10-Q

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, 2008.

or

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	76-0479645
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

19001 Crescent Springs Drive
Kingwood, Texas	77339
(Address of principal executive offices)	(Zip Code)

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

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

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ  Accelerated filer o  Non-accelerated filer   o
(Do not check if a smaller reporting company) Smaller reporting company 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 30, 2008, 25,340,647 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS

Part I
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4. Controls and Procedures	30
Part II
Item 1. Legal Proceedings	31
Item 1a. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6. Exhibits	34
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

ITEM 1. FINANCIAL STATEMENTS

ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS

	September 30,			December 31,
	2008			2007
	(Unaudited)
Current assets:
Cash and cash equivalents	$	189,470		$	135,793
Restricted cash		35,689			35,318
Marketable securities		226			74,880
Accounts receivable, net:
Trade		2,684			3,299
Unbilled		170,376			125,318
Other		2,754			6,217
Prepaid insurance		23,220			22,395
Other current assets		9,471			6,273
Income taxes receivable		—			3,918
Total current assets		433,890			413,411
Property and equipment:
Land		2,920			2,920
Buildings and improvements		62,640			61,620
Computer hardware and software		66,294			65,518
Software development costs		23,068			21,624
Furniture and fixtures		34,956			32,004
Aircraft		31,548			21,909
		221,426			205,595
Accumulated depreciation and amortization		(132,161	)		(127,654	)
Total property and equipment, net		89,265			77,941
Prepaid health insurance		9,000			9,000
Deposits — healthcare		2,585			2,811
Deposits — workers’ compensation		50,431			51,909
Goodwill and other intangible assets, net		8,855			4,785
Other assets		659			794
Total other assets		71,530			69,299
Total assets	$	594,685		$	560,651

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

LIABILITIES AND STOCKHOLDERS’ EQUITY

	September 30,			December 31,
	2008			2007
	(Unaudited)
Current liabilities:
Accounts payable	$	4,476		$	5,236
Payroll taxes and other payroll deductions payable		80,270			113,929
Accrued worksite employee payroll cost		156,350			110,406
Accrued health insurance costs		13,486			19,297
Accrued workers’ compensation costs		37,530			37,150
Accrued corporate payroll and commissions		18,993			20,123
Other accrued liabilities		9,783			8,395
Current portion of capital lease obligations		640			629
Income tax payable		217			—
Deferred income taxes		3,237			1,066
Total current liabilities		324,982			316,231
Noncurrent liabilities:
Accrued workers’ compensation costs		43,794			39,116
Capital lease obligations		59			537
Deferred income taxes		7,883			6,092
Total noncurrent liabilities		51,736			45,745
Commitments and contingencies
Stockholders’ equity:
Common stock		309			309
Additional paid-in capital		138,847			138,640
Treasury stock, at cost		(131,454	)		(123,600	)
Accumulated other comprehensive income, net of tax		—			5
Retained earnings		210,265			183,321
Total stockholders’ equity		217,967			198,675
Total liabilities and stockholders’ equity	$	594,685		$	560,651

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,
	2008		2007			2008			2007
Revenues (gross billings of $2.560 billion, $2.316 billion, $7.570 billion and $6.781 billion, less worksite employee payroll cost of $2.138 billion, $1.932 billion, $6.271 billion and $5.613 billion, respectively)	$	421,914	$	383,380		$	1,298,449		$	1,167,896
Direct costs:
Payroll taxes, benefits and workers’ compensation costs		336,415		308,338			1,042,282			946,320
Gross profit		85,499		75,042			256,167			221,576
Operating expenses:
Salaries, wages and payroll taxes		39,373		31,774			113,779			96,895
Stock-based compensation		2,337		1,885			7,630			5,628
General and administrative expenses		16,642		15,576			52,304			45,798
Commissions		3,211		3,104			9,579			8,727
Advertising		3,062		3,074			10,998			9,134
Depreciation and amortization		3,951		3,827			11,396			11,251
		68,576		59,240			205,686			177,433
Operating income		16,923		15,802			50,481			44,143
Other income (expense):
Interest income		1,727		2,957			6,110			8,941
Other, net		6		(22	)		(34	)		(74	)
Income before income taxes		18,656		18,737			56,557			53,010
Income tax expense		6,727		6,583			20,485			18,819
Net income	$	11,929	$	12,154		$	36,072		$	34,191
Basic net income per share of common stock	$	0.47	$	0.46		$	1.42		$	1.27
Diluted net income per share of common stock	$	0.46	$	0.45		$	1.40		$	1.24

See accompanying notes.

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2008
(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, 2007		30,839	$	309	$	138,640		$	(123,600	)	$	5		$	183,321		$	198,675
Purchase of treasury stock		—		—		—			(19,615	)		—			—			(19,615	)
Exercise of stock options		—		—		(2,405	)		5,564			—			—			3,159
Income tax benefit from stock- based compensation, net		—		—		808			—			—			—			808
Stock-based compensation expense		—		—		1,788			5,842			—			—			7,630
Other		—		—		16			355			—			—			371
Dividends paid		—		—		—			—			—			(9,128	)		(9,128	)
Change in unrealized gain on marketable securities, net of tax:
Unrealized loss		—		—		—			—			(5	)		—			(5	)
Net income		—		—		—			—			—			36,072			36,072
Comprehensive income																		36,067
Balance at September 30, 2008		30,839	$	309	$	138,847		$	(131,454	)	$	—		$	210,265		$	217,967

See accompanying notes.

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

	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	36,072		$	34,191
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,385			11,246
Stock-based compensation		7,630			5,628
Deferred income taxes		3,962			372
Changes in operating assets and liabilities:
Restricted cash		(371	)		1,210
Accounts receivable		(40,980	)		(20,184	)
Prepaid insurance		(825	)		6,280
Other current assets		(3,198	)		(3,684	)
Other assets		906			5,891
Accounts payable		(760	)		798
Payroll taxes and other payroll deductions payable		(33,659	)		(31,393	)
Accrued worksite employee payroll expense		45,944			35,851
Accrued health insurance costs		(5,811	)		2,093
Accrued workers’ compensation costs		5,058			(1,232	)
Accrued corporate payroll, commissions and other accrued liabilities		678			(7,103	)
Income taxes payable/receivable		3,239			5,562
Total adjustments		(6,802	)		11,335
Net cash provided by operating activities		29,270			45,526
Cash flows from investing activities:
Marketable securities:
Purchases		—			(85,743	)
Proceeds from maturities		3,895			950
Proceeds from dispositions		70,746			81,227
Cash exchanged for acquisition		(3,780	)		—
Property and equipment:
Purchases		(22,582	)		(9,534	)
Proceeds from dispositions		104			28
Net cash provided by (used in) investing activities		48,383			(13,072	)

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

	Nine Months Ended
	September 30,
	2008			2007
Cash flows from financing activities:
Purchase of treasury stock	$	(19,615	)	$	(61,345	)
Dividends paid		(9,128	)		(8,997	)
Proceeds from the exercise of stock options		3,159			2,508
Principal repayments on capital lease obligations		(467	)		(514	)
Income tax benefit from stock-based compensation		1,704			1,891
Other		371			513
Net cash used in financing activities		(23,976	)		(65,944	)
Net increase (decrease) in cash and cash equivalents		53,677			(33,490	)
Cash and cash equivalents at beginning of period		135,793			148,416
Cash and cash equivalents at end of period	$	189,470		$	114,926
Supplemental disclosures:
Cash paid for income taxes	$	11,674		$	11,087

See accompanying notes.

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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)

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, 2008 and 2007, revenues from the Company’s Texas markets represented 31% and 32% of the Company’s total revenues, respectively.

     In April 2008, the Company purchased certain assets and operations of USDatalink, Limited, an employee screening services company, for $4.2 million, including $420,000 to be paid in April 2009. An additional $300,000 is payable in 2009 upon the satisfaction of certain conditions, as specified in the purchase agreement.

     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, 2007. The Consolidated Balance Sheet at December 31, 2007, 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, 2008, and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the periods ended September 30, 2008 and 2007, have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made.

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

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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”), 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. As of September 30, 2008, Plan Costs were less than the net cash funded to United by $29.3 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $20.3 million balance is included in prepaid insurance, a current asset, on the Company’s Consolidated Balance Sheet.

Workers’ Compensation Costs

     The Company’s workers’ compensation coverage (the “ACE Program”) is currently provided by ACE Group of Companies (“ACE”). Under the arrangement with ACE, Administaff bears the economic burden for the first $1 million layer of claims per occurrence. ACE bears the economic burden for all claims in excess of such first $1 million layer. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether the Company satisfies its responsibilities.

     Prior to October 1, 2007, workers’ compensation coverage (the “AIG Program”) was provided through selected member insurance companies of American International Group, Inc. (“AIG”). The AIG Program structure was consistent with the ACE Program. AIG remains the carrier for all claim activity incurred between September 1, 2003 and September 30, 2007.

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     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 $8.3 million in 2008 and $15.9 million in 2007 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 2008 and 2007 was 2.8% 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 nine months ended September 30, 2008 and 2007:

	2008			2007
	(in thousands)
Beginning balance, January 1,	$	74,433		$	77,424
Accrued claims		26,916			18,689
Present value discount		(2,698	)		(2,886	)
Paid claims		(19,168	)		(17,303	)
Ending balance, September 30,	$	79,483		$	75,924
Current portion of accrued claims	$	35,689		$	36,195
Long-term portion of accrued claims		43,794			39,729
	$	79,483		$	75,924

     Under both the ACE and AIG 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. As of September 30, 2008, the total funds held by ACE and AIG were $86.1 million, of which $35.7 million is included in restricted cash and $50.4 million is included in deposits in the Company’s Consolidated Balance Sheets.

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3. Investments

     The Company invests its excess cash in federal government and municipal-based money market funds and debt instruments of U.S. municipalities. Administaff’s investments do not include any asset-backed securities with underlying collateral of sub-prime mortgages or home equity loans, nor do they include any collateralized debt obligations or collateralized loan obligations. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Liquid investments with stated maturities of greater than three months are classified as marketable securities in current assets, while less liquid investments are classified as marketable securities in non-current assets.

     The following table summarizes the Company’s investments in cash equivalents and marketable securities held by investment managers and overnight investments:

	September 30,		June 30,		December 31,
	2008		2008		2007
	(in thousands)
Overnight Holdings
Money market funds (cash equivalents)	$	93,058	$	95,429	$	130,435
Investment Holdings
Money market funds (cash equivalents)		99,470		63,916		9,824
Marketable securities (current assets)		226		3,831		74,880
Marketable securities (non-current assets)		—		7,850		—
Total	$	192,754	$	171,026	$	215,139

     The Company’s overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the overnight holdings balance as of September 30, 2008, are $69.7 million in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions; as well as $19.2 million in client prepayments. Please read “Cash Flows from Operating Activities — Timing of Customer Payments/Payrolls,” on page 28 for additional information.

     The Company accounts for marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company determines the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluates such classification as of each balance sheet date. At September 30, 2008 and December 31, 2007, all of the Company’s investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value.

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     On January 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (SFAS 157), for financial assets and liabilities. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:

• Level 1 — quoted prices in active markets using identical assets;

• Level 2 — significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs, and

• Level 3 — significant unobservable inputs.

     The following table summarizes the levels of fair value measurements of the Company’s financial assets:

	Fair Value Measurements
	(in thousands)
	September 30,
	2008		Level 1		Level 2		Level 3
Money Market Funds	$	192,528	$	192,528	$	—	$	—
Municipal Bonds		226		226		—		—
Total	$	192,754	$	192,754	$	—	$	—

     During the quarter ended September 30, 2008, the Company liquidated all of its Auction Rate Securities, including the $7.9 million classified as non-current assets (Level 3) at June 30, 2008, resulting in no gain or loss upon the sale.

4. Stockholders’ Equity

     The Company’s Board of Directors (the “Board”) has authorized a program to repurchase up to 12,500,000 shares of the Company’s outstanding common stock. As of September 30, 2008, the Company had repurchased 11,114,725 shares at a total cost of $219.3 million, including 756,883 shares at a total cost of $19.6 million during the nine months ended September 30, 2008, under this authorization.

     During the first and second quarters of 2008, the board of directors declared quarterly dividends of $0.11 per share of common stock. During the third quarter of 2008, the board of directors increased the quarterly dividend to $0.13 per share of common stock. During the nine months ended September 30, 2008 and 2007, total paid dividends were $9.1 million and $9.0 million, respectively.

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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				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Basic net income per share — weighted average shares outstanding		25,392		26,288		25,406		26,889
Effect of dilutive securities — treasury stock method:
Common stock options		298		524		300		562
Restricted stock awards		147		61		87		67
		445		585		387		629
Diluted net income per share — weighted average shares outstanding plus effect of dilutive securities		25,837		26,873		25,793		27,518
Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect		453		856		600		792

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.

State Unemployment Taxes

     During the second quarter 2008, the State of Colorado Department of Labor and Employment Unemployment Insurance Division (the “Division”) notified the Company of its identification of discrepancies, originating in 2002, regarding the application of the provisions of the Employment Security Act of Colorado. The Division has indicated that it is reviewing Administaff’s prior corporate reorganizations to determine whether the state unemployment accounts of certain Administaff subsidiaries should be combined into a single account, which could result in higher rates for certain prior and prospective periods. The Division has not issued a formal assessment of any additional taxes owed. The Company does not believe that the Division has any valid basis for assessing additional taxes and intends to defend itself vigorously. As a result of the uncertainty regarding the outcome of this matter, at this time the Company is unable to determine the ultimate additional tax liability, if any, related to this matter.

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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 2007 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”), 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.
	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 we would accrue a liability for the excess costs on our Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are less than the

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	cash funded to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums on our Consolidated Balance Sheet. As of September 30, 2008, Plan Costs were less than the net cash funded to United by $29.3 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $20.3 million balance is included in prepaid insurance, a current asset, in our Consolidated Balance Sheet.
•	Workers’ compensation costs — Our workers’ compensation coverage (the “ACE Program”) is currently provided by ACE Group of Companies (“ACE”). Under our arrangement with ACE, we bear the economic burden for the first $1 million layer of claims per occurrence. ACE bears the economic burden for all claims in excess of such first $1 million layer. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Prior to October 1, 2007, our coverage (the “AIG Program”) was provided through selected member insurance companies of American International Group, Inc. (“AIG”). The AIG Program structure was consistent with the ACE 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 our workers’ compensation claims cost estimates. During the nine months ended September 30, Administaff reduced workers’ compensation costs by $8.3 million in 2008 and $15.9 million in 2007 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 2008 and 2007 was 2.8% 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.
•	State unemployment taxes — We record our state unemployment (“SUI”) tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state. Prior to the receipt of final tax rates notices, we estimate our expected SUI tax rate in those states for which tax rate notices have not yet been received.

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	During the second quarter 2008, the State of Colorado Department of Labor and Employment Unemployment Insurance Division (the “Division”) notified Administaff of its identification of discrepancies, originating in 2002, regarding the application of the provisions of the Employment Security Act of Colorado. The Division has indicated that it is reviewing Administaff’s prior corporate reorganizations to determine whether the state unemployment accounts of certain Administaff subsidiaries should be combined into a single account, which could result in higher rates for certain prior and prospective periods. The Division has not issued a formal assessment of any additional taxes owed. We do not believe the Division has any valid basis for assessing additional taxes and we intend to defend ourselves vigorously. As a result of the uncertainty regarding the outcome of this matter, at this time we are unable to determine the ultimate additional tax liability, if any, related to this matter.
•	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.

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	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 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 Company’s 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 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. Our effective date was initially January 1, 2008. However, the FASB has released FASB Staff Position No. FAS 157-b, Effective Date of FASB Statement No. 157, which delayed the effective date of Statement 157 for all non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. Accordingly, we adopted SFAS on January 1, 2008 for our financial assets and liabilities only. The adoption of SFAS 157 for our financial assets and liabilities did not have a material impact on our consolidated

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financial statements and we do not anticipate a material impact when applied to our non-financial assets and liabilities.

     In December 2007, the FASB Statement 141R, “Business Combinations” (“SFAS 141R”) was issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transactions costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Our effective date will be January 1, 2009. We have not yet determined the impact of SFAS 141R, if any, on our consolidated financial statements, because the impact of SFAS 141R is fact-specific and will not be invoked until we acquire a business after the effective date.

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Results of Operations

          Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007.

          The following table presents certain information related to Administaff’s results of operations for the three months ended September 30, 2008 and 2007.

	Three months ended
	September 30,
	2008		2007		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $2.560 billion and $2.316 billion, less worksite employee payroll cost of $2.138 billion and $1.932 billion, respectively)	$	421,914	$	383,380		10.1	%
Gross profit		85,499		75,042		13.9	%
Operating expenses		68,576		59,240		15.8	%
Operating income		16,923		15,802		7.1	%
Other income		1,733		2,935		(41.0	)%
Net income		11,929		12,154		(1.9	)%
Diluted net income per share of common stock		0.46		0.45		2.2	%
Statistical Data:
Average number of worksite employees paid per month		119,389		112,496		6.1	%
Revenues per worksite employee per month (1)	$	1,178	$	1,136		3.7	%
Gross profit per worksite employee per month		239		222		7.7	%
Operating expenses per worksite employee per month		191		176		8.5	%
Operating income per worksite employee per month		47		47		—
Net income per worksite employee per month		33		36		(8.3	)%

⁽¹⁾ Gross billings of $7,147 and $6,862 per worksite employee per month less payroll cost of $5,969 and $5,726 per worksite employee per month, respectively.

          Revenues

          Our revenues for the third quarter of 2008 increased 10.1% over the 2007 period due to a 6.1% increase in the average number of worksite employees paid per month and a 3.7%, or $42, increase in revenues per worksite employee per month.

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          By region, our revenue growth over the third quarter of 2007 and revenue distribution for the quarter ended September 30, 2008 were as follows:

	Three months ended September 30,							Three months ended September 30,
	2008		2007		% Change			2008			2007
			(in thousands)					(% of total revenues)
Northeast	$	88,430	$	75,983		16.4	%		21.0	%		19.8	%
Southeast		44,900		40,702		10.3	%		10.6	%		10.6	%
Central		60,730		53,916		12.6	%		14.4	%		14.1	%
Southwest		139,731		132,589		5.4	%		33.1	%		34.6	%
West		84,968		77,506		9.6	%		20.1	%		20.2	%
Other revenue		3,155		2,684		17.5	%		0.8	%		0.7	%
Total revenue	$	421,914	$	383,380		10.1	%		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 2008, client retention improved, while new client sales declined and the net change in existing clients remained constant compared to the 2007 period.

          Gross Profit

          Gross profit for the third quarter of 2008 increased 13.9% to $85.5 million, compared to the third quarter of 2007. The average gross profit per worksite employee increased 7.7% to $239. 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 3.7% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 2.7% to $939 per worksite employee per month in the third quarter of 2008 versus $914 in the second quarter of 2007.

• Benefits costs — The cost of group health insurance and related employee benefits increased $10 per worksite employee per month, or 1.52% on a cost per covered employee basis, compared to the third quarter of 2007. The overall increase in benefits costs during the three months ended September 30, 2008, was mitigated by the impact of the cost savings associated with the January 2008 benefit plan design changes. The percentage of worksite employees covered under our health insurance plans was 73.3% in the 2008 period compared to 72.9% in the 2007 period. Please read “Critical Accounting Policies and Estimates — Benefits Costs” on page 15 for a discussion of our accounting for health insurance costs.

• Workers’ compensation costs — Workers’ compensation costs increased $8 per worksite employee per month compared to the third quarter of 2007. As a percentage of non-bonus payroll cost, workers’ compensation costs increased to 0.63% in the 2008 period from 0.52% in the 2007 period. During the 2008 period, the Company recorded reductions in workers’ compensation costs of $2.8 million, or 0.14% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods compared to $6.0 million, or

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	0.34% of non-bonus payroll costs, in the 2007 period. Please read “Critical Accounting Policies and Estimates — Workers’ Compensation Costs” on page 16 for a discussion of our accounting for workers’ compensation costs.
•	Payroll tax costs — Payroll taxes increased $9 per worksite employee per month compared to the third quarter of 2007, due primarily to a 5.6% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost declined from 6.55% in the 2007 period to 6.44% in the 2008 period due primarily to lower state unemployment tax rates in 2008.

          Operating Expenses

          The following table presents certain information related to the Company’s operating expenses for the three months ended September 30, 2008 and 2007.

	Three months ended September 30,							Three months ended September 30,
	2008		2007		% change			2008		2007		% change
			(in thousands)					(per worksite employee per month)
Salaries, wages and payroll taxes	$	39,373	$	31,774		23.9	%	$	110	$	94		17.0	%
Stock-based compensation		2,337		1,885		24.0	%		6		6		—
General and administrative expenses		16,642		15,576		6.8	%		46		46		—
Commissions		3,211		3,104		3.4	%		9		9		—
Advertising		3,062		3,074		(0.4	)%		9		9		—
Depreciation and amortization		3,951		3,827		3.2	%		11		12		(8.3	)%
Total operating expenses	$	68,576	$	59,240		15.8	%	$	191	$	176		8.5	%

          Operating expenses increased 15.8% to $68.6 million compared to the third quarter of 2007. Operating expense per worksite employee increased to $191 per month in the 2008 period from $176 in the 2007 period. The components of operating expenses changed as follows:

• Salaries, wages and payroll taxes of corporate and sales staff increased 23.9%, or $16 per worksite employee per month compared to the 2007 period due to: (i) a 13.3% increase in corporate headcount, primarily in the sales and service areas of the business in late 2007 and early 2008; and (ii) a $1.9 million increase in incentive compensation expense, which is largely tied to operating results.

• Stock-based compensation expense increased approximately $450,000, but remained flat on a per worksite employee per month basis. The stock-based compensation expense represents the vesting of restricted stock awards granted to employees.

• General and administrative expenses increased 6.8%, due to: (i) expenses associated with opening and relocating sales and service offices; and (ii) costs associated with the HRTools software enhancement initiatives. General and administrative expenses remained flat on a per worksite employee per month basis compared to the third quarter of 2007.

• Commissions expense increased 3.4%, but remained flat on a per worksite employee per month basis compared to the 2007 period.

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• Advertising costs decreased 0.4% and remained flat on a per worksite employee per month basis compared to the third quarter of 2007.

• Depreciation and amortization expense increased 3.2%, but decreased $1 on a per worksite employee per month basis compared to the 2007 period.

          Other Income (Expense)

          Other income (expense) decreased from $2.9 million in the third quarter of 2007 to $1.7 million in the 2008 period, due primarily to a decline in interest rates.

          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 $33 in the 2008 period, versus $47 and $36 in the 2007 period.

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          Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007.

          The following table presents certain information related to Administaff’s results of operations for the nine months ended September 30, 2008 and 2007.

	Nine months ended
	September 30,
	2008		2007		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $7.570 billion and $6.781 billion, less worksite employee payroll cost of $6.271 billion and $5.613 billion, respectively)	$	1,298,449	$	1,167,896		11.2	%
Gross profit		256,167		221,576		15.6	%
Operating expenses		205,686		177,433		15.9	%
Operating income		50,481		44,143		14.4	%
Other income		6,076		8,867		(31.5	)%
Net income		36,072		34,191		5.5	%
Diluted net income per share of common stock		1.40		1.24		12.9	%
Statistical Data:
Average number of worksite employees paid per month		116,360		108,571		7.2	%
Revenues per worksite employee per month (1)	$	1,240	$	1,195		3.8	%
Gross profit per worksite employee per month		245		227		7.9	%
Operating expenses per worksite employee per month		196		182		7.7	%
Operating income per worksite employee per month		48		45		6.7	%
Net income per worksite employee per month		34		35		(2.9	)%

⁽¹⁾ Gross billings of $7,228 and $6,940 per worksite employee per month less payroll cost of $5,988 and $5,745 per worksite employee per month, respectively.

          Revenues

          Our revenues for the nine months ended September 30, 2008, increased 11.2% over the 2007 period due to a 7.2% increase in the average number of worksite employees paid per month and a 3.8%, or $45, increase in revenues per worksite employee per month.

          By region, our revenue growth over the first nine months of 2007 and revenue distribution for the nine months ended September 30, 2008 were as follows:

	Nine months ended September 30,							Nine months ended September 30,
	2008		2007		% Change			2008			2007
			(in thousands)					(% of total revenues)
Northeast	$	274,104	$	231,485		18.4	%		21.1	%		19.8	%
Southeast		137,222		122,445		12.1	%		10.6	%		10.5	%
Central		187,516		164,619		13.9	%		14.4	%		14.1	%
Southwest		428,680		396,011		8.2	%		33.0	%		33.9	%
West		260,877		244,588		6.7	%		20.1	%		20.9	%
Other revenue		10,050		8,748		14.9	%		0.8	%		0.8	%
Total revenue	$	1,298,449	$	1,167,896		11.2	%		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 30, 2008, client retention, as a percentage of the worksite employee base, improved, while new client sales and the net change in existing clients declined compared to the 2007 period.

          Gross Profit

          Gross profit for the first nine months of 2008 increased 15.6% to $256.2 million, compared to the first nine months of 2007. The average gross profit per worksite employee increased 7.9% to $245 per month in the 2008 period from $227 per month in the 2007 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 3.8% per worksite employee per month, our primary direct costs, which include payroll taxes, benefits and workers’ compensation expenses, increased 2.8% to $995 per worksite employee per month in the first nine months of 2008 versus $968 in the first nine months of 2007.

• Benefits costs — The cost of group health insurance and related employee benefits increased $13 per worksite employee per month, or 2.2% on a per covered employee basis, compared to 2007. The overall increase in benefits costs during the nine months ended September 30, 2008, was mitigated by the impact of the cost savings associated with the January 2008 benefit plan design changes. The percentage of worksite employees covered under our health insurance plans was 73.3% in the 2008 period compared to 73.0% in the 2007 period. Please read “Critical Accounting Policies and Estimates — Benefits Costs” on page 15 for a discussion of our accounting for health insurance costs.

• Workers’ compensation costs — Workers’ compensation costs increased $6 per worksite employee per month compared to the first nine months of 2007. As a percentage of non-bonus payroll cost, workers’ compensation costs increased to 0.62% in the 2008 period from 0.55% in the 2007 period. During the 2008 period, we recorded reductions in workers’ compensation costs of $8.3 million, or 0.14% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $15.9 million, or 0.31% of non-bonus payroll costs, in the 2007 period. Please read “Critical Accounting Policies and Estimates — Workers’ Compensation Costs” on page 16 for a discussion of our accounting for workers’ compensation costs.

• Payroll tax costs — Payroll taxes increased $10 per worksite employee per month compared to the first nine month of 2007, primarily due to a 5.7% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost declined from 7.53% in the 2007 period to 7.40% in the 2008 period due to lower state unemployment tax rates in 2008.

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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, 2008 and 2007.

	Nine months ended September 30,							Nine months ended September 30,
	2008		2007		% change			2008		2007		% change
	(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes	$	113,779	$	96,895		17.4	%	$	109	$	99		10.1	%
Stock-based compensation		7,630		5,628		35.6	%		7		6		16.7	%
General and administrative expenses		52,304		45,798		14.2	%		50		47		6.4	%
Commissions		9,579		8,727		9.8	%		9		9		—
Advertising		10,998		9,134		20.4	%		10		9		11.1	%
Depreciation and amortization		11,396		11,251		1.3	%		11		12		(8.3	)%
Total operating expenses	$	205,686	$	177,433		15.9	%	$	196	$	182		7.7	%

          Operating expenses increased 15.9% to $205.7 million compared to the first nine months of 2007. Operating expense per worksite employee increased to $196 per month in the 2008 period from $182 in the 2007 period. The components of operating expenses changed as follows:

• Salaries, wages and payroll taxes of corporate and sales staff increased 17.4%, or $10 per worksite employee per month compared to the 2007 period due to: (i) a 11.4% increase in corporate headcount, primarily in the sales and service areas of the business; and (ii) a $2.9 million increase in incentive compensation expense, which is largely tied to our operating results.

• Stock-based compensation expense increased $2.0 million, or $1 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 14.2%, or $3 per worksite employee per month compared to the first nine months of 2007, due primarily to: (i) consulting fees associated with the HRTools software development and enhancement initiatives; (ii) expenses associated with the opening and relocating of sales offices; and (iii) increased travel expenses.

• Commissions expense increased 9.8%, but remained flat on a per worksite employee per month basis compared to the 2007 period.

• Advertising costs increased 20.4%, or $1 per worksite employee per month, due to an increase in business promotions and radio and television advertising expenditures relative to 2007.

• Depreciation and amortization expense increased 1.3%, but decreased $1 on a per worksite employee per month basis compared to the 2007 period.

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          Other Income (Expense)

          Other income (expense) decreased from $8.9 million in the first nine months of 2007 to $6.1 million in the 2008 period, due primarily to a decline in interest rates.

          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 $48 and $34 in the 2008 period, versus $45 and $35 in the 2007 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,				%
	2008		2007		Change			2008		2007		Change
			(in thousands, except per worksite employee data)
Payroll cost (GAAP)	$	2,137,954	$	1,932,491		10.6	%	$	6,271,168	$	5,613,354		11.7	%
Less: Bonus payroll cost		131,647		142,231		(7.4	)%		477,565		499,006		(4.3	)%
Non-bonus payroll cost	$	2,006,307	$	1,790,260		12.1	%	$	5,793,603	$	5,114,348		13.3	%
Payroll cost per worksite employee (GAAP)	$	5,969	$	5,726		4.2	%	$	5,988	$	5,745		4.2	%
Less: Bonus payroll cost per worksite employee		367		421		(12.8	)%		456		511		(10.8	)%
Non-bonus payroll cost per worksite employee	$	5,602	$	5,305		5.6	%	$	5,532	$	5,234		5.7	%

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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 dividends, 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 $189.7 million in cash and cash equivalents and marketable securities at September 30, 2008, including approximately $69.7 million for withheld federal and state income taxes, employment taxes and other payroll deductions, and $19.2 million in customer prepayments that were payable in October 2008. At September 30, 2008, we had working capital of $108.9 million compared to $97.2 million at December 31, 2007. 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 2008. 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 2008 decreased $16.3 million from 2007. 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 decrease in the reporting periods that end on a Friday. In the period ended September 30, 2008, which ended on a Tuesday, client prepayments were $19.2 million and accrued worksite employee payroll was $156.4 million. In the period ended September 30, 2007, which was a Sunday, client prepayments were $20.4 million and accrued worksite employee payroll was $130.7 million.

• Workers’ compensation plan funding — Under our workers’ compensation coverage policy, 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 the carrier, 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 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, based upon anticipated worksite employee payroll levels and workers’ compensation loss rates, were $32.1 million, less claims paid of $19.2 million in 2008, and $31.3 million, less claims paid of $17.3 million for the 2007

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	period. This compares to our estimate of workers’ compensation loss costs of $24.2 million and $15.8 million in 2008 and 2007, respectively. Additionally, during 2008 and 2007, we received $19.8 million and $24.3 million, respectively, from AIG for the return of excess claim funds related to the AIG Program.
•	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 $29.3 million surplus, $20.3 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, 2008.
•	Operating results — Our net income has a significant impact on our operating cash flows. Our net income increased 5.5% to $36.1 million in 2008 compared to 2007. Please read Results of Operations —Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007 on page 24

          Cash Flows Used in Investing Activities

          Cash flows provided by investing activities were $48.4 million during the nine months ended September 30, 2008. We liquidated approximately $74.6 million in marketable securities and reinvested the funds into cash equivalents. In addition, we invested approximately $22.6 million in capital expenditures and $3.8 million in the acquisition of USDatalink, an employment screening services company.

          Cash Flows Used in Financing Activities

          Cash flows used in financing activities were $24.0 million. During the first nine months of 2008, we repurchased $19.6 million in treasury stock and paid $9.1 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 “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 40 of our Form 10-K for the year ended December 31, 2007, filed with the SEC.

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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, 2008.

          There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2008, 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; (iii) 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 2007 annual report on Form 10-K under “Factors That May Affect Future Results and the Market Price of Common Stock” on page 40, 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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          The following additional factors may also have an effect on our results of operations.

          Current economic conditions may adversely affect our industry, business and results of operations.

          The United States economy is currently undergoing a period of slowdown and unprecedented volatility, which some observers view as a possible recession, and the future economic environment may continue to be less favorable than that of recent years. In addition, recent disruptions in national and international credit markets have lead to a scarcity of credit, tighter lending standards and higher interest rates on business loans. A prolonged economic downturn or a continuing scarcity of credit could adversely affect the financial condition and levels of business activity of our clients. This may in turn have a corresponding negative impact on our operating results as some of our clients may suffer business failures, and others may react to worsening conditions by reducing their employee headcount, lowering their wage and bonus levels, lowering their spending on other human resources benefits and services or determine not to outsource those services to us. In addition, worsening economic conditions may impair our ability to attract new clients. If any of these circumstances remain in effect for an extended period of time, there could be a material adverse effect on our financial results.

          The failure of our insurance carriers could have a material adverse effect on us.

          During the third quarter of 2008, it was publicly reported that American International Group, Inc. (“AIG Parent”) experienced significant financial difficulties, and the United States Federal Reserve has approved over $100 billion in emergency loans to AIG Parent. Selected member insurance companies of AIG Parent (the “Selected Member Carriers”) provide employment practices liability (“EPL”) insurance to Administaff and our clients, and also remain as the carriers for all workers’ compensation claim activity incurred between September 1, 2003 and September 30, 2007. As of September 30, 2008, AIG held funds of $43.4 million, which is included in restricted cash and deposits on the Company’s Consolidated Balance Sheet, to pay remaining claims under the AIG workers’ compensation program. Although AIG Parent has publicly stated that its Selected Member Carriers remain well-capitalized and financially secure, in the event that the Selected Member Carriers fail and are placed into a formal liquidation or a similar proceeding, the claim funds held by AIG would not necessarily be used to pay the Company’s remaining workers’ compensation claims. Instead, the claims could be paid by guaranty associations that have been established by most states, many of which could in turn attempt to return the liability for such claims to Administaff. Moreover, in the event of a failure of the carrier providing the EPL insurance, Administaff may be responsible for the payment of any such claims. Any such events could have a material adverse effect on net income in the reported period.

          For additional information about our workers’ compensation insurance, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Workers’ Compensation Costs” on page 16 and “—Other Matters” on page 29.

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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, 2008, 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)
07/01/2008 — 07/31/2008		54,180	$	25.40		11,050,661		1,449,339
08/01/2008 — 08/31/2008		48,309		26.89		11,098,970		1,401,030
09/01/2008 — 09/30/2008		15,755		25.99		11,114,725		1,385,275
Total		118,244	$	26.09		11,114,725		1,385,275

(1)	Our board of directors has approved the repurchase of up to an aggregate amount of 12,500,000 shares of Administaff common stock, of which 11,114,725 had been repurchased as of September 30, 2008. During the three months ended September 30, 2008, we repurchased 118,244 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 6. EXHIBITS

          (a) List of exhibits.

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.

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SIGNATURES

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

	Administaff, Inc.
Date: November 3, 2008	By:	/s/ Douglas S. Sharp
		Douglas S. Sharp
		Senior Vice President of Finance, Chief Financial Officer and Treasurer
		(Principal Financial and Duly Authorized Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Paul J. Sarvadi, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Administaff, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2008

/s/ Paul J. Sarvadi  

Paul J. Sarvadi 

Chairman of the Board and Chief Executive Officer 

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Douglas S. Sharp, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Administaff, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2008

/s/ Douglas S. Sharp  

Douglas S. Sharp 

Senior Vice President of Finance,
Chief Financial Officer and Treasurer 

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Administaff, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2008, (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Paul J. Sarvadi, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Paul J. Sarvadi

Paul J. Sarvadi

Chairman of the Board and Chief Executive Officer

November 3, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Administaff, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2008, (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Douglas S. Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Douglas S. Sharp

Douglas S. Sharp

Senior Vice President of Finance,
Chief Financial Officer and Treasurer

November 3, 2008