy statements and
other information filed electronically by public issuers (including the Company) with the
SEC.

The
Company also makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge through the
Investor Relations page on its website, www.gevityhr.com, as soon as reasonably
practicable after such reports are electronically filed with the SEC.

The
Company has adopted a Code of Business Conduct and Ethics, which applies to all employees
of the Company, including the Chief Executive Officer, Chief Financial Officer and other
senior financial officers of the Company, and which is available through the Investor
Relations page of the Companys website, www.gevityhr.com. The Company intends to
disclose any amendments of, or waivers to, the Code of Business Conduct and Ethics on the
Investor Relations page of its website, www.gevityhr.com. In
addition, the Company makes available, through its website, statements of beneficial
ownership of the Companys equity securities filed by its directors, officers and 10%
beneficial holders under Section 16 of the Exchange Act. The Company also posts on its
website the charters for its Audit Committee, Compensation Committee, Nominating/Corporate
Governance Committee, Executive Committee and Investment Committee.

A
copy these documents may be obtained from the Company, excluding exhibits, at no cost, by
writing to the Company at 600 301 Blvd. West, Suite 202, Bradenton, FL 34205, Attention:
Investor Relations, or by telephoning the Company at 1-800-2GEVITY or by sending the
Company an email via its Investor Relations page of its website, www.gevityhr.com.

The information on the Companys
website is not incorporated by reference into this report.

18


---

# 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, 2003, the Company leased space for its 44 offices located in Alabama,
Arizona, California, Colorado, Florida, Georgia, Massachusetts, Minnesota, New Jersey, New
York, North Carolina, Tennessee and Texas. 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 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. At a hearing held on September 26, 2003, the
Circuit Court of the Twelfth Judicial Circuit in and for Manatee County, Florida, approved
settlement of the class action lawsuit. The terms of the settlement include no admission
of liability or wrongdoing on the part of the Company or the individual defendants, and
call for payment in the total amount of $1.8 million to the class members who make a claim
and do not request exclusion, inclusive of attorneys fees and costs. The settlement
will be paid out of insurance proceeds with no financial impact on the Company.

On
August 12, 2003, a former employee filed a lawsuit against the Company, (Donald
Lauderback vs. Gevity HR, Inc., d/b/a Gevity Health Plan) in the U.S. District Court
for the Northern District of Texas. The plaintiff sought monetary damages based on his
claim that the Company wrongfully terminated him after approximately two weeks of
employment, for raising concerns related to the operation of the Companys health
insurance programs. He also sought monetary damages for a purported class of individuals
based on the manner in which the Company operated its health insurance programs. On
February 27, 2004, the Court granted the Companys Motion to Dismiss All Claims and
on March 1, 2004, entered Final Judgment in which all of Plaintiffs claims were
dismissed with prejudice.

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

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

19


---

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

None.

# Part II.

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

# 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 clearing prices for the common stock as
reported on NASDAQ and dividends per share of common stock paid during the last two fiscal
years:

|Fiscal Year Ended December 31, 2003 | High | Low | Dividends
|----------------------------------- | ---- | --- | ---------
|First Quarter                       |      |     | $        
|Second Quarter                      |      |     | $        
|Third Quarter                       |      |     | $        
|Fourth Quarter                      |      |     | $        

|Fiscal Year Ended December 31, 2002 | High | Low | Dividends
|----------------------------------- | ---- | --- | ---------
|First Quarter                       |      |     | $        
|Second Quarter                      |      |     | $        
|Third Quarter                       |      |     | $        
|Fourth Quarter                      |      |     | $        

# Dividends

The
Company did not pay any cash dividends prior to March 14, 2001. The Board of Directors
 declared a cash dividend on December 1, 2003, of $0.05 per share of common stock,
payable on January 31, 2004, to holders of record on January 15, 2004. On March 11, 2004, the Board of
Directors declared a quarterly cash dividend of $0.06 per share of common, payable on April 30, 2004, to holders of
record on April 15, 2004.
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.

Under
the terms of the Series A Preferred Stock, the consent of the Majority Holders, as defined
in the Purchase Agreement, (currently Frontenac), will be required for the payment of
dividends to the common stockholders in excess of 50% of net income for 2004, in excess of
40% of net income for 2005, and in excess of 30% of net income thereafter, so long as
Frontenac holds (or is entitled to vote) a majority of the Preferred stock.

# Holders

As
of February 27, 2004, there were 288 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.

20


---

# Securities Authorized
For Issuance Under Equity Compensation Plans

The following table presents the
information required to be disclosed under this caption.

|                             
|-----------------------------
|
|
|Equity compensation plans    
|approved by security holders 
|Equity compensation plans not
|approved by security holders 
|                             
|Total                        
|                             

21


---

# 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.

|                                                                  | FOR THE YEARS ENDED DECEMBER 31,
|----------------------------------------------------------------- | --------------------------------
|
|
|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 :                                     |                                 
|- Basic                                                           |                                 
|- Diluted                                                         |                                 
|Weighted average common shares:                                   |                                 
|- Basic                                                           |                                 
|- Diluted                                                         |                                 
|STATISTICAL AND OPERATING DATA:                                   |                                 
|Client employees at period end                                    |                                 
|Clients at period end (2)                                         |                                 
|Average number of client employees per client   at period end (2) |                                 
|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 Item 7 Revenue Recognition.

(2)    
          Clients at period end as measured by separate client payroll cycles.

# 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. 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.

22


---

# OVERVIEW AND INTRODUCTION

The
Company is a leading United States provider of end to end human capital management
solutions. The Company offers its clients, which are typically small to medium-sized
businesses with between 5 and 100 employees, a broad range of tools and services that
provide a complete solution for the clients human resource outsourcing needs. The
Companys tools and services include assisting clients with finding the right
employees, developing and managing the clients employees, retaining top-quality employees,
managing the clients paperwork, including benefits administration, payroll administration,
governmental compliance, risk management, unemployment administration, and health, welfare
and retirement benefits and protecting the clients business.

The
Company delivers its tools and services to its clients through an integrated and proactive
client relationship management system. Each client is assigned a dedicated human resource
consultant who is located at either a local Company branch office nearby the clients
location or at the Companys centralized field support service center located in
Bradenton, Florida. In addition, the client has 24 x 7 access to its human resource
information via the Companys internal portal, Gevity Central, as well as access to
specialized human resource consultants in areas including 401(k) administration,
unemployment service administration, etc.

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

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

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

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

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

The
Company has transitioned its business from one that provided discounted insurance products
to its clients to one that delivers human resource outsourcing solutions for its clients.
During such transition, the total number of client employees serviced by the Company
declined from over 130,000 client employees to under 90,000 client employees. During the
transition, the Company increased its profitability by focusing on increased profitability
per client employee.

23


---

The
Company continues to focus on increasing the profitability of each client employee as well
as on increasing the overall number of client employees serviced. The Company believes
that it can increase the overall number of client employees serviced through the hiring of
additional sales personnel that will result in a larger amount of new client employees
acquired, through improved human resource outsourcing service offerings that will lead to
higher current client employee retention levels and through acquisitions of other human
resource outsourcing client portfolios.

The
following table provides information that the Company utilizes when assessing the
financial performance of its business, which includes the effect of the TeamStaff
acquisition in November 2003:

|                                                                                  | For the Years Ended
|--------------------------------------------------------------------------------- | -------------------
|
|Statistical Data:                                                                 |                    
|Average number of client employees    paid by month                               |                    
|Average wage per average client    employees paid by month                        |                    
|Professional service fees per average    number of client employees paid by month |                    
|Gross profit per average number of    client employees paid by month              |                    
|Operating income per average    number of client employees    paid by month       |                    

The
average number of client employees paid by month is calculated based upon the sum of the
number of paid client employees at the end of each month in the year divided by 12 months.
All other statistical information above is based upon actual year-to-date amounts divided
by the average number of client employees paid by month.

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

# Revenues

The
gross billings that the Company charges its clients under its Professional Services
Agreement include each client employees gross wages, a professional service fee and,
to the extent elected by the clients, health and welfare benefit plan costs. The
Companys professional service fee, which is primarily computed on a per employee
basis, is intended to yield a profit to the Company and to cover the costs of the human
resource outsourcing services provided by the Company to the client, certain
employment-related taxes and workers compensation insurance coverage. The component
of the professional service fee related to human resource outsourcing varies according to
the size and the location of the client. The component of the professional service fee
related to workers compensation and unemployment insurance is based, in part, on the
clients historical claims experience. All charges by the Company are invoiced along
with each periodic payroll provided to the client. The Company accounts for its revenues
using the accrual method of accounting. Under the accrual method of accounting, the
Company recognizes its revenues in the period in which the client employee performs
work. The Company accrues revenues and unbilled receivables for professional service fees
relating to work performed by client employees but unpaid at the end of each period. In
addition, the related costs of services are accrued as a liability for the same period.
Subsequent to the end of each period, such wages are paid and the related service fees are
billed.

24


---

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

Historically
the Company reported the full amount of its gross billings, including the portion that
represents the gross wages of its client employees, as revenue. The Company changed from
gross revenue reporting to net revenue reporting for client employee salaries, wages and
certain payroll taxes during the fourth quarter of 2002. Based on the criteria established
by EITF No. 99-19, the Company determined that the change better recognized the substance
of the transactions between the Company and its clients. In addition, the change would
better focus the Company on, and allow investors to better understand, the financial
results of the Companys core business. The change to a more preferable accounting
method resulted in no effect on net income or earnings per share. Because of the
significance of the reclassification of revenue and expense components to the income
statement, the Company previously reflected the change as if it had occurred on January 1,
2000 in its Annual Report on Form 10-K for the Year Ended December 31, 2002.

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

# Cost Of Services

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

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

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

25


---

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

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

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

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

# Operating Expenses

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

# Income Taxes

The
Company records income tax expense (benefit) using the asset and liability method of
accounting for deferred income taxes. The Companys effective tax rates for 2003 and
2002 were 33.0% and 33.2% respectively. Such effective tax rates differed from the
statutory federal tax rates primarily because of state taxes and federal tax credits.

26


---

# Profitability

Profitability
is largely dependent upon the Companys success in generating professional fees for
its services and managing the costs that are within its control. The most volatile factors
that drive 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, and the Companys internal risk assessment
and client risk management programs; (ii) appropriately designed health benefit plans that
encourage client employee participation and efficient risk pooling; and (iii) aggressive
management of its state unemployment tax exposure.

# RESULTS OF OPERATIONS

Year Ended December 31,
2003 Compared to year Ended December 31, 2002.

# Revenue

The
following table presents certain information related to the Companys revenues for
the years ended December 31, 2003 (2003) and December 31, 2002
(2002):

|                                              | December 31,
2003 | December 31,
2002 | % Change
|--------------------------------------------- | ----------------- | ----------------- | --------
|
|Revenues:                                     |                   |                   |         
|Professional service fees                     |                   |                   | $       
|Employee health and welfare benefits          |                   |                   |         
|Workers' compensation                         |                   |                   |         
|State unemployment taxes and other            |                   |                   |         
|                                              |                   |                   |         
|Total Revenues                                |                   |                   | $       
|                                              |                   |                   |         
|Statistical Data:                             |                   |                   |         
|Gross salaries and wages (in thousands)       |                   |                   | $       
|Average number of client employees            |                   |                   |         
|paid by month                                 |                   |                   |         
|Average wage per average client               |                   |                   |         
|employees paid by month                       |                   |                   | $       
|Workers' compensation billing per             |                   |                   |         
|one hundred dollars of total wages            |                   |                   | $       
|Workers' compensation manual premium per      |                   |                   |         
|one hundred dollars of                        |                   |                   |         
|workers' compensation wages                   |                   |                   | $       
|Professional service fees per average         |                   |                   |         
|number of client employees paid by month      |                   |                   | $       
|Client employee health benefits participation |                   |                   |         

27


---

For
2003, revenues increased 13.7% to $425.8 million, from $374.7 million for 2002. Revenue
growth was a result of increases in the charges for professional service fees, as part of
the Companys strategy to emphasize the human resource consulting services that it
provides to its clients, and increases in fees for providing workers compensation
insurance and health and welfare benefits for client employees. Included in the
Companys results are $7.3 million of revenue attributable to the TeamStaff
acquisition in November 2003.

As
of December 31, 2003, the Company served over 7,500 clients as measured by each
clients FEIN and over 8,000 as measured by separate client payroll cycles, with
approximately 106,000 active client employees. The Company operates branch offices in
Alabama, Arizona, California, Colorado, Florida, Georgia, Massachusetts, Minnesota, New
Jersey, North Carolina, New York, Tennessee and Texas.

The
average number of paid client employees was 87,819 for 2003, as compared to 96,741 for
2002, representing a decrease of 9.2%. The Company believes this decrease was primarily a
result of the Companys change in pricing as it relates to the insurance products
offered to client employees. The effect of the TeamStaff acquisition on this calculation
was minimal for 2003 (1,906 additional paid client employees), as the number of paid
client employees for TeamStaff were only included in the calculation for one and one half
months after the acquisition.

The
average wage of paid client employees for 2003 increased 12.2% to $33,569 from $29,924 for
2002. This increase is consistent with the Companys strategy of focusing on clients
that pay higher wages to their employees.

Revenues
for professional service fees increased 8.7% to $97.4 million in 2003, from $89.6 million
in 2002, as a result of increases in professional service fees per employee of 19.8%, from
$926 in 2002 to $1,109 in 2003. Such service fee increases per employee were attributable
to both current and new client employees. In addition, professional service fees for 2003
were higher by $1.4 million as a result of the TeamStaff acquisition.

Revenues
for providing health and welfare benefits plans in 2003 were $214.7 million as compared to
$180.2 million in 2002, representing an increase of 19.1%. Health and welfare benefit plan
charges primarily increased as a result of higher costs to the Company to provide such
coverage for client employees and the Companys approach to pass along all
insurance-related cost increases.

Revenues
for providing workers compensation insurance coverage increased 8.6% to $104.2
million in 2003, from $96.0 million in 2002. Workers compensation billings, as a
percentage of client salaries and wages for 2003, were 3.54% as compared to 3.32% for
2002, representing an increase of 6.6%. Workers compensation charges increased in
2003 primarily due to billing increases for Florida clients as well as the TeamStaff
acquisition that added $1.9 million of workers compensation billings.

The
manual premium rate for workers compensation applicable to the Companys
clients decreased 8.6% during 2003 as compared to 2002. Manual premium rates are generally
the allowable rates that employers can be charged by insurance companies for workers
compensation insurance coverage. The decrease in the Companys manual premium rates
reflects the change in the workers compensation insurance risk profile of the
Companys clients and, when compared to the increase in billings for providing
workers compensation insurance to client employees, reflects the Companys
approach to charge market competitive rates for insurance coverage.

28


---

Revenues
from state unemployment taxes and other revenues increased 6.9% to $9.5 million in 2003
from $8.9 million in 2002. The increase was due to the net effect of an increase in other
revenues of $0.8 million and a decrease in state unemployment taxes of $0.2 million
primarily a result of the reduction in client employees.

# Cost of Services

The
following table presents certain information related to the Companys costs of
services for 2003 and 2002:

|                                        | December 31,
2003 | December 31,
2002 | % Change          
|--------------------------------------- | ----------------- | ----------------- | ------------------
|
|Costs of Services:                      |                   |                   |                   
|Employee health and welfare benefits    |                   |                   | $    212,081      
|Workers' compensation                   |                   |                   | 90,305            
|State unemployment taxes and other      |                   |                   | 7,723             
|                                        |                   |                   |                   
|Total Costs of Services                 |                   |                   | $    310,109      
|                                        |                   |                   |                   
|Statistical Data:                       |                   |                   |                   
|Gross salaries and wages (in thousands) |                   |                   | $2,948,005        
|Average number of client employees      |                   |                   |                   
|paid by month                           |                   |                   | 87,819            
|Workers compensation cost rate per      |                   |                   |                   
|one hundred dollars of total wages      |                   |                   | $             3.06
|Number of workers' compensation claims  |                   |                   | 5,765             
|Frequency of workers' compensation      |                   |                   |                   
|claims per one million dollars of       |                   |                   |                   
|workers' compensation wages             |                   |                   | 2.00x             

Cost
of services that include the cost of the Companys health and welfare benefit plans,
workers compensation insurance, state unemployment taxes and other costs were $310.1
million for 2003, compared to $284.1 million for 2002, representing an increase of $26.0
million, or 9.1%. This increase was primarily due to higher costs for health and welfare
benefit plans and workers compensation insurance.

The
cost of providing health and welfare benefit plans to clients employees for 2003 was
$212.1 million as compared to $190.0 million for 2002, representing an increase of 11.6%.
This increase was primarily attributable to higher costs associated with providing health
insurance. For 2003, there was no aggregate health benefit plan subsidy as compared to an
aggregate health benefit plan subsidy of $9.5 million in 2002.

Workers
compensation costs were $90.3 million for 2003, as compared to $88.0 million for 2002,
representing an increase of $2.3 million or 2.6%. Workers compensation costs
increased in 2003 primarily due to a change in the discount rate used to calculate the
prior year workers compensation liability from 4.0% at December 31, 2002 to 2.5% at
December 31, 2003.

29


---

After
consideration of the effect on workers compensation expense of the change in the
discount rate, overall workers compensation costs in 2003 were comparable to workers
compensation cost in 2002 despite the favorable claims metrics in 2003. A reduction in the
estimate of the total cost related to 2003 claims incurred as compared to the original
estimate of the total cost related to 2002 claims incurred (from $76.2 million for the
2002 policy year to $65.0 million for the 2003 policy year) was offset by an increase in
the premium and administrative costs related to the workers compensation insurance
program. The reduction in the estimate of claims costs for 2003 was based upon the
independent actuarial review of 5,765 current year claims as compared to 7,701 for the
2002 plan year.

State
unemployment taxes and other costs were $7.7 million for 2003, compared to $6.1 million
for 2002, representing an increase of $1.6 million or 26.4%. The increase primarily
relates to an increase in the costs of miscellaneous services to clients resulting from an
expanded product offering.

# Operating Expenses

The
following table presents certain information related to the Companys operating
expenses for 2003 and 2002:

|                                 | December 31,
2003 | December 31,
2002 | % Change
|-------------------------------- | ----------------- | ----------------- | --------
|
|Operating Expenses:              |                   |                   |         
|Salaries, wages and commissions  |                   |                   | $       
|Other general and administrative |                   |                   |         
|Depreciation and amortization    |                   |                   |         
|                                 |                   |                   |         
|Total Operating Expenses         |                   |                   | $       
|                                 |                   |                   |         
|Statistical Data:                |                   |                   |         
|Internal employees at year end   |                   |                   |         

Total
operating expenses were $94.1 million for 2003 as compared to $85.5 million for 2002,
representing an increase of $8.6 million, or 10.0%.

Salaries,
wages and commissions were $55.3 million for 2003 as compared to $52.3 million for 2002,
representing an increase of $3.0 million, or 5.6%. The increase is a primarily a result of
higher bonus expense of $2.3 million during 2003 and the addition of approximately 70
employees ($0.5 million of payroll-related costs) as part of the TeamStaff acquisition.

Other
general and administrative expenses were $31.5 million for 2003 as compared to $25.1
million in 2002, representing an increase of $6.4 million, or 25.4%. This increase is
primarily a result of increased sales and marketing costs of $4.0 million related to the
recruiting, training and developing of the expanded sales force and increased marketing
support to assist in new client acquisition, an increase in outside delivery fees of $0.8
million as the Company transitioned from the use of internal couriers to external courier
services, and higher general business insurance costs of $1.3 million.

Depreciation
and amortization expenses were $7.4 million for 2003 compared to $8.1 million for 2002.
Depreciation expense decreased as a result of assets reaching the end of their depreciable
lives.

30


---

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

# Revenues

The
following table presents certain information related to the Companys revenues for
the years ended December 31, 2002 (2002) and December 31, 2001
(2001):

|                                              | December 31,
2002 | December 31,
2001 | % Change
|--------------------------------------------- | ----------------- | ----------------- | --------
|
|Revenues:                                     |                   |                   |         
|Professional service fees                     |                   |                   | $       
|Employee health and welfare benefits          |                   |                   |         
|Workers' compensation                         |                   |                   |         
|State unemployment taxes and other            |                   |                   |         
|                                              |                   |                   |         
|Total Revenues                                |                   |                   | $       
|                                              |                   |                   |         
|Statistical Data:                             |                   |                   |         
|Gross salaries and wages (in thousands)       |                   |                   | $       
|Average number of client employees            |                   |                   |         
|paid by month                                 |                   |                   |         
|Average wage per average client               |                   |                   |         
|employees paid by month                       |                   |                   | $       
|Workers' compensation billing per             |                   |                   |         
|one hundred dollars of total wages            |                   |                   | $       
|Workers' compensation manual premium per      |                   |                   |         
|one hundred dollars of workers'               |                   |                   |         
|compensation wages                            |                   |                   | $       
|Professional service fees per average         |                   |                   |         
|number of client employees paid by month      |                   |                   | $       
|Client employee health benefits participation |                   |                   |         
|                                              |                   |                   |         

Revenues
increased 12.6% to $374.7 million in 2002 as compared to $332.8 million for 2001. Revenue
growth was a result of increases in the charges for professional service fees as part of
the Companys strategy to emphasize the human resource consulting services that it
provides to its clients and to increases in fees for providing health and welfare benefits
for client employees. Such increases were offset by lower billings for providing
workers compensation coverage to clients with lower workers compensation risk
profiles.

Revenues
from professional service fees increased 18.3% to $89.6 million in 2002, from $75.7
million in 2001, as a result of pricing actions. Higher professional service fees earned
per average paid client employee reflects the Companys strategy to emphasize the
human resource consulting services that it provides to its clients. This also resulted in
the increase of average professional service fees earned per average paid client employee
by 28.3% from $722 in 2001 to $926 in 2002.

31


---

The
average number of paid client employees was 96,741 for 2002 as compared to 104,852 for
2001, representing a decrease of 7.7%. The Company believes this decrease was primarily a
result of the Companys price increases, a decision by the Company to target new
clients with a lower workers compensation insurance risk profile, and to no longer
service existing clients in certain high-risk industries.

Revenues
from clients and client employees for medical insurance and retirement benefits coverage
increased in 2002 to $180.2 million from $129.2 million in 2002, representing an increase
of 39.4%. Revenues increased as the Company increased the charge for its health benefit
plans offered to client employees and the number of client employees participating in the
Companys health benefit plans increased.

Charges
to clients for workers compensation coverage as a percentage of client employees
salaries and wages for 2002 was 3.32%, compared to 4.36% for 2001, representing a decrease
of 23.9%. Such decline was due to the continuing change in the workers compensation
insurance risk profile of clients serviced.

Revenues
from state unemployment taxes and other decreased 10.8% to $8.9 million in 2002 from $10.0
million in 2001. The decrease was primarily the result of a decrease in state unemployment
taxes as a result of the reduction in client employees.

# Cost of Services

The
following table presents certain information related to the Companys costs of
services for 2002 and 2001:

|                                        | December 31,
2002 | December 31,
2001 | %
Change
|--------------------------------------- | ----------------- | ----------------- | --------
|
|Costs of Services:                      |                   |                   |         
|Employee health and welfare benefits    |                   |                   | $       
|Workers' compensation                   |                   |                   |         
|State unemployment taxes and other      |                   |                   |         
|                                        |                   |                   |         
|Total Costs of Services                 |                   |                   | $       
|                                        |                   |                   |         
|Statistical Data:                       |                   |                   |         
|Gross salaries and wages (in thousands) |                   |                   | $       
|Average number of client employees      |                   |                  
|paid by month                           |                   |                   |         
|Workers compensation cost rate per      |                   |                  
|one hundred dollars of total wages      |                   |                   | $       
|Number of workers' compensation claims  |                   |                   |         
|Frequency of workers' compensation      |                   |                   |         
|claims per one million dollars of       |                   |                   |         
|workers' compensation wages             |                   |                   |         

32


---

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 the collection of health care
benefit premiums with the client 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 client employees 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 and other costs were $6.1 million for 2002, compared to $7.5 million
for 2001, representing a decrease of $1.4 million or 18.3%. This decrease was partially
the result of the Company having fewer paid average client employees in 2002 subject to
state unemployment taxes and partially due to miscellaneous cost refunds received in 2002.

# Operating Expenses

The
following table presents certain information related to the Companys operating
expenses for 2002 and 2001:

|                                 | December 31,
2002 | December 31,
2001 | % Change
|-------------------------------- | ----------------- | ----------------- | --------
|
|Operating Expenses:              |                   |                   |         
|Salaries, wages and commissions  |                   |                   | $       
|Other general and administrative |                   |                   |         
|Depreciation and amortization    |                   |                   |         
|                                 |                   |                   |         
|Total Operating Expenses         |                   |                   | $       
|                                 |                   |                   |         
|Statistical Data:                |                   |                   |         
|Internal employees at year end   |                   |                   |         
|                                 |                   |                   |         

Total
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.

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.

33


---

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 Statement of Financial Accounting Standards
(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.

# LIQUIDITY AND CASH FLOWS

# Cash Flow

# General

The
Company periodically evaluates its liquidity requirements, capital needs and availability
of capital resources in view of its plans for expansion of its human resource outsourcing
portfolio through acquisition, collateralization requirements for insurance coverage and
other operating cash needs. As a result of this process, the Company has in the past
sought, and may in the future seek, to obtain additional capital from either private or
public sources. Certain types or amounts of financing will require the consent of the
Frontenac entities so long as they hold (or are entitled to vote) a majority of the Series
A Preferred Stock. The Company currently believes that its current cash balances,
restricted marketable securities and cash flow from operations will be sufficient to meet
its operational requirements for the next 12 months, excluding cash required for
acquisitions, if any.

The
Companys primary short-term liquidity requirements relate to the payment of accrued
payroll and payroll taxes of its internal and client employees, accounts payable for
capital expenditures, the payment of workers compensation premiums and medical
benefit plan premiums. The Companys billings to its clients include: (i) each client
employees gross wages; (ii) a professional service fee which is computed as a
percentage of the gross wages; (iii) related payroll taxes; and (iv) the clients
portion of benefits, including medical and retirement benefits, provided to the client
employees based on elected coverage levels by the client and the client employees.
Included in the Companys billings during 2003 were salaries, wages and payroll taxes
of client employees of $2,948.0 million. The billings to clients are managed from a cash
flow perspective so that a matching exists between the time that the funds are received
from a client to the time that the funds are paid to the client employees and to the
appropriate tax jurisdictions. As a co-employer, and under the terms of the Professional
Services Agreement, the Company is obligated to make certain wage, tax and regulatory
payments. Therefore, the objective of the Company is to minimize the credit risk
associated with remitting the payroll and associated taxes before receiving the service
fees from the client. To the extent this objective is not achieved, short-term cash
requirements can be significant. In addition, the timing and amount of payments for
payroll, payroll taxes and benefit premiums can vary significantly based on various
factors, including the day of the week on which a payroll period ends and the existence of
holidays at or immediately following a payroll period-end.

34


---

# Restricted Cash

At
December 31, 2003, the Company had $152.0 million in total cash and cash equivalents,
certificates of deposits and marketable securities, of which $44.7 million was
unrestricted. The Company is required to collateralize its obligations under its
workers compensation and health benefit plans and certain general insurance
coverage. The Company uses its cash, cash equivalents and marketable securities to
collateralize these obligations as more fully described below. Cash, cash equivalents and
marketable securities used to collateralize these obligations are designated as restricted
in the Companys financial statements.

At
December 31, 2003, the Company had pledged $107.3 million of restricted certificates of
deposit and restricted marketable securities, with original maturities of less than one
year, as collateral for certain standby letters of credit, in collateral trust
arrangements issued in connection with the Companys workers compensation and
health benefit plans, and in an escrow account as contingent consideration related to the
TeamStaff acquisition, as follows:

|                                                     | December 31, 2003 | December 31, 2002
|---------------------------------------------------- | ----------------- | -----------------
|
|Certificates of Deposit - restricted:                |                   |                  
|BCBS standby letter of credit                        |                   |                  
|Workers' compensation standby letter of credit - CNA |                   |                  
|Other                                                |                   |                  
|                                                     |                   |                  
|Total Certicates of Deposit - restricted             |                   |                  
|                                                     |                   |                  
|Short-term marketable securities - restricted:       |                   |                  
|Workers' compensation collateral - CNA               |                   |                  
|General insurance collateral obligations - AIG       |                   |                  
|Escrow for TeamStaff acquisition                     |                   |                  
|                                                     |                   |                  
|Total short-term marketable securities - restricted  |                   |                  
|                                                     |                   |                  
|Long-term marketable securities restricted:          |                   |                  
|Workers' compensation collateral - AIG               |                   |                  
|                                                     |                   |                  
|Total restricted assets                              |                   |                  
|                                                     |                   |                  
|                                                     |                   |                  

The
amount of collateral required to be provided to BCBS is expected to increase based in part
on the increase in plan participation and the requirement by BCBS to increase the
Companys collateralized obligations from one months estimate of claims payment
to two months. The Company was not required to collateralize the Aetna program for 2003 or
2002.

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

35


---

# Operating Cash Flow

At
December 31, 2003, the Company had net working capital of $90.1 million, including
restricted funds classified as short-term of $90.3 million, as compared to $89.6 million
in net working capital as of December 31, 2002, including $92.5 million of restricted
funds classified as short-term.

Net
cash provided by operating activities was $21.8 million for the year ended December 31,
2003 as compared to net cash provided by operating activities of $37.5 million for the
year ended December 31, 2002, representing a decrease of $15.7 million. The overall
decrease in cash is primarily attributable to $24.4 million of premium payments to AIG for
the 2003 workers compensation program in excess of projected claim liabilities. Of
this amount, the Company expects to receive approximately $11.7 during 2004 as a return of
premium from AIG. This reduction in cash was partially offset by the increase in net
income during the year and other smaller changes in working capital items. The Company
believes that it has a sufficient amount of restricted cash and marketable securities to
cover its short-term and long-term workers compensation obligations related to its
current open policy years with AIG and CNA.

# Cash Flow from
Investing Activities

Cash
used in investing activities for the year ended December 31, 2003 of $25.3 million,
primarily relates to the net purchases of restricted investments as a result of
collateralization obligations for the 2003 AIG workers compensation program, the use
of $7.2 for the TeamStaff acquisition (excluding the $2.5 million of contingent purchase
price held in escrow and included in restricted investments), and capital expenditures of
$3.1 million related primarily to information technology. The Company plans to spend
approximately $7.0 million on capital expenditures (primarily technology-related) during
2004. Capital expenditures are expected to be funded through operations and/or leasing
arrangements.

# Cash Flow from
Financing Activities

Cash provided by financing activities for the year ended 2003, of $14.4 million, was
primarily a result of the sale by the Company on June 6, 2003, of 30,000 shares of Series
A Preferred Stock for $27.7 million (net of transaction costs of $2.3 million). Proceeds
from the sale of the Series A Preferred Stock totaling $16.3 million were used by the
Company to purchase from Charles S. Craig, a former director of the Company, 2,997,734
shares of common stock and 60,000 options to purchase common stock. The remaining proceeds
were partially used to fund the TeamStaff acquisition on November 17, 2003 ($9.7 million)
with the remaining balance added to the Companys working capital.

Additionally,
the Company received approximately $7.5 million from directors, officers and employees of
the Company upon the exercise of 1,440,920 stock options and the purchase of 45,500 shares
of common stock under the Companys Employee Stock Purchase Plan.

# Inflation

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

# Commitments and
Contractual Obligations

Off-Balance
Sheet ArrangementsThe Company does not currently have any
off-balance sheet arrangements.

36


---

Table
Of Contractual ArrangementsThe following table summarizes the
Companys contractual obligations and commercial commitments as of December 31, 2003
and the effect they are expected to have on its liquidity and capital resources (in
thousands):

|                 | Payment due by period
|---------------- | ---------------------
|
|Long - term      |                      
|debt obligations |                      
|Capital lease    |                      
|obligations      |                      
|Operating lease  |                      
|obligations      |                      
|Purchase         |                      
|obligations      |                      
|Other (2)        |                      
|                 |                      
|Total            |                      
|                 |                      

---

| | (1) | Excluded
from the table of contractual obligations are the potential amounts due
               the Series A Preferred Stockholders as a result of a Company call or the
               Voluntary Redemption offer by the Company. Amounts are excluded  as they
are                considered discretionary by the Company. See the further discussion at
Note 13                of the Consolidated Financial Statements.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Included
in Other is the maximum amount of the contingent
               consideration related to the TeamStaff acquisition. Actual payment to
TeamStaff                may be lower upon the finalization of the purchase price
adjustment. See the                further discussion at Note 8 of the Consolidated
Financial Statements.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37


---

# CRITICAL ACCOUNTING
ESTIMATES

The
preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosures of contingent assets and liabilities. The
accounting estimates described below are those that the Company considers critical in
preparing its financial statements because they are particularly dependent on estimates
and assumptions made by management that are uncertain at the time the accounting estimates
are made. While management has used its best estimates based upon facts and circumstances
available at the time, different estimates reasonably could have been used in the current
period, and changes in the accounting estimates used are reasonably likely to occur from
period to period, which may have a material impact on the presentation of our financial
condition and results of operations. Management periodically reviews the estimates and
assumptions and reflects the effects of revisions in the period they are determined to be
necessary. Management has reviewed the critical accounting estimates with the
Companys Audit Committee. The descriptions below are summarized and have been
simplified for clarity. A detailed description of the significant accounting policies used
by the Company in preparing its financial statements is included in Note 1 to the
Consolidated Financial Statements appearing elsewhere in this Form 10-K.

Workers
Compensation Receivable/Reserves.     The Company has had a loss sensitive workers
compensation insurance program since January 1, 2000. The program was insured by CNA until
December 31, 2002 and is currently insured by AIG effective January 1, 2003.

As
part of these programs, the Company has individual stop loss coverage at $1 million per
occurrence. In addition, the Company has 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 for the 2003 policy year and 130% of expected losses as determined by
CNA for the policy years from January 1, 2000 through December 31, 2002.

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

The
Companys Consolidated Financial Statements reflect the estimates made by the
independent actuaries as well as other factors related to the Companys workers
compensation programs within the Cost of Services on the Companys Consolidated
Statements of Operations and within the Workers Compensation Receivable, the Accrued
Insurance Premiums, Health and Workers Compensation Insurance Reserves or the
Long-term Accrued Health and Workers Compensation Insurance Reserves on the
Companys Consolidated Balance Sheets. To the extent that the premium payment to the
carriers for the first $1 million per occurrence of claims is greater than (less than) the
amount of the ultimate liability accrued to date, a receivable (liability) is recorded. 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.

39


---

Such
increase or decrease to the accrual rate is reflected in the accounting period for which
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 recognize the workers compensation cost obligations that are not
expected to be received (paid) in the following year, the Company includes a portion of
the obligation as a long-term receivable (liability) using an applicable discount rate.
Fluctuations in the interest rate environment influence the selection of the discount
rate. Increases in the discount rate result in a decrease in the net present value of the
liability while decreases in the discount rate result in an increase in the net present
value of the liability.

The
following loss reserve development table illustrates the change over time of reserves
established for workers compensation claims for each of the open policy years. This
table excludes the 2000 program year for the Texas Workers Compensation Insurance
Fund, which was a guaranteed cost program. The second section, reading down, shows the
number of claims reported. The third section, reading down, shows the number of open
claims as of the end of each successive year. The fourth section, reading down, shows the
amount of open case reserves as of the end of each successive year. The fifth 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.

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 plan years.

39


---

|                                 | Year Ended December 31,
|-------------------------------- | -----------------------
|
|Originally reported reserves for |                        
|unpaid claims and claims         |                        
|expenses limited to $1.0 million |                        
|per occurrence                   |                        
|Number of claims reported as of: |                        
|End of initial year              |                        
|One year later                   |                        
|Two years later                  |                        
|Three years later                |                        
|Number of open claims reported   |                        
|as of:                           |                        
|End of initial year              |                        
|One year later                   |                        
|Two years later                  |                        
|Three years later                |                        
|Insurance carrier open case      |                        
|reserve amount as of:            |                        
|End of initial year              |                        
|One year later                   |                        
|Two years later                  |                        
|Three years later                |                        
|Cumulative net paid claims by    |                        
|insurance carrier as of:         |                        
|                                 |                        
|End of initial year              |                        
|One year later                   |                        
|Two years later                  |                        
|Three years later                |                        
|Undiscounted reserves            |                        
|reestimated as of:               |                        
|End of initial year              |                        
|One year later                   |                        
|Two years later                  |                        
|Three years later                |                        

40


---

The
following table summarizes the expected undiscounted cash flows related to workers
compensation claims payments for the open policy years as of December 31, 2003:

|                                       | For the Policy Years Ended
|-------------------------------------- | --------------------------
|
|
|Actual premium/collateral              |                           
|payments to carriers                   |                           
|                                       |                           
|Paid claims by insurance carrier       |                           
|Estimated future claims covered        |                           
|by premium/collateral                  |                           
|                                       |                           
|Total estimated ultimate claims        |                           
|Estimated interest on                  |                           
|premium/collateral payments            |                           
|                                       |                           
|Estimated return of premium/collateral |                           
|                                       |                           
|                                       |                           

The Company expects to receive
approximately $11.7 million of returned premium (including interest) during 2004 relative
to the AIG 2003 policy year. All other estimated premium/collateral return is expected to
be long-term.

Medical
Benefit Plan Liabilities. The Company provides medical benefit plans to its client
employees through several medical benefits plan providers under a minimum premium plan
with BCBS, a retrospective premium plan with Aetna for the Aetna PPO plan and guarantee
cost contracts for all other plans.

With
respect to the medical benefit plans with BCBS, 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 by an independent actuary 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.

With
respect to the Aetna PPO plans, the Company establishes a liability (if necessary) based
upon estimates provided by Aetna if claims are higher than initially projected, up to the
7.5% additional recall cap.

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, adjustments to health reserves are
sometimes significant.

The
following table provides 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:

41


---

# MEDICAL BENEFIT PLAN
LIABILITIES

|                                 | 
|-------------------------------- | 
|
|
|Medical Benefit Plan Liabilities | 

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 subsidy.

The
Companys financial statements reflect the estimates made within the Cost Of Services
on the Companys Consolidated Statement of Operations and within the Accrued
Insurance Premiums, Health and Workers Compensation Reserves on the Companys
Consolidated Balance Sheet.

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

Allowance
for Doubtful Accounts.      The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its clients to pay their fees. The
Company believes that the success of its business is heavily dependent on its ability to
collect these fees for several reasons including the fact that the Company is at risk for
the payment of its direct costs and client employee payroll costs regardless of whether
the clients pay their fees; the large volume and dollar amount of transactions processed
by the Company; and the periodic and recurring nature of payroll, upon which the fees are
based. The Company has established very tight credit policies and generally requires its
clients to pay in advance or simultaneously with the delivery of the payroll. In addition,
the Company maintains the right to terminate its Professional Services Agreement and
associated client employees or to require prepayment, letters of credit or other
collateral upon deterioration in a clients financial position or upon nonpayment by
a client. As a result of the Companys tight credit policies, customer nonpayment
have been historically low as a percentage of revenues. If the financial condition of the
Companys customers were to deteriorate rapidly, resulting in non-payment, the
Companys uncollected accounts receivable could grow rapidly and the Company could be
required to provide for additional allowances.

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.

42


---

# ITEM 7 A.         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 Consolidated Financial Statements). 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 and related to the collateral provided to AIG for the 2003
and 2004 workers compensation program. The insurance premiums paid to CNA and
collateral held for AIG are invested in short-term auction market preferred stocks,
auction market municipal bonds, a mutual fund, as well as money market funds. The
insurance premiums paid to AIG under its 2003 workers compensation program earn a
fixed rate of return and are not subject to market risk from changes in interest rates.
The Company does not expect changes in interest rates to have a material effect on income
or cash flows in 2004, although there can be no assurances that interest rates will not
change.

# ITEM 8.         FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

The
information required by this Item 8 is contained in a separate section of this Form 10-K.
See Index to Consolidated Financial Statements and Financial Statement
Schedule.

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

None.

# ITEM 9A.         CONTROLS AND
PROCEDURES

As
of the end of the period covered by this report, the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon
that evaluation, (i) the Companys management concluded that the Companys
disclosure controls and procedures were effective as of the end of the period covered by
this report and (ii) no changes in the Companys internal control over financial
reporting were identified in the prior fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over
financial reporting.

# PART III.

# ITEM 10.         DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY

Information
regarding the Companys executive officers is included under Business 
Executive Officers of the Registrant. Other information required by this Item 10 and
information regarding the Committees of the Board of Directors will be contained in the
Companys Proxy Statement, relating to the 2004 Annual Meeting of Shareholders,
expected to be held on May 20, 2004 (the Proxy Statement) and is incorporated
herein by reference.

43


---

# 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.         PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The
information required by this Item 14 will be contained in the Proxy Statement and is
incorporated herein by reference.

# PART IV.

# ITEM 15.         EXHIBITS,
FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a)       
          1. The financial statements and independent auditors report are listed in
          the Index to Financial Statements and Financial Statement Schedule
          on page F-1 and included on pages F-2 through F-32.

2.       
          The financial statement schedule required by Item 14(a) (2) is included on page
          S-1.

3.       
          Exhibit Index, including those incorporated by reference:

# 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 | Second
Articles of Amendment and Restatement of the Articles of Incorporation as filed with the
Secretary of State of the State of Florida on August 13, 2003.+
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | Second
Amended and Restated Bylaws (filed as Exhibit 3.2 to the Companys Annual Report on
      Form 10-K filed March 31, 2003 and incorporated herein by reference).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.1 | Form
of First Amendment and Supplement dated as of March 5, 2003 to 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 99.4 to the Companys Current Report
on Form 8-K filed March 6, 2003 and incorporated herein by reference).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44


---

| | 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 (filed as Exhibit 10.5 to the Companys Annual Report on Form 10-K filed
March 31, 2003, and incorporated herein by reference).*
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 filed 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
filed 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 filed 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 filed 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 filed March
25, 2002 and incorporated herein by reference).*
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 | 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 filed May 15, 2000 and
incorporated herein by reference).*
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12 | 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 filed May 15, 2001 and incorporated herein by reference).*
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45


---

| | 10.13 | 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 filed April 1, 2002 and
incorporated herein by reference). *
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 | Employment
Offer Letter from the Company to Sal Uglietta, dated September 24, 2003 (filed as
Exhibit 99.2 to the Companys Current Report on Form 8-K filed September 29, 2003
and incorporated herein by reference).*
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 | Non-Solicitation,
Non-Compete and Confidentiality Agreement between the Company and Sal Uglietta, dated
September 24, 2003 (filed as Exhibit 99.3 to the Companys Current Report on
Form 8-K filed September 29, 2003 and incorporated herein by reference).*
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Change
of Status and General Release letter dated April 23, 2003 accepted by John E. Panning
(filed as Exhibit 99.2 to the Companys Current Report on Form 8-K filed April 24,
2003 and incorporated herein by reference).*
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 | Promotion
Letter dated April 23, 2003 accepted by Peter C. Grabowski (filed as Exhibit 99.3 to the
Companys Current Report on Form 8-K filed April 24, 2003 and incorporated herein by
reference).*
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 | 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 on Form S-1 filed March 7, 1997 and incorporated herein by
reference).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 | Blue
Cross/Blue Shield of Florida Group Master Policy for the Company effective January 1,
2003. +
| | ----- | --------------------------------------------------------------------------------------------------

| | 10.20 | Aetna,
Inc. Financial Conditions related            to the Group Master Policy effective January
1, 2003 +
| | ----- | ----------------------------------------------------------------------------------------------------------

| | 10.21 | Final
Bound  Proposal of AIG Risk  Management,  Inc. to be the carrier of the 2004  Workers'
 Compensation                   Program of the Company. (Certain confidential information
in this documant, marked by an asterisk and brackets,  has been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule 24b-c of the
Securities Exchange Act of 1934 as amended). +
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22 | 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 filed October 23, 2002 and incorporated herein by reference).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23 | 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 filed March 31, 1998 and incorporated herein by reference).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46


---

| | 10.24 | Workers Compensation
and Employers Liability Policy issued by Texas Workers Compensation Insurance
Fund to Gevity HR of Texas, L.P., effective January 1, 2000 (filed as Exhibit 10.13 to
the Companys Annual Report on Form 10-K for the year ended December 31, 1999 filed
April 3, 2000 and incorporated herein by reference).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.25 | 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 filed
April 3, 2000 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.26 | Workers Compensation
and Employers Liability Policy issued by Continental Casualty Co. to the Company,
effective January 1, 2000 (filed as Exhibit 10.15 to the Companys Annual Report on
Form 10-K for the year ended December 31, 1999 filed April 3, 2000 and incorporated
herein by reference).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.27 | 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 filed
April 1, 2002 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.28 | 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, 2001 filed
April 1, 2002 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.29 | Form
of the Preferred Stock Purchase Agreement by and among Gevity HR, Inc., Frontenac VIII
Limited Partnership, Frontenac Masters VIII Limited Partnership, SunTrust Equity Funding,
LLC d/b/a SunTrust Equity Partners and BVCF IV, L.P., dated as of April 24, 2003
(filed as Exhibit 99.1 to the Companys Current Report on Form 8-K filed June 10,
2003 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.30 | Form
of the First Amendment to Purchase Agreement by and among Gevity HR, Inc., Frontenac VIII
Limited Partnership, Frontenac Masters VIII Limited Partnership, SunTrust Equity Funding,
LLC d/b/a SunTrust Equity Partners, BVCF IV, L.P. and C&B Capital L.P., dated as of
June 3, 2003 (filed as Exhibit 99.2 to the Companys Current Report on Form 8-K
filed June 10, 2003 and incorporated herein by reference).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.31 | Form
of the Voting Rights Letter Agreement by and among Frontenac VIII Limited Partnership,
Frontenac Masters VIII Limited Partnership, SunTrust Equity Funding, LLC d/b/a SunTrust
Equity Partners, BVCF IV, L.P. and C&B Capital L.P., dated as of June 6, 2003
(filed as Exhibit 99.4 to the Companys Current Report on Form 8-K filed June 10,
2003 and incorporated herein by reference).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.32 | Form
of the Registration Rights Agreement, by and among Gevity HR, Inc., Frontenac VIII
Limited Partnership, Frontenac Masters VIII Limited Partnership, SunTrust Equity Funding,
LLC d/b/a SunTrust Equity Partners, BVCF IV, L.P. and C&B Capital L.P., dated as of
June 6, 2003 (filed as Exhibit 99.5 to the Companys Current Report on Form 8-K
filed June 10, 2003 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.33 | Form
of the First Amendment and Supplement to the Rights Agreement by and among Gevity HR,
Inc. and American Stock Transfer & Trust Company, dated as of March 5, 2003
(filed as Exhibit 99.6 to the Companys Current Report on Form 8-K filed June 10,
2003 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47


---

| | 10.34 | Form
of the Second Amendment and Supplement to the Rights Agreement by and among Gevity HR,
Inc. and American Stock Transfer & Trust Company, dated as of June 6, 2003
(filed as Exhibit 99.7 to the Companys Current Report on Form 8-K filed June 10,
2003 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.35 | Waiver
Letter dated July 16, 2003 executed by the holders of the Series A Preferred Stock (filed
as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 filed August 14, 2003 and incorporated herein by reference).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 18.1 | Independent
Auditors letter regarding the Companys revenue reporting change from gross to
net revenues (filed as Exhibit 18.1 to the Companys Annual Report on Form 10-K
filed March 31, 2003, and incorporated by reference).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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  on Form S-1  filed  December  15,  1998  and
 incorporated  herein  by                   reference).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 23.2 | Independent
Auditors' Consent to Form 10-K for the year ended December 31, 2003. +
| | ---- | ----------------------------------------------------------------------------------

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

| | 31.2 | Certification
 of  Peter  C.  Grabowski,  as Chief  Financial  Officer,  pursuant  to  Section  302 of
the                   Sarbanes-Oxley Act of 2002. +
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32 | Certification
furnished 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, 2003:

1.    
          A Current Report on Form 8-K was filed on November 18, 2003, announcing the
          acquisition by the Company of the human resources outsourcing portfolio of
          TeamStaff, Inc. on November 17, 2003.

2.    
          A Current Report on Form 8-K was filed on October 23, 2003, announcing the
          Companys financial results for the three and nine month periods ended
          September 30, 2003.

48


---

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.                                          
|--------------------- |  | ---------------------------------------------------------
|Dated: March 10, 2004 |  | /s/ Erik Vonk                                            
|                      |  | Erik Vonk, Chairman of the Board, Chief 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.

|                      |  |                                                                                        
|--------------------- |  | ---------------------------------------------------------------------------------------
|Dated: March 10, 2004 |  | /s/ Erik Vonk                                                                          
|                      |  | Erik Vonk, Chairman of the Board, Chief Executive
Officer (Principal Executive Officer)

|                      |  |                                                                                        
|--------------------- |  | ---------------------------------------------------------------------------------------
|Dated: March 10, 2004 |  | /s/ Peter C. Grabowski                                                                 
|                      |  | Peter C. Grabowski
Chief Financial Officer
(Principal Financial and Accounting Officer)

|                      |  |                           
|--------------------- |  | --------------------------
|Dated: March 10, 2004 |  | /s/ George B. Beitzel     
|                      |  | George B. Beitzel
Director

|                      |  |                           
|--------------------- |  | --------------------------
|Dated: March 10, 2004 |  | /s/ Darcy E. Bradbury     
|                      |  | Darcy E. Bradbury
Director

|                      |  |                        
|--------------------- |  | -----------------------
|Dated: March 10, 2004 |  | /s/ James E. Cowie     
|                      |  | James E. Cowie
Director

|                      |  |                           
|--------------------- |  | --------------------------
|Dated: March 10, 2004 |  | /s/ Jonathan H. Kagan     
|                      |  | Jonathan H. Kagan
Director

|                      |  |                       
|--------------------- |  | ----------------------
|Dated: March 10, 2004 |  | /s/ David S. Katz     
|                      |  | David S. Katz
Director

|                      |  |                          
|--------------------- |  | -------------------------
|Dated: March 10, 2004 |  | /s/ James F. Manning     
|                      |  | James F. Manning
Director

|                      |  |                        
|--------------------- |  | -----------------------
|Dated: March 10, 2004 |  | /s/ Elliot B. Ross     
|                      |  | Elliot B. Ross
Director

49


---

GEVITY HR, INC. AND
SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

|                                                                    |  | 
|------------------------------------------------------------------- |  | 
|
|                                                                    |  | 
|Independent Auditors' Report                                        |  | 
|Consolidated Balance Sheets as of December 31, 2003 and 2002        |  | 
|Consolidated Statements of Operations for the Years Ended           |  | 
|December 31, 2003, 2002, and 2001                                   |  | 
|Consolidated Statements of Changes in Shareholders'                 |  | 
|Equity for the Years Ended December 31, 2003, 2002, and 2001        |  | 
|Consolidated Statements of Cash Flows for the Years Ended           |  | 
|December 31, 2003, 2002, and 2001                                   |  | 
|Notes to Consolidated Financial Statements                          |  | 
|Financial Statement Schedule II - Valuation and Qualifying Accounts |  | 

F-1


---

# INDEPENDENT AUDITORS
REPORT

Board of DirectorsGevity
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, 2003. 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, 2003 and 2002 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003 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 client
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 LLPCertified
Public Accountants

Tampa, Florida March 11,
2004

F-1


---

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

|                                                 | December 31,
2003 | December 31,
2002
|------------------------------------------------ | ----------------- | -----------------
|
|Current assets:                                  |                   |                  
|Cash and cash equivalents                        |                   |                  
|                                                 |                   |                  
|Certificates of deposit - restricted             |                   |                  
|Marketable securities - restricted               |                   |                  
|Accounts receivable, net                         |                   |                  
|Short-term workers' compensation receivable, net |                   |                  
|Deferred tax asset                               |                   |                  
|Other current assets                             |                   |                  
|                                                 |                   |                  
|Total current assets                             |                   |                  
|Property and equipment, net                      |                   |                  
|Long-term marketable securities - restricted     |                   |                  
|Long-term workers' compensation receivable, net  |                   |                  
|Intangible assets, net                           |                   |                  
|Goodwill                                         |                   |                  
|Deferred tax asset                               |                   |                  
|Other assets                                     |                   |                  
|                                                 |                   |                  
|                                                 |                   |                  
|Total assets                                     |                   |                  
|                                                 |                   |                  
|                                                 |                   |                  

See
notes to consolidated financial statements.

F-3


---

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

|                                                                      | December 31,
2003 | December 31,
2002
|--------------------------------------------------------------------- | ----------------- | -----------------
|
|Current liabilities:                                                  |                   |                  
|Accrued payroll and payroll taxes                                     |                   |                  
|Accrued insurance premiums, health and                                |                   |                  
|workers' compensation insurance reserves                              |                   |                  
|Customer deposits and prepayments                                     |                   |                  
|Accounts payable and other accrued liabilities                        |                   |                  
|Income taxes payable                                                  |                   |                  
|Dividends payable                                                     |                   |                  
|                                                                      |                   |                  
|Total current liabilities                                             |                   |                  
|Long-term accrued health and workers' compensation                    |                   |                  
|insurance reserves                                                    |                   |                  
|Deferred tax liability                                                |                   |                  
|Other long-term liabilities                                           |                   |                  
|                                                                      |                   |                  
|Total liabilities                                                     |                   |                  
|                                                                      |                   |                  
|Commitments and contingencies (see notes)                             |                   |                  
|Series A convertible, redeemable preferred stock, $0.01 par value,    |                   |                  
|($30,000 liquidation preference) 30,000 shares authorized, issued and |                   |                  
|outstanding as of December 31, 2003, net                              |                   |                  
|                                                                      |                   |                  
|Shareholders' equity:                                                 |                   |                  
|Common stock, $.01 par value                                          |                   |                  
|Shares authorized: 100,000,000                                        |                   |                  
|Shares issued:                                                        |                   |                  
|December 31, 2003 - 22,251,477                                        |                   |                  
|December 31, 2002 - 20,810,557                                        |                   |                  
|Additional paid in capital                                            |                   |                  
|Retained earnings                                                     |                   |                  
|Accumulated other comprehensive  income                               |                   |                  
|Treasury stock (3,062,751 and 50,517 shares at cost, respectively)    |                   |                  
|                                                                      |                   |                  
|Total shareholders' equity                                            |                   |                  
|                                                                      |                   |                  
|Total liabilities, convertible redeemable preferred                   |                   |                  
|stock and shareholders' equity                                        |                   |                  
|                                                                      |                   |                  
|                                                                      |                   |                  
|                                                                      |                   |                  

See
notes to consolidated financial statements.

F-4


---

# GEVITY HR, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS
OF OPERATIONS(in $000s, except share
and per share data)

|                                                          | YEARS ENDED DECEMBER 31,
|--------------------------------------------------------- | ------------------------
|
|Revenues                                                  |                         
|Cost of services                                          |                         
|                                                          |                         
|                                                          |                         
|Gross profit                                              |                         
|                                                          |                         
|                                                          |                         
|Operating expenses:                                       |                         
|Salaries, wages and commissions                           |                         
|Other general and administrative                          |                         
|Depreciation and amortization                             |                         
|                                                          |                         
|Total operating expenses                                  |                         
|                                                          |                         
|Operating income (loss)                                   |                         
|Interest income, net                                      |                         
|Other (expense) income, net                               |                         
|                                                          |                         
|Income (loss) before income taxes                         |                         
|Income tax provision (benefit)                            |                         
|                                                          |                         
|Net income (loss)                                         |                         
|                                                          |                         
|Non-cash charges attributable to beneficial conversion    |                         
|feature and accretion of redemption value of convertible, |                         
|redeemable preferred stock                                |                         
|Preferred stock dividends                                 |                         
|                                                          |                         
|                                                          |                         
|Net income (loss) attributable to common shareholders     |                         
|                                                          |                         
|Net income (loss) per common share                        |                         
|- Basic                                                   |                         
|- Diluted                                                 |                         
|                                                          |                         
|Weighted average common shares outstanding                |                         
|- Basic                                                   |                         
|- Diluted                                                 |                         
|                                                          |                         

See
notes to consolidated financial statements.

F-5


---

# GEVITY HR, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITYYEARS
ENDED DECEMBER 31, 2003, 2002 AND 2001(in $000s, except share
and per share data)

|                                              |  |  |            |   |  |         |  
|--------------------------------------------- |  |  | ---------- | - |  | ------- | -
|
|Balance, December 31, 2000                    |  |  | 20,651,107 |   |  | $   207 |  
|Repurchase and retirement                     |  |  |            |   |  |         |  
|of common stock                               |  |  | (38,545    | ) |  | (1      | )
|Purchase of treasury stock                    |  |  | --         |   |  | --      |  
|Common Stock dividends       paid and payable |  |  | --         |   |  | --      |  
|Comprehensive loss:                           |  |  |            |   |  |         |  
|Unrealized gain on                            |  |  |            |   |  |         |  
|marketable securities                         |  |  | --         |   |  | --      |  
|Net loss                                      |  |  | --         |   |  | --      |  
|Total comprehensive loss                      |  |  |            |   |  |         |  
|                                              |  |  |            |   |  |         |  
|                                              |  |  |            |   |  |         |  
|Balance, December 31, 2001                    |  |  | 20,612,562 |   |  | 206     |  
|Issuance of common stock                      |  |  | 197,995    |   |  | 2       |  
|Purchase of treasury stock                    |  |  | --         |   |  | --      |  
|Tax benefit of stock option                   |  |  |            |   |  |         |  
|exercises                                     |  |  | --         |   |  | --      |  
|Common Stock dividends     paid and payable   |  |  | --         |   |  | --      |  
|Comprehensive Income:                         |  |  |            |   |  |         |  
|Net income                                    |  |  | --         |   |  | --      |  
|Total comprehensive income                    |  |  |            |   |  |         |  
|                                              |  |  |            |   |  |         |  
|                                              |  |  |            |   |  |         |  
|Balance, December 31, 2002                    |  |  | 20,810,557 |   |  | 208     |  
|Purchase of treasury stock                    |  |  | --         |   |  | --      |  
|Issuance of common stock                      |  |  | 1,440,920  |   |  | 15      |  
|Tax benefit of stock                          |  |  |            |   |  |         |  
|option exercises                              |  |  | --         |   |  | --      |  
|                                              |  |  |            |   |  |         |  
|Beneficial conversion                         |  |  |            |   |  |         |  
|discount on redeemable                        |  |  |            |   |  |         |  
|preferred stock                               |  |  | --         |   |  | --      |  
|Accretion of beneficial                       |  |  |            |   |  |         |  
|conversion feature                            |  |  |            |   |  |         |  
|on preferred stock                            |  |  | --         |   |  | --      |  
|Preferred stock dividends                     |  |  |            |   |  |         |  
|paid and payable                              |  |  | --         |   |  | --      |  
|                                              |  |  |            |   |  |         |  
|Common stock dividends paid                   |  |  |            |   |  |         |  
|and payable                                   |  |  | --         |   |  | --      |  
|Comprehensive income:                         |  |  |            |   |  |         |  
|Unrealized loss on marketable                 |  |  |            |   |  |         |  
|securities                                    |  |  | --         |   |  | --      |  
|Net income                                    |  |  | --         |   |  | --      |  
|Total comprehensive income                    |  |  |            |   |  |         |  
|                                              |  |  |            |   |  |         |  
|Balance, December 31, 2003                    |  |  | 22,251,477 |   |  | $   223 |  
|                                              |  |  |            |   |  |         |  
|                                              |  |  |            |   |  |         |  

See
notes to consolidated financial statements.

F-6


---

# GEVITY HR, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS
OF CASH FLOWS
(in $000s)

|                                                     | Years Ended December 31,
|---------------------------------------------------- | ------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                         
|Net income (loss)                                    |                         
|Adjustments to reconcile net income (loss)           |                         
|to net cash provided by operating activities:        |                         
|Depreciation and amortization                        |                         
|Deferred taxes (benefit) provision, net              |                         
|Provision for bad debts                              |                         
|Other                                                |                         
|Changes in operating working capital:                |                         
|Accounts receivable, net                             |                         
|Other current assets                                 |                         
|Workers' compensation receivable                     |                         
|Other assets                                         |                         
|Accrued insurance premiums, health and               |                         
|workers' compensation insurance reserves             |                         
|Accrued payroll and payroll taxes                    |                         
|Accounts payable and other accrued liabilities       |                         
|Income taxes payable                                 |                         
|Customer deposits and prepayments                    |                         
|Long-term accrued health and workers'                |                         
|compensation insurance reserves                      |                         
|Other long-term liabilities                          |                         
|                                                     |                         
|Net cash provided by operating activities            |                         
|                                                     |                         
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                         
|Purchases of marketable securities and certificates  |                         
|of deposit                                           |                         
|Maturities of marketable securities and certificates |                         
|of deposit                                           |                         
|Purchase of intangible assets                        |                         
|Capital expenditures                                 |                         
|                                                     |                         
|Net cash (used in) provided by investing activities  |                         
|                                                     |                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                         
|Payment of cash dividends to shareholders            |                         
|Proceeds from issuance of Series A Convertible       |                         
|Redeemable Preferred Stock, net of issuance costs    |                         
|Purchase of treasury stock                           |                         
|Proceeds from issuance of common shares              |                         
|Repurchase of common shareholders' interests         |                         
|                                                     |                         
|Net cash provided by (used in) financing activities  |                         
|                                                     |                         
|Net increase (decrease) in cash and cash equivalents |                         
|Cash and cash equivalents - beginning of year        |                         
|                                                     |                         
|Cash and cash equivalents - end of year              |                         
|                                                     |                         
|Supplemental disclosure of cash flow information:    |                         
|Income taxes (refund) paid                           |                         

See
notes to consolidated financial statements.

F-7


---

# GEVITY HR, INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in $000s, except
share and 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. Gevity is a leading provider of end to end
human capital management solutions that create business value and promote employee
excellence by putting people first. The Companys high-impact outsourcing services
provide a competitive advantage to clients by helping them to find, develop and retain
talent, manage the paperwork, and protect their business. Employee focused solutions are
delivered by professionals in the Company's branch offices, supplemented by the industrys leading Web-based
technology. These solutions are provided to small and medium-sized businesses in the
United States. The Companys more than 900 employees are dedicated to providing
businesses with typically between 5 and 100 employees, or to larger employers with
multiple locations, access to a broad range of outsourced professional human resource
services and to effectively become the in-sourced human resources department
for each such business. The Company has assembled, developed and deployed a very capable
team of human resource professionals who have the human resource expertise necessary to
deliver to the Companys clients and their employees a comprehensive, fully
integrated human resource solution that is generally available only to larger businesses.

Delivered
through a combination of centralized and local human resource consultants, as well as
through leading edge Oracle-based, web-enabled technology, the Companys tools and
services are designed to positively impact each clients business in two important
ways. First, the Company believes that its clients and their employees benefit from the
Companys offering through increased work satisfaction that generally leads to higher
productivity. Second, the Company expects that the general profitability of client
businesses will be positively impacted since the Companys services allow their
clients managers to concentrate on revenue producing activities rather than the time
consuming and increasingly complex burdens associated with employee administration.

As
of December 31, 2003, the Company served more than 7,500 clients, as measured by
individual client Federal Employer Identification Numbers (FEIN), with
approximately 106,000 active client employees, and maintained offices in Alabama, Arizona,
California, Colorado, Florida, Georgia, Massachusetts, Minnesota, New Jersey, New York,
North Carolina, Tennessee and Texas.

Principles
of Consolidation  The accompanying consolidated financial statements include the
accounts of Gevity HR, Inc. and all of its wholly-owned subsidiaries: Staff Leasing, LLC;
Concorda Insurance Company Limited; Gevity HR XII Corp.; Gevity HR XI, LLC; Gevity HR ASO,
LLC 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 materially from those estimates.

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

F-8


---

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, 2003 and 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 specific identification method, and realized gains and
losses are included in other income (expense).

Property
and Equipment  Property and equipment are stated at cost less accumulated
depreciation. 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

Internal Use Software
 Certain costs of computer software developed or obtained for internal use are
capitalized and amortized on a straight-line basis over the estimated useful lives of the
software, generally three to five years. Costs incurred during the preliminary project
stage, as well as general and administrative, overhead, maintenance and training, and
costs that do not add functionality to existing systems, are expensed as incurred.

Goodwill
and Other Intangible Assets  As of January 1, 2002, the Company adopted SFAS No.
142, Goodwill and Other Intangible Assets, which addresses the accounting and
reporting standards for the acquisition of intangible assets outside of a business
combination and for goodwill and other intangible assets subsequent to their acquisition.
This accounting standard requires that goodwill be (1) separately disclosed from other
intangible assets in the balance sheet, (2) no longer amortized, and (3) tested for
impairment on a periodic basis. In accordance with SFAS 142, the Company no longer
amortizes goodwill but reviews goodwill for impairment annually, or more frequently if
certain indicators arise. The Company has elected the fourth quarter as the quarter to
complete its annual goodwill impairment test. The Company concluded that there was no
impairment of goodwill as of December 31, 2003 and December 31, 2002. Goodwill
amortization expense was $733 for the year ended December 31, 2001. Pro forma net income
(loss) and earnings (loss) per share for the years ended December 31, 2003, 2002 and 2001,
adjusted to eliminate historical amortization of goodwill and related tax effect are as
follows:

F-9


---

|                                  |  | For the Years Ended December 31,
|--------------------------------- |  | --------------------------------
|
|Net income (loss)                 |  |                                 
|Goodwill amortization, net of tax |  |                                 
|                                  |  |                                 
|                                  |  |                                 
|Net income (loss)                 |  |                                 
|                                  |  |                                 
|Basic earnings (loss) per share   |  |                                 
|                                  |  |                                 
|Diluted earnings (loss) per share |  |                                 
|                                  |  |                                 

The
Company adopted SFAS No. 141, Business Combinations, as of July 1, 2001. SFAS 141
requires that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Acquired intangible assets with finite lives are amortized
on a straight-line basis over their estimated useful lives.

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 related risk.

Revenue
Recognition  The gross billings that the Company charges its clients under its
Professional Services Agreement include each client employees gross wages, a
professional service fee and, to the extent elected by the clients, health and welfare
benefit plan costs. The Companys professional service fee, which is primarily
computed on a per employee basis, is intended to yield a profit to the Company and to
cover the cost of human resource outsourcing services provided by the Company to the
client, certain employment-related taxes and workers compensation insurance
coverage. The component of the professional service fee related to human resource
outsourcing services varies according to the size and location of the client. 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. The Company accounts for its revenues using the accrual method of accounting.
Under the accrual method of accounting, the Company recognizes its revenues in the period
in which the client employee performs work. The Company accrues revenues and unbilled
receivables for service fees relating to work performed by client employees but unpaid at
the end of each period. In addition, the related costs of services are accrued as a
liability for the same period. Subsequent to the end of each period, such costs are paid
and the related service fees are billed.

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 professional service fees, health and retirement plan fees, workers
compensation and unemployment insurance fees. The Company reports revenues on a gross
basis for these fees because the Company is the primary obligor and deemed to be the
principal in these transactions under EITF No. 99-19. The Company reports revenues on a
net basis for the amount billed to clients for employee salaries, wages and
payroll-related taxes less amounts paid to client employees and taxing authorities for
these salaries, wages and taxes.

F-10


---

Historically
the Company reported as revenue the full amount of its gross billings, including the
portion that represents the gross wages of its clients employees. The Company
changed from gross revenue reporting for client employee salaries, wages and certain
payroll taxes during the fourth quarter of 2002. Based on the criteria established by EITF
No. 99-19, the Company determined that the change better recognized the substance of the
transactions between the Company and its clients. In addition, the change would better
focus the Company on, and allow investors to better understand, the financial results of
the Companys core business. The change to a more preferable accounting method
resulted in no effect on net income or earnings per share. Because of the significance of
the reclassification of revenue and expense components to the income statement, the
Company previously reflected the change as if it had occurred on January 1, 2000 in the
Annual Report on Form 10-K for the Year Ended December 31, 2002.

The
table presented below reflects the effect of the change on the amounts previously reported
for the year ended December 31, 2001, and the amounts that would have been reported for
the years ended December 31, 2003 and December 31, 2002, under the gross revenue reporting
method.

For the year ended December 31, 2003:

|                   | Gross Revenue
Reporting Method | Reclassification | Net Revenue
Reporting Method
|------------------ | ------------------------------ | ---------------- | ----------------------------
|Revenues           |                                |                  | $                           
|Cost of services   |                                |                  |                             
|Gross profit       |                                |                  |                             
|Operating expenses |                                |                  |                             
|Net income         |                                |                  | $                           

For the year ended December 31, 2002:

|                   | Gross Revenue
Reporting Method | Reclassification | Net Revenue
Reporting Method
|------------------ | ------------------------------ | ---------------- | ----------------------------
|Revenues           |                                |                  | $                           
|Cost of services   |                                |                  |                             
|Gross profit       |                                |                  |                             
|Operating expenses |                                |                  |                             
|Net income         |                                |                  | $                           

For the year ended December 31, 2001:

|                   | Gross Revenue
Reporting Method | Reclassification | Net Revenue
Reporting Method
|------------------ | ------------------------------ | ---------------- | ----------------------------
|Revenues           |                                |                  | $                           
|Cost of services   |                                |                  |                             
|Gross profit       |                                |                  |                             
|Operating expenses |                                |                  |                             
|Net loss           |                                |                  | $                           

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.

F-11


---

Workers
Compensation Costs The Company has maintained a loss sensitive workers
compensation program since January 1, 2000. The program was with CNA Financial
Corporation, (CNA) until December 31, 2002 and is with member insurance
companies of American International Group, Inc. (AIG) effective January 1,
2003. The insured loss sensitive programs provide insurance coverage for claims incurred
in each plan year but which will be paid out over future periods. In states where private
insurance is not permitted, client employees are covered by state insurance funds.

Workers
compensation expense for the year is based upon premiums paid to the carrier for the
current year coverage, estimated total cost of claims to be paid by the Company that fall
within the policy deductible, the administrative costs of the programs, the return on
investment premium dollars paid as part of the program and the discount rate used to
determine the present value of future payments to be made under the program. Additionally,
any revisions to the estimates of the prior year loss sensitive programs are recognized in
the current year. Workers compensation reserves are established based upon the
present value of the future payments to be made under the program. A workers
compensation receivable is established when premium dollars paid into the plan are in
excess of required reserves (see Notes 6 and 11).

At
least annually, the Company obtains, from an independent actuary, a calculation of the
estimated costs of claims incurred based on the Companys current and historical loss
development trends. The estimated costs of the claims calculated may be subsequently
revised by the independent actuary based on future developments relating to such claims.

Health
Benefits  Claims incurred under the health benefit plans are expensed as
incurred according to the terms of each contract. For certain contracts, liability
reserves are established for the benefit claims reported but not yet paid and claims that
have been incurred but not yet reported (see Note 10).

Stock-Based
Compensation  In December 2002, the Financial Accounting Standards Boards
(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, Accounting for
Stock-based Compensation and Accounting Principle Board (APB) Opinion No.
28, Interim Financial Reporting, to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for
condensed financial statements for interim periods. The Company has determined it will not
voluntarily change to the fair-market method of accounting for stock-based employee
compensation.

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

F-12


---

|                                      |  | For the Years Ended December 31,
|------------------------------------- |  | --------------------------------
|
|Net income (loss)                     |  |                                 
|Less: employee compensation for stock |  |                                 
|option program, net of tax effect     |  |                                 
|                                      |  |                                 
|                                      |  |                                 
|Net income (loss)                     |  |                                 
|                                      |  |                                 
|                                      |  |                                 
|Basic earnings (loss) per share       |  |                                 
|                                      |  |                                 
|Diluted earnings (loss) per share     |  |                                 
|                                      |  |                                 

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. Basic earnings per share
is calculated by dividing net income attributable to common shareholders by the weighted
average number of common shares outstanding during the year. Diluted earnings per share is
calculated by dividing net income by the weighted average number of common shares and
common equivalent shares outstanding during the year. Common equivalent shares are
calculated using the treasury stock method for stock options and assumes conversion of the
Companys convertible, redeemable preferred stock.

Comprehensive
Income (Loss)SFAS No. 130, Reporting Comprehensive Income
establishes standards for reporting and display of comprehensive income and its
components. 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. SFAS No. 130 requires that the Companys change in
unrealized gains and losses on equity securities available for sale be included in
comprehensive income (loss).

New
Accounting Pronouncements  In January 2003, the FASB issued FASB Interpretation
46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(Interpretation 46). In December 2003, the FASB issued a revision to Interpretation 46 to
make certain technical corrections and address certain implementation issues that had
arisen. Interpretation 46, as revised, provides a new framework for identifying variable
interest entities (VIEs) and determining when a company should include the assets,
liabilities, noncontrolling interests and results of activities of a VIE in its
consolidated financial statements. Interpretation 46 was effective immediately for VIEs
created after January 31, 2003. The Company has evaluated the provisions of this
interpretation and determined that it does not have a material impact on the
Companys consolidated financial statements.

In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement is
generally effective for contracts entered into or modified after June 30, 2003. The
Company has evaluated the provisions of this statement and determined that it does not
have a material impact on the Companys consolidated financial statements.

In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The statement requires issuers to
classify as liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations of the issuer. Generally, the statement is
effective for all financial instruments entered into or modified after May 31, 2003, and
is otherwise effective at the beginning of the first interim period beginning after June
15, 2003. The Company has evaluated the provisions of this statement and determined that
it does not have a material impact on the Companys consolidated financial
statements.

F-13


---

# 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 No. 131, reviews financial
information on a Company-wide basis.

# 3.         CERTIFICATES OF
DEPOSIT  RESTRICTED

As
of December 31, 2003, 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 one of the Companys health benefit plans and in connection with
utility deposits. At December 31, 2002, the Company had certificates of deposit, with
original maturities of less than one year, that served as collateral for certain standby
letters of credit issued in connection with the Companys workers compensation
and one of the Companys 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.

# 4.         MARKETABLE SECURITIES
 RESTRICTED

At
December 31, 2003 and December 31, 2002, the Companys investment portfolio consisted
of restricted marketable debt and equity securities classified as available-for-sale.

Restricted
marketable securities include collateral held in connection with the Companys
workers compensation programs, collateral held in connection with the Companys
general insurance programs and escrow amounts held in connection with the TeamStaff
acquisition (see Note 8) and have been classified as restricted in the accompanying
condensed consolidated balance sheets. Due to the short-term maturity of these
instruments, the carrying amount approximates fair value. The interest earned on these
certificates and securities is recognized as interest income on the Companys
consolidated statements of income.

F-14


---

The
carrying amount of the marketable securities portfolio by type and classification as of
December 31, 2003 and December 31, 2002 is as follows:

|                                                    | Amortized
Cost | Gross
Unrealized
Gain | Estimated
Fair Value
|--------------------------------------------------- | -------------- | --------------------- | --------------------
|As of December 31, 2003:                            |                |                       |                     
|Short-term                                          |                |                       |                     
|Auction market municipal bonds - restricted         |                |                       | $                   
|Auction market preferred shares - restricted        |                |                       |                     
|Money market - restricted                           |                |                       |                     
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Total short-term marketable securities - restricted |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Long-term                                           |                |                       |                     
|Money market - restricted                           |                |                       | $                   
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|As of December 31, 2002:                            |                |                       |                     
|Short-term                                          |                |                       |                     
|Auction market municipal bonds- restricted          |                |                       | $                   
|Auction market preferred shares - restricted        |                |                       |                     
|Commercial paper - restricted                       |                |                       |                     
|Money market - restricted                           |                |                       |                     
|                                                    |                |                       |                     
|                                                    |                |                       |                     
|Total short-term marketable securities - restricted |                |                       | $                   
|                                                    |                |                       |                     

For
the year ended December 31, 2003, realized losses from the sale of securities approximated
$100 based upon the specific identification method. There were no realized gains or losses
on the sale of marketable securities for the year ended December 31, 2002.

There
were no unrealized gains or losses on marketable securities as of December 31, 2003. As of
December 31, 2002, an unrealized gain, net of tax expense of $0.5, is reflected as other
comprehensive income in the consolidated balance sheet.

# 5.         ACCOUNTS RECEIVABLE

At
December 31, 2003 and 2002, accounts receivable consisted of the following:

|                                      | December 31,
2003 | December 31,
2002
|------------------------------------- | ----------------- | -----------------
|Billed to clients                     |                   |                  
|Unbilled revenues                     |                   |                  
|                                      |                   |                  
|                                      |                   |                  
|                                      |                   |                  
|Less: Allowance for doubtful accounts |                   |                  
|                                      |                   |                  
|                                      |                   |                  
|Total                                 |                   |                  
|                                      |                   |                  

# 6.        WORKERS
COMPENSATION RECEIVABLE

The
Company established a loss sensitive workers compensation insurance program with AIG
effective January 1, 2003. In 2003, the Company began to operate a wholly owned
Bermuda-based insurance company as a component of its workers compensation insurance
programs. See Note 11 regarding the Companys prior years workers compensation
insurance programs with CNA.

The
2003 AIG workers compensation insurance program provides for a sharing of risk
between the Company and AIG whereby AIG assumes risk in at least three areas within the
program: (i) individual claim stop loss insurance risk; (ii) aggregate claim stop loss
insurance risk; and (iii) premium payment credit risk.

F-15


---

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

With
respect to the individual claim stop loss insurance risk, the Company is responsible for
paying, through AIG, claim amounts related to the first $1 million per occurrence. Claim
amounts in excess of $1 million per occurrence are insured through the AIG program. The
Company, through its Bermuda based insurance company, remits premiums to AIG, to cover
AIGs estimate of claims related to the first $1 million per occurrence. Under the
2003 workers compensation insurance program, of the $85,000 of such premiums paid,
the Company is guaranteed by AIG to receive a 2.42% per annum fixed return on $73,500 and
1.85% on the remaining amount so long as the premiums remain with AIG for at least 7
years. If excess premium payments are withdrawn prior to the 7-year period, the interest
rate is adjusted downward based upon a sliding scale.

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

Finally,
with respect to the premium payment credit risk, this program is a fully insured policy
written by AIG. If the Company were to fail to make premium payments to AIG as scheduled,
then AIG would be responsible for the payment of all losses under the terms of the policy.
AIG required the Company to provide $17,000 of collateral related to premium payment
credit risk. The required collateral is provided in the form of cash and short-term
investments placed into a trust account. The Company has reached an agreement with AIG
whereby the $17,000 of collateral related to premium payment credit risk for the 2003 plan
year will serve as collateral for the 2004 plan year. This amount, along with the related
interest earned to date, has been included as long-term marketable securities 
restricted as of December 31, 2003.

The
Company accrues for workers compensation costs under the AIG program based upon
premiums paid, estimated total costs of claims to be paid by the Company that fall within
the $1.0 million policy deductible, the administrative costs of the program, return on
investment premium dollars paid and the discount rate used to determined the net present
value of the expected future payments to be made under the program. At December 31, 2003
the discount rate used to calculate the present value of claim liability was 2.5%. Premium
payments made to AIG during 2003 were in excess of the present value of the estimated
claim liability. This resulted in a workers compensation receivable, net, at
December 31, 2003.

The
following table summarizes the activity related to the 2003 AIG workers compensation
insurance program:

|                                                 | 
|------------------------------------------------ | 
|Premium payments to AIG                          | 
|Interest earned on premium payments              | 
|Claims paid by AIG                               | 
|Present value of future claims liabilities       | 
|                                                 | 
|                                                 | 
|Total workers' compensation receivable           | 
|Short-term workers' compensation receivable, net | 
|                                                 | 
|Long-term workers' compensation receivable, net  | 
|                                                 | 

F-16


---

# 7.         PROPERTY AND EQUIPMENT

At
December 31, 2003 and 2002, property and equipment consisted of the following:

|                               | December 31,
2003 | December 31,
2002
|------------------------------ | ----------------- | -----------------
|Leasehold improvements         |                   |                  
|Furniture and fixtures         |                   |                  
|Vehicles                       |                   |                  
|Equipment                      |                   |                  
|Computer hardware and software |                   |                  
|                               |                   |                  
|Total property and equipment   |                   |                  
|Less accumulated depreciation  |                   |                  
|                               |                   |                  
|                               |                   |                  
|                               |                   |                  

For
the years ended December 31, 2003, 2002, and 2001, depreciation expense was $7,184,
$7,783, and $8,475, respectively.

# 8.         INTANGIBLE ASSETS

TeamStaff Acquisition

On
November 17, 2003, the Company acquired the human resource outsourcing client portfolio of
TeamStaff, Inc, a New Jersey corporation (TeamStaff) together with other
assets. The transaction was accomplished through an assignment by TeamStaff (and its
subsidiaries) to the Company of all of its client service agreements, which covered over
1,500 clients and over 16,000 client employees. The other assets acquired consisted
primarily of a proprietary benefits reconciliation software program and leases of certain
office space occupied by TeamStaff. In addition, approximately 70 internal employees of
TeamStaff became employees of the Company.

The
purchase price for the acquired assets was $9,683 (including direct acquisition costs of
approximately $183), which the Company paid in cash from its internal funds. Of this
amount, $2,500 is being held in an escrow account and will be disbursed based upon the
retention of clients acquired and new clients obtained by former sales personnel of
TeamStaff. Retention will be measured by the comparison of annualized professional service
fees for the transferred clients as of November 17, 2003, with annualized professional
service fees for the total of all former TeamStaff clients and new clients obtained by
former TeamStaff sales personnel that process a payroll after February 14, 2004. To the
extent that the annualized professional fees for those client payrolls processed after
February 14, 2004 is less than the November 17, 2003 annualized professional service fees,
the amount of such difference will be paid from the escrow account to the Company (up to a
maximum of $2,500). The remaining escrow balance, if any, will be paid to TeamStaff. The
Company estimates that the client retention during the measurement period will be in
excess of 90%.

The
TeamStaff acquisition was accounted for by the purchase method, in accordance with SFAS
No. 141, Business Combinations. The results of operations for TeamStaff are
included in the Companys statement of operations for the period November 17, 2003
through December 31, 2003. The purchase price of $7,183 (excluding $2,500 of contingent
purchase price included with marketable securities-restricted as of December 31, 2003) was
allocated to assets acquired based upon their estimated fair value on the date of
acquisition as determined by third party valuation and management estimates. This resulted
in 100% of the purchase price being allocated to the client list intangible asset. This
intangible asset is being amortized on a straight-line basis over its estimated useful
life of 5 years. At December 31, 2003, the TeamStaff client list intangible asset is equal
to $7,004 (net of accumulated amortization of $179). Resolution of the contingency may
result in an additional amount (up to $2,500) allocated to the intangible asset.

F-17


---

In
accordance with the TeamStaff purchase agreement, TeamStaff and the Company agreed to
pro-rate certain November costs and TeamStaff agreed to pay the Company for the assumption
of certain employment related liabilities. TeamStaff also agreed to perform transition
services through January 31, 2004, for a fee and the Company agreed to process payroll for
TeamStaffs internal employees under a co-employment arrangement through December 31,
2003. In connection with the above, and as a result of net cash received by TeamStaff
related to client billings subsequent to November 17, 2003, the Company has recorded a
receivable from TeamStaff of approximately $2,671 at December 31, 2003. This receivable is
included in other current assets on the Companys Consolidated Balance Sheet as of
December 31, 2003. TeamStaff is currently reviewing the components of the receivable. As a
result, the receivable as of December 31, 2003, has not been agreed to by both parties.

Other

During
the year ended December 31, 2003, the Company purchased a client list for approximately
$129 (including direct acquisition costs of $27). At December 31, 2003, the portion of the
intangible asset related to this client list (which is being amortized on a straight-line
basis over the estimated useful life of 5 years) is equal to $124 (net of accumulated
amortization of $5).

# 9.         OTHER ASSETS

At
December 31, 2003 and 2002, other current assets consisted of the following:

|                           | December 31, 2003 | December 31, 2002
|-------------------------- | ----------------- | -----------------
|Due from TeamStaff         |                   |                  
|Prepaid insurance          |                   |                  
|Employee receivables       |                   |                  
|Prepaid employment taxes   |                   |                  
|Other prepaid expenses     |                   |                  
|Other receivables          |                   |                  
|Short-term deposits        |                   |                  
|Other                      |                   |                  
|                           |                   |                  
|Total other current assets |                   |                  
|                           |                   |                  

See
Note 8 for a discussion of amounts Due from TeamStaff.

At
December 31, 2003 and 2002, other assets consisted of the following:

|         | December 31, 2003 | December 31, 2002
|-------- | ----------------- | -----------------
|Deposits |                   |                  
|Other    |                   |                  
|         |                   |                  
|         |                   |                  
|         |                   |                  

For
the years ended December 31, 2003, 2002 and 2001, other amortization expense, related to
other assets, was $2, $333, and $54, respectively.

F-18


---

# 10.         HEALTH BENEFITS

Blue
Cross Blue Shield of Florida (BCBS) is the primary partner in Florida,
delivering medical care benefits to approximately 22,000 Florida client employees. The
Companys policy with BCBS is a minimum premium policy expiring September 30, 2005.
Pursuant to this policy, the Company is obligated to reimburse BCBS for the cost of the
claims incurred by participants under the plan, plus the cost of plan administration. The
administrative costs per covered client employee associated with this policy are specified
by year and the aggregate loss coverage is provided to the Company at the level of 115% of
projected claims. The Companys obligation to BCBS related to incurred but not
reported claims is secured by a letter of credit. As of December 31, 2003, the amount of
the letter of credit for BCBS securing such obligations was $6,000. The amount of the
letter of credit is intended to approximate one months claims payments. The policy
allows for an adjustment to the letter of credit amounts based on premium volume and for
increases to the claims payment factor to a maximum of two months of expected claims
payments.

Aetna
is the primary medical care benefits provider for approximately 16,000 client employees
throughout the remainder of the country including client employees acquired in the
TeamStaff acquisition. The Companys 2004 policy with Aetna provides for an HMO and
PPO offering to plan participants. The Aetna HMO medical benefit plans are subject to a
guaranteed cost contract that caps the Companys annual liability. The Aetna PPO
medical benefit plan is a retrospective funding arrangement whereby the PPO plan is
subject to a 7.5% additional premium if actual claims are greater than projected at the
inception of the policy year. Client employees acquired in the TeamStaff acquisition
continue to be provided medical care benefits under existing Aetna medical benefit plan
policies that are subject to guaranteed cost contracts that cap the Companys annual
liability.

The
Company provides to approximately 1,000 client employees, in various areas of the country,
regional medical benefit plans. Medical benefit plan providers under such plans are Kaiser
Foundation Health Plan, Inc. in California, Health Partners (Minnesota) in Minnesota,
Harvard Pilgrim Healthcare in Massachusetts and Capital Health Plans in the Tallahassee,
Florida region.

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

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

In
certain instances, the Company decides to make a contribution toward the medical benefit
plan costs of certain clients. This contribution is referred to as a health benefit
subsidy. The addition of the client employees of these clients as participants in the
Companys medical benefit plans helps to stabilize the overall claims experience risk
associated with those plans. An aggregate health benefit subsidy in excess of a planned
amount may occur when medical cost inflation exceeds expected medical cost trends or when
medical benefit plan enrollment of those who qualify for a subsidy exceeds expectations.
During the years ended December 31, 2003, 2002 and 2001, the Company recorded an aggregate
health benefit subsidy of $0, $9,500 and $9,283, respectively.

Included
in accrued insurance premiums, health and workers compensation insurance reserves at
December 31, 2003 and December 31, 2002 are $20,233 and $20,274, respectively, of
short-term liabilities related to the Companys health care plans. Included in
long-term accrued health and workers compensation reserves at December 31, 2002 are
$1,000 of long-term liabilities related to the Companys health benefit plans. There
were no long-term liabilities related to the Companys health benefit plans at
December 31, 2003.

F-19


---

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

# 11.         WORKERS
COMPENSATION INSURANCE RESERVES

The
Company has loss sensitive workers compensation insurance programs with CNA for
policy years 2000, 2001 and 2002. See Note 6 regarding the Companys 2003
workers compensation insurance program with AIG.

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

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

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

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

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

For
the 2000 and 2001 programs, the Company guaranteed that the premium paid to CNA would earn
an annual rate of return equal to seven percent. For the 2002 program, the Company
guaranteed CNA that the premium would earn a rate of return equal to four and one-quarter
percent. The Company is required to pay additional premiums to CNA after the close of each
calendar year based on the difference between the actual return earned by the premium paid
and the guaranteed annual rate of return. The additional premium paid to CNA is used to
pay claims incurred during the policy year and is included in the amount of accrued
insurance premium reserves at December 31, 2003 and 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 would be responsible for the payment of all losses under the terms of
the policy. CNA does require the Company to provide collateral based on the estimate of
expected losses for each policy year. The payment of first year claims by the Company and
premium payments to fund claims to be paid in later years by CNA reduce the amount of the
total collateral to be provided by the Company. The required collateral can be provided in
the form of deposits paid to CNA, cash and short-term investments placed into a trust
account, letters of credit and surety bond collateral provided by independent surety bond
companies. CNA does not receive collateral equal to the limits of the aggregate claim stop
loss insurance amount, which is 130% of the estimate of the expected losses for the policy
year. Such collateral amount is established at the beginning of the policy year and actual
payroll volumes may vary, resulting in a difference in the amount of expected losses and
in the amount of collateral provided based on estimates of expected losses made at the
inception of each policy year. Such variances, in addition to not receiving collateral
equal to the aggregate claim stop loss amount, results in credit and premium payment risk
to CNA.

F-20


---

The
Company accrues for workers compensation costs under the CNA program based upon
payroll dollars paid to client employees, the specific risks associated with the type of
work performed by the client employees, the administrative costs of the program, the
expected rate of return earned by premium dollars paid to CNA as part of the program and
the discount rate used to determine the present value of future payments to be made under
the program. Total liabilities for workers compensation costs at December 31, 2003
and December 31, 2002, were $71,118 and $74,397, respectively, of which $59,280 and
$60,672, respectively, were classified as long-term. The discount rate used to calculate
the present value of the claim liabilities was 2.5% at December 31, 2003 and 4.0% at
December 31, 2002.

The
Company had issued $7,000 in standby letters of credit at December 31, 2002, in
conjunction with the Companys CNA workers compensation insurance programs.
There were no standby letters of credit issued in connection with the CNA policies at
December 31, 2003. In addition, the Company had pledged $79,136 and $79,023 in restricted
marketable securities at December 31, 2003 and December 31, 2002, respectively, as
collateral for the Companys CNA workers compensation programs.

# 12.         COMMITMENTS AND
CONTINGENCIES

Operating Leases

The
Company occupies office facilities and leases office equipment under operating leases,
which expire in various years through 2009. Rent expense was $5,639, $5,015, and $5,040
for the years ended December 31, 2003, 2002, and 2001, respectively. Future minimum
payments under non-cancelable operating leases as of December 31, 2003 are as follows:

| | Year Ending December 31, |  | Amount    
| | ------------------------ |  | ----------
|
| |                          |  | 2004      
| |                          |  | 2005      
| |                          |  | 2006      
| |                          |  | 2007      
| |                          |  | 2008      
| |                          |  | 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. At a hearing held on September 26, 2003, the Circuit Court of the Twelfth
Judicial Circuit in and for Manatee County, Florida, approved settlement of the class
action lawsuit. The terms of the settlement include no admission of liability or
wrongdoing on the part of the Company or the individual defendants, and call for payment
in the total amount of $1.8 million to the class members who make a claim and do not
request exclusion, inclusive of attorneys fees and costs. The settlement will be
paid out of insurance proceeds with no financial impact to the Company.

F-21


---

On
August 12, 2003, a former employee filed a lawsuit against the Company, (Donald
Lauderback vs. Gevity HR, Inc., d/b/a Gevity Health Plan) in the U.S. District Court
for the Northern District of Texas. The plaintiff sought monetary damages based on his
claim that the Company wrongfully terminated him after approximately two weeks of
employment, for raising concerns related to the operation of the Companys health
insurance programs. He also sought monetary damages for a purported class of individuals
based on the manner in which the Company operated its health insurance programs. On
February 27, 2004, the Court granted the Companys Motion to Dismiss All Claims and
on March 1, 2004, entered Final Judgment in which all of Plaintiffs claims were
dismissed with prejudice.

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

Regulatory Matters

The
Companys employer and health care operations are subject to numerous federal, state
and local laws related to employment, taxes and benefit plan matters. Generally, these
rules affect all companies in the U.S. However, the rules that govern Professional
Employer Organizations (PEOs) constitute an evolving area due to uncertainties
resulting from the non-traditional employment relationship between the PEO, the client and
the client employees. Many federal and state laws relating to tax and employment matters
were enacted before the widespread existence of PEOs and do not specifically address the
obligations and responsibilities of these PEO relationships. If the IRS concludes that
PEOs are not employers of certain client employees for purposes of the
Internal Revenue Code of 1986, as amended (the Code), the tax qualified status
of the Companys defined contribution retirement 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 Code if a PEO that maintains a single employer defined contribution
retirement plan for client employees takes certain remedial action by the last day of the
first plan year beginning on or after January 1, 2003. The Company maintained a frozen
single employer defined contribution retirement plan benefiting certain client employees
and took remedial action to qualify for the relief provided under the IRS guidance within
the applicable deadline. As part of the remedial action, all of the plans assets
(approximately $884) were transferred out of the plan, as directed by participants, and
the plan was terminated.

The
Company also maintains two defined contribution retirement plans (including a multiple
employer plan acquired in the TeamStaff acquisition) with participants that include client
employees. The plans are designed as multiple employer plans and, as such, their 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.

F-22


---

# 13.        CONVERTIBLE
REDEEMABLE PREFERRED STOCK

On
June 6, 2003, the Company sold its Series A Convertible, Redeemable Preferred Stock (the
Series A Preferred Stock),to Frontenac VIII Limited Partnership and Frontenac
Masters VIII Limited Partnership  each a limited
partnership and an affiliate of Frontenac Company LLC, (collectively, Frontenac), SunTrust Equity Funding, LLC d/b/a/
SunTrust Equity Partners, BVCF IV, L.P., an affiliate of Adams Street Partners, LLC and
C&B Capital, L.P. (collectively, the Purchasers). This sale was pursuant
to the Preferred Stock Purchase Agreement dated as of April 24, 2003, as amended on June
3, 2003 to include C&B Capital, L.P. as an additional purchaser (as amended, the
Purchase Agreement). Under the terms of the Purchase Agreement, the Company
agreed to issue and sell to the Purchasers an aggregate of 30,000 shares of the Series A
Preferred Stock, par value of $0.01, for a purchase price of $1,000 per share
(Liquidation Value). The Purchase Agreement was entered into pursuant to a
letter agreement dated March 5, 2003. Proceeds from the sale totaled $27,686, net of
issuance costs of $2,314.

Proceeds
from the transaction totaling $16,272 were used to purchase from Charles S. Craig, a
former director of the Company, 2,997,734 shares of the Companys common stock, $0.01
par value per share (the Common Stock), at a net price of $5.38 per share, and
to purchase from him options to purchase 60,000 shares of Common Stock for an aggregate
price of $144. The remaining proceeds were partially used to fund the TeamStaff
acquisition ($9,683), with the remaining balance added to the Companys working
capital.

Dividends

Holders
of the Series A Preferred Stock are entitled to receive dividends equal to 4% per annum.
Dividends accrue on a daily basis on the sum of the Liquidation Value thereof plus all
accumulated and unpaid dividends. Such dividends accrue whether or not they have been
declared and whether or not there are profits, surplus or other funds of the Company
legally available for the payment of dividends. All dividends accrued on the Series A
Preferred Stock are payable in cash on January 31, April 30, July 31, and October 31 of
each year, beginning July 31, 2003. As of December 31, 2003, the Company had accrued $201
of preferred stock dividends related to the January 31, 2004 dividend payment date.

To
the extent the Company declares or pays any dividends (other than in stock) on the
Companys Common Stock and the dividend is greater than the dividend the holders of
the Series A Preferred Stock would otherwise receive, the holders of the Series A
Preferred Stock must be paid a comparable dividend based upon the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock had all of the
outstanding Series A Preferred Stock been converted immediately prior to the record date
for the Common Stock dividend. In June 2003, the Company declared a cash dividend of $0.05
per share on its Common Stock for shareholders of record on July 15, 2003. In July 2003,
the Company paid $276 of preferred stock dividends based upon the value of the Common
Stock dividend on an as if converted basis.

Under
the terms of the Series A Preferred Stock, the consent of the Majority Holders (currently
Frontenac), as defined in the Purchase Agreement, were or will be required for the payment
of dividends to the Common Stock holders in excess of 50% of net income for 2003 and 2004,
in excess of 40% of net income for 2005, and in excess of 30% of net income thereafter, so
long as Frontenac holds (or is entitled to vote) a majority of the Preferred Stock.

Conversion Rights

The
Series A Preferred Stock is convertible at any time into shares of Common Stock, at an
initial conversion price of $5.44 per share of Common Stock. The conversion price is the
average of the closing prices of the Common Stock for the five business days preceding
March 5, 2003 (the execution date of the letter of intent for the Series A Preferred Stock
transaction). The conversion price is subject to adjustment in certain circumstances that
primarily relate to the prevention of dilution of the conversion rights granted. To
determine the number of shares of Common Stock issuable upon conversion, the number of
shares of Series A Preferred Stock being converted is multiplied by $1,000 and the result
is divided by the conversion price then in effect. The Series A Preferred Stock is
convertible into 5,514,705 shares of Common Stock based on the conversion price of $5.44.

F-23


---

Company Call Rights

If
at any time after June 6, 2005, the average closing prices for the Companys Common
Stock has equaled or exceeded $21.76 for a period of at least 30 consecutive trading days
preceding the date of a liquidity notice given by the Company to the holders of Series A
Preferred Stock, then the Company may choose to effect a Liquidity Event. A Liquidity
Event is defined as, at the Companys option, the consummation of an underwritten
public offering, the closing of a purchase by the Company of the Series A Preferred Stock
or a combination of both. Upon the happening of a Liquidity Event, holders of the Series A
Preferred Stock will receive, with respect to at least 50% of their outstanding Series A
Preferred Stock, cash in an amount per share of Common Stock into which the Series A
Preferred Stock is convertible, equal to:

| |  | if
a public offering, the price per share paid by the purchasers in the public offering; and,
| | - | ---------------------------------------------------------------------------------------------

| |  | if
a purchase by the Company,  the market price per share of Common Stock as of the date of
the  Liquidity                   Event;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

but in either case not less than
$21.76. Any shares of Series A Preferred Stock not purchased by the Company or sold in the
public offering will automatically convert into Common Stock.

Redemption

Voluntary Redemption
Offer

The
Company may offer to redeem 10,000 shares of the Series A Preferred Stock on July 31 of
each of the years 2006, 2007 and 2008. The Majority Holders have the option to accept the
offer with respect to all or any portion of their shares. If accepted by the Majority
Holders, the Company is required to redeem the shares requested by the Majority Holders
and the shares of any other holder of the Series A Preferred Stock accepting the offer, up
to an aggregate of 10,000 shares. The voluntary redemption price is the sum of the
Liquidation Value, accrued and unpaid dividends and an amount sufficient to provide a 25%
internal rate of return (the Premium Redemption Price).

Majority Holder
Demand Redemption

The
Majority Holder may require the Company to redeem up to 10,000 shares of the Series A
Preferred Stock on each of the following dates (the Demand Redemption Dates):

| |  | July
31, 2009, if the Company did not make a voluntary redemption offer on July 31, 2006;
| | - | -----------------------------------------------------------------------------------------

| |  | July
31, 2010, if the Company did not make a voluntary redemption offer on July 31, 2007; and
| | - | ---------------------------------------------------------------------------------------------

| |  | July
31, 2011, if the Company did not make a voluntary redemption offer on July 31, 2008.
| | - | -----------------------------------------------------------------------------------------

F-24


---

The
demand redemption price is the Liquidation Value plus accrued and unpaid dividends. In
July 2003, the holders of Series A Preferred Stock irrevocably waived their right to
receive in payment of the demand redemption price the greater of the sum of the fair
market value of the Common Stock issuable on conversion plus accrued and unpaid dividends
and the Liquidation Value plus accrued and unpaid dividends (the Cash Redemption
Price).

Companys
Additional Redemption Offer

Any
time after June 6, 2008, and on or before July 31, 2011, the Company may redeem all (but
not less than all) of the Series A Preferred Stock then outstanding if:

| |  | the
Majority Holders have not consented to a Change of Ownership, Fundamental Change or
Organic Change (each as defined in the Certificate of Designation of the Series A
Preferred Stock) within 30 days after receiving the Companys request for approval;
and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Company has made all of the voluntary redemption offers (previously described) on each
voluntary redemption date.
| | - | ---------------------------------------------------------------------------------------------------------------------

The
redemption price in this case is the greater of the Premium Redemption Price or the Cash
Redemption Price.

Special Redemption

If
there is a Change in Ownership or a Fundamental Change, the Majority Holders may require
the Company to redeem all or a portion of the Series A Preferred Stock. The redemption
price in this case is the Cash Redemption Price.

Voting Rights

The
holders of the Series A Preferred Stock, voting separately at an annual or special
meeting, will vote their shares to elect two directors to serve as members of the
Companys Board of Directors. As permitted, Frontenac has designated two persons to
serve on the Board of Directors until the 2004 annual meeting and such persons were
elected as directors as of June 6, 2003. This right will terminate on the earlier of the
date on which Frontenac is no longer the Majority Holder and the date on which there are
no shares of Series A Preferred Stock outstanding.

The
holders of Series A Preferred Stock are entitled to one vote for each share of Common
Stock into which their Series A Preferred Stock was convertible on the date of its
original issue, subject to certain adjustments for stock splits, stock dividends, stock
purchase rights, recapitalizations and similar matters, and will vote together with the
holders of Common Stock on all matters except the election of the two members of the Board
of Directors and the approval rights referred to in the next sentence. In addition, the
Company may not, without the affirmative vote of Frontenac, so long as Frontenac is the
Majority Holder of the outstanding Series A Preferred Stock, take certain specified
actions generally involving capital transactions and significant changes to the
Companys business.

Liquidation Preference

Upon
the liquidation, dissolution or winding up of the Company, each holder of the Series A
Preferred Stock will be entitled to receive, before distributions are made to any other
shareholders, the greater of (the Liquidation Payment Amount):

F-25


---

| |  | the
aggregate Liquidation Value plus all accrued and unpaid dividends; and
| | - | --------------------------------------------------------------------------

| |  | the
aggregate amount that would have been paid in connection with the liquidation event to
the holders of the Series A Preferred stock on as-converted basis.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Deemed Liquidation

The
Majority Holders may deem any of the following to be a Liquidation
Event:

| |  | any
consolidation or merger of the Company (other than a merger in which the Company is the
surviving entity, the terms of the Series A Preferred Stock remain unchanged, the holders
of capital stock who possess the voting power to elect a majority of the Board of
Directors continue to possess such voting power, and no person other than the holders of
Series A Preferred Stock has beneficial ownership of more than 25% of the outstanding
Common Stock);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
sale or transfer of all or substantially all of the assets of the Company; or
| | - | ---------------------------------------------------------------------------------

| |  | any
sale, transfer or issuance of shares of capital stock by the Company or a shareholder,
the result of which causes the holders of capital stock who possessed the voting power to
elect a majority of the Board of Directors to lose such power.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
the Majority Holders deem an event to be a Liquidation Event, the holders of the Series A
Preferred Stock will be entitled to receive a payment equal to the Liquidation Payment
Amount.

Registration Rights

The
Company and the Purchasers entered into a Registration Rights Agreement under which the
Purchasers and subsequent holders of the Series A Preferred Stock have been granted
certain demand and piggyback registration rights with respect to the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock.

Noncompliance

Upon
certain events of noncompliance with covenants contained in the Certificate of Designation
of the Series A Preferred Stock, the following may occur:

| |  | the
dividend rate on the Series A Preferred Stock will increase by an increment of 1% and
will continue to increase every 90 days by an additional increment of 1%, not to exceed
the greater of (i) 8%, or (ii) the prime rate plus 400 basis points;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
holders of Series A Preferred Stock will receive special voting rights, giving them a
total of one additional vote as Board members, exercisable as to 1⁄2 vote by each
director elected by holders of Series A Preferred Stock; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Company may be obligated to redeem all of the Series A Preferred Stock at the greater of
the Premium Redemption Price or the Cash Redemption Price.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

As
of December 31, 2003, the Company is not aware of any event of noncompliance.

F-25


---

Financial Statement
Presentation

The
Company has classified the Series A Preferred Stock outside of permanent equity as a
result of certain redemption features. The Series A Preferred Stock was recorded at its
fair value on the date of issuance of approximately $30,000 less issuance costs of $2,314,
and less an allocation of $27,298 to a beneficial conversion feature. The beneficial
conversion feature resulted from the conversion feature of the Series A Preferred Stock
that was in-the-money at the date of issuance attributable to the increase in the market
price of the Companys Common Stock during the period from the date on which the
conversion price was fixed (approximating market price at that time) and the date on which
the Series A Preferred Stock was issued. The beneficial conversion feature is calculated
as the difference between the market price and the conversion price on the date of
issuance, multiplied by the number of shares of Common Stock into which the Series A
Preferred Stock is convertible. The beneficial conversion amount is recorded as a
reduction of the carrying value of the Series A Preferred Stock and an increase to
additional paid-in-capital. The difference between the aggregate Liquidation Value of
$30,000 and the initial balance of $388 recorded in the Series A Preferred Stock account
on the Companys balance sheet, as a result of the beneficial conversion feature and
the cost of issuance (Redemption Value), is being accreted over the periods
from the date of issuance to the respective Demand Redemption Dates for each 10,000 share
tranche, utilizing the interest method. Accretion of the Redemption Value is recognized as
an increase in the carrying value of the Series A Preferred Stock and as a return to the
holders of Series A Preferred Stock and approximated $166 for the year ended December 31,
2003.

# 14.         RELATED PARTIES

Certain
members of the Board of Directors utilized the services of the Company with respect to
themselves and/or their companies. The amount of service fees paid by the directors or their companies was
$60, $60 and $66 in 2003, 2002, and 2001, respectively.

# 15.         RETIREMENT PLAN

The
Company offers a defined contribution 401(k) retirement plan to its internal employees as
well as its external client employees. In 2002, the Company did not match any portion of
internal employees elective contributions. In 2001 and 2003, 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 $184, $0 and $464, for
the years 2003, 2002, and 2001, 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.

# 16.         GEOGRAPHIC MARKET
CONCENTRATION AND DEPENDENCE ON KEY VENDORS

Geographic
Market Concentration  As of December 31, 2003, the Company had offices in thirteen
states and client employees in 49 states. The Companys Florida client billings
accounted for 61%, 74% and 68% of the Companys total client billings in 2003, 2002
and 2001, respectively. As a result of the size of the Companys base of client
employees in Florida, 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 client 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
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.

F-27


---

# 17.         EQUITY

Employee Stock Option Plan

In
1997, the Company adopted the 1997 Stock Incentive Plan (the 1997 Plan). The
1997 Plan provides for various equity incentives, including options, to be granted to key
employees, officers, and directors of Gevity HR, Inc. Initially, 2,500,000 shares of
common stock were authorized for issuance under the 1997 plan. In May of 2000,
shareholders approved an amendment to the plan that increased the number of shares
reserved for issuance under the plan to 4,500,000 shares. Options granted to date under
the 1997 Plan generally have a vesting period of 4 years for officers and key employees
and generally are immediately vested for non-employee directors. Options generally may not
be exercised more than 10 years from the date of the grant.

In
May 2002, the shareholders approved the 2002 Incentive Plan (the 2002 Plan).
The 2002 Plan provides for various equity incentives including options, to be granted to
key employees, officers, and directors of Gevity HR, Inc. Under the 2002 Plan, 2,000,000
shares of Common Stock were authorized for issuance. Options granted to date under the
2002 Plan have a vesting period of 4 years and may not be exercised more than 10 years
from the date of the grant.

Under
both stock option plans, the exercise price of each option equals the market price of the
Companys common stock on the date of grant and accordingly under APB No. 25, no
compensation expense is recognized. For pro forma disclosure purposes (included in Note
1), in accordance with SFAS No. 123, the fair value of option grants is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

| |  |  | Year Ended December 31,        
| |  |  | -------------------------------
|
| |  |  | Risk-free interest rate        
| |  |  | Expected dividend yield        
| |  |  | Expected volatility            
| |  |  | Expected option life (in years)

Using
the Black-Scholes option-pricing model, the weighted-average fair values of options at
their grant date during 2003, 2002 and 2001 were $11.78, $1.90 and $0.76, respectively.

The
following table summarizes the activity in the Companys stock option plans for the
years ended December 31, 2003, 2002 and 2001:

|                                 | 2003 | 2002 | 2001
|-------------------------------- | ---- | ---- | ----
|
|Outstanding at beginning of year |      |      |     
|Granted                          |      |      |     
|Exercised                        |      |      |     
|Forfeited                        |      |      |     
|                                 |      |      |     
|Outstanding at end of year       |      |      |     
|                                 |      |      |     
|Exercisable at end of year       |      |      |     
|                                 |      |      |     

F-28


---

Components
of stock options outstanding under the Companys options plans as of December 31,
2003 are as follows:

|Options Outstanding | Options Exercisable
|------------------- | -------------------
|
|$ 0.00 - $ 2.95     |                    
|$ 2.96 - $ 5.90     |                    
|$ 5.91 - $ 8.85     |                    
|$ 8.86 - $11.80     |                    
|$11.81 - $14.75     |                    
|$14.76 - $17.70     |                    
|$17.71 - $20.65     |                    
|$20.66 - $23.60     |                    
|                    |                    
|                    |                    
|                    |                    
|                    |                    

Employee Stock Purchase
Plan

The
Company has a shareholder approved 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 2003, 45,500 shares of common stock (from
treasury) were sold to employees participating in the Companys employee stock
purchase plan for proceeds of approximately $156. Employees purchased 45,255 shares under
this plan during 2002 for proceeds of approximately $124. During 2002, the Company
purchased in the open market 34,000 shares of stock at a cost of $136 to be held for the
employee stock purchase plan.

# 18.         EARNINGS PER SHARE

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 years
ended December 31, 2003 and 2002 is as follows:

|                                                          | Net income
(Numerator) | Shares
(Denominator) | Per Share
Amount
|--------------------------------------------------------- | ---------------------- | -------------------- | ----------------
|
|For the year ended 2003:                                  |                        |                      |                 
|Basic EPS:                                                |                        |                      |                 
|Net income                                                |                        |                      | $               
|Non-cash charges attributable to beneficial conversion    |                        |                      |                 
|feature and accretion of redemption value of convertible, |                        |                      |                 
|redeemable preferred stock                                |                        |                      |                 
|Preferred stock dividends                                 |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|Net income attributable to common shareholders            |                        |                      |                 
|                                                          |                        |                      |                 
|Effect of dilutive securities:                            |                        |                      |                 
|Options                                                   |                        |                      |                 
|Convertible, redeemable preferred stock                   |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|Diluted EPS:                                              |                        |                     
|Net income                                                |                        |                      | $               
|                                                          |                        |                      |                 
|For the year ended 2002:                                  |                        |                     
|Basic EPS:                                                |                        |                      |                 
|Net income                                                |                        |                      | $               
|                                                          |                        |                      |                 
|Effect of dilutive securities:                            |                        |                      |                 
|Options                                                   |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|                                                          |                        |                      |                 
|Diluted EPS:                                              |                        |                     
|Net income                                                |                        |                      | $               
|                                                          |                        |                      |                 

For the years ended 2003, 2002, and
2001 approximately 219,000, 2,459,000 and 2,418,000 shares respectively, (weighted for the
time period they were outstanding) were excluded from the diluted earnings per share
calculation because they were anti-dilutive.

F-29


---

# 19.         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.

The
provision for income taxes for the year ended December 31, 2003 is as follows:

|                    | Current | Deferred | Total
|------------------- | ------- | -------- | -----
|
|U. S. Federal Tax   |         |          | $    
|State and local tax |         |          |      
|                    |         |          |      
|                    |         |          |      
|Total provision     |         |          | $    
|                    |         |          |      

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

|                          | Current | Deferred | Total
|------------------------- | ------- | -------- | -----
|
|U. S. Federal Tax         |         |          | $    
|State and local tax       |         |          |      
|                          |         |          |      
|                          |         |          |      
|Total provision (benefit) |         |          | $    
|                          |         |          |      

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

|                          | Current | Deferred | Total
|------------------------- | ------- | -------- | -----
|
|U. S. Federal Tax         |         |          | $    
|State and local tax       |         |          |      
|                          |         |          |      
|                          |         |          |      
|Total provision (benefit) |         |          | $    
|                          |         |          |      

F-30


---

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, 2003, 2002 and 2001, is as
follows:

|                                          | 2003 | 2002 | 2001
|----------------------------------------- | ---- | ---- | ----
|
|Statutory U.S. Federal tax at 35%         |      |      |     
|(34% for 2001)                            |      |      | $   
|Increase (reduction) from:                |      |      |     
|State and local tax, less Federal benefit |      |      |     
|Tax credits                               |      |      |     
|Other, net                                |      |      |     
|                                          |      |      |     
|                                          |      |      |     
|Total tax provision (benefit)             |      |      | $   
|                                          |      |      |     
|                                          |      |      |     
|Effective tax rate                        |      |      |     
|                                          |      |      |     

The
components of deferred tax assets and liabilities included on the balance sheet at
December 31, 2003 and 2002 are as follows:

|                                                       | 2003 | 2002
|------------------------------------------------------ | ---- | ----
|
|Deferred Tax Assets:                                   |      |     
|Tax basis in excess of book basis of intangible assets |      |     
|Reserves not currently deductible                      |      |     
|Tax credit carryover                                   |      |     
|                                                       |      |     
|                                                       |      |     
|Total deferred tax assets                              |      |     
|                                                       |      |     
|                                                       |      |     
|Deferred Tax Liabilities:                              |      |     
|Unearned revenue                                       |      |     
|Depreciation                                           |      |     
|                                                       |      |     
|                                                       |      |     
|Total deferred tax liabilities                         |      |     
|                                                       |      |     
|                                                       |      |     
|Net deferred tax asset                                 |      |     
|                                                       |      |     
|                                                       |      |     
|Balance Sheet Classification:                          |      |     
|Current:                                               |      |     
|Net current deferred tax asset                         |      |     
|Non-current:                                           |      |     
|Net non-current deferred tax (liability) asset         |      |     
|                                                       |      |     
|                                                       |      |     
|Net deferred tax asset                                 |      |     
|                                                       |      |     

The
Company received income tax refunds, net of tax payments, of $930 in 2003 and $902 in
2001. The Company paid $1,747 of income taxes in 2002. In 2003, the Company generated
$1,705 of tax credits, resulting in a credit carryforward of $4,108. In 2002, the Company
generated $961 of tax credits. As of December 31, 2003 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.

F-31


---

# 20.         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, 2003 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.

|                 | Quarter Ended
|---------------- | -------------
|
|
|
|Revenues         |              
|Gross Profit     |              
|Gross Profit     |              
|margin           |              
|Operating income |              
|Net income       |              
|Earnings         |              
|per share:       |              
|-Basic           |              
|-Diluted         |              

# 21. SUBSEQUENT EVENT

On
March 11, 2004, the Company's Board of Directors declared
a quarterly cash dividend of $0.06 per share of common stock,
payable on April 30, 2004, to holders of record on April 15, 2004.

F-32


---

S-1

# SCHEDULE II 
VALUATION AND QUALIFYING ACCOUNTSALLOWANCE FOR DOUBTFUL
ACCOUNTS (IN THOUSANDS OF DOLLARS)

| 
|-
|
|$

|  |     |  |   |    
|- | --- |  | - | ---
|
|$ | 747 |  | $ | 491

|  |     |  |   |    
|- | --- |  | - | ---
|
|$ | 640 |  | $ | 363

S-1


---