10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2001.
	or
[   ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from ___________ to __________

Commission File No. 1-13998

Administaff, Inc.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	76-0479645 (I.R.S. Employer Identification No.)
19001 Crescent Springs Drive Kingwood, Texas (Address of principal executive offices)	77339 (Zip Code)

(Registrant’s Telephone Number, Including Area Code): (281) 358-8986

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

      As of May 4, 2001, 27,349,076 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS

	Part I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Part II
Item 1.	Legal Proceedings	20
Item 6.	Exhibits and Reports on Form 8-K	20

ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS

				March 31,			December 31,
				2001			2000
				(Unaudited)
Current assets:
	Cash and cash equivalents			$	57,238		$	69,733
	Marketable securities				31,336			38,953
	Accounts receivable:
		Trade			1,471			7,311
		Unbilled			52,623			57,084
		Other			786			820
	Prepaid expenses				4,171			6,785
	Income tax receivable				4,431			—
	Deferred income tax benefit				737			694
			Total current assets		152,793			181,380
Property and equipment:
	Land				2,920			2,920
	Buildings and improvements				15,193			14,047
	Computer hardware and software				32,089			28,679
	Software development costs				12,474			11,556
	Furniture and fixtures				18,833			18,756
	Vehicles				1,932			1,863
	Construction in progress				363			195
					83,804			78,016
	Accumulated depreciation				(29,255	)		(25,649	)
			Total property and equipment		54,549			52,367
Other assets:
	Notes receivable from employees				994			994
	Other assets				8,150			8,076
			Total other assets		9,144			9,070
			Total assets	$	216,486		$	242,817

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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

			March 31,			December 31,
			2001			2000
			(Unaudited)
Current liabilities:
	Accounts payable		$	3,344		$	1,496
	Payroll taxes and other payroll deductions payable			47,349			57,919
	Accrued worksite employee payroll expense			55,784			57,354
	Other accrued liabilities			7,142			10,819
	Income taxes payable			—			2,613
		Total current liabilities		113,619			130,201
Noncurrent liabilities:
	Deferred income taxes			7,005			7,106
		Total noncurrent liabilities		7,005			7,106
Commitments and contingencies
Stockholders’ equity:
	Common stock			304			304
	Additional paid-in capital			86,028			75,378
	Treasury stock, at cost			(36,728	)		(20,643	)
	Accumulated other comprehensive income			296			172
	Retained earnings			45,962			50,299
		Total stockholders’ equity		95,862			105,510
		Total liabilities and stockholders’ equity	$	216,486		$	242,817

See accompanying notes.

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

		Three Months Ended
		March 31,
		2001			2000
Revenues		$	1,043,419		$	755,545
Direct costs:
	Salaries and wages of worksite employees		872,280			629,937
	Benefits and payroll taxes		143,310			104,903
Gross profit			27,829			20,705
Operating expenses:
	Salaries, wages and payroll taxes		16,164			12,068
	General and administrative expenses		11,845			7,562
	Commissions		3,133			2,212
	Advertising		1,458			930
	Depreciation and amortization		3,732			2,632
			36,332			25,404
Operating loss			(8,503	)		(4,699	)
Other income:
	Interest income		1,394			799
	Other, net		3			9
			1,397			808
Loss before income taxes			(7,106	)		(3,891	)
Income tax benefit			2,769			1,420
Net loss		$	(4,337	)	$	(2,471	)
Basic and diluted net loss per share of common stock		$	(0.16	)	$	(0.09	)

See accompanying notes.

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2001
(in thousands)
(Unaudited)

											Accumulated
		Common Stock				Additional					Other
		Issued				Paid-In		Treasury			Comprehensive		Retained
		Shares		Amount		Capital		Stock			Income		Earnings			Total
Balance at December 31, 2000			30,435	$	304	$	75,378	$	(20,643	)	$	172	$	50,299		$	105,510
	Purchase of treasury    stock		—		—		—		(21,566	)		—		—			(21,566	)
	Exercise of common stock    purchase warrants		—		—		10,520		5,480			—		—			16,000
	Exercise of stock options		15		—		121		—			—		—			121
	Other		—		—		9		1			—		—			10
	Change in unrealized gain on    marketable securities		—		—		—		—			124		—			124
	Net loss		—		—		—		—			—		(4,337	)		(4,337	)
	Comprehensive loss																(4,213	)
Balance at March 31, 2001			30,450	$	304	$	86,028	$	(36,728	)	$	296	$	45,962		$	95,862

See accompanying notes.

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

				Three Months Ended
				March 31,
				2001			2000
Cash flows from operating activities:
	Net loss			$	(4,337	)	$	(2,471	)
	Adjustments to reconcile net loss to net cash provided by (used      in) operating activities:
		Depreciation and amortization			3,698			2,716
		Bad debt expense			899			294
		Deferred income taxes			(144	)		688
		Loss (gain) on the disposition of assets			(3	)		5
		Changes in operating assets and liabilities:
			Accounts receivable		9,436			(8,417	)
			Prepaid expenses		2,614			(1,138	)
			Other assets		(89	)		(182	)
			Accounts payable		1,848			(523	)
			Payroll taxes and other payroll deductions payable		(10,571	)		15,995
			Accrued worksite employee payroll expense		(1,570	)		6,134
			Other accrued liabilities		(3,677	)		2,440
			Income taxes payable/receivable		(7,044	)		(2,828	)
			Total adjustments		(4,603	)		15,184
			Net cash provided by (used in) operating activities		(8,940	)		12,713
Cash flows from investing activities:
	Marketable securities:
		Purchases			(17,905	)		(4,666	)
		Proceeds from dispositions			25,682			1,787
	Property and equipment:
		Purchases			(5,024	)		(2,272	)
		Investment in software development costs			(918	)		(1,133	)
		Proceeds from dispositions			44			26
			Net cash provided by (used in) investing activities		1,879			(6,258	)

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)

			Three Months Ended
			March 31,
			2001			2000
Cash flows from financing activities:
	Purchase of treasury stock		$	(21,566	)	$	—
	Proceeds from the exercise of common stock     purchase warrants			16,000			—
	Proceeds from the exercise of stock options			122			896
	Other			10			20
		Net cash provided by (used in) financing activities		(5,434	)		916
Net increase (decrease) in cash and cash equivalents				(12,495	)		7,371
Cash and cash equivalents at beginning of period				69,733			25,451
Cash and cash equivalents at end of period			$	57,238		$	32,822

See accompanying notes.

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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2001

1. Basis of Presentation

      Administaff, Inc. (“the Company”) is a professional employer organization (“PEO”) that provides a comprehensive Personnel Management System that encompasses a broad range of services, including benefits and payroll administration, medical and workers’ compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, performance management, and training and development services to small and medium-sized businesses in strategically selected markets. For the three months ended March 31, 2001 and 2000, revenues from the Company’s Texas markets represented 46% and 53% of the Company’s total revenues, respectively.

      The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

      The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

      The accompanying consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2000. The consolidated balance sheet at December 31, 2000, has been derived from the audited financial statements at that date but does not include all of the information or footnotes required by generally accepted accounting principles for complete financial statements. The Company’s consolidated balance sheet at March 31, 2001, and the consolidated statements of operations, cash flows and stockholders’ equity for the interim periods ended March 31, 2001 and 2000, have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Historically, the Company’s earnings pattern has included losses in the first quarter, followed by improved profitability in subsequent quarters throughout the year. This pattern is due to the effects of employment-related taxes which are based on each employee’s cumulative earnings up to specified wage levels, causing employment-related taxes to be largest in the first quarter and then decline over the course of the year.

      Certain prior year amounts have been reclassified to conform with current year presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

2. Stockholders’ Equity

      On February 28, 2001, American Express Travel Related Services Company, Inc. (“American Express”) exercised warrants to purchase 800,000 shares of common stock at $20 per share. The shares were issued from treasury stock held by the Company. On March 12, 2001, the Company repurchased 800,000 shares of common stock from American Express for $19.6 million.

      On March 9, 2001, the Company repurchased 100,000 shares of common stock on the open market for $2.0 million.

      On February 9, 2001, the Company’s Board of Directors authorized the repurchase of an additional 1,000,000 shares of common stock under the Company’s existing repurchase program. Of the 5,000,000 shares authorized for repurchase as of March 31, 2001, the Company has repurchased 3,242,000 shares at a total cost of approximately $40.3 million.

      On October 16, 2000, the Company effected a two-for-one stock split of its common stock in the form of a 100% stock dividend. All share and per share amounts presented in these financial statements have been retroactively restated to reflect this change in the Company’s capital structure.

3. Net Loss Per Share

      The numerator and denominator used in the calculations of both basic and diluted net loss per share were net loss and the weighted average shares outstanding, respectively. The weighted average shares outstanding for the three months ended March 31, 2001 and 2000 were 27,508,000 and 26,948,000, respectively. For the three months ended March 31, 2001 and 2000, options and common stock purchase warrants to purchase 7,363,000 and 6,302,000 shares of common stock were excluded from the calculation of net loss per share because their assumed exercise would have been anti-dilutive.

4. Marketable Securities

      At March 31, 2001, the Company’s marketable securities consisted of debt securities issued by corporate and governmental entities, with contractual maturities ranging from 91 days to five years from the date of purchase. All of the Company’s investments in marketable securities are classified as available-for-sale, and as a result, are reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income in stockholders’ equity.

5. Commitments and Contingencies

      The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

the final outcome of such litigation will not have a material adverse effect on the Company’s financial position or results of operations.

      The Company’s 401(k) plan is currently under audit by the Internal Revenue Service (the “IRS”) for the year ended December 31, 1993. Although the audit is for the 1993 plan year, certain conclusions of the IRS could be applicable to other years as well. In addition, the IRS has established an Employee Leasing Market Segment Group (the “Market Segment Group”) for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program.

      The primary outstanding issue from these audits involves the Company’s rights under the Internal Revenue Code (the “Code”) as a co-employer of its worksite employees, including officers and owners of client companies. In conjunction with the 1993 401(k) plan year audit, the IRS Houston District has sought technical advice (the “Technical Advice Request”) from the IRS National Office about whether worksite employee participation in the 401(k) plan violates the exclusive benefit rule under the Code because they are not employees of the Company. The Technical Advice Request contains the conclusions of the IRS Houston District that the 401(k) plan should be disqualified because it covers worksite employees who are not employees of the Company. The Company’s response to the Technical Advice Request refutes the conclusions of the IRS Houston District. With respect to the Market Segment Group study, the Company understands that the issue of whether a PEO and a client company may be treated as co-employers for certain federal tax purposes (the “Industry Issue”) has been referred to the IRS National Office.

      Should the IRS conclude that the Company is not a “co-employer” of worksite employees for purposes of the Code, worksite employees could not continue to make salary deferral contributions to the 401(k) plan or pursuant to the Company’s cafeteria plan or continue to participate in certain other employee benefit plans of the Company. The Company believes that, although unfavorable to the Company, a prospective application of such a conclusion (that is, one applicable only to periods subsequent to a final conclusion by the IRS) would not have a material adverse effect on its financial position or results of operations, as the Company could continue to make available comparable benefit programs to its client companies at comparable costs to the Company. However, if the IRS National Office adopts the conclusions of the IRS Houston District set forth in the Technical Advice Request and any such conclusions were applied retroactively to disqualify the 401(k) plan for 1993 and subsequent years, employees’ vested account balances under the 401(k) plan would become taxable, the Company would lose its tax deductions to the extent its matching contributions were not vested, the 401(k) plan’s trust would become a taxable trust and the Company would be subject to liability with respect to its failure to withhold applicable taxes with respect to certain contributions and trust earnings. Further, the Company would be subject to liability, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by employees, including worksite employees. In such a scenario, the Company would also face the risk of client dissatisfaction and potential litigation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

While the Company is not able to predict either the timing or the nature of any final decision that may be reached with respect to the 401(k) plan audit or with respect to the Technical Advice Request or the Market Segment Group study and the ultimate outcome of such decisions, the Company believes that a retroactive application of an unfavorable determination is unlikely. The Company also believes that a prospective application of an unfavorable determination would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Results of Operations

      The following discussion should be read in conjunction with the 2000 annual report on Form 10-K as well as with the consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q.

      Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000.

      The following table presents certain information related to the Company’s results of operations for the three months ended March 31, 2001 and 2000.

	Three months ended
	March 31,
							%
	2001			2000			Change
	(in thousands, except per share and statistical data)
Revenues	$	1,043,419		$	755,545			38.1	%
Gross profit		27,829			20,705			34.4	%
Operating expenses		36,332			25,404			43.0	%
Operating loss		(8,503	)		(4,699	)		(81.0	)%
Other income		1,397			808			72.9	%
Net loss		(4,337	)		(2,471	)		(75.5	)%
Diluted net loss per share of common stock		(0.16	)		(0.09	)		(77.8	)%
Statistical Data:
Average number of worksite employees paid per month		67,460			53,897			25.2	%
Fee revenue per worksite employee per month	$	4,798		$	4,387			9.4	%
Fee payroll cost per worksite employee per month		3,960			3,621			9.4	%
Gross markup per worksite employee per month		838			766			9.4	%
Gross profit per worksite employee per month		138			128			7.8	%
Operating expenses per worksite employee per month		180			157			14.6	%
Operating loss per worksite employee per month		(42	)		(29	)		(44.8	)%
Net loss per worksite employee per month		(21	)		(15	)		(40.0	)%

      Revenues

      The Company’s revenues for the three months ended March 31, 2001 increased 38.1% over the same period in 2000 due to a 25.2% increase in the average number of worksite employees paid per month, accompanied by a 9.4% increase in fee revenue per worksite employee per month. The Company’s continued expansion of its sales force through new market and sales office openings was the primary factor contributing to the increase in the average number of worksite employees paid.

      Revenues from markets opened prior to 1993 (the commencement of the Company’s national expansion plan) increased 14.7% over the first quarter of 2000, while revenues from markets

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opened after 1993 increased 55.9%. For the three months ended March 31, 2001, revenues from the state of Texas represented 45.8% of the Company’s total revenues and Houston, the Company’s original market, represented 25.2% of the total.

      The 9.4% increase in fee revenue per worksite employee per month directly related to the 9.4% increase in fee payroll cost per worksite employee per month, reflecting (i) compensation increases within the Company’s existing worksite employee base; (ii) the continued penetration of markets with generally higher wage levels, such as San Francisco, New York and Washington, D.C.; (iii) the addition of clients with worksite employees that have a higher average base pay than the existing client base; and (iv) the attrition of clients with worksite employees that have a lower average base pay than the existing client base.

      Gross Profit

      Gross profit for the first quarter of 2001 increased 34.4% over the first quarter of 2000, primarily due to the 25.2% increase in the average number of worksite employees paid per month accompanied by a 7.8% increase in gross profit per worksite employee per month. Gross profit per worksite employee increased to $138 per month in the 2001 period from $128 per month in the 2000 period, reflecting effective execution of the Company’s pricing strategy. The Company’s pricing objectives attempt to maintain or improve the gross profit per worksite employee by matching or exceeding changes in its primary direct costs with increases in the gross markup per worksite employee.

      Gross markup per worksite employee per month increased 9.4% to $838 in the 2001 period versus $766 in the 2000 period. Approximately 38% of the $72 increase in gross markup per employee was the result of increased service fees designed to match the increased payroll tax expense associated with the higher average payroll cost per worksite employee. The remaining increase in gross markup per employee was the result of other increases in the Company’s comprehensive service fees, which were designed to match or exceed known trends in the Company’s primary direct costs.

      The Company’s primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 9.6% to $697 per worksite employee per month in the 2001 period versus $636 in the 2000 period. Payroll taxes increased $28 per worksite employee per month over the first quarter of 2000, primarily due to the increased average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost decreased to 8.65% in the 2001 period from 8.85% in the 2000 period. This decrease was the result of an increase in bonus payroll cost per worksite employee and the Company’s lower growth rate, which allowed a larger proportion of the Company’s worksite employees to meet their state unemployment tax limits during the first quarter of 2001 compared to the 2000 period. The cost of health insurance and related employee benefits increased $27 per worksite employee per month over the first quarter of 2000 due to a 4.4% increase in the cost per covered employee and an increase in the percentage of worksite employees covered under the Company’s health insurance plans to 72.4% in the 2001 period from 68.3% in the

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2000 period. Workers’ compensation costs increased $6 per worksite employee per month over the first quarter of 2000, and increased slightly to 1.27% of fee payroll cost in the 2001 period from 1.22% in the 2000 period.

      Gross profit, measured as a percentage of revenue, declined to 2.67% in the 2001 period from 2.74% in the 2000 period. This decline was due primarily to the increase in average payroll cost per worksite employee. Because payroll cost is the largest single component of both revenues and direct costs, an increase in the average payroll cost per worksite employee creates a mathematical downward pressure on the calculation of gross profit as a percentage of revenue.

      Operating Expenses

      The following table presents certain information related to the Company’s operating expenses for the three months ended March 31, 2001 and 2000.

		Three months ended March 31,							Three months ended March 31,
		2001		2000		% change			2001		2000		% change
		(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes		$	16,164	$	12,068		33.9	%	$	80	$	75		6.7	%
General and administrative expenses			11,845		7,562		56.6	%		59		46		28.3	%
Commissions			3,133		2,212		41.6	%		16		14		14.3	%
Advertising			1,458		930		56.8	%		7		6		16.7	%
Depreciation and amortization			3,732		2,632		41.8	%		18		16		12.5	%
	Total operating expenses	$	36,332	$	25,404		43.0	%		180		157		14.6	%

      Operating expenses increased 43.0% over the first quarter of 2000, primarily due to the 25.2% growth in the average number of worksite employees paid by the Company. Operating expenses per worksite employee increased 14.6% to $180 per month in the 2001 period versus $157 in the 2000 period. During the first quarter of 2001, the Company’s operating expenses continued to be impacted by several strategic initiatives, including its national sales and service expansion, the enhancement of its proprietary professional employer information system, the enhancement of its Internet-based service delivery platform, Administaff Assistant, and the enhancement of its eCommerce portal, bizzport.

      Salaries, wages and payroll taxes of corporate and sales staff increased to $80 per worksite employee per month in the 2001 period from $75 in the 2000 period. This increase was primarily due to a 39% increase in corporate headcount over the first quarter 2000.

      General and administrative expenses increased to $59 per worksite employee per month from $46 in the first quarter of 2000. The increase primarily resulted from (i) rent expense associated with the Company’s national expansion plan, including a new service center and additional sales offices in new and existing markets; (ii) an increase in the bad debt reserve; (iii) data communication and

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consulting fee expenses associated with the Company’s technology initiatives; and (iv) human resource expenses related to staffing the new sales offices.

      Depreciation and amortization expense increased $2 per worksite employee per month over the 2000 period as a result of the increased capital assets placed in service in 2001 and late 2000, including (i) the implementation of the fifth generation of the Company’s proprietary PEO information system; (ii) the implementation and enhancement of certain components of Administaff Assistant, which included both internal software development costs and externally purchased software and hardware; (iii) the opening of new sales offices; (iv) the relocation of the Houston service center; and (v) the expansion of corporate headquarters.

      Commissions expense increased by $2 per worksite employee per month from the 2000 period due to a restructuring of the sales representative compensation plan in the fall of 2000. Advertising costs also increased $1 per month on a per worksite employee basis versus the first quarter of 2000 as the Company opened three new sales offices in the first quarter of 2001, compared to one in the 2000 period.

      Net Loss

      Other income increased 72.9% due to a 74.5% increase in interest income. This increase was primarily related to a higher level of cash and marketable securities in the 2001 period resulting from the Company’s strong performance in 2000.

      The Company’s provision for income taxes differed from the U.S. statutory rate of 34% primarily due to state income taxes and tax-exempt interest income. The effective income tax rate for the 2001 period increased to 39% versus the effective rate of 36.5% during the 2000 period. This increase was a result of (i) a 1% increase in the federal rate to 35%; and (ii) an increase in the Company’s effective state income tax rate due to a broader geographic distribution of revenue into states with higher income tax rates such as California, New York and Illinois.

      Operating loss and net loss per worksite employee per month increased to $42 and $21 in the 2001 period, versus $29 and $15 in the 2000 period. The Company’s net loss and diluted net loss per share for the quarter ended March 31, 2001 increased to $4.3 million and $0.16, versus $2.5 million and $0.09 for the quarter ended March 31, 2000.

Liquidity and Capital Resources

      The Company periodically evaluates its liquidity requirements, capital needs and availability of resources in view of, among other things, expansion plans, debt service requirements 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 raise additional capital or take other steps to increase or manage its liquidity and capital resources. The Company currently believes that its cash on hand, marketable securities and cash flows from operations will be adequate to meet its short-term liquidity requirements. The

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Company will rely on these same sources, as well as public and private debt and equity financing, to meet its long-term liquidity needs and its capital needs.

      The Company had $88.6 million in cash and cash equivalents and marketable securities at March 31, 2001, of which approximately $47.3 million was payable in April 2001 for withheld federal and state income taxes, employment taxes and other payroll deductions. The remainder is available to the Company for general corporate purposes, including, but not limited to, current working capital requirements, expenditures related to the continued expansion of the Company’s sales, service and technology infrastructure, capital expenditures and the Company’s stock repurchase program. At March 31, 2001, the Company had working capital of $39.2 million compared to $51.2 million at December 31, 2000. This decline was primarily due to a $5.6 million net repurchase of treasury stock and $5.9 million in capital expenditures during the period. As of March 31, 2001, the Company had no long-term debt.

      Cash Flows From Operating Activities

      The $21.7 million decrease in net cash provided by operating activities was primarily the result of the timing of payroll tax payments surrounding the December 31 and March 31 payroll periods of each period. The timing and amounts of such payments can vary significantly based on various factors, including the day of the week on which a period ends and the existence of holidays on or immediately following a period end.

      Cash Flows From Investing Activities

      The $8.1 million increase in net cash provided by investing activities is primarily the result of net sale proceeds from marketable securities during the first three months of 2001, which were converted to short-term cash equivalents by the Company’s investment managers in response to uncertainty in the bond market during the first quarter.

      Capital expenditures during the 2001 period primarily related to software development, hardware and software costs related to the enhancement of the Company’s proprietary professional employer information system, Administaff Assistant and bizzport. In addition, capital expenditures included building improvements and furniture and fixtures at the Company’s sales offices and corporate headquarters to accommodate the Company’s expansion plans.

      Cash Flows From Financing Activities

      The $6.4 million decrease in cash provided by financing activities was primarily a result of repurchasing $21.6 million in treasury stock, partially offset by $16 million in proceeds from the exercise of common stock purchase warrants by American Express.

-17-

      Seasonality, Inflation and Quarterly Fluctuations

      Historically, the Company’s earnings pattern includes losses in the first quarter, followed by improved profitability in subsequent quarters throughout the year. This pattern is due to the effects of employment-related taxes which are based on each employee’s cumulative earnings up to specified wage levels, causing employment-related taxes to be highest in the first quarter and then decline over the course of the year. Since the Company’s revenues related to an individual employee are generally earned and collected at a relatively constant rate throughout each year, payment of such employment-related tax obligations has a substantial impact on the Company’s financial condition and results of operations during the first six months of each year. Other factors that affect direct costs could mitigate or enhance this trend.

      The Company believes the effects of inflation have not had a significant impact on its results of operations or financial condition.

Factors That May Affect Future Results and the Market Price of Common Stock

      The statements contained herein that are not historical facts are forward-looking statements within the meaning of the federal securities laws (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,” and “assume,” and similar expressions. Forward-looking statements involve a number of risks and uncertainties. In the normal course of business, Administaff, Inc., in an effort to help keep its stockholders and the public informed about the Company’s operations, may from time to time issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings, unit growth, profit per worksite employee, pricing, operating expenses or other aspects of operating results. Administaff bases the forward-looking statements on its current expectations, estimates and projections. Administaff cautions you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that Administaff cannot predict. In addition, Administaff has based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: (i) changes in general economic conditions; (ii) regulatory and tax developments including the ongoing audit of the Company’s 401(k) plan and related compliance issues, and possible adverse application of various federal, state and local regulations; (iii) changes in the Company’s direct costs and operating expenses including increases in health insurance premiums, workers’ compensation rates and state unemployment tax rates, liabilities for employee and client actions or payroll-related claims, changes in the costs of expanding into new markets, and failure to manage growth of the Company’s operations; (iv) the estimated costs and effectiveness of capital projects and investments in technology and infrastructure; (v) the Company’s ability to effectively implement its eBusiness strategy; (vi) the

-18-

effectiveness of the Company’s sales and marketing efforts, including the Company’s marketing agreements with American Express and other companies; (vii) the potential for impairment of investments in other companies; and (viii) changes in the competitive environment in the PEO industry, including the entrance of new competitors and the Company’s ability to renew or replace client companies. These factors are discussed in detail in the Company’s 2000 annual report on Form 10-K. Any of these factors, or a combination of such factors, could materially affect the results of the Company’s operations and whether forward-looking statements made by the Company ultimately prove to be accurate.

-19-

PART II

ITEM 1. LEGAL PROCEEDINGS.

      The Company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company believes that its pending legal proceedings would not have a material adverse effect on its financial position or results of operations.

ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K.

List of Exhibits:
10.1	Letter Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated February 16, 2001.
10.2	Letter Agreement between Administaff, Inc. and American Express Foundation, dated February 16, 2001.
10.3	Administaff, Inc. 2001 Incentive Plan.
Reports on Form 8-K:
None.

-20-

SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Administaff, Inc.
Date:    May 15, 2001	By:	/s/ Richard G. Rawson
		Richard G. Rawson Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date:    May 15, 2001	By:	/s/ Douglas S. Sharp
		Douglas S. Sharp Vice President, Finance (Principal Accounting Officer)

-21-

INDEX TO EXHIBITS

EXHIBIT
NO.	DESCRIPTION
10.1	Letter Agreement between Administaff, Inc. and American Express Travel Related Services Company, Inc., dated February 16, 2001.
10.2	Letter Agreement between Administaff, Inc. and American Express Foundation, dated February 16, 2001.
10.3	Administaff, Inc. 2001 Incentive Plan.

EX-10.1

   1
                                                                    EXHIBIT 10.1

                                Administaff, Inc.
                          19001 Crescent Springs Drive
                               Kingwood, TX 77339


February 16, 2001



American Express Travel Related Services Company, Inc.
American Express Tower
World Financial Center
200 Vesey Street
New York, New York 10285

Dear Sirs:

This letter sets forth the parties' agreement with respect to the purchase by
Administaff, Inc. ("ASF") from American Express Travel Related Services Company,
Inc. ("TRS") of up to 275,000 shares of ASF common stock, par value $0.01 per
share (the "Shares").

The parties agree as follows:

1.       ASF agrees to purchase up to 275,000 Shares from TRS at a purchase
         price per share equal to ninety-nine percent (99%) of the average of
         the closing sales prices of a Share as reported on the New York Stock
         Exchange composite transactions tape and reflected in the three star
         New York City edition of the Wall Street Journal over a twenty (20)
         trading-day period, of which the first ten trading days end on February
         16, 2001 and the second ten trading days commence on the day that ASF
         releases its earnings report for the fourth quarter of 2000.

2.       ASF's obligation to purchase the Shares is conditional upon (a) TRS
         first having exercised its warrant to purchase 800,000 shares of ASF
         common stock (the "Warrant Shares") at an exercise price of $20 per
         Warrant Share (subject to adjustment in accordance with the terms of
         the warrant) on or before March 10, 2001, the expiration date of the
         warrant; (b) the per share purchase price calculated as set forth in
         (1) above not exceeding $30; and (c) TRS notifying ASF that it is
         exercising its right to sell Shares under this Agreement not later than
         5:00 p.m. on March 12, 2001.

3.       Notwithstanding anything else to the contrary herein, TRS is not
         obligated to exercise the warrant; provided that if TRS does exercise
         the warrant and thereafter TRS desires to sell up to 275,000 Shares on
         or before March 12, 2001, TRS shall sell such Shares first pursuant to
         this Agreement.

4.       The closing of the sale and purchase will take place on March 12, 2001
         or such other day determined by TRS and ASF. At the closing, ASF will
         pay to TRS the aggregate


   2
         purchase price for the Shares by wire transfer of immediately available
         funds, and TRS will deliver to ASF certificates representing the
         Shares, duly endorsed for transfer. If so requested by TRS, the parties
         will net settle the exercise of the warrant and the sale and purchase
         of the Shares hereunder.

5.       ASF will pay all stamp, transfer and similar taxes in connection with
         the issuance of the Warrant Shares. TRS will pay all stamp, transfer
         and similar taxes, and all federal and state income taxes, in
         connection with TRS' ownership and exercise of the warrant and the sale
         of the Shares.

6.       The Shares TRS intends to sell are those common shares originally
         purchased from ASF in March 1998 and not the Warrant Shares. The
         parties shall execute any additional documents, if any, reasonably
         required for TRS to adequately identify the Shares sold by TRS
         hereunder as being the shares originally purchased from ASF in March
         1998.

7.       ASF will prepare a press release pursuant to which it will announce
         this agreement. Such release shall require the prior approval of TRS,
         such approval not to be unreasonably withheld.

   3
8.       This letter agreement shall be governed by the laws of the State of New
         York, without reference to conflict of laws rules.

                             ADMINISTAFF, INC.


                             By:   /s/ Richard G. Rawson
                                   ---------------------------------------------
                             Richard G. Rawson
                             Executive Vice President of Administration,
                             Chief Financial Officer and Treasurer


AGREED:

AMERICAN EXPRESS TRAVEL RELATED
SERVICES COMPANY, INC.


By: /s/ Jay B. Stevelman
    ---------------------------------
Name:      Jay B. Stevelman
Title:     Treasurer

EX-10.2

   1
                                                                    EXHIBIT 10.2

                                Administaff, Inc.
                          19001 Crescent Springs Drive
                               Kingwood, TX 77339


February 16, 2001

American Express Foundation
American Express Tower
World Financial Center
200 Vesey Street
New York, New York 10285

Dear Sirs:

This letter sets forth the parties' agreement with respect to the purchase by
Administaff, Inc. ("ASF") from the American Express Foundation ("Foundation") of
up to 525,000 shares of ASF common stock, par value $0.01 per share (the
"Shares").

The parties agree as follows:

1.       ASF agrees to purchase up to 525,000 Shares from the Foundation at a
         purchase price per share equal to ninety-nine percent (99%) of the
         average of the closing sales prices of a Share as reported on the New
         York Stock Exchange composite transactions tape and reflected in the
         three star New York City edition of the Wall Street Journal over a
         twenty (20) trading-day period, of which the first ten trading days end
         on February 16, 2001 and the second ten trading days commence on the
         day that ASF releases its earnings report for the fourth quarter of
         2000.

2.       ASF's obligation to purchase the Shares is conditional upon (a)
         American Express Travel Related Services Company, Inc. ("TRS") first
         having exercised its warrant to purchase 800,000 shares of ASF common
         stock (the "Warrant Shares") at an exercise price of $20 per Warrant
         Share (subject to adjustment in accordance with the terms of the
         warrant) on or before March 10, 2001, the expiration date of the
         warrant; (b) the per share purchase price calculated as set forth in
         (1) above not exceeding $30; and (c) the Foundation notifying ASF that
         it is exercising its right to sell Shares under this Agreement not
         later than 5:00 p.m. on March 12, 2001.

3.       It is understood and agreed by the parties that TRS is not obligated to
         exercise the warrant, provided that if TRS does exercise the warrant
         and thereafter the Foundation desires to sell up to 575,000 Shares on
         or before March 12, 2001, the Foundation shall sell such Shares first
         pursuant to this Agreement.

4.       The closing of the sale and purchase will take place on March 12, 2001
         or such other day determined by the Foundation and ASF. At the closing,
         ASF will pay to the Foundation the aggregate purchase price for the
         Shares by wire transfer of immediately


   2
         available funds, and Foundation will deliver to ASF certificates
         representing the Shares, duly endorsed for transfer.

5.       The Foundation will pay all stamp, transfer and similar taxes and all
         federal and state income taxes in connection with the Foundation's sale
         of the Shares.

6.       The Shares Foundation intends to sell are those common shares
         originally purchased by TRS from ASF in March 1998 and contributed by
         TRS to the Foundation. The parties shall execute any additional
         documents, if any, reasonably required for the Foundation to adequately
         identify the Shares sold by it hereunder as being the shares originally
         purchased by TRS from ASF in March 1998.

7.       ASF will prepare a press release pursuant to which it will announce
         this agreement. Such release shall require the prior approval of the
         Foundation, such approval not to be unreasonably withheld.


   3

8.       This letter agreement shall be governed by the laws of the State of New
         York, without reference to conflict of laws rules.

                               ADMINISTAFF, INC.


                               By: /s/ Richard G. Rawson
                                  ----------------------------------------------
                               Richard G. Rawson
                               Executive Vice President of Administration,
                               Chief Financial Officer and Treasurer


AGREED:

AMERICAN EXPRESS FOUNDATION


By: /s/ David I. Yowan
   ----------------------------------
Name:      David I. Yowan
Title:     Treasurer

EX-10.3

   1
                                                                    EXHIBIT 10.3



                                ADMINISTAFF, INC.
                               2001 INCENTIVE PLAN

                     (ADOPTED EFFECTIVE AS OF MARCH 7, 2001)

          1. OBJECTIVES. This Administaff, Inc. 2001 Incentive Plan (this
"Plan") is intended as an incentive to retain and attract persons of training,
experience and ability to serve as employees of Administaff, Inc., a Delaware
corporation (the "Company"), and its Subsidiaries and as nonemployee directors
of the Company, to encourage the sense of proprietorship of such persons and to
stimulate the active interest of such persons in the development and financial
success of the Company and its Subsidiaries.

          2. DEFINITIONS. As used herein, the terms set forth below shall have
the following respective meanings:

          "ANNUAL DIRECTOR AWARD DATE" means, for each calendar year beginning
on or after January 1, 2002, in which this Plan is in effect, the date on which
the annual meeting of the stockholders of the Company is held in that year.

          "AWARD" means an Employee Award or a Director Award.

          "AWARD AGREEMENT" means a written agreement between the Company and a
Participant that sets forth the terms, conditions and limitations applicable to
an Award.

          "BOARD" means the Board of Directors of the Company.

          "CASH AWARD" means an Award payable in cash.

          "CAUSE" means:

          (a) the Director whose removal is proposed has been convicted, or when
     a Director is granted immunity to testify when another has been convicted,
     of a felony by a court of competent jurisdiction and such conviction is no
     longer subject to direct appeal;

          (b) such Director has been found by the affirmative vote of a majority
     of the entire Board at any regular or special meeting of the Board called
     for that purpose or by a court of competent jurisdiction to have been
     guilty of willful misconduct in the performance of his duties to the
     Company in a matter of substantial importance to the Company; or

          (c) such Director has been adjudicated by a court of competent
     jurisdiction to be mentally incompetent, which mental incompetency directly
     affects his ability as a Director of the Company.

          "CHANGE IN CONTROL" means:


   2

          (a) the date of the acquisition by any "person" (within the meaning of
     Section 13(d)(3) or 14(d)(2) of the Exchange Act), excluding the Company or
     any of its Subsidiaries, of beneficial ownership (within the meaning of
     Rule 13d-3 under the Exchange Act) of 30% or more of either the then
     outstanding shares of common stock of the Company or the then outstanding
     voting securities entitled to vote generally in the election of directors;
     or

          (b) the date the individuals who constitute the Board as of March 7,
     2001 (the "Incumbent Board"), cease for any reason to constitute at least a
     majority of the members of the Board, provided that any person becoming a
     director subsequent to March 7, 2001, whose election, or nomination for
     election by the Company's stockholders, was approved by a vote of at least
     a majority of the directors then comprising the Incumbent Board (other than
     any individual whose nomination for election to Board membership was not
     endorsed by the Company's management prior to, or at the time of, such
     individual's initial nomination for election) shall be, for purposes of
     this Plan, considered as though such person were a member of the Incumbent
     Board; or

          (c) the date of consummation of a merger, consolidation,
     recapitalization, reorganization, sale or disposition of all or a
     substantial portion of the Company's assets or the issuance of shares of
     stock of the Company in connection with the acquisition of the stock or
     assets of another entity, provided, however, that a Change in Control shall
     not occur under this clause (c) if consummation of the transaction would
     result in at least 65% of the total voting power represented by the voting
     securities of the Company (or, if not the Company, the entity that succeeds
     to all or substantially all of the Company's business) outstanding
     immediately after such transaction being beneficially owned (within the
     meaning of Rule 13d-3 promulgated pursuant to the Exchange Act) by at least
     65% of the holders of outstanding voting securities of the Company
     immediately prior to the transaction, with the voting power of each such
     continuing holder relative to other such continuing holders not
     substantially altered in the transaction; or

          (d) the date the Company files a report or proxy statement with the
     Securities and Exchange Commission pursuant to the Exchange Act disclosing
     in response to Form 8-K or Schedule 14A (or any successor schedule, form or
     report of item therein) that a change in control of the Company has or may
     have occurred, or will or may occur in the future, pursuant to any then
     existing contract or transaction.

          "CODE" means the United States Internal Revenue Code of 1986, as
amended from time to time.

          "COMMITTEE" means the Compensation Committee of the Board or any other
committee as may be designated by the Board.

          "COMMON STOCK" means the common stock, par value $0.01 per share, of
the Company or any security into which such Common Stock may be changed by
reason of any transaction or event of the type described in Section 13.

          "COMPANY" means Administaff, Inc., a Delaware corporation.



                                      -2-
   3

          "DIRECTOR" means a member of the Board, excluding any individual who
is also an employee of the Company or any Subsidiary.

          "DIRECTOR AWARD" means a Director Option.

          "DIRECTOR OPTION" means a nonqualified stock option granted to a
Director pursuant to Section 7.

          "DISABILITY" means the inability to perform the duties of the
Director's position for a period of six (6) consecutive months or for an
aggregate of six (6) months during any twelve (12) month period after the Grant
Date by reason of any medically determinable physical or mental impairment, as
determined by the Committee in the Committee's sole discretion.

          "EMPLOYEE" means an individual employed by the Company or any
Subsidiary. For purposes of this Plan, an Employee also includes any individual
who has been offered employment by the Company or any Subsidiary, provided that
(a) any Award granted to such prospective employee shall be canceled if such
individual fails to commence such employment, (b) no payment of value may be
made in connection with such Award until such individual has commenced such
employment, and (c) such individual may not be granted an ISO prior to the date
the individual actually commences employment.

          "EMPLOYEE AWARD" means any Option, Performance Award, Phantom Stock
Award, Cash Award, Stock Award, Stock Appreciation Right or Other Stock-Based
Award, whether granted singly, in combination or in tandem, to a Participant who
is an Employee pursuant to any applicable terms, conditions and limitations as
the Committee may establish in order to fulfill the objectives of the Plan.

          "EXERCISE PRICE" means the price at which the Option Shares may be
purchased under the terms of the Award Agreement.

          "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time.

          "FAIR MARKET VALUE" of a share of Common Stock means, as of a
particular date, (a) if shares of Common Stock are listed on a national
securities exchange, the closing sales price per share of Common Stock on the
consolidated transaction reporting system for the principal national securities
exchange on which shares of Common Stock are listed on that date or, if there
shall have been no such sale so reported on that date, on the last preceding
date on which such a sale was so reported or, at the discretion of the
Committee, the price prevailing on the exchange at the time of exercise; (b) if
shares of Common Stock are not so listed but are quoted on the Nasdaq National
Market, the closing sales price per share of Common Stock reported by the Nasdaq
National Market on that date or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was so
reported or, at the discretion of the Committee, the price prevailing on the
Nasdaq National Market at the time of exercise; (c) if the Common Stock is not
so listed or quoted, the closing price on that date or, if there are no
quotations available for such date, on the last preceding date on which such
quotations shall be available, as reported by the Nasdaq Stock Market or, if not
reported by the Nasdaq Stock Market, by the National Quotation Bureau
Incorporated; or (d) if none of the above is applicable,



                                      -3-
   4

then such amount as may be determined by the Committee or the Board in such a
manner as it deems in good faith to be the fair market value per share of Common
Stock.

          "GRANT DATE" means (a) with respect to an Award other than a Director
Award, the date specified by the Committee in the Award Agreement on which such
Award will become effective, and (b) with respect to a Director Award, the
automatic date of grant for such Award as provided in Section 7.

          "ISO" means an incentive stock option within the meaning of Code
Section 422.

          "OPTION" means a right to purchase a particular number of shares of
Common Stock at a particular Exercise Price, subject to certain terms and
conditions as provided in this Plan and in the Award Agreement. An Option may be
in the form of an ISO or a nonqualified stock option within the meaning of Code
Section 83.

          "OPTION SHARES" means the shares of Common Stock covered by a
particular Option.

          "OTHER STOCK-BASED AWARD" means any Award that shall consist of a
right that (a) is not an Option, Performance Award, Phantom Stock Award, Stock
Award or SAR, and (b) is denominated or payable in, valued in whole or in part
by reference to, or otherwise based on or related to shares of Common Stock as
is deemed by the Committee to be consistent with the terms of the Plan.

          "PARTICIPANT" means an Employee or a Director to whom an Award has
been granted under this Plan.

          "PERFORMANCE AWARD" means an Employee Award, such as a Performance
Unit, that is subject to the achievement of one or more Performance Objectives
established by the Committee.

          "PERFORMANCE OBJECTIVES" means the objectives, if any, established by
the Committee that are to be achieved with respect to an Award granted under
this Plan, which may be described in terms of Company-wide objectives, in terms
of objectives that are related to performance of a division, Subsidiary,
department, geographic market or function within the Company or a Subsidiary in
which the Participant receiving the Award is employed, or in individual or other
terms, and which shall relate to the period of time determined by the Committee.
The Performance Objectives intended to qualify under Code Section 162(m) shall
be with respect to one or more of the following: (a) net earnings; (b) operating
income; (c) earnings before interest and taxes; (d) earnings before interest,
taxes, depreciation and amortization expenses; (e) earnings before taxes and
unusual or nonrecurring items; (f) total revenue; (g) return on investment; (h)
return on equity; (i) return on total capital; (j) return on assets; (k) total
stockholder return; (l) return on capital employed in the business; (m) stock
price performance; (n) earnings per share growth; (o) cash flows; (p) total
profit; (q) operating expenses; (r) fee revenue; (s) total revenue less bonus
payroll; (t) the number of paid worksite employees; and (u) gross mark-up per
worksite employee.



                                      -4-
   5

          The Committee shall determine, in its sole discretion, at the time of
grant of an Award, which Performance Objectives to use with respect to an Award,
the weighting of such objectives if more than one is used and whether such
objective(s) is (are) to be measured against a Company-established budget or
target, an index or a peer group of companies. A Performance Objective need not
be based on an increase or a positive result and may be based, for example, on
maintaining the status quo or limiting economic losses.

          "PERFORMANCE UNIT" means a unit equivalent to $100 or such other value
as determined by the Committee.

          "PHANTOM STOCK AWARD" means the right to receive the value of a
specified number of shares of Common Stock.

          "PLAN" means the Administaff, Inc. 2001 Incentive Plan, as amended
from time to time.

          "RESTRICTED STOCK" means shares of Common Stock that are restricted or
subject to forfeiture provisions.

          "STOCK APPRECIATION RIGHTS" or "SARS" means the right to receive an
amount in cash or Common Stock equal to the appreciation in value of a specified
number of shares of Common Stock over a particular period of time.

          "STOCK AWARD" means an Employee Award denominated in or payable in
shares of Common Stock, which may be Restricted Stock.

          "SUBSIDIARY" means (a) with respect to any Awards other than ISOs, (i)
in the case of a corporation, any corporation of which the Company directly or
indirectly owns shares representing 50% or more of the combined voting power of
the shares of all classes or series of capital stock of such corporation that
have the right to vote generally on matters submitted to a vote of the
stockholders of such corporation, and (ii) in the case of a partnership or other
business entity not organized as a corporation, any such business entity of
which the Company directly or indirectly owns 50% or more of the voting, capital
or profits interests (whether in the form of partnership interests, membership
interests or otherwise), and (b) with respect to Awards of ISOs, any subsidiary
within the meaning of Code Section 424(f).

     3.   PLAN ADMINISTRATION AND DESIGNATION OF PARTICIPANTS. All Employees of
the Company and its Subsidiaries and all Directors of the Company are eligible
for Awards under this Plan. The Committee shall select the Participants from
time to time by the grant of Employee Awards under this Plan and, subject to the
terms and conditions of this Plan, shall determine all terms and conditions of
the Employee Awards. The Committee shall have no discretion with respect to the
grant of Director Awards.

          This Plan shall be administered by the Committee, which shall have
full and exclusive power to interpret this Plan and to adopt such rules,
regulations and guidelines for carrying out this Plan as it may deem necessary
or appropriate.

          The Committee may, in its discretion, provide for the extension of the
exercisability of an Employee Award, accelerate the vesting or exercisability of
an Employee



                                      -5-
   6
 Award, eliminate or make less restrictive any restrictions contained in an
Employee Award, waive any restriction or other provision of this Plan or an
Employee Award or otherwise amend or modify an Employee Award in any manner that
is either (a) not adverse to the Participant to whom such Employee Award was
granted, or (b) consented to by such Participant. Notwithstanding anything
herein to the contrary, no Option or SAR shall be granted in exchange for
another Option or SAR if the Exercise Price of the previously granted Option or
SAR is greater than the Exercise Price of the replacement Option or SAR.

          No member of the Committee shall be liable for anything done or
omitted to be done by him or her, by any member of the Committee or by any
officer of the Company in connection with the performance of any duties under
this Plan, except for his or her own willful misconduct or as expressly provided
by statute.

     4.   AWARD AGREEMENT. Each Award granted hereunder shall be described in an
Award Agreement, which shall be subject to the terms and conditions of this Plan
and shall be signed by the Participant and by the appropriate officer for and on
behalf of the Company.

     5.   SHARES OF COMMON STOCK RESERVED FOR THIS PLAN. Subject to adjustment
as provided in Section 13 hereof, a total of 1,500,000 shares of Common Stock
shall be reserved for issuance upon the exercise or payment of Awards granted
pursuant to this Plan. Such shares may be shares of original issuance or
treasury shares or a combination of the foregoing. The Committee and the
appropriate officers of the Company shall from time to time take whatever
actions are necessary to execute, acknowledge, file and deliver any documents
required to be filed with or delivered to any governmental authority or any
stock exchange or transaction reporting system on which shares of Common Stock
are listed or quoted in order to make shares of Common Stock available for
issuance pursuant to this Plan. Awards that are forfeited or terminated or
expire unexercised in such a manner that all or some of the shares of Common
Stock subject thereto are not issued to a Participant shall immediately become
available for the granting of Awards under this Plan.

     6.   EMPLOYEE AWARDS.

          (a) OPTIONS. An Employee Award may be in the form of an Option. The
     Exercise Price of an Option granted under this Plan shall not be less than
     100% of the Fair Market value of the Common Stock at the time of grant.
     Options granted to an Employee of the Company may, in the discretion of the
     Committee, provide for an automatic "reload" grant upon the exercise of the
     Option, with such terms and conditions on any such reload grant as the
     Committee may choose, provided, however, that the Exercise Price for such
     reload option shall not be less than 100% of the Fair Market Value of the
     Common Stock at the time of grant of such reload option and the term for
     such reload option shall not exceed the remaining term for the original
     Option.

               (i) INCENTIVE STOCK OPTIONS. Options granted to Employees
          hereunder may be ISOs. An ISO shall consist of a right to purchase a
          specified number of shares of Common Stock at a price specified by the
          Committee in the Award Agreement or otherwise, which shall not be less
          than the Fair Market Value of the Common Stock on the Grant Date. Any
          ISO granted shall expire not later than ten (10) years after the Grant
          Date, with the expiration date to be specified by the Committee in the
          Award Agreement. Any ISO granted must, in addition to being



                                      -6-
   7

          subject to applicable terms, conditions and limitations established by
          the Committee, comply with Code Section 422. All other terms,
          conditions and limitations applicable to ISOs shall be determined by
          the Committee.

               (ii) NONQUALIFIED STOCK OPTIONS. Options granted to Employees may
          be nonqualified stock options within the meaning of Code Section 83. A
          nonqualified stock option shall consist of a right to purchase a
          specified number of shares of Common Stock at a price specified by the
          Committee in the Award Agreement or otherwise, which shall not be less
          than the Fair Market Value of the Common Stock on the Grant Date. The
          expiration date of the nonqualified stock option shall be specified by
          the Committee in the Award Agreement. All other terms, conditions and
          limitations applicable to nonqualified stock options shall be
          determined by the Committee.

          (b) PERFORMANCE AWARD. An Employee Award may be in the form of a
     Performance Award, such as a Performance Unit. A Performance Award shall be
     subject to the achievement of one or more Performance Objectives. All other
     terms, conditions and limitations applicable to Performance Awards shall be
     determined by the Committee.

          (c) STOCK AWARD (INCLUDING RESTRICTED STOCK). An Employee Award may
     consist of Common Stock or may be denominated in units of Common Stock. All
     terms, conditions and limitations applicable to any Stock Award pursuant to
     this Plan shall be determined by the Committee.

          (d) PHANTOM STOCK AWARD. An Employee Award may be in the form of
     Phantom Stock or other bookkeeping account tied to the value of shares of
     Common Stock. All terms, conditions and limitations applicable to any
     Phantom Stock Award shall be determined by the Committee.

          (e) STOCK APPRECIATION RIGHT. An Employee Award may be in the form of
     SARs. All terms, conditions and limitations applicable to any Employee
     Awards of SARs shall be determined by the Committee.

          (f) CASH AWARD. An Employee Award may be in the form of a Cash Award.
     All terms, conditions and limitations applicable to any Cash Award shall be
     determined by the Committee.

          (g) OTHER STOCK-BASED AWARDS. An Employee Award may be in the form of
     any Other Stock-Based Award. All terms, conditions and limitations
     applicable to any Other Stock-Based Award shall be determined by the
     Committee.

          (h) The following limitations shall apply to any Award made hereunder:

               (i) Notwithstanding anything herein to the contrary, no
          Participant may be granted, during any one calendar year period,
          Options or SARs (that are not subject to the achievement of any
          Performance Objectives) with respect to more than 100,000 shares of
          Common Stock.



                                      -7-
   8

               (ii) Notwithstanding anything herein to the contrary, no
          Participant may be granted, during any one calendar year period,
          Performance Awards having a total value in excess of $1,000,000 or
          Cash Awards (that are not subject to the achievement of any
          Performance Objectives) having a total value in excess of $1,000,000.

               (iii) Notwithstanding anything herein to the contrary, no
          Participant may be granted, during any one calendar year period, Stock
          Awards or Phantom Stock Awards (that are not subject to the
          achievement of any Performance Objectives) or Other Stock-Based Awards
          with respect to more than 100,000 shares of Common Stock.

     7.   DIRECTORS AWARDS. Directors of the Company shall be granted Director
Awards in accordance with this Section 7 and subject to applicable terms and
limitations set forth in this Plan and the applicable Award Agreements.
Notwithstanding anything herein to the contrary, if the number of shares of
Common Stock available for Awards under this Plan is insufficient to make all
automatic grants of Director Awards provided for in this Section 7 on the
applicable Grant Date, then all Directors who are entitled to a Director Award
on such date shall share ratably in the number of shares then available for
Awards under this Plan, all Directors shall have no right to receive a Director
Award with respect to the deficiencies in the number of available shares, and
all future Director Awards under this Section 7 shall terminate.

          (a) INITIAL DIRECTOR AWARD. Each Director who is elected or appointed
     to the Board for the first time after March 7, 2001, shall be automatically
     granted, on the date of his or her election or appointment to the Board, a
     Director Option to purchase 7,500 shares of Common Stock (the "Initial
     Director Award"), which shall become vested and exercisable as to one-third
     (1/3) of the Option Shares on each anniversary of the Grant Date unless
     such Director requests in writing not to receive such Initial Director
     Award. Notwithstanding the foregoing, if the Director terminates his
     service as a member of the Board, his or her unvested Option Shares, if
     any, shall terminate immediately on such termination date, unless such
     termination of service is due to death or Disability, in which event the
     unvested Option Shares shall become immediately 100% vested and exercisable
     on such termination date.

          (b) ANNUAL DIRECTOR AWARD. On the Annual Director Award Date, each
     Director who is in office immediately after the annual meeting on such date
     and who was not elected or appointed to the Board for the first time on
     such date shall be automatically granted a Director Option to purchase 5000
     shares of Common Stock (the "Annual Director Award"), which shall be 100%
     vested and exercisable on the Grant Date unless such Director requests in
     writing not to receive such Annual Director Award.

          (c) TERMINATION OF DIRECTOR AWARDS. The Initial Director Award and the
     Annual Director Award granted to each Director shall terminate and be of no
     force and effect with respect to any shares of Common Stock not previously
     purchased by the Director upon the first to occur of:

                    (i) the tenth (10th) anniversary of the Grant Date for such
               Award or



                                      -8-
   9

                    (ii) with respect to

                         (1) the portion of the Initial Director Award and
                    Annual Director Award exercisable upon termination of
                    service, the expiration of (A) three (3) months following
                    the Director's termination of service for Cause or (B) three
                    (3) years following the Director's termination of service
                    for any other reason; and/or

                         (2) the portion of the Initial Director Award not
                    exercisable upon termination of service, the date of the
                    Director's termination of service.

                    Notwithstanding anything herein to the contrary, the normal
     expiration date for Director Awards shall not be extended.

          (d) EXERCISE PRICE. The exercise price of the Common Stock under the
     Initial Director Award and the Annual Director Award granted to each
     Director shall be the Fair Market Value of the shares of Common Stock
     subject to such Director Award on the Grant Date for such Director Award.

          (e) AWARD AGREEMENT. Each Initial Director Award and Annual Director
     Award granted to a Director shall be evidenced by an Award Agreement
     between the Company and such Director that sets forth the terms, conditions
     and limitations described above and any additional terms, conditions and
     limitations applicable to the Initial Director Award or the Annual Director
     Award. Such Award Agreements shall be consistent with the terms and
     conditions of this Plan.

     8.   PAYMENT OF AWARDS.

          (a) GENERAL. Payment of Awards may be made in the form of cash or
     Common Stock or combinations thereof and may include such restrictions as
     the Committee shall determine, including, in the case of Common Stock,
     restrictions on transfer and forfeiture provisions.

          (b) DEFERRAL. The Committee may, in its discretion, (i) permit
     selected Participants to elect to defer payments of some or all types of
     Awards in accordance with procedures established by the Committee or (ii)
     provide for the deferral of an Award in an Award Agreement or otherwise.
     Any such deferral may be in the form of installment payments or a future
     lump-sum payment. Any deferred payment, whether elected by the Participant
     or specified by the Award Agreement or the Committee, may be forfeited if
     and to the extent that the Award Agreement so provides.

          (c) DIVIDENDS AND INTEREST. Dividends or dividend equivalent rights
     may be extended to and made part of any Award denominated in Common Stock
     or units of Common Stock, subject to such terms, conditions and
     restrictions as the Committee may establish. The Committee may also
     establish rules and procedures for the crediting of interest on deferred
     cash payments and dividend equivalents for deferred payment denominated in
     Common Stock or units of Common Stock.



                                      -9-
   10

          (d) SUBSTITUTION OF AWARDS. At the discretion of the Committee, a
     Participant who has been granted an Employee Award may be offered an
     election to substitute an Employee Award for another Employee Award or
     Employee Awards of the same or different type, subject to the overall
     limits expressed in this Plan.

          (e) NO FRACTIONAL SHARES. The Committee shall not be required to issue
     any fractional shares of Common Stock under this Plan. The Committee, in
     its sole discretion, may provide for the elimination of fractions for the
     settlement of fractions in cash.

     9.   OPTION EXERCISE. The price at which shares of Common Stock may be
purchased under an Option shall be paid in full at the time of exercise (a) in
cash or by check payable and acceptable to the Company, or (b) by tendering to
the Company shares of Common Stock owned by the Participant for at least six
months, if acquired pursuant to a Company stock option, such shares having an
aggregate Fair Market Value as of the date of exercise and tender that is not
greater than the Exercise Price for the shares with respect to which the Option
is being exercised, and by paying any remaining amount of the Exercise Price as
provided in (a) above (provided that the Committee may, upon confirming that the
Participant owns the number of shares being tendered, authorize the issuance of
a new certificate for the number of shares being acquired pursuant to the
exercise of the Option less the number of shares being tendered upon the
exercise and return to the Participant (or not require surrender of) the
certificate for the shares being tendered upon the exercise), or (c) by the
Participant delivering to the Company a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company cash or a check payable and acceptable to the Company to pay the
Exercise Price and any required tax withholding amounts, provided that in the
event the Participant chooses to pay the Exercise Price and withholding taxes as
provided in (c) above, the Participant and the broker shall comply with such
procedures and enter into such agreements as the Committee may prescribe as a
condition of such payment procedure, or (d) by a combination of such payment
methods.

     10.  TERMINATION OF EMPLOYMENT OR SERVICE. Upon the termination of
employment or service by a Participant, any unexercised, deferred or unpaid
Awards shall be treated as provided in the specific Award Agreement evidencing
the Award or, in the case of Director Awards, as provided in this Plan. Unless
otherwise specifically provided in the Award Agreement, each Award granted
pursuant to this Plan that is an Option shall immediately terminate to the
extent the Option is not vested (or does not become vested as a result of such
termination of employment or service) on the date the Participant terminates
employment or service with the Company or its Subsidiaries.

     11.  ACCELERATION UPON A CHANGE IN CONTROL. Notwithstanding anything
herein to the contrary, all conditions and/or restrictions relating to the
continued employment or service of a Participant and/or the achievement of
Performance Objectives with respect to the vesting and exercisability or full
entitlement to any Award shall immediately lapse upon a Change in Control.

     12.  ASSIGNABILITY. Unless otherwise permitted by the Committee, no
Award granted under this Plan shall be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated by a Participant other than by (a) will or
the laws of descent and distribution, or (b)



                                      -10-
   11

a qualified domestic relations order. During the lifetime of a Participant, any
Award shall be exercisable only by him, or in the case of a Participant who is
mentally incapacitated, the Award shall be exercisable by his guardian or legal
representative. The Committee may prescribe and include in applicable Award
Agreements other restrictions on transfer. Any attempted assignment or transfer
in violation of this Section 12 shall be null and void. Upon the Participant's
death, the personal representative or other person entitled to succeed to the
rights of the Participant (the "Successor Participant") may exercise such
rights. A Successor Participant must furnish proof satisfactory to the Company
of his or her right to exercise the Award under the Participant's will or under
the applicable laws of descent and distribution.

          Subject to approval by the Committee in its sole discretion, other
than with respect to ISOs, all or a portion of the Awards granted to a
Participant under this Plan may be transferable by the Participant, to the
extent and only to the extent specified in such approval, to (a) the spouse,
children or grandchildren (including adopted children and stepchildren and
grandchildren) of the Participant ("Immediate Family Members"), (b) a trust or
trusts for the exclusive benefit of such Immediate Family Members and, if
applicable, the Participant, or (c) a partnership or partnerships in which such
Immediate Family Members and, if applicable, the Participant are the only
partners, provided that the Award Agreement pursuant to which such Awards are
granted (or an amendment thereto) must expressly provide for transferability in
a manner consistent with this Section. Subsequent transfers of transferred
Awards shall be prohibited except by will or the laws of descent and
distribution, unless such transfers are made to the original Participant or a
person to whom the original Participant could have made a transfer in the manner
described herein. No transfer shall be effective unless and until written notice
of such transfer is provided to the Committee, in the form and manner prescribed
by the Committee. Following transfer, any such Awards shall continue to be
subject to the same terms and conditions as were applicable immediately prior to
transfer, and except as otherwise provided herein, the term "Participant" shall
be deemed to refer to the transferee. No transferred Options shall be
exercisable unless arrangements satisfactory to the Company have been made to
satisfy any tax withholding obligations the Company may have with respect to the
Options. The consequences of termination of employment or service shall continue
to be applied with respect to the original Participant, following which the
Awards shall be exercisable by the transferee only to the extent and for the
periods specified in this Plan and the Award Agreement.

     13.  ADJUSTMENTS.

          (a) The existence of outstanding Awards shall not affect in any manner
     the right or power of the Company or its stockholders to make or authorize
     (i) any or all adjustments, recapitalization, reorganizations or other
     changes in the ownership of the Company or its business, (ii) any merger or
     consolidation of the Company, (iii) any issue of bonds, debentures or other
     obligations, (iv) the dissolution or liquidation of the Company, (v) any
     sale or transfer of all or any part of its assets or business, or (vi) any
     other Company act or proceeding of any kind, whether or not of a character
     similar to that of the acts or proceedings enumerated above.

          (b) In the event of any Common Stock distribution or split,
     recapitalization, extraordinary distribution, merger, consolidation,
     combination or exchange of shares of Common Stock or similar change or upon
     the occurrence of any other event that the



                                      -11-
   12
     Committee, in its sole discretion, deems appropriate, (i) the number of
     shares of Common Stock reserved under this Plan and covered by outstanding
     Awards, (ii) the Exercise Price in respect of such Awards, and (iii) the
     kind of shares covered thereby (including shares of another issuer) shall
     be adjusted as appropriate.

          (c) In the event of a corporate merger, consolidation, acquisition of
     property or stock, separation, reorganization or liquidation, the Committee
     shall be authorized (i) to issue or assume Awards by means of substitution
     of new Awards, as appropriate, for previously issued Awards or to assume
     previously issued Awards as part of such adjustment, or (ii) to cancel
     Awards that are Options or SARs and give the Participants who are the
     holders of such Awards notice and opportunity to exercise for thirty (30)
     days prior to such cancellation.

          (d) The Committee, in its sole discretion and without the consent of
     the Participant, may amend (i) any stock-based Award to reflect a change in
     accounting rules required by the Financial Accounting Standards Board, and
     (ii) any Award that is not intended to meet the requirements of Code
     Section 162(m), to reflect a significant event that the Committee, in its
     sole discretion, believes to be appropriate to reflect the original intent
     in the grant of the Award.

     14.  TAX WITHHOLDING. The Company shall have the right to deduct applicable
taxes from any Award payment and withhold, at the time of delivery or vesting of
cash or shares of Common Stock under this Plan, an appropriate amount of cash or
number of shares of Common Stock or a combination thereof for payment of taxes
required by law or to take such other action as may be necessary in the opinion
of the Company to satisfy all obligations for withholding of such taxes. The
Committee may also permit withholding to be satisfied by the transfer to the
Company of shares of Common Stock theretofore owned by the holder of the Award
with respect to which withholding is required. If shares of Common Stock are
used to satisfy tax withholding, such shares shall be valued based on the Fair
Market Value when the tax withholding is required to be made.

     15.  AMENDMENTS OR TERMINATION. The Company may amend, alter or discontinue
this Plan, except that (a) no amendment or alteration that would impair the
rights of any Participant under any Award that he has been granted shall be made
without his consent, and (b) no amendment or alteration shall be effective prior
to approval by the Company's stockholders to the extent such approval is
determined by the Board to be required by applicable laws, regulations or
exchange requirements.

     16.  RESTRICTIONS. No shares of Common Stock or other form of payment shall
be issued with respect to any Award unless the Company shall be satisfied, based
on the advice of its counsel, that such issuance will be in compliance with
applicable federal and state securities laws. The Award Agreement may include
provisions for the repurchase by the Company of Common Stock acquired pursuant
to an Award and repurchase of the Participant's Option rights.

     17.  UNFUNDED PLAN. Insofar as it provides for Awards of cash, Common Stock
or rights thereto, this Plan shall be unfunded. Although bookkeeping accounts
may be established with respect to Participants who are entitled to cash, Common
Stock or rights thereto under this Plan, any such accounts shall be used merely
as a bookkeeping convenience. The Company shall not be required to segregate any
assets that may at any time be represented by cash,



                                      -12-
   13

Common Stock or rights thereto, nor shall this Plan be construed as providing
for such segregation, nor shall the Company, the Board or the Committee be
deemed to be a trustee of any cash, Common Stock or rights thereto to be granted
under this Plan. Any liability or obligation of the Company to any Participant
with respect to a grant of cash, Common Stock or rights thereto under this Plan
shall be based solely upon any contractual obligations that may be created by
this Plan and any Award Agreement, and no such liability or obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. None of the Company, the Board or the Committee shall
be required to give any security or bond for the performance of any obligation
that may be created by this Plan.

     18.  INDEMNIFICATION. The Company shall indemnify and hold harmless any
member of the Board or the Compensation Committee and other individuals,
including Employees and Directors, performing services on behalf of the
Committee, against any liability, cost or expense arising as a result of any
claim asserted by any person or entity under the laws of any state or of the
United States with respect to any action or failure to act of such individuals
taken in connection with this Plan, except claims or liabilities arising on
account of the willful misconduct or bad faith of such Board member,
Compensation Committee member or individual.

     19.  MISCELLANEOUS. The granting of any Award shall not impose upon the
Company any obligation to maintain any Participant as an Employee or a Director
and shall not diminish the power of the Company to terminate any Participant's
employment or service at any time.

     20.  GOVERNING LAW. This Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by mandatory provisions of
the Code or the securities laws of the United States, shall be governed by and
construed in accordance with the laws of the State of Texas.

     21.  EFFECTIVE DATE OF PLAN. This Plan shall be effective as of March 7,
2001, subject to approval of this Plan by the stockholders of the Company within
one year of the date this Plan is adopted by the Board. If the stockholders of
the Company should fail to so approve this Plan within one year of the adoption
date, this Plan shall terminate and cease to be of any further force or effect
and all grants of Awards hereunder shall be null and void.


                                    Attested to by the Secretary of Administaff,
                                    Inc., as adopted by the Board of Directors
                                    effective as of March 7, 2001.


                                    /s/ John H. Spurgin
                                    --------------------------------------------


                                      -13-