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 September 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 October 29, 2007, 26,743,718 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


	September 30,			December 31,
	2007			2006
	(Unaudited)
Current assets:
Cash and cash equivalents	$	114,926		$	148,416
Restricted cash		36,195			37,405
Marketable securities		89,034			85,617
Accounts receivable, net:
Trade		2,339			8,157
Unbilled		138,325			112,432
Other		2,243			2,134
Prepaid insurance		13,409			10,660
Other current assets		8,257			4,573
Income taxes receivable		—			3,193
Deferred income taxes		2,878			2,492

Total current assets		407,606			415,079

Property and equipment:
Land		2,920			2,920
Buildings and improvements		61,306			60,120
Computer hardware and software		65,738			61,375
Software development costs		21,830			20,588
Furniture and fixtures		31,556			30,537
Vehicles and aircraft		22,091			22,091

		205,441			197,631
Accumulated depreciation and amortization		(125,950	)		(116,511	)

Total property and equipment, net		79,491			81,120

Other assets:
Prepaid health insurance		9,000			11,000
Deposits – healthcare		2,811			2,461
Deposits – workers’ compensation		41,737			46,429
Goodwill and other intangible assets, net		4,820			4,922
Other assets		954			504

Total other assets		59,322			65,316

Total assets	$	546,419		$	561,515

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

LIABILITIES AND STOCKHOLDERS’ EQUITY


	September 30,			December 31,
	2007			2006
	(Unaudited)
Current liabilities:
Accounts payable	$	4,600		$	3,802
Payroll taxes and other payroll deductions payable		85,533			116,926
Accrued worksite employee payroll cost		130,669			94,818
Accrued health insurance costs		13,945			2,824
Accrued workers’ compensation costs		38,093			39,035
Accrued corporate payroll and commissions		13,239			21,381
Income tax payable		2,369			—
Other accrued liabilities		8,349			7,309
Current portion of capital lease obligations		617			583

Total current liabilities		297,414			286,678

Noncurrent liabilities:
Capital leases obligations, net of current portion		618			1,166
Accrued workers’ compensation costs		39,729			40,019
Deferred income taxes		5,915			5,207

Total noncurrent liabilities		46,262			46,392

Commitments and contingencies

Stockholders’ equity:
Common stock		309			309
Additional paid-in capital		138,681			135,942
Treasury stock, at cost		(108,949	)		(55,405	)
Accumulated other comprehensive loss, net of tax		(222	)		(131	)
Retained earnings		172,924			147,730

Total stockholders’ equity		202,743			228,445

Total liabilities and stockholders’ equity	$	546,419		$	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						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues (gross billings of $2.316 billion, $1.990 billion, $6.781 billion and $5.813 billion, less worksite employee payroll cost of $1.932 billion, $1.652 billion, $5.613 billion and $4.776 billion, respectively)	$	383,380		$	338,421		$	1,167,896		$	1,036,835
Direct costs:
Payroll taxes, benefits and workers’ compensation costs		308,338			266,557			946,320			828,762

Gross profit		75,042			71,864			221,576			208,073

Operating expenses:
Salaries, wages and payroll taxes		31,774			30,393			96,895			88,057
Stock-based compensation		1,885			1,011			5,628			2,368
General and administrative expenses		15,576			14,722			45,798			44,573
Commissions		3,104			2,722			8,727			8,264
Advertising		3,074			2,819			9,134			8,521
Depreciation and amortization		3,827			3,896			11,251			11,620

		59,240			55,563			177,433			163,403

Operating income		15,802			16,301			44,143			44,670

Other income (expense):
Interest income		2,957			2,567			8,941			8,384
Interest expense		(26	)		(14	)		(87	)		(1,076	)
Other, net		4			13			13			125


Income before income taxes		18,737			18,867			53,010			52,103

Income tax expense		6,583			6,754			18,819			18,952


Net income	$	12,154		$	12,113		$	34,191		$	33,151


Basic net income per share of common stock	$	0.46		$	0.44		$	1.27		$	1.21


Diluted net income per share of common stock	$	0.45		$	0.43		$	1.24		$	1.17

See accompanying notes.

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 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		—		—		—			(61,345	)		—			—			(61,345	)
Exercise of stock options		—		—		(1,119	)		3,627			—			—			2,508
Income tax benefit from stock-based compensation		—		—		1,891			—			—			—			1,891
Stock-based compensation expense		—		—		1,749			3,879			—			—			5,628
Other		—		—		218			295			—			—			513
Dividends paid		—		—		—			—			—			(8,997	)		(8,997	)
Change in unrealized loss on marketable securities, net of tax:
Unrealized loss		—		—		—			—			(91	)		—			(91	)
Net income		—		—		—			—			—			34,191			34,191

Comprehensive income																		34,100

Balance at September 30, 2007		30,839	$	309	$	138,681		$	(108,949	)	$	(222	)	$	172,924		$	202,743

See accompanying notes.

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ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	34,191		$	33,151
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,246			11,767
Stock-based compensation		5,628			2,368
Deferred income taxes		372			3,932
Changes in operating assets and liabilities:
Restricted cash		1,210			(7,278	)
Accounts receivable		(20,184	)		(20,169	)
Prepaid insurance		6,280			(831	)
Other current assets		(3,684	)		(2,270	)
Other assets		5,891			11,349
Accounts payable		798			(1,587	)
Payroll taxes and other payroll deductions payable		(31,393	)		(20,804	)
Accrued worksite employee payroll expense		35,851			22,959
Accrued health insurance costs		2,093			518
Accrued workers’ compensation costs		(1,232	)		10,808
Accrued corporate payroll, commissions and other accrued liabilities		(7,103	)		(1,992	)
Income taxes payable/receivable		5,562			(1,768	)

Total adjustments		11,335			7,002

Net cash provided by operating activities		45,526			40,153

Cash flows from investing activities:
Marketable securities:
Purchases		(85,743	)		(56,710	)
Proceeds from maturities		82,177			32,916
Proceeds from dispositions		—			50
Property and equipment:
Purchases		(9,534	)		(9,853	)
Proceeds from dispositions		28			93

Net cash used in investing activities		(13,072	)		(33,504	)

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


	Nine Months Ended
	September 30,
	2007			2006
Cash flows from financing activities:
Purchase of treasury stock	$	(61,345	)	$	(23,780	)
Dividends paid		(8,997	)		(7,509	)
Proceeds from the exercise of stock options		2,508			15,166
Principal repayments on long-term debt and capital lease obligations		(514	)		(33,001	)
Income tax benefit from stock-based compensation		1,891			11,697
Other		513			556

Net cash used in financing activities		(65,944	)		(36,871	)


Net decrease in cash and cash equivalents		(33,490	)		(30,222	)
Cash and cash equivalents at beginning of period		148,416			137,407

Cash and cash equivalents at end of period	$	114,926		$	107,185


Supplemental disclosures:
Cash paid for income taxes	$	11,087		$	5,439
Cash paid for interest	$	87		$	1,031

See accompanying notes.

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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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 the nine months ended September 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 September 30, 2007, and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the periods ended September 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 September 30, 2007, Plan Costs were less than the net cash funded to United by $19.3 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $10.3 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 0.73% of total benefits costs, during the nine months ended September 30, 2007.

Workers’ Compensation Costs

Our workers’ compensation coverage (the “AIG Program”) through September 30, 2007, was provided through selected member insurance companies of American International Group,

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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 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.

Effective October 1, 2007, the Company entered into an arrangement with ACE Group of Companies (“ACE”) to provide workers’ compensation insurance coverage (“ACE Program”), with coverage and a program structure substantially consistent with the AIG Program. AIG remains the carrier for all claim activity incurred between September 1, 2003 and September 30, 2007.

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 nine months ended September 30, Administaff reduced accrued workers’ compensation costs by $15.9 million in 2007 and $5.5 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 4.8%) 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.

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The following table provides the activity and balances related to accrued workers’ compensation claims for the nine months ended September 30, 2007 and 2006 (in thousands):


	2007			2006
Beginning balance, January 1,	$	77,424		$	60,272
Accrued claims		18,689			32,310
Present value discount		(2,886	)		(4,757	)
Paid claims		(17,303	)		(15,646	)

Ending balance, September 30,	$	75,924		$	72,179

Current portion of accrued claims	$	36,195		$	34,858
Long-term portion of accrued claims		39,729			37,321

	$	75,924		$	72,179

Under both the AIG and ACE Programs, 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 September 30, 2007, the total funds held by AIG and ACE were $77.9 million, of which $36.2 million is included in restricted cash and $41.7 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. The Company has repurchased 9,776,164 shares at a total cost of $180.5 million, including 1,760,415 shares at a total cost of $61.3 million during the nine months ended September 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 nine months ended September 30, 2007, a total of $9.0 million in dividend payments has been made.

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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 September 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 nine months ended September 30, 2007 was 35.5%.

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				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Basic net income per share – weighted average shares outstanding		26,288		27,544		26,889		27,471
Effect of dilutive securities – treasury stock method:
Common stock options		524		624		562		832
Restricted stock awards		61		91		67		99

		585		715		629		931


Diluted net income per share – weighted average shares outstanding plus effect of dilutive securities		26,873		28,259		27,518		28,402


Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect		856		657		792		219

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 September 30, 2007, Plan Costs were less than the net cash funded to United by $19.3 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $10.3 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 0.73% of total benefits costs, during the nine months ended September 30, 2007.

•		Workers’ compensation costs – Our workers’ compensation coverage (the “AIG Program”) through September 30, 2007, was 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. Effective October 1, 2007, the Company entered into an arrangement with ACE Group of Companies (“ACE”) to provide workers’ compensation insurance coverage (“ACE Program”), with coverage and a program structure substantially consistent with the AIG Program. AIG remains the carrier for all claim activity incurred between September 1, 2003 and September 30, 2007.

		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

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		Company’s workers’ compensation claims cost estimates. During the nine months ended September 30, Administaff reduced workers’ compensation costs by $15.9 million in 2007 and $5.5 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 4.8%) 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

- 16 -

		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 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

- 17 -

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.

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

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


	Three months ended
	September 30,
	2007		2006		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $2.316 billion and $1.990 billion, less worksite employee payroll cost of $1.932 billion and $1.652 billion, respectively)	$	383,380	$	338,421		13.3	%
Gross profit		75,042		71,864		4.4	%
Operating expenses		59,240		55,563		6.6	%
Operating income		15,802		16,301		(3.1	)%
Other income		2,935		2,566		14.4	%
Net income		12,154		12,113		0.3	%
Diluted net income per share of common stock		0.45		0.43		4.7	%

Statistical Data:
Average number of worksite employees paid per month		112,496		102,530		9.7	%
Revenues per worksite employee per month ⁽¹⁾	$	1,136	$	1,100		3.3	%
Gross profit per worksite employee per month		222		234		(5.1	)%
Operating expenses per worksite employee per month		176		181		(2.8	)%
Operating income per worksite employee per month		47		53		(11.3	)%
Net income per worksite employee per month		36		39		(7.7	)%


⁽¹⁾		Gross billings of $6,862 and $6,470 per worksite employee per month less payroll cost of $5,726 and $5,370 per worksite employee per month, respectively.

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Revenues

Our revenues for the third quarter of 2007 increased 13.3% over the 2006 period due to a 9.7% increase in the average number of worksite employees paid per month and a 3.3%, or $36, increase in revenues per worksite employee per month.

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


	Three months ended September 30,							Three months ended September 30,
	2007		2006		% Change			2007			2006
	(in thousands)							(% of total revenues)
Northeast	$	75,983	$	62,568		21.4	%		19.8	%		18.5	%
Southeast		40,702		37,036		9.9	%		10.6	%		11.0	%
Central		53,916		48,203		11.9	%		14.1	%		14.2	%
Southwest		132,589		112,135		18.2	%		34.6	%		33.1	%
West		77,506		76,211		1.7	%		20.2	%		22.5	%
Other revenue		2,684		2,268		18.3	%		0.7	%		0.7	%

Total revenue	$	383,380	$	338,421		13.3	%		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 third quarter of 2007, new client sales improved, while client retention and the net change in existing clients declined slightly compared to the 2006 period.

Gross Profit

Gross profit for the third quarter of 2007 increased 4.4% to $75.0 million, compared to the third quarter of 2006. The average gross profit per worksite employee decreased 5.1% to $222 per month in the 2007 period from $234 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 3.3% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 5.5% to $914 per worksite employee per month in the third quarter of 2007 versus $866 in the third quarter of 2006.

•

Benefits costs - The cost of group health insurance and related employee benefits increased $49 per worksite employee per month, or 9.6% on a cost per covered employee basis, compared to the third quarter of 2006. The percentage of worksite employees covered under our health insurance plans was 72.9% in the 2007 period compared to 72.0% 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.

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	•		Workers’ compensation costs - Workers’ compensation costs decreased $17 per worksite employee per month compared to the third quarter of 2006. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.52% in the 2007 period from 0.90% 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 $6.0 million, or 0.34% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods compared to $2.8 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 15 for a discussion of our accounting for workers’ compensation costs.

	•		Payroll tax costs - Payroll taxes increased $17 per worksite employee per month compared to the third quarter of 2006, due primarily to a 6.6% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost declined from 6.67% in the 2006 period to 6.55% in the 2007 period primarily due to 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 September 30, 2007 and 2006.


	Three months ended September 30,							Three months ended September 30,
	2007		2006		% change			2007		2006		% change
	(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes	$	31,774	$	30,393		4.5	%	$	94	$	99		(5.1	)%
Stock-based compensation		1,885		1,011		86.4	%		6		3		100.0	%
General and administrative expenses		15,576		14,722		5.8	%		46		48		(4.2	)%
Commissions		3,104		2,722		14.0	%		9		9		—
Advertising		3,074		2,819		9.0	%		9		9		—
Depreciation and amortization		3,827		3,896		(1.8	)%		12		13		(7.7	)%

Total operating expenses	$	59,240	$	55,563		6.6	%	$	176	$	181		(2.8	)%

Operating expenses increased 6.6% to $59.2 million compared to the third quarter of 2006. Operating expense per worksite employee decreased to $176 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 4.5%, but decreased $5 per worksite employee per month compared to the 2006 period. The increase in total dollars was primarily due to the 6.4% increase in corporate headcount, primarily in the sales and service areas of the business in 2007 as compared to the 2006, offset by a $1.8 million decrease in incentive compensation expense accrual.

•		Stock-based compensation expense increased $874,000 or $3 per worksite employee per month. The stock based compensation expense primarily represents the vesting of restricted stock awards granted to employees.

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•		General and administrative expenses increased 5.8%, but decreased $2 per worksite employee per month compared to the third quarter of 2006.

•		Commissions expense increased 14.0%, but remained flat on a per worksite employee per month basis compared to the 2006 period.

•		Advertising costs increased 9.0%, but remained flat on a per worksite employee per month basis compared to the third quarter of 2006.

•		Depreciation and amortization expense decreased 1.8% or $1 per worksite employee per month compared to the 2006 period.

Other Income (Expense)

Other income (expense) increased from $2.6 million in the third quarter of 2006 to $2.9 million in the 2007 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 $47 and $36 in the 2007 period, versus $53 and $39 in the 2006 period.

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Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006.

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


	Nine months ended
	September 30,
	2007		2006		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $6.781 billion and $5.813 billion, less worksite employee payroll cost of $5.613 billion and $4.776 billion, respectively)	$	1,167,896	$	1,036,835		12.6	%
Gross profit		221,576		208,073		6.5	%
Operating expenses		177,433		163,403		8.6	%
Operating income		44,143		44,670		(1.2	)%
Other income		8,867		7,433		19.3	%
Net income		34,191		33,151		3.1	%
Diluted net income per share of common stock		1.24		1.17		6.0	%

Statistical Data:
Average number of worksite employees paid per month		108,571		99,459		9.2	%
Revenues per worksite employee per month ⁽¹⁾	$	1,195	$	1,158		3.2	%
Gross profit per worksite employee per month		227		232		(2.2	)%
Operating expenses per worksite employee per month		182		183		(0.5	)%
Operating income per worksite employee per month		45		50		(10.0	)%
Net income per worksite employee per month		35		37		(5.4	)%


⁽¹⁾		Gross billings of $6,940 and $6,494 per worksite employee per month less payroll cost of $5,745 and $5,335 per worksite employee per month, respectively.

Revenues

Our revenues for the nine months ended September 30, 2007, increased 12.6% over the 2006 period due to a 9.2% increase in the average number of worksite employees paid per month and a 3.2%, or $37, increase in revenues per worksite employee per month.

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


	Nine months ended September 30,							Nine months ended September 30,
	2007		2006		% Change			2007			2006
	(in thousands)							(% of total revenues)
Northeast	$	231,485	$	189,453		22.2	%		19.8	%		18.3	%
Southeast		122,445		111,219		10.1	%		10.5	%		10.7	%
Central		164,619		149,103		10.4	%		14.1	%		14.4	%
Southwest		396,011		344,515		14.9	%		33.9	%		33.2	%
West		244,588		235,763		3.7	%		20.9	%		22.7	%
Other revenue		8,748		6,782		29.0	%		0.8	%		0.7	%

Total revenue	$	1,167,896	$	1,036,835		12.6	%		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 nine months ended September, 2007, new client sales and the net change in existing clients improved, while client retention declined slightly compared to the 2006 period.

Gross Profit

Gross profit for the nine months ended September 30, 2007, increased 6.5% to $221.6 million, compared to the 2006 period. The average gross profit per worksite employee decreased 2.2% to $227 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 3.2% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 4.5% to $968 per worksite employee per month in the first nine months of 2007 versus $926 in the first nine months of 2006.

	•		Benefits costs - The cost of group health insurance and related employee benefits increased $46 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 72.5% 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 nine months of 2006. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.55% 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 $15.9 million, or 0.31% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods compared to $5.5 million, or 0.13% 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 $15 per worksite employee per month compared to the first nine months of 2006, due to a 7.7% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost declined from 7.83% in the 2006 period to 7.53% 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 nine months ended September 30, 2007 and 2006.


	Nine months ended September 30,							Nine months ended September 30,
	2007		2006		% change			2007		2006		% change
	(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes	$	96,895	$	88,057		10.0	%	$	99	$	98		1.0	%
Stock-based compensation		5,628		2,368		137.7	%		6		3		100.0	%
General and administrative expenses		45,798		44,573		2.7	%		47		50		(6.0	)%
Commissions		8,727		8,264		5.6	%		9		9		—
Advertising		9,134		8,521		7.2	%		9		10		(10.0	)%
Depreciation and amortization		11,251		11,620		(3.2	)%		12		13		(7.7	)%

Total operating expenses	$	177,433	$	163,403		8.6	%	$	182	$	183		(0.5	)%

Operating expenses increased 8.6% to $177.4 million compared to the first nine months of 2006. Operating expense per worksite employee decreased to $182 per month in the 2007 period from $183 in the 2006 period. The components of operating expenses changed as follows:

•		Salaries, wages and payroll taxes of corporate and sales staff increased 10.0%, or $1 per worksite employee per month compared to the 2006 period. Corporate headcount, primarily in the sales and service areas of the business, increased 8.6% in the 2007 period as compared to 2006.

•		Stock-based compensation expense increased $3.3 million, or $3 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 2.7%, but decreased $3 on a per worksite employee per month basis compared to the first nine months of 2006.

•		Commissions expense increased 5.6%, but remained flat on a per worksite employee per month basis compared to the 2006 period.

•		Advertising costs increased 7.2% due to an increase in radio and television advertising expenditures relative to 2006, but decreased $1 per worksite employee per month compared to the third quarter of 2006.

•		Depreciation and amortization expense decreased 3.2%, or $1 on a per worksite employee per month basis, compared to the 2006 period.

Other Income (Expense)

Other income (expense) increased from $7.4 million in the first nine months of 2006 to $8.9 million in the 2007 period. Interest expense was reduced by $1.0 million as compared to

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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 $45 and $35 in the 2007 period, versus $50 and $37 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							Nine months ended
	September 30,							September 30,
	2007		2006		% change			2007		2006		% change
	(in thousands, except per worksite employee data)
Payroll cost (GAAP)	$	1,932,491	$	1,651,694		17.0	%	$	5,613,354	$	4,775,737		17.5	%
Less: Bonus payroll cost		142,231		120,620		17.9	%		499,006		382,728		30.4	%

Non-bonus payroll cost	$	1,790,260	$	1,531,074		16.9	%	$	5,114,348	$	4,393,009		16.4	%


Payroll cost per worksite employee (GAAP)	$	5,726	$	5,370		6.6	%	$	5,745	$	5,335		7.7	%
Less: Bonus payroll cost per worksite employee		421		392		7.4	%		511		427		19.7	%

Non-bonus payroll cost per worksite employee	$	5,305	$	4,978		6.6	%	$	5,234	$	4,908		6.6	%

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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 $204.0 million in cash and cash equivalents and marketable securities at September 30, 2007, including approximately $76.0 million for withheld federal and state income taxes, employment taxes and other payroll deductions, and $20.4 million in customer prepayments that were payable in October 2007. At September 30, 2007, we had working capital of $110.2 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 increased $5.4 million from 2006 to $45.5 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:

	•		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 September 2007, when client prepayments were $20.4 million and accrued worksite employee payroll was $130.7 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.

	•		Operating results - Our net income has a significant impact on our operating cash flows. Our net income increased 3.1% to $34.2 million in 2007 compared to 2006. Please read Results of Operations — Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 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

- 26 -

			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 $19.3 million surplus, $10.3 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 September 30, 2007.

	•		Workers’ compensation plan funding - Under our arrangement with AIG, we make monthly payments to the carriers 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 the carriers, 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 $31.3 million, less claims paid of $17.3 million in 2007, and $37.4 million, less claims paid of $15.6 million for the 2006 period. This compares to our estimate of workers’ compensation loss costs of $15.8 million and $27.6 million in 2007 and 2006, respectively. Additionally, in the periods ended September 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.

			Effective October 1, 2007, the Company entered into an arrangement with ACE Group of Companies (“ACE”) to provide workers’ compensation insurance coverage (“ACE Program”), with coverage and a program structure substantially consistent with the AIG Program. AIG remains the carrier for all claim activity incurred between September 1, 2003 and September 30, 2007.

			*Cash Flows Used in Investing Activities*

Cash flows used in investing activities were $13.1 million. We invested approximately $9.5 million in capital expenditures during the first nine months of 2007.

Cash Flows Used in Financing Activities

Cash flows used in financing activities were $65.9 million. During the first nine months of 2007, we repurchased $61.3 million in treasury stock and paid $9.0 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

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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 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.

As disclosed in a press release on October 15, 2007, an Administaff laptop computer containing personal information, including names, addresses and Social Security numbers of individuals who were Administaff worksite employees during the calendar year 2006, was reported missing. The Company’s investigation strongly indicates that this was a random event and that the personal information was not specifically targeted. The laptop computer, which was reported missing on October 3, 2007, was password protected. However, the personal information was not saved in an encrypted location, which was a clear violation of Administaff’s policies. The Company has taken steps to notify approximately 96,000 former worksite employees and approximately 63,000 current worksite employees, as well as its current clients, of the missing computer. Additionally, Administaff has offered free credit monitoring services to the affected individuals. The Company estimates that the direct financial costs of responding to this event will be approximately $700,000, which will be substantially incurred in the fourth quarter of 2007. The Company is reviewing applicable insurance coverage, which may provide reimbursement for up to 90% of these costs. The Company has not determined what further impact, if any, this matter will have on its future operations.

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 September 30, 2007.

There has been no change in our internal controls over financial reporting that occurred during the three months ended September 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 September 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⁾
07/01/2007 - -07/31/2007		77,131	$	33.27		9,444,964		1,055,036

08/01/2007 - 08/31/2007		331,200		32.63		9,776,164		723,836

09/01/2007 - 09/30/2007		—		—		9,776,164		723,836

Total		408,331	$	32.75		9,776,164		723,836


⁽¹⁾		On June 7, 2007, our board of directors authorized the repurchase of up to one million additional shares of Administaff common stock, bringing the total amount to 10,500,000 shares, of which 9,776,164 had been repurchased as of September 30, 2007. During the three months ended September 30, 2007, we repurchased 408,331 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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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 6. Exhibits			31
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


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: November 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)


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.

	(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

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	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)		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.


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


		/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
November 1, 2007


/s/ Douglas S. Sharp Douglas S. Sharp
Vice President of Finance, Chief Financial Officer and Treasurer
November 1, 2007


*		Filed herewith.