e10vq

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2006.


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

For the transition period from to

Commission File No. 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		77339
(Address of principal executive offices)		(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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of April 28, 2006, 27,981,927 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

PART I

ITEM 1. FINANCIAL STATEMENTS.

ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS


	March 31,			December 31,
	2006			2005
	(Unaudited)
Current assets:
Cash and cash equivalents	$	150,929		$	137,407
Restricted cash		29,116			27,580
Marketable securities		63,617			57,973
Accounts receivable:
Trade		1,857			5,225
Unbilled		98,244			91,258
Other		2,024			1,928
Prepaid insurance		9,235			9,218
Other current assets		5,096			4,664
Income taxes receivable		1,207			—
Deferred income taxes		2,264			3,308

Total current assets		363,589			338,561

Property and equipment:
Land		2,920			2,920
Buildings and improvements		58,780			58,264
Computer hardware and software		59,819			58,194
Software development costs		19,207			18,435
Furniture and fixtures		29,030			28,748
Vehicles and aircraft		22,160			22,366

		191,916			188,927
Accumulated depreciation and amortization		(108,913	)		(105,307	)

Total property and equipment, net		83,003			83,620

Other assets:
Prepaid insurance		11,000			11,000
Deposits — healthcare		2,086			954
Deposits — workers’ compensation		64,029			55,421
Goodwill and other intangible assets		4,985			5,018
Other assets		970			865

Total other assets		83,070			73,258

Total assets	$	529,662		$	495,439

-3-

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

LIABILITIES AND STOCKHOLDERS’ EQUITY


	March 31,			December 31,
	2006			2005
	(Unaudited)
Current liabilities:
Accounts payable	$	4,315		$	4,979
Payroll taxes and other payroll deductions payable		111,419			101,293
Accrued worksite employee payroll cost		85,221			78,393
Accrued health insurance costs		5,573			3,495
Accrued workers’ compensation costs		31,114			30,212
Accrued corporate payroll and commissions		7,399			17,801
Other accrued liabilities		7,699			7,453
Current portion of long-term debt		1,712			1,700

Total current liabilities		254,452			245,326

Noncurrent liabilities:
Long-term debt		32,756			33,190
Accrued workers’ compensation costs		35,750			32,692
Deferred income taxes		2,029			1,802

Total noncurrent liabilities		70,535			67,684

Commitments and contingencies

Stockholders’ equity:
Common stock		309			309
Additional paid-in capital		128,045			119,573
Deferred compensation expense		—			(2,931	)
Treasury stock, at cost		(42,823	)		(45,614	)
Accumulated other comprehensive loss, net of tax		(165	)		(153	)
Retained earnings		119,309			111,245

Total stockholders’ equity		204,675			182,429

Total liabilities and stockholders’ equity	$	529,662		$	495,439

See accompanying notes.

-4-

ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2006
(in thousands)
(Unaudited)


														Accumulated
	Common Stock				Additional			Deferred						Other
	Issued				Paid-In			Compensation			Treasury			Comprehensive			Retained
	Shares		Amount		Capital			Expense			Stock			Income (Loss)			Earnings			Total
Balance at December 31, 2005		30,839	$	309	$	119,573		$	(2,931	)	$	(45,614	)	$	(153	)	$	111,245		$	182,429
Purchase of treasury stock		—		—		—			—			(1,072	)		—			—			(1,072	)
Exercise of stock options		—		—		3,097			—			5,806			—			—			8,903
Income tax benefit from stock-based compensation		—		—		5,870			—			—			—			—			5,870
Cumulative effect of change in accounting principle		—		—		(684	)		2,931			(2,296	)		—			—			(49	)
Stock-based compensation expense		—		—		42			—			296			—			—			338
Other		—		—		147			—			57			—			—			204
Dividends paid		—		—		—			—			—			—			(2,477	)		(2,477	)
Change in unrealized gain on marketable securities, net of tax:
Unrealized loss		—		—		—			—			—			(12	)		—			(12	)
Net income		—		—		—			—			—			—			10,541			10,541

Comprehensive income																					10,529

Balance at March 31, 2006		30,839	$	309	$	128,045		$	—		$	(42,823	)	$	(165	)	$	119,309		$	204,675

See accompanying notes.

-6-

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


	Three Months Ended
	March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	10,541		$	4,590
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,891			3,835
Stock-based compensation		289			1,038
Deferred income taxes		1,276			(3,424	)
Changes in operating assets and liabilities:
Restricted cash		(1,536	)		(1,629	)
Accounts receivable		(3,714	)		(11,985	)
Prepaid insurance		1,873			(4,067	)
Other current assets		(432	)		772
Other assets		(9,842	)		(7,878	)
Accounts payable		(664	)		(953	)
Payroll taxes and other payroll deductions payable		10,126			17,404
Accrued worksite employee payroll expense		6,828			39,108
Accrued health insurance costs		188			3,833
Accrued workers’ compensation costs		3,960			5,347
Other accrued liabilities		(10,004	)		(1,887	)
Income taxes payable/receivable		4,511			6,224

Total adjustments		6,750			45,738

Net cash provided by operating activities		17,291			50,328

Cash flows from investing activities:
Marketable securities:
Purchases		(6,116	)		(669	)
Proceeds from maturities		380			—
Proceeds from dispositions		50			305
Property and equipment:
Purchases		(3,284	)		(1,412	)
Proceeds from dispositions		65			42

Net cash used in investing activities		(8,905	)		(1,734	)

-7-

ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2006

Basis of Presentation

Administaff, Inc. (“the Company”) is a professional employer organization (“PEO”). As a PEO, the Company provides a bundled comprehensive service for its clients in the area of personnel management. The Company provides its comprehensive service through its Personnel Management System, which encompasses a broad range of human resource functions, including payroll and benefits administration, health and workers’ compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, employee performance management, and employee training and development. For the three months ended March 31, 2006 and 2005, revenues from the Company’s Texas markets represented 36% and 39%, respectively, of the Company’s total revenues.

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 in the United States 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, 2005. The Consolidated Balance Sheet at December 31, 2005, 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, 2006, and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the periods ended March 31, 2006 and 2005, 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.

Certain prior year amounts have been reclassified to conform to the 2006 presentation.

The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations.

-9-

Stock-Based Compensation

At March 31, 2006, the Company has three stock-based employee compensation plans. Prior to January 1, 2006, the Company accounted for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective January 1, 2006, the Company began accounting for these plans under the recognition and measurement principles of Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment “Statement 123(R)”. The cumulative effect of the change in accounting principle associated with the adoption of Statement 123(R) resulted in a $50,000 reduction in stock-based compensation and the reclassification of $2.9 million in previously recognized deferred compensation to additional paid-in capital and treasury stock.

During the first quarter of 2005, the Company accelerated the vesting of all outstanding stock options, resulting in the recognition of $790,000 ($487,000, net of taxes) of stock-based compensation expense. In addition, the Company issued 303,600 restricted common shares that vest over three years. During the first three months of 2006 and 2005, the Company recognized $289,000 ($183,000, net of taxes), and $248,000 ($153,000 net of taxes), respectively, of stock-based compensation expense associated with the restricted stock grant. As of March 31, 2006, unrecognized compensation expense associated with the non-vested shares outstanding was $2.5 million. This expense is expected to be recognized over the next twenty-two months.

The following table illustrates the effect on net income and net income per share in the first quarter of 2005 had the Company applied the fair value recognition provisions of Statement 123(R) to stock-based employee compensation.


	Three months ended
	March 31, 2005
	(in thousands)
Net income, as reported	$	4,590
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(291	)

Pro forma net income	$	4,299


Net income per share:
Basic — as reported	$	0.18
Basic — pro forma	$	0.17
Diluted — as reported	$	0.18
Diluted — pro forma	$	0.16

The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in

-10-

estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the Company’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Accounting Policies

Health Insurance Costs

The Company provides health insurance coverage to its worksite employees through a national network of carriers including UnitedHealthcare (“United”), Cigna Healthcare, PacifiCare, Kaiser Permanente, Blue Cross and Blue Shield of Georgia, Blue Shield of California and Tufts, all of which provide fully insured policies or service contracts.

The policy with United, which was first obtained in January 2002, provides the majority of the Company’s health insurance coverage. As a result of certain contractual terms, the Company has accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, Administaff records the costs of the United Plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during the quarter; (ii) recent claim development patterns under the plan; and (iii) the number of participants in the plan. Each reporting period, changes in the estimated ultimate costs resulting from changes in the actual claims experience and other trends are incorporated into the benefits costs estimates.

Additionally, since the plan’s inception in January 2002, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the cash funded to United, a deficit in the plan would be incurred and the Company would accrue a liability for the excess costs on its Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are less than the cash funded to United, a surplus in the plan would be incurred and the Company would record an asset for the excess premiums on its Consolidated Balance Sheet.

In 2005, Administaff and United entered into a new three-year arrangement, whereby a previous contractual requirement to maintain a security deposit with United was eliminated. Accordingly, the outstanding security deposit at December 31, 2004 of $17.5 million was returned to Administaff during the quarter ended June 30, 2005. The terms of the new arrangement also require Administaff to maintain an accumulated cash surplus in the plan of $11 million, which is reported as long-term prepaid insurance. As of March 31, 2006, Plan Costs were less than the net cash funded to United by $12.2 million. As this amount is in excess of the agreed-upon $11 million surplus maintenance level, the $1.2 million balance is included in prepaid insurance, a current asset, on the Company’s Consolidated Balance Sheet.

-11-

Workers’ Compensation Costs

In October 2005, the Company renewed its workers’ compensation program with selected member insurance companies of American International Group, Inc. (“AIG”). Under its arrangement with AIG, which ends on September 30, 2006, the Company bears the economic burden for the first $1 million layer of claims per occurrence. AIG bears the economic burden for all claims in excess of such first $1 million layer. The policies are fully insured, whereby AIG has the responsibility to pay all claims incurred under the policies regardless of whether the Company satisfies its responsibilities. As of March 31, 2006, the total collateral held by AIG was $7.6 million, which is included in deposits in the Company’s Consolidated Balance Sheets.

Under its arrangement with AIG, the Company makes monthly payments to AIG comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The claim funds are retained and held by AIG until claims are submitted and processed for payment to the insured. As of March 31, 2006, the total claim funds held by AIG was $85.5 million, of which $29.1 million is included in restricted cash and $56.4 million is included in deposits in the Company’s Consolidated Balance Sheets.

The Company employs a third party actuary to estimate its workers’ compensation claims cost based on worksite employee payroll levels, the nature of the worksite employees’ job responsibilities, historical paid claim data and other actuarial assumptions. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into the Company’s workers’ compensation claims cost estimates. During the three months ended March 31, 2006, the Company reduced accrued workers’ compensation costs by $2.5 million for changes in estimated losses related to prior reporting periods. As of March 31, 2006, the Company has estimated $64.9 million in outstanding workers’ compensation claims, net of paid claims, and recorded such amounts in accrued workers’ compensation costs in the Company’s Consolidated Balance Sheets. During the three month period ended March 31, 2006, workers’ compensation cost estimates were discounted to present value at an average rate of 4.5%. Workers’ compensation costs are accreted over the estimated claim payment period, and included as a component of workers’ compensation costs in the Company’s Consolidated Statements of Operations.

The following table provides the activity and balances related to accrued workers’ compensation claims for the three months ended March 31, 2006 (in thousands):


Beginning balance	$	60,272
Accrued claims		11,064
Present value discount		(1,520	)
Paid claims		(4,950	)

Ending balance	$	64,866

Current portion of accrued claims	$	29,116
Long-term portion of accrued claims		35,750

	$	64,866

-12-

New Accounting Standard

Effective January 1, 2006, the Company adopted Statement No. 123(R). Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We adopted Statement 123(R) using the “modified prospective” method in which compensation cost is recognized beginning with the effective date: (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date; and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.

Because the Company accelerated the vesting of all outstanding stock options during the first quarter of 2005, the adoption of SFAS 123(R) did not have a material impact on our results of operations in the first quarter of 2006. The cumulative effect of the change in accounting principle associated with the adoption of Statement 123(R) resulted in a $50,000 reduction in stock-based compensation and the reclassification of $2.9 million in previously recognized deferred compensation to additional paid-in capital and treasury stock.

Stockholders’ Equity

The Company’s Board of Directors has authorized the repurchase of up to 8,000,000 shares of the Company’s outstanding common stock. The Company repurchased 24,911 shares at a total cost of $1.1 million during the three months ended March 31, 2006. As of March 31, 2006, the Company has repurchased 7,426,534 shares under this authorization at a total cost of $96.0 million.

On February 27, 2006, the board of directors declared a quarterly dividend of $0.09 per share of common stock. The $2.5 million dividend was paid on March 31, 2006.

Income Taxes

The Company’s provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses. The income tax rate for the three months ended March 31, 2006 was 36.7%.

-13-

Net Income Per Share

The numerator used in the calculations of both basic and diluted net income per share for all periods presented was net income. The denominator for each period presented was determined as follows:


	Three Months Ended
	March 31,
	2006		2005
	(in thousands)
Basic net income per share — weighted average shares outstanding		27,201		25,649
Effect of dilutive securities:
Common stock options — treasury stock method		1,182		432

Diluted net income per share — weighted average shares outstanding plus effect of dilutive securities		28,383		26,081


Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect		—		4,020

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 the final outcome of such litigation will not have a material adverse effect on the Company’s financial position or results of operations, except as set forth below.

Class Action Litigation

On June 13, 2003, a class action lawsuit was filed against the Company in the United States District Court for the Southern District of Texas on behalf of purchasers of the Company’s common stock alleging violations of the federal securities laws. After that date, six similar class actions were filed against the Company in that court. Those lawsuits also named as defendants certain of the Company’s officers and directors. In May 2004, the lead plaintiff filed its Consolidated Complaint, which amended and consolidated the seven previously filed cases. In June 2004, the Company filed a motion to dismiss the Consolidated Complaint. On March 30, 2006, the court granted the Company’s motion to dismiss and thereafter entered a final order of dismissal with prejudice. The lead plaintiff did not file a notice of appeal by the deadline to do so. Accordingly, the Company believes that this matter is now concluded.

State Unemployment Taxes

The Company records its state unemployment (“SUI”) tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state. Prior to the receipt of final tax rate notices, the Company estimates its expected SUI tax rate in those states for which tax rate notices have not yet been received.

-14-

In December 2001, as a result of the 2001 corporate reorganization, the Company filed for a transfer of its reserve account with the Employment Development Department of the State of California (“EDD”). The EDD approved the Company’s request for transfer of its reserve account in May 2002 and also notified the Company of its new contribution rates based upon the approved transfer. In December 2003, the Company received a Notice of Duplicate Accounts and Notification of Assessment (“Notice”) from the Employment Development Department of the State of California (“EDD”). The Notice stated that the EDD was collapsing the accounts of the Company’s subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all the Company’s California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, the Company filed a petition with an administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the Notice. Pending a resolution of its protest, in the fourth quarter of 2003 the Company accrued and recorded at the higher assessed rate for all of 2003.

In June 2004, the Company agreed to settle its dispute with the EDD for $3.3 million (“Settlement”). Based upon receipt of written acknowledgement of this agreement, the Company reduced its accrued payroll tax liability and payroll tax expense by $2.3 million during the quarter ended June 30, 2004. The Settlement was subject to the final approval by EDD’s legal department, the California Attorney General’s office and the ALJ. In October 2004, the legal department of the EDD verbally indicated they considered the previously agreed-upon settlement amount to be insufficient and suggested a settlement amount of $5.2 million. The Company and the State of California continued discussions, but in February 2005, the Company was notified that the EDD had rejected the Company’s settlement offer and that the matter will proceed with the appeals process with the ALJ. If the outcome of the appeals process is unfavorable and the company is assessed additional interest and penalties, the Company may recognize an increase in its payroll tax expense in a future period. Conversely, if the outcome of the appeals process is favorable to the Company, the Company may recognize a decrease in its payroll tax expense in a future period.

-15-

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

The following discussion should be read in conjunction with our 2005 annual report on Form 10-K, as well as with our consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to health and workers’ compensation insurance claims experience, state unemployment taxes, client bad debts, income taxes, property and equipment and contingent liabilities. Management bases these estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following accounting policies are critical and/or require significant judgments and estimates used in the preparation of our consolidated financial statements:

•		Benefits costs — We provide health insurance coverage to our worksite employees through a national network of carriers including UnitedHealthcare (“United”), Cigna Healthcare, PacifiCare, Kaiser Permanente, Blue Cross and Blue Shield of Georgia, Blue Shield of California and Tufts, all of which provide fully insured policies or service contracts.

		The policy with United, which was first obtained in January 2002, provides the majority of our health insurance coverage. As a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, we record the costs of the United Plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”), as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during the quarter; (ii) recent claim development patterns under the plan; and (iii) the number of participants in the plan. Each reporting period, changes in the estimated ultimate costs resulting from changes in the actual claims experience and other trends are incorporated into the benefits costs estimates.

		Additionally, since the plan’s inception in January 2002, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the cash funded to United, a

-16-

deficit in the plan would be incurred and we would accrue a liability for the excess costs on our Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are less than the cash funded to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums on our Consolidated Balance Sheet.

		In 2005, Administaff and United entered into a new three-year arrangement, whereby a previous contractual requirement to maintain a security deposit with United was eliminated. Accordingly, the outstanding security deposit at December 31, 2004 of $17.5 million was returned to Administaff during the quarter ended June 30, 2005. The terms of the new arrangement also require Administaff to maintain an accumulated cash surplus in the plan of $11 million, which is reported as long-term prepaid insurance. As of March 31, 2006, Plan Costs were less than the net cash funded to United by $12.2 million. As this amount is in excess of the agreed-upon $11 million surplus maintenance level, the $1.2 million balance is included in prepaid insurance, a current asset, on the Company’s Consolidated Balance Sheet.

•		State unemployment taxes — We record our state unemployment (“SUI”) tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state. Prior to the receipt of final tax rate notices, we estimate our expected SUI tax rate in those states for which tax rate notices have not yet been received.

		In December 2001, as a result of the 2001 corporate reorganization, we filed for a transfer of our reserve account with the Employment Development Department of the State of California (“EDD”). The EDD approved our request for transfer of our reserve account in May 2002, and notified us of our new contribution rates based upon the approved transfer. In December 2003, we received a Notice of Duplicate Accounts and Notification of Assessment (“Notice”) from the Employment Development Department of the State of California (“EDD”). The Notice stated that the EDD was collapsing the accounts of Administaff’s subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all our California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, we filed a petition with an administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the Notice. Pending a resolution of our protest, in the fourth quarter of 2003 we accrued and recorded at the higher assessed rate for all of 2003.

		In June 2004, we agreed to settle our dispute with the EDD for $3.3 million (“Settlement”). Based upon receipt of written acknowledgement of this agreement, we reduced our accrued payroll tax liability and payroll tax expense by $2.3 million during the quarter ended June 30, 2004. The Settlement was subject to the final approval by EDD’s legal department, the California Attorney General’s office and the ALJ. In October 2004, the legal department of the EDD verbally indicated they considered the previously agreed-upon settlement amount to be insufficient and suggested a settlement amount of $5.2 million. We continued discussions

-17-

with the State of California, but in February 2005, we were notified that the EDD had rejected our settlement offer and that the matter will proceed with the appeals process with the ALJ. If the outcome of the appeals process is unfavorable and we are assessed additional interest and penalties, we may recognize an increase in our payroll tax expense in a future period. Conversely, if the outcome of the appeals process is favorable to us, we may recognize a decrease in our payroll tax expense in a future period.

•		Workers’ compensation costs — On September 1, 2003, we obtained an annual workers’ compensation policy with selected member insurance companies of American International Group, Inc. (“AIG”). This policy was subsequently renewed in September 2004 and September 2005. Under our arrangement with AIG, we bear the economic burden for the first $1 million layer of claims per occurrence. AIG bears the economic burden for all claims in excess of such first $1 million layer. The policies are fully insured whereby AIG has the responsibility to pay all claims incurred under the policies regardless of whether we satisfy our responsibilities.

		Because we bear the economic burden of the first $1 million layer of claims per occurrence, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers compensation insurance includes ongoing healthcare and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. Our management estimates our workers’ compensation costs by applying an aggregate loss development rate to worksite employee payroll levels.

		We employ a third party actuary to estimate our loss development rate, which is primarily based upon the nature of worksite employees’ job responsibilities, the location of worksite employees, the historical frequency and severity of workers compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into the Company’s workers’ compensation claims cost estimates. During the three months ended March 31, 2006, Administaff reduced accrued workers’ compensation costs by $2.5 million for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in 2006 and 2005 was 4.5% and 3.5%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.

•		Contingent liabilities — We accrue and disclose contingent liabilities in our consolidated financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. SFAS No. 5 requires accrual of contingent liabilities that are considered probable to occur and can be reasonably estimated. For

-18-

contingent liabilities that are considered reasonably possible to occur, financial statement disclosure is required, including the range of possible loss if it can be reasonably determined. We have disclosed in our financial statements several issues that we believe are reasonably possible to occur, although we cannot determine the range of possible loss in all cases. As these issues develop, we will continue to evaluate the probability of future loss and the potential range of such losses. If such evaluation were to determine that a loss was probable and the loss could be reasonably estimated, we would be required to accrue our estimated loss, which would reduce net income in the period such determination was made.

•		Deferred taxes — We have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, our ability to realize our deferred tax assets could change from our current estimates. If we determine we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to reduce the valuation allowance would increase net income in the period that such determination is made. Likewise, should we determine we will not be able to realize all or part of our net deferred tax assets in the future, an adjustment to increase the valuation allowance would reduce net income in the period such determination is made.

•		Allowance for doubtful accounts — We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to pay our comprehensive service fees. We believe the success of our business is heavily dependent on our ability to collect these comprehensive service fees for several reasons, including:

	•		the fact that we are at risk for the payment of our direct costs and worksite employee payroll costs regardless of whether our clients pay their comprehensive service fees;

	•		the large volume and dollar amount of transactions we process; and

	•		the periodic and recurring nature of payroll, upon which the comprehensive service fees are based.

		To mitigate this risk, we have established very tight credit policies. We generally require our clients to pay their comprehensive service fees no later than one day prior to the applicable payroll date. In addition, we maintain the right to terminate our Client Service Agreement and associated worksite 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 these efforts, losses related to client nonpayment have historically been low as a percentage of revenues. However, if our clients’ financial condition were to deteriorate rapidly, resulting in nonpayment, our accounts receivable balances could grow and we could be required to provide for additional allowances, which would decrease net income in the period that such determination was made.

•		Property and equipment — Our property and equipment relate primarily to our facilities and related improvements, furniture and fixtures, computer hardware and software and

-19-

capitalized software development costs. These costs are depreciated or amortized over the estimated useful lives of the assets. If the useful lives of these assets were determined to be shorter than their current estimates, our depreciation and amortization expense could be accelerated, which would decrease net income in the periods of such a determination. In addition, we periodically evaluate these costs for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would analyze the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we would record an impairment loss, which would reduce net income, to the extent the carrying value of the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset.

•

Goodwill and other intangibles — The December 2005 acquisition of HRTools.com and associated software applications included certain identifiable intangible assets and goodwill implied in the purchase price. The goodwill and intangible assets are subject to the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). In accordance with SFAS 142, goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Our purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, five to ten years.

New Accounting Pronouncement

-20-

deferred compensation to additional paid-in capital and treasury stock related to restricted stock awards.

Results of Operations

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005.

The following table presents certain information related to Administaff’s results of operations for the three months ended March 31, 2006 and 2005.


	Three months ended
	March 31,
	2006		2005		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $1.912 billion and $1.574 billion, less worksite employee payroll cost of $1.551 billion and $1.275 billion, respectively)	$	360,636	$	298,976		20.6	%
Gross profit		67,993		54,028		25.8	%
Operating expenses		53,599		47,148		13.7	%
Operating income		14,394		6,880		109.2	%
Other income		2,258		559		303.9	%
Net income		10,541		4,590		129.7	%
Diluted net income per share of common stock		0.37		0.18		105.6	%

Statistical Data:
Average number of worksite employees paid per month		96,006		83,729		14.7	%
Revenues per worksite employee per month⁽¹⁾	$	1,252	$	1,190		5.2	%
Gross profit per worksite employee per month		236		215		9.8	%
Operating expenses per worksite employee per month		186		188		(1.1	)%
Operating income per worksite employee per month		50		27		85.2	%
Net income per worksite employee per month		37		18		105.6	%


⁽¹⁾		Gross billings of $6,639 and $6,267 per worksite employee per month less payroll cost of $5,387 and $5,077 per worksite employee per month, respectively.

-21-

Revenues

Our revenues for the first quarter of 2006 increased 20.6% over the 2005 period due to a 14.7% increase in the average number of worksite employees paid per month and a 5.2%, or $62, increase in revenues per worksite employee per month.

By region, our revenue growth over the first quarter of 2005 and revenue distribution for the quarter ended March 31, 2006 were as follows:


	Three months ended March 31,							Three months ended March 31,
	2006		2005		% Change			2006			2005
	(in thousands)							(% of total revenues)
Northeast	$	61,071	$	44,950		35.9	%		16.9	%		15.0	%
Southeast		33,363		25,835		29.1	%		9.3	%		8.7	%
Central		51,187		39,229		30.5	%		14.2	%		13.1	%
Southwest		131,130		117,316		11.8	%		36.4	%		39.2	%
West		81,627		69,855		16.9	%		22.6	%		23.4	%
Other revenue		2,258		1,791		26.1	%		0.6	%		0.6	%

Total revenue	$	360,636	$	298,976		20.6	%		100.0	%		100.0	%

Our unit growth rate is affected by three primary sources — new client sales, client retention and the net change in existing clients through worksite employee new hires and layoffs. During the first quarter of 2006, new client sales and the net change in existing clients improved over the 2005 period, while client retention declined slightly.

Gross Profit

Gross profit for the first quarter of 2006 increased 25.8% to $68.0 million compared to the first quarter of 2005. The average gross profit per worksite employee increased 9.8% to $236 per month in the 2006 period from $215 per month in the 2005 period.

While our revenues increased 5.2% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 4.2% to $1,016 per worksite employee per month in the first quarter of 2006 versus $975 in the first quarter of 2005.

•

Payroll tax costs — Payroll taxes increased $28 per worksite employee per month compared to the first quarter of 2005, due to a 6.1% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost was 9.5% in both the 2006 and 2005 periods. Please read “Critical Accounting Policies and Estimates — State Unemployment Taxes” on page 17 for a discussion of the Company’s accounting for state unemployment taxes.

-22-

•		Benefits costs — The cost of health insurance and related employee benefits increased $15 per worksite employee per month to $444 compared to the first quarter of 2005. This increase is due to a 3.1% increase in the cost per covered employee and an increase in the percentage of worksite employees covered under our health insurance plans to 73.1% in the 2006 period from 72.8% in the 2005 period. Please read “Critical Accounting Policies and Estimates — Benefits Costs” on page 16 for a discussion of our accounting for health insurance costs.

•		Workers’ compensation costs — Workers’ compensation costs decreased $2 per worksite employee per month compared to the first quarter of 2005. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.99% in the 2006 period from 1.13% in the 2005 period as a result of favorable trends in both the frequency and severity of workers’ compensation claims. These trends resulted in reductions in estimated accrued workers’ compensation costs related to prior reporting periods of $2.5 million, or 0.18% of non-bonus payroll costs, in the 2006 period. Please read “Critical Accounting Policies and Estimates — Workers’ Compensation Costs” on page 18 for a discussion of our accounting for workers’ compensation costs.

Operating Expenses

The following table presents certain information related to the Administaff’s operating expenses for the three months ended March 31, 2006 and 2005.


	Three months ended March 31,							Three months ended March 31,
	2006		2005		% change			2006		2005		% change
	(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes	$	28,224	$	23,331		21.0	%	$	98	$	93		5.4	%
Stock-based compensation		289		1,038		(72.2	)%		1		4		(75.0	)%
General and administrative expenses		15,975		13,783		15.9	%		55		55		—
Commissions		2,833		2,364		19.8	%		10		9		11.1	%
Advertising		2,383		2,875		(17.1	)%		8		12		(33.3	)%
Depreciation and amortization		3,895		3,757		3.7	%		14		15		(6.7	)%

Total operating expenses	$	53,599	$	47,148		13.7	%	$	186	$	188		(1.1	)%

Operating expenses increased 13.7% to $53.6 million compared to the first quarter of 2005. Operating expense per worksite employee decreased to $186 per month in the 2006 period from $188 in the 2005 period. The components of operating expenses changed as follows:

•		Salaries, wages and payroll taxes of corporate and sales staff increased 21.0%, or $5 per worksite employee per month compared to the 2005 period, primarily due to a 13.7% increase in corporate headcount.

•		Stock-based compensation expense decreased 72.2% or $3 per worksite employee per month. The 2006 stock-based compensation expense primarily represents the vesting of restricted stock awards. The 2005 amount also includes an additional $790,000 related to the

-23-

acceleration of stock option vesting during the first quarter of 2005. Please read Note 1 to the consolidated financial statements on page 10 for additional information.

•		General and administrative expenses increased 15.9% due primarily to higher expenses associated with the increase in corporate headcount and expenses associated with the Company’s 20^th anniversary celebration held in February 2006. General and administrative expenses remained flat on a per worksite employee per month basis compared to the first quarter of 2005.

•		Commissions expense increased 19.8% due primarily to the 14.7% increase in worksite employees, or $1 on a per worksite employee per month basis compared to the 2005 period.

•		Advertising costs decreased 17.1%, or $4 per worksite employee per month compared to the first quarter of 2005, due to a shift in the timing of advertising expenditures relative to 2005.

•		Depreciation and amortization expense increased 3.7%, but decreased $1 per worksite employee per month compared to the 2005.

Other Income (Expense)

Other income (expense) increased from $559,000 in the first quarter of 2005 to $2.3 million in the 2006 period. Interest income increased by $1.7 million, primarily as a result of an increase in cash balances, including cash held in our workers’ compensation program, and higher interest rates in the 2006 period.

Income Tax Expense

Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses.

Net Income

Operating and net income per worksite employee per month was $50 and $37 in the 2006 period, versus $27 and $18 in the 2005 period.

Non-GAAP Financial Measures

Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our worksite employees. Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program. As a result, our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs. Non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles (“GAAP”) and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should

-24-

not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP financial measures as provided in the table below.


	Three months ended March 31,
	2006			2005			% Change
	(in millions except per worksite employee data)
GAAP to non-GAAP reconciliation:
Payroll cost (GAAP)	$	1,551,502		$	1,275,328			21.7	%
Less: Bonus payroll cost		(153,727	)		(143,815	)		6.9	%

Non-bonus payroll cost	$	1,397,775		$	1,131,513			23.5	%


Payroll cost per worksite employee (GAAP)	$	5,387		$	5,077			6.1	%

Less: Bonus payroll cost per worksite employee		(534	)		(572	)		(6.6	)%

Non-bonus payroll cost per worksite employee worksite employee	$	4,853		$	4,505			7.7	%

Liquidity and Capital Resources

We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of, among other things, expansion plans, dividends, debt service requirements and other operating cash needs. To meet short and long-term liquidity requirements, including payment of direct costs, operating expenses and repaying debt, we rely primarily on cash from operations. However, we have in the past sought, and may in the future seek, to raise additional capital or take other steps to increase or manage our liquidity and capital resources. We had $214.5 million in cash and cash equivalents and marketable securities at March 31, 2006, including approximately $103.7 million for withheld federal and state income taxes, employment taxes and other payroll deductions and $7.0 million in customer prepayments that were payable in April 2006. At March 31, 2006, we had working capital of $109.1 million compared to $93.2 million at December 31, 2005. We currently believe that our cash on hand, marketable securities and cash flows from operations will be adequate to meet our liquidity requirements for the remainder of 2006. We will rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs.

Cash Flows From Operating Activities

Our cash flows from operating activities in 2006 decreased $33.0 million from 2005 to $17.3 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our clients. The level of cash and cash equivalents, and thus our reported cash flows from operating activities are significantly impacted by various external and

-25-

internal factors, which are reflected in part by the changes in our balance sheet accounts. These include the following:

	•		Operating results — Our net income has a significant impact on our operating cash flows. Our net income increased 129.7% to $10.5 million in 2006 compared to 2005. Please read Results of Operations — Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005 on page 21.

	•		Timing of customer payments / payrolls — We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to the payment of worksite employee payrolls. Therefore, the date of the last day of a reporting period has a substantial impact on our reporting of operating cash flows. For example, many worksite employees are paid on Fridays; therefore, operating cash flows decline in the reporting periods that end on a Friday, such as in March 2006, when client prepayments were $7.0 million and accrued worksite employee payroll was $85.2 million. However, for those reporting periods that end on a Thursday, such as in March 2005, when customer prepayments were $46.2 million and accrued worksite employee payroll was $98.4 million, our cash flows are higher due to the collection of the comprehensive service fee and client’s payroll funding prior to processing the large number worksite employees’ payrolls one day subsequent to quarter-end.

	•		Medical plan funding — Our healthcare contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes in the participation level of the United Plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows. Since inception of the United Plan in January 2002, cash funded to United has exceeded Plan Costs, resulting in a $12.2 million surplus, $1.2 million of which is reflected as a current asset, and $11.0 million of which is reflected as a long-term asset on our Consolidated Balance Sheet at March 31, 2006.

	•		Workers’ compensation plan funding — Under our arrangement with AIG, we make monthly payments to AIG comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). These pre-determined amounts are stipulated in our agreement with AIG, and are based primarily on anticipated worksite employee payroll levels and workers compensation loss rates during the policy year. Changes in payroll levels from that which was anticipated in the arrangement with AIG can result in changes in the amount of the cash payments to AIG, which will impact our reporting of operating cash flows. Our claim funds paid to AIG, based upon anticipated worksite employee payroll levels and workers’ compensation loss rates, were $14.1 million, less claims paid of $4.9 million in 2006, and $12.4 million, less claims paid of $3.4 million for the 2005 period. This compares to our estimate of workers’ compensation loss costs of $9.5 million and $8.1 million in 2006 and 2005, respectively.

-26-

Cash Flows Used in Investing Activities

Cash flows used in investing activities increased $7.2 million from 2005 to $8.9 million. We invested a net $5.7 million in marketable securities and approximately $3.3 million in capital expenditures during the first three months of 2006.

Cash Flows Provided by Financing Activities

Cash flows provided by financing activities primarily related to $8.9 million in proceeds from the exercise of employee stock options, offset by $2.5 million in dividends paid and the repurchase of $1.1 million in treasury stock.

Other Matters

As previously disclosed, after capital constraints and downgrades from various rating agencies, our former workers’ compensation insurance carrier, Lumbermens Mutual Casualty Company, a unit of Kemper Insurance Companies (“Kemper”) has entered into a “run-off.” If the run-off process is not successful and Kemper is placed into a formal liquidation or a similar proceeding, most states have established guaranty associations to pay the remaining claims. However, the guaranty associations of certain states, including Texas, may attempt to return the liability for such remaining claims to Administaff, which may have a material adverse effect on net income in the reported period. For more information regarding Kemper as well as the effect on us of the bankruptcy of another former workers compensation insurance carrier, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Factors That May Affect Future Results and the Market Price of Common Stock- Increases in Health Insurance Premiums and Workers’ Compensation Costs” on pages 39 and 40 of our Form 10-K for the year ended December 31, 2005 filed with the SEC. Our 2005 Form 10-K is also available on our Web site at www.administaff.com.

ITEM 4. CONTROLS AND PROCEDURES.

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2006.

There has been no change in our internal controls over financial reporting that occurred during the three months ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

-27-

PART II

ITEM 1. LEGAL PROCEEDINGS.

Please read Note 6 to financial statements, which is incorporated herein by reference.

ITEM 1a. RISK FACTORS

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,” “possibly,” “probably,” “goal,” “objective,” “assume,” “outlook,” “guidance,” “predicts,” “appears,” “indicator” 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 our stockholders and the public informed about our 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. We base the forward-looking statements on our current expectations, estimates and projections. These statements are not guarantees of future performance and involve risks and uncertainties that we cannot predict. In addition, we have 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 and possible adverse application of various federal, state and local regulations; (iii) changes in our direct costs and operating expenses including, but not limited to, increases in health insurance premiums and workers’ compensation rates and underlying claims trends, financial solvency of workers’ compensation carriers and other insurers, 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 our operations; (iv) our ability to effectively manage our retirement services operation; (v) the effectiveness of our sales and marketing efforts; (vi) changes in the competitive environment in the PEO industry, including the entrance of new competitors and our ability to renew or replace client companies; (vii) our liability for worksite employee payroll and benefits costs; and (viii) an adverse final judgment or settlement of claims against Administaff. These factors are discussed in detail in our 2005 annual report on Form 10-K and elsewhere in this report. Any of these factors, or a combination of such factors, could materially affect the results of our operations and whether forward-looking statements we make ultimately prove to be accurate.

-28-

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases by Administaff during the three months ended March 31, 2006, of equity securities that are registered by Administaff pursuant to Section 12 of the Exchange Act:


							Maximum
					Total Number of		Number of
					Shares		Shares that May
					Purchased as		Yet Be
	Total Number				Part of Publicly		Purchased
	of Shares		Average Price Paid		Announced		Under the
Period	Purchased ⁽¹⁾		per Share		Program ⁽²⁾		Program ⁽²⁾
01/01/2006-01/31/2006		—	$	—		7,401,623		598,377
02/01/2006-02/28/2006		24,911		43.04		7,426,534		573,466
03/01/2006 – 03/31/2006		—		—		7,426,534		573,466

Total		24,911	$	43.04		7,426,534		573,466


⁽¹⁾		Our board of directors has approved the repurchase of up to an aggregate amount of 8,000,000 shares of Administaff common stock, of which 7,426,534 had been repurchased as of March 31, 2006. During the three months ended March 31, 2006, we purchased 24,911 shares of our common stock.

⁽²⁾		Unless terminated earlier by resolution of the board of directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.

-29-


	Part I

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 4.	Controls and Procedures	27

	Part II

Item 1.	Legal Proceedings	28

Item 1a.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 6.	Exhibits	30
Certification of CEO pursuant to Section 302
Certification of CFO pursuant to Section 302
Certification of CEO pursuant to Section 906
Certification of CFO pursuant to Section 906


	Three Months Ended
	March 31,
	2006			2005
Cash flows from financing activities:
Purchase of treasury stock	$	(1,072	)	$	(4,877	)
Dividends paid		(2,477	)		(1,807	)
Principal repayments on long-term debt and capital lease obligations		(422	)		(409	)
Proceeds from the exercise of stock options		8,903			529
Other		204			160

Net cash provided by (used in) financing activities		5,136			(6,404	)


Net increase in cash and cash equivalents		13,522			42,190
Cash and cash equivalents at beginning of period		137,407			81,740

Cash and cash equivalents at end of period	$	150,929		$	123,930


Supplemental disclosures:
Cash paid for income taxes	$	333		$	149
Cash paid for interest	$	634		$	512

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



	Administaff, Inc.

Date: May 2, 2006	By:	/s/ Douglas S. Sharp

		Douglas S. Sharp
		Vice President of Finance,
		Chief Financial Officer and Treasurer
	(Principal Financial and Duly Authorized Officer)


Exhibits		Description of Exhibit

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

	1.		I have reviewed this quarterly report on Form 10-Q of Administaff, Inc.;

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

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

	4.		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 1, 2006

		/s/ Paul J. Sarvadi

		Paul J. Sarvadi
		Chairman of the Board and Chief Executive Officer



Date: May 1, 2006

		/s/ Douglas S. Sharp

		Douglas S. Sharp Vice President of Finance, Chief Financial Officer and Treasurer



/s/ Paul J. Sarvadi

Paul J. Sarvadi Chairman of the Board and Chief Executive Officer
May 1, 2006