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 June 30, 2007.


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 (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 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 þ Accelerated filer o 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 July 27, 2007, 26,994,681 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


	June 30,			December 31,
	2007			2006
	(Unaudited)
Current assets:
Cash and cash equivalents	$	118,933		$	148,416
Restricted cash		35,792			37,405
Marketable securities		86,348			85,617
Accounts receivable, net:
Trade		2,298			8,157
Unbilled		117,583			112,432
Other		2,127			2,134
Prepaid insurance		12,009			10,660
Other current assets		6,978			4,573
Income taxes receivable		48			3,193
Deferred income taxes		196			2,492

Total current assets		382,312			415,079

Property and equipment:
Land		2,920			2,920
Buildings and improvements		60,742			60,120
Computer hardware and software		63,824			61,375
Software development costs		21,393			20,588
Furniture and fixtures		30,693			30,537
Vehicles and aircraft		22,091			22,091

		201,663			197,631
Accumulated depreciation and amortization		(122,395	)		(116,511	)

Total property and equipment, net		79,268			81,120

Other assets:
Prepaid health insurance		9,000			11,000
Deposits – healthcare		2,811			2,461
Deposits – workers’ compensation		35,645			46,429
Goodwill and other intangible assets, net		4,854			4,922
Other assets		969			504

Total other assets		53,279			65,316

Total assets	$	514,859		$	561,515

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

LIABILITIES AND STOCKHOLDERS’ EQUITY


	June 30,			December 31,
	2007			2006
	(Unaudited)
Current liabilities:
Accounts payable	$	3,307		$	3,802
Payroll taxes and other payroll deductions payable		89,641			116,926
Accrued worksite employee payroll cost		102,896			94,818
Accrued health insurance costs		9,045			2,824
Accrued workers’ compensation costs		37,384			39,035
Accrued corporate payroll and commissions		12,670			21,381
Other accrued liabilities		7,746			7,309
Current portion of capital lease obligations		606			583

Total current liabilities		263,295			286,678

Noncurrent liabilities:
Capital leases obligations, net of current portion		857			1,166
Accrued workers’ compensation costs		40,491			40,019
Deferred income taxes		5,979			5,207

Total noncurrent liabilities		47,327			46,392

Commitments and contingencies

Stockholders’ equity:
Common stock		309			309
Additional paid-in capital		138,457			135,942
Treasury stock, at cost		(98,091	)		(55,405	)
Accumulated other comprehensive loss, net of tax		(141	)		(131	)
Retained earnings		163,703			147,730

Total stockholders’ equity		204,237			228,445

Total liabilities and stockholders’ equity	$	514,859		$	561,515

See accompanying notes.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues (gross billings of $2.191 billion, $1.910 billion, $4.465 billion and $3.822 billion, less worksite employee payroll cost of $1.814 billion, $1.573 billion, $3.681 billion and $3.124 billion, respectively)	$	376,758		$	337,778		$	784,516		$	698,414
Direct costs:
Payroll taxes, benefits and workers’ compensation costs		298,291			269,562			637,982			562,205

Gross profit		78,467			68,216			146,534			136,209

Operating expenses:
Salaries, wages and payroll taxes		33,076			29,440			65,121			57,664
Stock-based compensation		2,435			1,068			3,743			1,357
General and administrative expenses		14,276			13,876			30,222			29,851
Commissions		2,704			2,709			5,623			5,542
Advertising		3,958			3,319			6,060			5,702
Depreciation and amortization		3,704			3,829			7,424			7,724

		60,153			54,241			118,193			107,840

Operating income		18,314			13,975			28,341			28,369

Other income (expense):
Interest income		2,987			3,008			5,984			5,817
Interest expense		(29	)		(392	)		(61	)		(1,062	)
Other, net		—			(7	)		9			112


Income before income taxes		21,272			16,584			34,273			33,236

Income tax expense		7,627			6,087			12,235			12,198


Net income	$	13,645		$	10,497		$	22,038		$	21,038


Basic net income per share of common stock	$	0.51		$	0.38		$	0.81		$	0.77


Diluted net income per share of common stock	$	0.50		$	0.37		$	0.79		$	0.74

See accompanying notes.

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2007
(in thousands)
(Unaudited)


											Accumulated
	Common Stock				Additional						Other
	Issued				Paid-In			Treasury			Comprehensive			Retained
	Shares		Amount		Capital			Stock			Income (Loss)			Earnings			Total
Balance at December 31, 2006		30,839	$	309	$	135,942		$	(55,405	)	$	(131	)	$	147,730		$	228,445
Purchase of treasury stock		—		—		—			(47,973	)		—			—			(47,973	)
Exercise of stock options		—		—		(702	)		2,674			—			—			1,972
Income tax benefit from stock-based compensation		—		—		1,721			—			—			—			1,721
Stock-based compensation expense		—		—		1,324			2,419			—			—			3,743
Other		—		—		172			194			—			—			366
Dividends paid		—		—		—			—			—			(6,065	)		(6,065	)
Change in unrealized loss on marketable securities, net of tax:
Unrealized gain		—		—		—			—			(10	)		—			(10	)
Net income		—		—		—			—			—			22,038			22,038

Comprehensive income																		22,028

Balance at June 30, 2007		30,839	$	309	$	138,457		$	(98,091	)	$	(141	)	$	163,703		$	204,237

See accompanying notes.

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


	Six Months Ended
	June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	22,038		$	21,038
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,423			7,934
Stock-based compensation		3,743			1,357
Deferred income taxes		3,074			458
Changes in operating assets and liabilities:
Restricted cash		1,613			(3,644	)
Accounts receivable		715			1,434
Prepaid insurance		4,802			6,121
Other current assets		(2,405	)		(1,342	)
Other assets		11,968			11,203
Accounts payable		(495	)		(1,033	)
Payroll taxes and other payroll deductions payable		(27,285	)		(18,802	)
Accrued worksite employee payroll expense		8,078			5,593
Accrued health insurance costs		70			(1,635	)
Accrued workers’ compensation costs		(1,179	)		8,105
Accrued corporate payroll, commissions and other accrued liabilities		(8,274	)		(5,584	)
Income taxes payable/receivable		3,145			(2,365	)

Total adjustments		4,993			7,800

Net cash provided by operating activities		27,031			28,838

Cash flows from investing activities:
Marketable securities:
Purchases		(70,943	)		(49,410	)
Proceeds from maturities		70,189			26,830
Proceeds from dispositions		—			50
Property and equipment:
Purchases		(5,509	)		(8,391	)
Proceeds from dispositions		14			78

Net cash used in investing activities		(6,249	)		(30,843	)

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


	Six Months Ended
	June 30,
	2007			2006
Cash flows from financing activities:
Purchase of treasury stock	$	(47,973	)	$	(13,897	)
Dividends paid		(6,065	)		(4,997	)
Proceeds from the exercise of stock options		1,972			13,733
Principal repayments on long-term debt and capital lease obligations		(286	)		(32,864	)
Income tax benefit from stock-based compensation		1,721			10,948
Other		366			388

Net cash used in financing activities		(50,265	)		(26,689	)


Net decrease in cash and cash equivalents		(29,483	)		(28,694	)
Cash and cash equivalents at beginning of period		148,416			137,407

Cash and cash equivalents at end of period	$	118,933		$	108,713


Supplemental disclosures:
Cash paid for income taxes	$	4,408		$	3,425
Cash paid for interest	$	61		$	994

See accompanying notes.

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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2007

1. Basis of Presentation

Administaff, Inc. (“Administaff” or 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 both periods ended June 30, 2007 and 2006, revenues from the Company’s Texas markets represented 32% 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 accounting principles generally accepted 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, 2006. The Consolidated Balance Sheet at December 31, 2006, has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by accounting principles generally accepted in the United States for complete financial statements. The Company’s Consolidated Balance Sheet at June 30, 2007, and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the periods ended June 30, 2007 and 2006, 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 2007 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.

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2. Accounting Policies

Health Insurance Costs

The Company provides group 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, Hawaii Medical Service Association 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, to estimate a completion rate; and (iii) the number of participants in the plan. Each reporting period, changes in the estimated ultimate costs resulting from claims trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.

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 April 2007, Administaff and United entered into a new three-year arrangement, which reduced the required accumulated cash surplus in the plan from $11.0 million to $9.0 million and included a $3.3 million administrative fee credit, which was recorded as a reduction in benefits costs in the second quarter of 2007. As of June 30, 2007, Plan Costs were less than the net cash funded to United by $16.8 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $7.8 million balance is included in prepaid insurance, a current asset, on the Company’s Consolidated Balance Sheet.

Adjustments to estimated benefits costs, resulting primarily from higher than anticipated incurred claims related to prior reporting periods, totaled $3.5 million, or 1.1% of total benefits costs, during the six months ended June 30, 2007.

Workers’ Compensation Costs

Our workers’ compensation coverage (the “AIG Program”) is currently provided through selected member insurance companies of American International Group, Inc. (“AIG”). 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

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layer. The AIG Program is a fully insured policy whereby AIG has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities.

Because the Company bears the economic burden of the first $1 million layer of claims per occurrence, such claims, which are the primary component of the Company’s 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. The Company estimates its workers’ compensation costs by applying an aggregate loss development rate to worksite employee payroll levels.

The Company employs a third party actuary to estimate its 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 six months ended June 30, Administaff reduced accrued workers’ compensation costs by $11.4 million in 2007 and $4.4 million in 2006 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 2007 and 2006 was 5.0% and 4.8%, respectively) and are accreted over the estimated claim payment period and included as a component of direct 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 six months ended June 30, 2007 and 2006 (in thousands):


	2007			2006
Beginning balance, January 1,	$	77,424		$	60,272
Accrued claims		12,584			22,757
Present value discount		(1,990	)		(3,326	)
Paid claims		(11,735	)		(10,732	)

Ending balance, June 30,	$	76,283		$	68,971

Current portion of accrued claims	$	35,792		$	31,224
Long-term portion of accrued claims		40,491			37,747

	$	76,283		$	68,971

Under the AIG Program, a portion of Administaff’s monthly premiums are set aside to fund the payment of claims, and any excess premiums funded into the program are returned to the Company subsequent to the end of the policy period. During the quarter ended June 30, 2007, the Company received $24.3 million in excess funding primarily related to the 2005-2006 policy period. As of June 30, 2007, the total funds held by AIG were $71.4 million, of which

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$35.8 million is included in restricted cash and $35.6 million is included in deposits in the Company’s Consolidated Balance Sheets.

State Unemployment Taxes

State unemployment tax (“SUI”) funds are managed by individual states that set annual tax rates based, in part, on employers’ prior years’ unemployment compensation experience in each state. In recent periods, certain state funds have been generating surpluses due to lower unemployment levels. The State of Texas has a statutory requirement that stipulates that a portion of fund surpluses be returned to employers based on a predetermined calculation involving funding and compensation levels. In May 2007, Administaff received a refund of $2.9 million as a result of this statutory calculation, which was reported as a reduction of payroll tax expense in the second quarter of 2007.

3. Stockholders’ Equity

The Company’s Board of Directors (the “Board”) has authorized a program to repurchase up to 10,500,000 shares of the Company’s outstanding common stock, including 1,000,000 shares authorized in June 2007. The Company has repurchased 9,367,833 shares at a total cost of $167.1 million, including 1,352,084 shares at a total cost of $48.0 million during the six months ended June 30, 2007, under this authorization.

During each quarter of 2007, the board of directors declared quarterly dividends of $0.11 per share of common stock. During the six months ended June 30, 2007, a total of $6.1 million in dividend payments has been made.

4. Income Taxes

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) an interpretation of FASB Statement No. 109 “Accounting for Income Taxes”, on January 1, 2007. The adoption of FIN 48 resulted in no impact to the Company’s consolidated financial statements.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2007, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax years 2003 — 2006 remain open to examination by the Internal Revenue Service of the United States.

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 six months ended June 30, 2007 was 35.7%.

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5. 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				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Basic net income per share – weighted average shares outstanding		26,919		27,663		27,195		27,433
Effect of dilutive securities – treasury stock method:
Common stock options		545		797		580		937
Restricted stock awards		53		101		70		103

		598		898		650		1,040

Diluted net income per share – weighted average shares outstanding plus effect of dilutive securities		27,517		28,561		27,845		28,473


Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect		878		—		760		—

6. 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.

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

The following discussion should be read in conjunction with our 2006 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 and payroll taxes, client bad debts, income taxes, property and equipment, goodwill and other intangibles, 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 group 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, Hawaii Medical Service Association 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, to estimate a completion rate; and (iii) the number of participants in the plan. Each reporting period, changes in the estimated ultimate costs resulting from claims trends, plan design and migration, participant demographics and other factors are incorporated into the reported benefits costs.

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		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 April 2007, Administaff and United entered into a new three-year arrangement, which reduced the required accumulated cash surplus in the plan from $11.0 million to $9.0 million and included a $3.3 million administrative fee credit, which was recorded as a reduction in benefits costs in the second quarter of 2007. As of June 30, 2007, Plan Costs were less than the net cash funded to United by $16.8 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $7.8 million balance is included in prepaid insurance, a current asset, on the Company’s Consolidated Balance Sheet.

		Adjustments to estimated benefits costs, resulting primarily from higher than anticipated incurred claims related to prior reporting periods, totaled $3.5 million, or 1.1% of total benefits costs, during the six months ended June 30, 2007.

•		Workers’ compensation costs – Our workers’ compensation coverage (the “AIG Program”) is currently provided through selected member insurance companies of American International Group, Inc. (“AIG”). 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 require 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 six months ended June 30, Administaff reduced workers’ compensation costs by $11.4 million in 2007 and $4.4 million in 2006 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.

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		Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in 2007 and 2006 was 5.0% and 4.8%, 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 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. From time to time we disclose in our financial statements 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 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 customers to pay our comprehensive service fees. We believe that 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 the Client Service Agreement and associated worksite employees or to require prepayment, letters of credit or other collateral if a client’s financial position deteriorates or if the client does not pay the comprehensive service fee. As a result of these efforts, losses related to customer

- 16 -

		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 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 Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, is reflected as an adjustment to the opening balance of retained earnings. The Company’s adoption date was January 1, 2007. The adoption of FIN 48 did not have an impact on our Consolidated Financial Statements.

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In September 2006, FASB Statement 157, “Fair Value Measurements” (“SFAS 157”) was issued. SFAS 157 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. SFAS 157, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. The effective date for the Company is January 1, 2008. The Company is evaluating the impact of adopting SFAS 157 on its Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and liabilities at fair value. The effective date for the Company is January 1, 2008. The Company is evaluating the impact of the provisions of SFAS 159 on its Consolidated Financial Statements.

Results of Operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006.

The following table presents certain information related to Administaff’s results of operations for the three months ended June 30, 2007 and 2006.


	Three months ended
	June 30,
	2007		2006		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $2.191 billion and $1.910 billion, less worksite employee payroll cost of $1.814 billion and $1.573 billion, respectively)	$	376,758	$	337,778		11.5	%
Gross profit		78,467		68,216		15.0	%
Operating expenses		60,153		54,241		10.9	%
Operating income		18,314		13,975		31.0	%
Other income		2,958		2,609		13.4	%
Net income		13,645		10,497		30.0	%
Diluted net income per share of common stock		0.50		0.37		35.1	%

Statistical Data:
Average number of worksite employees paid per month		108,336		99,839		8.5	%
Revenues per worksite employee per month⁽¹⁾	$	1,159	$	1,128		2.7	%
Gross profit per worksite employee per month		241		228		5.7	%
Operating expenses per worksite employee per month		185		181		2.2	%
Operating income per worksite employee per month		56		47		19.1	%
Net income per worksite employee per month		42		35		20.0	%


⁽¹⁾		Gross billings of $6,741 and $6,378 per worksite employee per month less payroll cost of $5,582 and $5,250 per worksite employee per month, respectively.

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Revenues

Our revenues for the second quarter of 2007 increased 11.5% over the 2006 period due to an 8.5% increase in the average number of worksite employees paid per month and a 2.7%, or $31, increase in revenues per worksite employee per month.

By region, our revenue growth over the second quarter of 2006 and revenue distribution for the quarter ended June 30, 2007 were as follows:


	Three months ended June 30,							Three months ended June 30,
	2007		2006		% Change			2007			2006
			(in thousands)					(% of total revenues)
Northeast	$	74,042	$	61,662		20.1	%		19.7	%		18.3	%
Southeast		39,735		36,165		9.9	%		10.5	%		10.7	%
Central		52,495		47,955		9.5	%		13.9	%		14.2	%
Southwest		128,800		112,652		14.3	%		34.2	%		33.3	%
West		78,726		77,089		2.1	%		20.9	%		22.8	%
Other revenue		2,960		2,255		31.3	%		0.8	%		0.7	%

Total revenue	$	376,758	$	337,778		11.5	%		100.0	%		100.0	%

Our 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 second quarter of 2007, new client sales and the net change in existing clients, measured as a percentage of the worksite employee base, improved, while client retention declined slightly compared to the 2006 period.

Gross Profit

Gross profit for the second quarter of 2007 increased 15.0% to $78.5 million, compared to the second quarter of 2006. The average gross profit per worksite employee increased 5.7% to $241 per month in the 2007 period from $228 per month in the 2006 period. Our pricing objectives attempt to maintain or improve the gross profit per worksite employee by increasing revenue per worksite employee to match or exceed changes in primary direct costs and operating expenses.

While our revenues increased 2.7% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 2.0% to $918 per worksite employee per month in the second quarter of 2007 versus $900 in the second quarter of 2006.

•

Benefits costs – The cost of group health insurance and related employee benefits increased $31 per worksite employee per month, or 6.4% on a cost per covered employee basis, compared to the second quarter of 2006. The percentage of worksite employees covered under our health insurance plans was 72.8% in the 2007 period compared to 72.4% in the 2006 period. The 2007 benefit costs were partially offset by a $3.3 million, or $10 per worksite employee per month, administrative fee credit from UHC related to the three-year health insurance agreement signed in April 2007, while the 2006 benefits costs were partially offset by a $1.9 million, or $6 per worksite employee per month,

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reduction in the estimated benefits costs, resulting primarily from lower than anticipated incurred claims in the 2005 reporting periods. Please read “Critical Accounting Policies and Estimates – Benefits Costs” on page 14 for a discussion of our accounting for health insurance costs.

	•		Workers’ compensation costs – Workers’ compensation costs decreased $19 per worksite employee per month compared to the second quarter of 2006. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.52% in the 2007 period from 0.95% in the 2006 period as a result of favorable trends in both the frequency and severity of workers’ compensation claims. During the 2007 period, the Company recorded reductions in workers’ compensation costs of $6.4 million, or 0.38% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods compared to $2.3 million, or 0.16% of non-bonus payroll costs, in the 2006 period. Please read “Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 15 for a discussion of our accounting for workers’ compensation costs.

	•		Payroll tax costs – Payroll taxes increased $7 per worksite employee per month compared to the second quarter of 2006, due primarily to a 6.3% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost declined from 7.45% in the 2006 period to 7.14% in the 2007 period primarily due to a $2.9 million, or 0.16% of payroll cost, state unemployment tax refund from the State of Texas, and lower state unemployment tax rates in 2007.

Operating Expenses

The following table presents certain information related to the Administaff’s operating expenses for the three months ended June 30, 2007 and 2006.


	Three months ended June 30,							Three months ended June 30,
	2007		2006		% change			2007		2006		% change
			(in thousands)					(per worksite employee per month)
Salaries, wages and payroll taxes	$	33,076	$	29,440		12.4	%	$	102	$	98		4.1	%
Stock-based compensation		2,435		1,068		128.0	%		8		4		100.0	%
General and administrative expenses		14,276		13,876		2.9	%		44		46		(4.3	)%
Commissions		2,704		2,709		(0.2	)%		8		9		(11.1	)%
Advertising		3,958		3,319		19.3	%		12		11		9.1	%
Depreciation and amortization		3,704		3,829		(3.3	)%		11		13		(15.4	)%

Total operating expenses	$	60,153	$	54,241		10.9	%	$	185	$	181		2.2	%

Operating expenses increased 10.9% to $60.2 million compared to the second quarter of 2006. Operating expense per worksite employee increased to $185 per month in the 2007 period from $181 in the 2006 period. The components of operating expenses changed as follows:

•

Salaries, wages and payroll taxes of corporate and sales staff increased 12.4%, or $4 per worksite employee per month compared to the 2006 period. The increase in total dollars was primarily due to: (i) a 7.3% increase in corporate headcount, primarily in the sales and

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service areas of the business in 2007 as compared to the 2006; and (ii) a $700,000 increase in incentive compensation expense accrual.

•		Stock-based compensation expense increased $1.4 million or $4 per worksite employee per month. The stock based compensation expense primarily represents the vesting of restricted stock awards granted to employees, including 282,500 shares granted in March 2007.

•		General and administrative expenses increased 2.9%, but decreased $2 per worksite employee per month compared to the second quarter of 2006.

•		Commissions expense remained relatively flat, but decreased $1 per worksite employee per month compared to the 2006 period.

•		Advertising costs increased 19.3%, or $1 per worksite employee per month compared to the second quarter of 2006, primarily due to a change in the timing and level of radio and television advertising expenditures relative to 2006.

•		Depreciation and amortization expense decreased 3.3% or $2 on a per worksite employee per month basis compared to the 2006 period.

Other Income (Expense)

Other income (expense) increased from $2.6 million in the second quarter of 2006 to $3.0 million in the 2007 period. Interest expense was reduced by $363,000 as compared to the 2006 period, due to the repayment of the $32.3 million outstanding variable-rate mortgage on our corporate headquarters in May 2006.

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 $56 and $42 in the 2007 period, versus $47 and $35 in the 2006 period.

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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006.

The following table presents certain information related to Administaff’s results of operations for the six months ended June 30, 2007 and 2006.


	Six months ended
	June 30,
	2007		2006		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $4.465 billion and $3.822 billion, less worksite employee payroll cost of $3.681 billion and $3.124 billion, respectively)	$	784,516	$	698,414		12.3	%
Gross profit		146,534		136,209		7.6	%
Operating expenses		118,193		107,840		9.6	%
Operating income		28,341		28,369		(0.1	)%
Other income		5,932		4,867		21.9	%
Net income		22,038		21,038		4.8	%
Diluted net income per share of common stock		0.79		0.74		6.8	%

Statistical Data:
Average number of worksite employees paid per month		106,609		97,923		8.9	%
Revenues per worksite employee per month⁽¹⁾	$	1,226	$	1,189		3.1	%
Gross profit per worksite employee per month		229		232		(1.3	)%
Operating expenses per worksite employee per month		185		184		0.5	%
Operating income per worksite employee per month		44		48		(8.3	)%
Net income per worksite employee per month		34		36		(5.6	)%


⁽¹⁾		Gross billings of $6,981 and $6,506 per worksite employee per month less payroll cost of $5,755 and $5,317 per worksite employee per month, respectively.

Revenues

Our revenues for the six months ended June 30, 2007, increased 12.3% over the 2006 period due to an 8.9% increase in the average number of worksite employees paid per month and a 3.1%, or $37, increase in revenues per worksite employee per month.

By region, our revenue growth over the first six months of 2006 and revenue distribution for the six months ended June 30, 2007 were as follows:


	Six months ended June 30,							Six months ended June 30,
	2007		2006		% Change			2007			2006
			(in thousands)					(% of total revenues)
Northeast	$	155,502	$	126,885		22.6	%		19.8	%		18.2	%
Southeast		81,743		74,184		10.2	%		10.4	%		10.6	%
Central		110,703		100,899		9.7	%		14.1	%		14.4	%
Southwest		263,422		232,380		13.4	%		33.6	%		33.3	%
West		167,082		159,552		4.7	%		21.3	%		22.8	%
Other revenue		6,064		4,514		34.3	%		0.8	%		0.7	%

Total revenue	$	784,516	$	698,414		12.3	%		100.0	%		100.0	%

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Our 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 six months ended June 30, 2007, new client sales and the net change in existing clients, measured as a percentage of the worksite employee base, improved, while client retention declined slightly compared to the 2006 period.

Gross Profit

Gross profit for the first half of 2007 increased 7.6% to $146.5 million, compared to the first half of 2006. The average gross profit per worksite employee decreased 1.3% to $229 per month in the 2007 period from $232 per month in the 2006 period. Our pricing objectives attempt to maintain or improve the gross profit per worksite employee by increasing revenue per worksite employee to match or exceed changes in primary direct costs and operating expenses.

While our revenues increased 3.1% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 4.2% to $997 per worksite employee per month in the first half of 2007 versus $957 in the first half of 2006.

	•		Benefits costs – The cost of group health insurance and related employee benefits increased $45 per worksite employee per month, or 9.6% on a per covered employee basis, compared to 2006. The percentage of worksite employees covered under our health insurance plans was 73.0% in the 2007 period compared to 72.7% in the 2006 period. Please read “Critical Accounting Policies and Estimates – Benefits Costs” on page 14 for a discussion of our accounting for health insurance costs.

	•		Workers’ compensation costs – Workers’ compensation costs decreased $18 per worksite employee per month compared to the first six months of 2006. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.56% in the 2007 period from 0.97% in the 2006 period as a result of favorable trends in both the frequency and severity of workers’ compensation claims. During the 2007 period, the Company recorded reductions in workers’ compensation costs of $11.4 million, or 0.34% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods compared to $4.4 million, or 0.15% of non-bonus payroll costs, in the 2006 period. Please read “Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 15 for a discussion of our accounting for workers’ compensation costs.

•

Payroll tax costs – Payroll taxes increased $14 per worksite employee per month compared to the first half of 2006, due to an 8.2% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost declined from 8.45% in the 2006 period to 8.05% in the 2007 period due to: i) worksite employees reaching their taxable wage limit earlier in 2007 as a result of increased payroll averages and bonus levels; and ii) lower state unemployment tax rates in 2007, including a $2.9 million state unemployment tax refund from the State of Texas.

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Operating Expenses

The following table presents certain information related to the Administaff’s operating expenses for the six months ended June 30, 2007 and 2006.


	Six months ended June 30,							Six months ended June 30,
	2007		2006		% change			2007		2006		% change
			(in thousands)					(per worksite employee per month)
Salaries, wages and payroll taxes	$	65,121	$	57,664		12.9	%	$	102	$	98		4.1	%
Stock-based compensation		3,743		1,357		175.8	%		6		2		200.0	%
General and administrative expenses		30,222		29,851		1.2	%		47		51		(7.8	)%
Commissions		5,623		5,542		1.5	%		9		10		(10.0	)%
Advertising		6,060		5,702		6.3	%		9		10		(10.0	)%
Depreciation and amortization		7,424		7,724		(3.9	)%		12		13		(7.7	)%

Total operating expenses	$	118,193	$	107,840		9.6	%	$	185	$	184		0.5	%

Operating expenses increased 9.6% to $118.2 million compared to the first six months of 2006. Operating expense per worksite employee increased to $185 per month in the 2007 period from $184 in the 2006 period. The components of operating expenses changed as follows:

•		Salaries, wages and payroll taxes of corporate and sales staff increased 12.9%, or $4 per worksite employee per month compared to the 2006 period. Corporate headcount, primarily in the sales and service areas of the business, increased 9.8% in the 2007 period as compared to 2006.

•		Stock-based compensation expense increased $2.4 million, or $4 per worksite employee per month. Stock based compensation expense primarily represents the vesting of restricted stock awards granted to employees.

•		General and administrative expenses increased 1.2%, but decreased $4 on a per worksite employee per month basis compared to the first half of 2006.

•		Commissions expense increased 1.5%, but decreased $1 per worksite employee per month compared to the 2006 period.

•		Advertising costs increased 6.3% due to an increase in radio and television advertising expenditures relative to 2006, but decreased $1 per worksite employee per month compared to the second quarter of 2006.

•		Depreciation and amortization expense decreased 3.9% or $1 on a per worksite employee per month basis compared to the 2006 period.

Other Income (Expense)

Other income (expense) increased from $4.9 million in the first half of 2006 to $5.9 million in the 2007 period. Interest expense was reduced by $1.0 million as compared to the

- 24 -

2006 period, due to the repayment of the $32.3 million outstanding variable-rate mortgage on our corporate headquarters in May 2006.

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 $44 and $34 in the 2007 period, versus $48 and $36 in the 2006 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 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							Six months ended
	June 30,							June 30,
	2007		2006		% change			2007		2006		% change
	(in thousands, except per worksite employee data)
Payroll cost (GAAP)	$	1,814,103	$	1,572,541		15.4	%	$	3,680,862	$	3,124,043		17.8	%
Less: Bonus payroll cost		120,779		108,381		11.4	%		356,774		262,108		36.1	%

Non-bonus payroll cost	$	1,693,324	$	1,464,160		15.7	%	$	3,324,088	$	2,861,935		16.1	%


Payroll cost per worksite employee (GAAP)	$	5,582	$	5,250		6.3	%	$	5,755	$	5,317		8.2	%
Less: Bonus payroll cost per worksite employee		372		362		2.8	%		558		446		25.1	%

Non-bonus payroll cost per worksite employee	$	5,210	$	4,888		6.6	%	$	5,197	$	4,871		6.7	%

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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 $205.3 million in cash and cash equivalents and marketable securities at June 30, 2007, including approximately $81.5 million for withheld federal and state income taxes, employment taxes and other payroll deductions, and $8.2 million in customer prepayments that were payable in July 2007. At June 30, 2007, we had working capital of $119.0 million compared to $128.4 million at December 31, 2006. 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 2007. 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 2007 decreased $1.8 million from 2006 to $27.0 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 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 4.8% to $22.0 million in 2007 compared to 2006. Please read Results of Operations – Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006 on page 22.

	•		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 $16.8 million surplus, $7.8 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Consolidated Balance Sheet at June 30, 2007.

	•		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

- 26 -

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 $21.3 million, less claims paid of $11.7 million in 2007, and $25.8 million, less claims paid of $10.7 million for the 2006 period. This compares to our estimate of workers’ compensation loss costs of $10.6 million and $19.4 million in 2007 and 2006, respectively. Additionally, in the periods ended June 30, 2007 and 2006, Administaff received $24.3 million and $25.7 million, respectively, from AIG for the return of excess claim funds related to the AIG program.

•

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 June 2007, when client prepayments were $8.2 million and accrued worksite employee payroll was $102.9 million. However, for those reporting periods that end on a Thursday, 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.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were $6.2 million. We invested approximately $5.5 million in capital expenditures during the first six months of 2007.

Cash Flows Used in Financing Activities

Cash flows used in financing activities were $50.3 million. During the first six months of 2007, we repurchased $48.0 million in treasury stock and paid $6.1 million in dividends.

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

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“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 Workers’ Compensation Costs” on page 38 of our Form 10-K for the year ended December 31, 2006, filed with the SEC. Our 2006 Form 10-K is also available on our Web site at www.administaff.com.

ITEM 4. CONTROLS AND PROCEDURES.

In accordance with the Securities Exchange Act of 1934 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 June 30, 2007.

There has been no change in our internal controls over financial reporting that occurred during the three months ended June 30, 2007, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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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,” “target,” “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, including, but not limited to, the California State Unemployment Tax matter; increases in health insurance costs 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) the effectiveness of our sales and marketing efforts; (v) changes in the competitive environment in the PEO industry, including the entrance of new competitors and our ability to renew or replace client companies; (vi) our liability for worksite employee payroll and benefits costs; and (vii) an adverse final judgment or settlement of claims against Administaff. These factors are discussed in detail in our 2006 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.

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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 June 30, 2007, of equity securities that are registered by Administaff pursuant to Section 12 of the Exchange Act:


					Total Number of		Maximum
					Shares Purchased as		Number of Shares
	Total Number				Part of Publicly		that May Yet be
	of Shares		Average Price		Announced		Purchased Under
Period	Purchased ⁽¹⁾		Paid per Share		Program⁽²⁾		the Program⁽²⁾
04/01/2007 – 04/30/2007		186,090	$	33.55		8,547,684		952,316
05/01/2007– 05/31/2007		697,282		35.53		9,244,966		255,034
06/01/2007 – 06/30/2007		122,867		34.58		9,367,833		1,132,167
Total		1,006,239	$	35.05		9,367,833		1,132,167


⁽¹⁾		Our board of directors has approved the repurchase of up to an aggregate amount of 10,500,000 shares of Administaff common stock, including 1,000,000 shares in June 2007, of which 9,367,833 had been repurchased as of June 30, 2007. During the three months ended June 30, 2007, we repurchased 1,006,239 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.

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

An Annual Meeting of Stockholders of the Company was held on May 2, 2007. At the Meeting, holders of 26,450,820 shares of common stock were present in person or by proxy, which constituted a quorum thereof. The vote of stockholders in respect of the two proposals voted on at the Meeting, both of which were approved, is set forth below:

Election of Class III Directors to serve until the Annual Meeting of Stockholders in 2010.


	For		Withheld
Jack M. Fields, Jr.		23,708,452		2,742,368
Paul S. Lattanzio		24,869,567		1,581,253
Richard G. Rawson		24,854,962		1,595,858

Directors continuing in office were Michael W. Brown, Eli Jones, Gregory E. Petsch, Paul J. Sarvadi and Austin P. Young.

Ratification of Ernst & Young, LLP as the Company’s independent auditors for the year ending December 31, 2007.


For	Against	Abstain
25,121,984	1,320,541	8,298

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ITEM 6. EXHIBITS

(a) List of exhibits.


10.1	*(+)	Letter Agreement dated April 21, 2007, between Administaff of Texas, Inc. and UnitedHealthcare Insurance Company.

10.2	*(+)	Amendment to Minimum Premium Financial Agreement, as amended and restated effective January 1, 2005, by and between Administaff of Texas, Inc., and UnitedHealthcare Insurance Company.

10.3	*(+)	Amendment to Minimum Premium Administrative Services Agreement, as amended and restated effective January 1, 2005, by and between Administaff of Texas, Inc., and UnitedHealthcare Insurance Company.

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.


*		Filed herewith.

(+)		Confidential Treatment has been requested for this exhibit and confidential portions have been filed with the Securities and Exchange Commision.

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EXHIBIT INDEX

(a) List of exhibits.


10.1	*(+)	Letter Agreement dated April 21, 2007, between Administaff of Texas, Inc. and UnitedHealthcare Insurance Company.

10.2	*(+)	Amendment to Minimum Premium Financial Agreement, as amended and restated effective January 1, 2005, by and between Administaff of Texas, Inc., and UnitedHealthcare Insurance Company.

10.3	*(+)	Amendment to Minimum Premium Administrative Services Agreement, as amended and restated effective January 1, 2005, by and between Administaff of Texas, Inc., and UnitedHealthcare Insurance Company.

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.


*		Filed herewith.

(+)		Confidential Treatment has been requested for this exhibit and confidential portions have been filed with the Securities and Exchange Commision.


Part I

Item 1. Financial Statements			3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14

Item 4. Controls and Procedures			28

Part II

Item 1. Legal Proceedings			29

Item 1a. Risk Factors			29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30

Item 4. Submission of Matters to a Vote of Security Holders			31

Item 6. Exhibits			32
Letter Agreement
Amendment to Minimum Premium Financial Agreement
Amendment to Minimum Premium Administrative Services Agreement
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


	Administaff, Inc.

Date: August 1, 2007	By:	/s/ Douglas S. Sharp

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

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