form10k.htm

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this annual report. Historical results are not necessarily indicative of trends in operating results for any future period.

The statements contained in this annual report that are not historical facts are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this annual report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in Item 1A. Risk Factors on page 17 and the uncertainties set forth from time to time in our other public reports and filings and public statements.

Overview

Our PEO services provide a comprehensive Personnel Management System that encompasses a broad range of services, including benefits and payroll 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 services. Our long-term strategy continues to be aggregating the best small and medium-sized businesses in the United States on the common platform of our unique human resource service offering, thereby leveraging our buying power to provide additional valuable services to clients. Our overall operating results can be measured in terms of revenues, payroll costs, gross profit or operating income per worksite employee per month. We often use the average number of worksite employees paid during a period as our unit of measurement in analyzing and discussing our results of operations.

While the decline in U.S. economic activity and the associated reductions in employment levels significantly impacted us in 2009, we implemented strategic plans to minimize the impact of these developments in 2010. Our business plan included, but was not limited to, an increase in our comprehensive service fee in an attempt to recover the higher costs associated with higher COBRA enrollment, and reductions in operating expenses through a 5% reduction in workforce.

We ended 2010 averaging 111,249 paid worksite employees in the fourth quarter, which represents an 8.0% increase over the first quarter of 2010. Approximately 15% of our paid worksite employees are in our mid-market sector, which is defined as companies with 150 to 2,000 worksite employees. Our paid mid-market worksite employees increased 11% in 2010 over 2009. We expect the average number of paid worksite employees to increase to a range of 112,500 to 113,000 in the first quarter of 2011.

Our 2010 average gross profit per worksite employee per month was $232, an $11 increase over 2009. Higher gross profit per worksite employee per month in 2010 compared to 2009 was primarily the result of a $72 revenue increase, which was offset by a $61 direct cost increase. The direct cost increase was due primarily to expected increases in medical and payroll tax costs.

Operating expenses were relatively flat in 2010 at $261.5 million; however, this amount includes approximately $5.0 million associated with acquisition costs and operating expenses related to two acquisitions made during the year. On a per worksite employee per month basis, operating expenses increased from $200 in 2009 to $204 in 2010.

Our net income in 2010 was $22.4 million, a $5.9 million increase compared to 2009. We ended 2010 with working capital of $144.5 million. During 2010, we paid $13.5 million in dividends and repurchased shares at a cost of $7.9 million.

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Revenues

We account for our revenues in accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition. Our PEO gross billings to clients include the payroll cost of each worksite employee at the client location and a markup computed as a percentage of each worksite employee’s payroll cost. We invoice the gross billings concurrently with each periodic payroll of our worksite employees. Revenues, which exclude the payroll cost component of gross billings, and therefore, consist solely of the markup, are recognized ratably over the payroll period as worksite employees perform their service at the client worksite. This markup includes pricing components associated with our estimates of payroll taxes, benefits and workers’ compensation costs, plus a separate component related to our HR services. We include revenues that have been recognized but not invoiced in unbilled accounts receivable on our Consolidated Balance Sheets.

Our revenues are primarily dependent on the number of clients enrolled, the resulting number of worksite employees paid each period and the number of worksite employees enrolled in our benefit plans. Because our total markup is computed as a percentage of payroll cost, revenues are also affected by the payroll cost of worksite employees, which may fluctuate based on the composition of the worksite employee base, inflationary effects on wage levels and differences in the local economies of our markets.

Direct Costs

The primary direct costs associated with our PEO revenue-generating activities are:

employment-related taxes (“payroll taxes”);

costs of employee benefit plans; and

workers’ compensation costs.

Payroll taxes consist of the employer’s portion of Social Security and Medicare taxes under FICA, federal unemployment taxes and state unemployment taxes. Payroll taxes are generally paid as a percentage of payroll cost. The federal tax rates are defined by federal regulations. State unemployment tax rates are subject to claim histories and vary from state to state.

Employee benefits costs are comprised primarily of health insurance premiums and claims costs (including dental and pharmacy costs), but also include costs of other employee benefits such as life insurance, vision care, disability insurance, education assistance, adoption assistance, a flexible spending account and a worklife program.

Workers’ compensation costs include administrative and risk charges paid to the insurance carrier, and claims costs, which are driven primarily by the frequency and severity of claims.

Gross Profit

Our gross profit per worksite employee is primarily determined by our ability to accurately estimate and control direct costs and our ability to incorporate changes in these costs into the gross billings charged to PEO clients, which are subject to contractual arrangements that are typically renewed annually. We use gross profit per worksite employee per month as our principal measurement of relative performance at the gross profit level.

Operating Expenses

Salaries, wages and payroll taxes – Salaries, wages and payroll taxes are primarily a function of the number of corporate employees and their associated average pay and any additional incentive compensation. Our corporate employees include client services, sales and marketing, benefits, legal, finance, information technology and administrative support personnel.

·	Stock-based compensation – Our stock-based compensation primarily relates to the recognition of non-cash compensation expense over the vesting period of restricted stock awards.

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·	General and administrative expenses – Our general and administrative expenses primarily include:

rent expenses related to our service centers and sales offices;

outside professional service fees related to legal, consulting and accounting services, and acquisition transaction expenses;

administrative costs, such as postage, printing and supplies;

employee travel expenses; and

repairs and maintenance costs.

·	Commissions – Commission expense consists of amounts paid to sales managers and representatives. Commissions are based on the number of new accounts sold and a percentage of revenue generated by such personnel.

·	Advertising – Advertising expense primarily consists of media advertising and other business promotions in our current and anticipated sales markets, including the Administaff Small Business Classic sponsorship.

·	Depreciation and amortization – Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices and technology infrastructure.

Income Taxes

Administaff’s provision for income taxes typically differs from the U.S. statutory rate of 35%, due primarily to state income taxes and non-deductible expenses. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant items resulting in deferred income taxes include prepaid assets, accruals for workers’ compensation expenses, stock-based compensation and depreciation. Changes in these items are reflected in our financial statements through a deferred income tax provision.

Critical Accounting Policies and Estimates

Administaff’s 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 our management 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 these estimates, including those related to health and workers’ compensation insurance claims experience, client bad debts, income taxes, property and equipment, goodwill and other intangibles, and contingent liabilities. We base 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 Shield of California, Hawaii Medical Service Association, Unity Health Plans and Tufts, all of which provide fully insured policies or service contracts.

The health insurance contract with United 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) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and COBRA enrollees.

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Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.

Additionally, since the plan’s inception, 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 premiums paid and owed 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 premiums paid and owed 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. The terms of the arrangement with United require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. As of December 31, 2010, Plan Costs were less than the premiums paid and owed to United by $28.9 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $19.9 million balance is included in prepaid insurance, a current asset, on our Consolidated Balance Sheet. The premiums owed to United at December 31, 2010, were $12.1 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheet.

We believe the use of recent claims activity is representative of incurred and paid trends during the reporting period. The estimated completion rate used to compute incurred but not reported claims involves a significant level of judgment. Accordingly, an increase (or decrease) in the completion rates used to estimate the incurred claims would result in an increase (or decrease) in benefits costs and net income would decrease (or increase) accordingly.

The following table illustrates the sensitivity of changes in the completion rates on our estimate of total benefit costs of $759.5 million in 2010:

Change in Completion Rate			Change in Benefits Costs (in thousands)			Change in Net Income (in thousands)

	(2.5	)%	$	(12,832	)	$	7,571
	(1.0	)%		(5,133	)		3,028
	1.0	%		5,133			(3,028	)
	2.5	%		12,832			(7,571	)

Workers’ compensation costs – Since October 1, 2007, our workers’ compensation coverage has been provided through our arrangement with the ACE Group of Companies (“ACE”). Under our arrangement with ACE (the “ACE Program”), we bear the economic burden for the first $1 million layer of claims per occurrence, and effective October 1, 2010, we also bear the economic burden for a maximum aggregate amount of $5 million per policy year for claim amounts that exceed the first $1 million. ACE bears the economic burden for all claims in excess of these levels. 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. Our coverage from September 1, 2003 through September 30, 2007 was provided through selected member insurance companies of American International Group, Inc. (the “AIG Program”).

Because we bear the economic burden for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing healthcare and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.

We employ a third party actuary to estimate our loss development rate, which is primarily based upon the nature of worksite employees’ job responsibilities, the location of worksite employees, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into the Company’s workers’ compensation claims cost estimates. During the years ended December 31, 2010 and 2009, Administaff reduced accrued workers’ compensation costs by $6.2 million and $5.7 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost

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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 2010 and 2009 was 1.4% and 1.8%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.

Our claim trends could be greater than or less than our prior estimates, in which case we would revise our claims estimates and record an adjustment to workers’ compensation costs in the period such determination is made. If we were to experience any significant changes in actuarial assumptions, our loss development rates could increase (or decrease) which would result in an increase (or decrease) in workers’ compensation costs and a resulting decrease (or increase) in net income reported in our Consolidated Statement of Operations.

The following table illustrates the sensitivity of changes in the loss development rate on our estimate of workers’ compensation costs totaling $45.6 million in 2010:

Change in Loss Development Rate			Change in Workers’ Compensation Costs (in thousands)			Change in Net Income (in thousands)

	(5.0	)%	$	(1,841	)	$	1,086
	(2.5	)%		(920	)		543
	2.5	%		920			(543	)
	5.0	%		1,841			(1,086	)

At the beginning of each policy period, the insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated worksite employee payroll levels and expected workers’ compensation loss rates, as determined by the carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits, a long-term asset in our Consolidated Balance Sheets. In 2010, we received $15.6 million for the return of excess claim funds related to the ACE program, which reduced deposits. As of December 31, 2010, we had restricted cash of $41.2 million and deposits of $51.7 million. We have estimated and accrued $96.9 million in incurred workers’ compensation claim costs as of December 31, 2010. Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on our Consolidated Balance Sheets.

Contingent liabilities – We accrue and disclose contingent liabilities in our Consolidated Financial Statements in accordance with ASC 450-10, Contingencies. U.S. generally accepted accounting principles (“GAAP”) requires accrual of contingent liabilities that are considered probable to occur and that 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 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 that 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 that we would be able to realize our deferred tax assets in the future in excess of the 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 that 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.

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Allowance for doubtful accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to pay their 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 PEO 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 CSA 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 conditions 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 we determine that the useful lives of these assets will be shorter than we currently estimate, 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. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we may record an impairment loss, which would reduce net income, to the extent that 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 – Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. Purchased intangible assets other than goodwill are 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

We believe that we have implemented the accounting pronouncements with a material impact on our financial statement and do not believe there are any new or pending announcements that will materially impact our financial position or results of operations.

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Results of Operations

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009.

The following table presents certain information related to the Company’s results of operations for the years ended December 31, 2010 and 2009.

	Year ended December 31,
	2010		2009		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $10.169 billion and $9.856 billion, less worksite employee payroll cost of $8.449 billion and $8.203 billion, respectively)	$	1,719,752	$	1,653,096		4.0	%
Gross profit		298,536		287,967		3.7	%
Operating expenses		261,476		260,934		0.2	%
Operating income		37,060		27,033		37.1	%
Other income		961		1,616		(40.5	)%
Net income		22,440		16,574		35.4	%
Diluted net income per share of common stock		0.86		0.65		32.3	%

Statistical Data:
Average number of worksite employees paid per month		107,014		108,736		(1.6	)%
Revenues per worksite employee per month(1)	$	1,339	$	1,267		5.7	%
Gross profit per worksite employee per month		232		221		5.0	%
Operating expenses per worksite employee per month		204		200		2.0	%
Operating income per worksite employee per month		29		21		38.1	%
Net income per worksite employee per month		17		13		30.8	%

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(1)	Gross billings of $7,919 and $7,553 per worksite employee per month, less payroll cost of $6,580 and $6,286 per worksite employee per month, respectively.

Revenues

Our revenues, which represent gross billings net of worksite employee payroll cost, increased 4.0% compared to 2009, due to a 5.7%, or $72 increase in revenues per worksite employee per month, offset in part by a 1.6% decrease in the average number of worksite employees paid per month. The 5.7% increase in revenues per worksite employee per month was due primarily to increases in the benefits and payroll tax pricing to offset anticipated increases in these direct costs.

By region, our revenue change from 2009 and revenue distribution for years ended December 31, 2010 and 2009 were as follows:

	Year ended December 31,							Year ended December 31,
	2010		2009		% Change			2010			2009
	(in thousands)							( % of total revenue)

Northeast	$	412,233	$	369,761		11.5	%		24.2	%		22.5	%
Southeast		184,223		182,888		0.7	%		10.8	%		11.1	%
Central		251,756		248,544		1.3	%		14.8	%		15.2	%
Southwest		522,518		518,828		0.7	%		30.7	%		31.6	%
West		331,916		321,935		3.1	%		19.5	%		19.6	%
		1,702,646		1,641,956		3.7	%		100.0	%		100.0	%
Other revenue		17,106		11,140		53.6	%
Total revenue	$	1,719,752	$	1,653,096		4.0	%

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Our growth in the number of worksite employees paid 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. In 2010, our average number of paid worksite employees decreased 1.6% compared to 2009. However, during 2010 our average number of paid worksite employees increased 8.0% from the first quarter of 2010 to 111,249 in the fourth quarter of 2010, as the net change in existing clients, new client sales and client retention improved throughout 2010.

Gross Profit

Gross profit increased 3.7% to $298.5 million compared to 2009. The average gross profit per worksite employee increased 5.0% to $232 per month in 2010 versus $221 in 2009. 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 per worksite employee per month increased 5.7% to $1,339 on 2010 versus 2009, our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 5.8% to $1,107 per worksite employee per month. The primary direct cost components changed as follows:

Benefits costs – The cost of group health insurance and related employee benefits increased $29 per worksite employee per month, or 6.0%, on a per covered employee basis compared to 2009. This increase was due to expected medical cost increases, as well as higher claims associated with increased COBRA participation resulting from the severe economic environment and the American Recovery and Reinvestment Act of 2009, as amended (“ARRA”). ARRA provided a federal subsidy for COBRA premiums and extended the election period for certain terminated employees. The net costs of claims per COBRA enrollee are approximately double the cost of claims associated with active enrollees. The number of individuals electing COBRA coverage has declined from 7.2% in the fourth quarter of 2009 to 5.5% in the fourth quarter of 2010. The percentage of worksite employees covered under our health insurance plan was 74.3% in 2010 versus 74.8% in 2009. Please read “—Critical Accounting Policies and Estimates – Benefits Costs” on page 31 for a discussion of our accounting for health insurance costs.

Workers’ compensation costs – Workers’ compensation costs decreased 4.1%, but increased $1 per worksite employee per month compared to 2009. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.60% in 2010 from 0.64% in 2009. During 2010, the Company recorded reductions in workers’ compensation costs of $6.2 million, or 0.08% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $5.7 million, or 0.08% of non-bonus payroll costs in 2009. The 2010 period costs include the impact of a 1.4% discount rate used to accrue workers’ compensation loss claims, compared to a 1.8% discount rate used in the 2009 period. Please read “—Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 32 for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs – Payroll taxes increased 5.3%, or $31 per worksite employee per month compared to 2009. Payroll taxes as a percentage of payroll cost increased from 6.96% in 2009 to 7.11% in 2010. The increases in payroll tax costs were due primarily to higher state unemployment tax rates, which increased approximately 50% over the 2009 period as a result of unemployment claims experienced during the economic recession and a 4.7% increase in average payroll cost per worksite employee per month.

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Operating Expenses

The following table presents certain information related to our operating expenses for the years ended December 31, 2010 and 2009.

	Year ended December 31,							Year ended December 31,
	2010		2009		% Change			2010		2009		% Change
	(in thousands)							(per worksite employee per month)

Salaries, wages and payroll taxes	$	146,901	$	144,086		2.0	%	$	115	$	110		4.5	%
Stock–based compensation		8,126		10,064		(19.3	)%		6		8		(25.0	)%
General and administrative expenses		63,214		62,381		1.3	%		49		48		2.1	%
Commissions		11,881		11,800		0.7	%		9		9		—
Advertising		16,447		16,011		2.7	%		13		12		8.3	%
Depreciation and amortization		14,907		16,592		(10.2	)%		12		13		(7.7	)%
Total operating expenses	$	261,476	$	260,934		0.2	%	$	204	$	200		2.0	%

Operating expenses of $261.5 million were relatively flat compared to 2009. The 2010 operating expenses included $5.0 million related to acquisition costs and ongoing operating expenses associated with the ExpensAble and Galaxy Technologies acquisitions. Operating expenses per worksite employee per month increased to $204 in 2010 versus $200 in 2009. The components of operating expenses changed as follows:

·	Salaries, wages and payroll taxes of corporate and sales staff increased 2.0%, or $5 per worksite employee per month compared to 2009, primarily due to an increase in our incentive compensation accrual associated with our improved operating results compared to 2009.

Stock-based compensation decreased 19.3%, or $2 per worksite employee per month compared to 2009, due primarily to a large number of forfeitures in 2010 as a result of employee terminations. The stock-based compensation expense represents amortization of restricted stock awards granted to employees and the annual stock grant made to non-employee directors. Please read Note 1 to the Consolidated Financial Statements on page F-17 for additional information.

·	General and administrative expenses increased 1.3%, or $1 per worksite employee per month.

·	Commissions expense increased 0.7%, but remained flat on a per worksite employee per month basis compared to 2009.

·	Advertising costs increased 2.7%, or $1 per worksite employee per month compared to 2009.

·	Depreciation and amortization expense decreased 10.2%, or $1 per worksite employee per month compared to the 2009 period, due primarily to the reduction in capital expenditures during 2009 and 2010.

Other Income

Other income decreased to $961,000 in 2010 compared to $1.6 million in 2009, due to the continued decline in interest rates.

Income Tax Expense

During 2010 we incurred federal and state income tax expense of $15.6 million on pre-tax income of $38.0 million. Our provision for income taxes differed from the US statutory rate of 35% primarily due to state income taxes and non-deductible expenses, offset slightly by tax-exempt interest income. Our effective income tax rate was 41.0% in the 2010 period compared to 42.1% in the 2009 period.

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Net Income

Net income for 2010 was $22.4 million, or $0.86 per diluted share, compared to $16.6 million, or $0.65 per diluted share in 2009. On a per worksite employee per month basis, net income was $17 in 2010 compared to $13 in 2009.

Results of Operations

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008.

The following table presents certain information related to the Company’s results of operations for the years ended December 31, 2009 and 2008.

	Year ended December 31,
	2009		2008		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $9.856 billion and $10.372 billion, less worksite employee payroll cost of $8.203 billion and $8.648 billion, respectively)	$	1,653,096	$	1,724,434		(4.1	)%
Gross profit		287,967		343,739		(16.2	)%
Operating expenses		260,934		278,757		(6.4	)%
Operating income		27,033		64,982		(58.4	)%
Other income		1,616		7,035		(77.0	)%
Net income		16,574		45,780		(63.8	)%
Diluted net income per share of common stock		0.65		1.76		(63.1	)%

Statistical Data:
Average number of worksite employees paid per month		108,736		116,957		(7.0	)%
Revenues per worksite employee per month(1)	$	1,267	$	1,229		3.1	%
Gross profit per worksite employee per month		221		245		(9.8	)%
Operating expenses per worksite employee per month		200		199		0.5	%
Operating income per worksite employee per month		21		46		(54.3	)%
Net income per worksite employee per month		13		33		(60.6	)%

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(1)	Gross billings of $7,553 and $7,391 per worksite employee per month, less payroll cost of $6,286 and $6,162 per worksite employee per month, respectively.

Revenues

Our revenues, which represent gross billings net of worksite employee payroll cost, decreased 4.1% compared to 2008, due to a 7.0% decrease in the average number of worksite employees paid per month, offset in part by a 3.1%, or $38, increase in revenues per worksite employee per month. The 3.1% increase in revenues per worksite employee per month was due primarily to increases in the benefits and payroll tax pricing related to our direct costs.

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By region, our revenue change from 2008 and revenue distribution for years ended December 31, 2009 and 2008 were as follows:

	Year ended December 31,							Year ended December 31,
	2009		2008		% Change			2009			2008
	(in thousands)							( % of total revenue)

Northeast	$	369,761	$	363,268		1.8	%		22.5	%		21.2	%
Southeast		182,888		183,091		(0.1	)%		11.1	%		10.7	%
Central		248,544		249,145		(0.2	)%		15.2	%		14.6	%
Southwest		518,828		569,655		(8.9	)%		31.6	%		33.3	%
West		321,935		345,736		(6.9	)%		19.6	%		20.2	%
		1,641,956		1,710,895		(4.0	)%		100.0	%		100.0	%
Other revenue		11,140		13,539		(17.7	)%
Total revenue	$	1,653,096	$	1,724,434		(4.1	)%

Our growth in the number of paid worksite employees 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 2009, our average number of worksite employees declined by 7.0%, as the net change in existing clients, new client sales and client retention declined as compared to 2008.

Gross Profit

Gross profit decreased 16.2% to $288.0 million compared to 2008. The average gross profit per worksite employee decreased 9.8% to $221 per month in 2009 versus $245 in 2008. 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 per worksite employee per month increased 3.1% to $1,267 in 2009 versus 2008, our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 6.3% to $1,046 per worksite employee per month. The primary direct cost components changed as follows:

Benefits costs – The cost of group health insurance and related employee benefits increased $53 per worksite employee per month, or 8.6% on a per covered employee basis compared to 2008. This increase was due to increased utilization by active participants, as well as higher claims associated with increased COBRA participation resulting from the severe economic environment and ARRA. ARRA provided a federal subsidy for COBRA premiums and extended the election period for certain terminated employees. The net costs of COBRA claims per enrollee are approximately double the cost of claims associated with active enrollees. In addition, the number of individuals electing COBRA coverage has increased from 3.8% of participants in the United Plan in the second quarter of 2008 to 7.2% in the fourth quarter of 2009. The percentage of worksite employees covered under our health insurance plan was 74.8% in 2009 versus 73.5% in 2008. Please read “—Critical Accounting Policies and Estimates – Benefits Costs” on page 31 for a discussion of our accounting for health insurance costs.

Workers’ compensation costs – Workers’ compensation costs decreased 4.4%, but increased $1 per worksite employee per month compared to 2008. As a percentage of non-bonus payroll cost, workers’ compensation costs increased to 0.64% in 2009 from 0.63% in 2008. During 2009, the Company recorded reductions in workers’ compensation costs of $5.7 million, or 0.08% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $9.8 million, or 0.13% of non-bonus payroll costs in 2008. The 2009 period costs include the impact of a 1.8% discount rate used to accrue workers’ compensation loss claims, compared to a 2.6% discount rate used in the 2008 period. Please read “—Critical Accounting Policies and Estimates – Workers’ Compensation Costs” on page 32 for a discussion of our accounting for workers’ compensation costs.

·	Payroll tax costs – Payroll taxes decreased 4.9%, but increased $10 per worksite employee per month compared to 2008, due to a 2.0% increase in average payroll cost per worksite employee per month. Payroll taxes as a percentage of payroll cost increased from 6.94% in 2008 to 6.96% in 2009.

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Operating Expenses

The following table presents certain information related to our operating expenses for the years ended December 31, 2009 and 2008.

	Year ended December 31,							Year ended December 31,
	2009		2008		% Change			2009		2008		% Change
	(in thousands)							(per worksite employee per month)

Salaries, wages and payroll taxes	$	144,086	$	153,538		(6.2	)%	$	110	$	110		—
Stock–based compensation		10,064		9,970		0.9	%		8		7		14.3	%
General and administrative expenses		62,381		69,348		(10.0	)%		48		49		(2.0	)%
Commissions		11,800		12,665		(6.8	)%		9		9		—
Advertising		16,011		17,666		(9.4	)%		12		13		(7.7	)%
Depreciation and amortization		16,592		15,570		6.6	%		13		11		18.2	%
Total operating expenses	$	260,934	$	278,757		(6.4	)%	$	200	$	199		0.5	%

Operating expenses decreased 6.4% to $260.9 million in 2009 compared to 2008. Operating expenses per worksite employee per month increased to $200 in 2009 versus $199 in 2008. The components of operating expenses changed as follows:

Salaries, wages and payroll taxes of corporate and sales staff decreased 6.2%, and remained flat on a per worksite employee per month basis compared to 2008. During 2009, we initiated a number of operating expense savings measures, including the absence of merit salary increases and reductions in 401(k) match for corporate employees. In addition, incentive compensation expense was lower due to reduced operating results in 2009 as compared to 2008.

Stock-based compensation increased $94,000 over 2008. The stock-based compensation expense represents amortization of restricted stock awards granted to employees and the annual stock grant made to non-employee directors. Please read Note 1 to the Consolidated Financial Statements on page F-17 for additional information.

·	General and administrative expenses decreased 10.0%, or $1 per worksite employee per month, due to various cost-saving initiatives implemented in 2009, including reductions in travel, overnight postage, repairs and maintenance, training and printing.

·	Commissions expense decreased 6.8%, but remained flat on a per worksite employee per month basis compared to 2008.

·	Advertising costs decreased 9.4%, or $1 per worksite employee per month compared to 2008, due to cost-saving efforts in 2009 as well as lower advertising rates.

·	Depreciation and amortization expense increased 6.6%, or $2 per worksite employee per month compared to the 2008 period, due primarily to depreciation associated with investments in computer software in the latter half of 2008.

Other Income

Other income decreased to $1.6 million in 2009 compared to $7.0 million in 2008, due to the significant decline in interest rates.

Income Tax Expense

During 2009 we incurred federal and state income tax expense of $12.1 million on pre-tax income of $28.6 million. Our provision for income taxes differed from the US statutory rate of 35% primarily due to state income taxes and non-deductible expenses, offset slightly by tax-exempt interest income. Our effective income tax rate was

42.1% in the 2009 period compared to 36.4% in the 2008 period, due to increases in state income taxes and non-deductible items, and a decline in tax-exempt interest income.

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Net Income

Net income for 2009 was $16.6 million, or $0.65 per diluted share, compared to $45.8 million, or $1.76 per diluted share in 2008. On a per worksite employee per month basis, net income was $13 in 2009 compared to $33 in 2008.

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 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.

	Year ended December 31,
	2010		2009		% Change
	(in thousands, except per worksite employee)
GAAP to non-GAAP reconciliation:
Payroll cost (GAAP)	$	8,449,484	$	8,202,743		3.0	%
Less: bonus payroll cost		839,066		750,351		11.8	%
Non-bonus payroll cost	$	7,610,418	$	7,452,392		2.1	%

Payroll cost per worksite employee (GAAP)	$	6,580	$	6,286		4.7	%
Less: Bonus payroll cost per worksite employee		654		575		13.7	%
Non-bonus payroll cost per worksite employee	$	5,926	$	5,711		3.8	%

Liquidity and Capital Resources

We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of, among other things, our expansion plans, potential acquisitions, debt service requirements and other operating cash needs. To meet short-term liquidity requirements, which are primarily the payment of direct and operating expenses, we rely primarily on cash from operations. Longer-term projects or significant acquisitions may be financed with debt or equity. 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 $278.2 million in cash, cash equivalents and marketable securities at December 31, 2010, of which approximately $128.8 million was payable in early January 2011 for withheld federal and state income taxes, employment taxes and other payroll deductions, and $8.1 million in customer prepayments that were payable in January 2011. At December 31, 2010, we had working capital of $144.5 million compared to $127.6 million at December 31, 2009. We currently believe that our cash on hand, marketable securities and cash flows from operations will be adequate to meet our liquidity requirements for 2011. 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.

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Cash Flows from Operating Activities

Our cash flows from operating activities in 2010 were $78.8 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our PEO 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 client 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 and associated payroll taxes. Therefore, the last business 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 and at month-end; therefore, operating cash flows decrease in the reporting periods that end on a Friday. In the year ended December 31, 2010, which ended on a Friday, client prepayments were $8.1 million and accrued worksite employee payroll was $109.7 million. In the year ended December 31, 2009, which ended on a Thursday, client prepayments were $13.1 million and accrued worksite employee payroll was $93.1 million.

Workers’ compensation plan funding – Under our workers’ compensation insurance arrangements, 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 agreements with the carriers, and are based primarily on anticipated worksite employee payroll levels and workers’ compensation loss rates during the policy year. Changes in payroll levels from those that were anticipated in the arrangements can result in changes in the amount of the cash payments, 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 $40.3 million in 2010 and $43.4 million in 2009. However, our estimates of workers’ compensation loss costs were $32.7 million and $33.3 million in 2010 and 2009, respectively. During 2010 and 2009, we received $15.6 million and $17.0 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase to working capital.

Medical plan funding – Our health care 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, premiums paid and owed to United have exceeded Plan Costs, resulting in a $28.9 million surplus, $19.9 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 Sheets at December 31, 2010. The premiums owed to United at December 31, 2010, were $12.1 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheet.

·	Operating results – Our net income has a significant impact on our operating cash flows. Our net income increased 35.4% to $22.4 million in 2010 from $16.6 million in 2009. Please read “Results of Operations – Year Ended December 31, 2010 Compared to Year Ended December 31, 2009” on page 35.

Cash Flows Used in Investing Activities

Our cash flows used in investing activities were $58.6 million during 2010. We invested $39.0 million, net, in marketable securities, $12.9 million in acquisitions and $6.8 million in capital expenditures.

Cash Flows Used in Financing Activities

Our cash flows used in financing activities were $12.5 million during 2010, primarily due to $13.5 million in dividends paid.

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Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments as of

December 31, 2010, and the effect they are expected to have on our liquidity and capital resources (in thousands):

Contractual obligations:	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years

Non-cancelable operating leases	$	50,129	$	14,116	$	22,006	$	10,163	$	3,844
Purchase obligations (1)		12,192		4,861		2,771		1,410		3,150
Other long-term liabilities:
Accrued workers’ compensation claim costs(2)		96,934		39,204		25,386		22,596		9,748
Estimated acquisition payouts(3)		3,897		2,636		1,261		—		—
Total contractual cash obligations	$	163,152	$	60,817	$	51,424	$	34,169	$	16,742

(1)

The table includes purchase obligations associated with non-cancelable contracts individually greater than $100,000 and one year.

(2)

Accrued workers’ compensation claim costs include the short and long-term amounts. For more information, please read, “Critical Accounting Policies and Estimates – Workers’ Compensation Costs,” on page 32.

(3)

Estimated acquisition costs include short and long-term amounts estimated to be paid in connection with earn outs and contractual arrangements. For additional discussion on acquisition costs, please read Note 5, “Acquisitions,” on page F-21.

Seasonality, Inflation and Quarterly Fluctuations

We believe the effects of inflation have not had a significant impact on our results of operations or financial condition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash equivalent short-term investments and our available-for-sale marketable securities. The cash equivalent short-term investments consist primarily of overnight investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. The available-for-sale marketable securities are

subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates.

We attempt to limit our exposure to interest rate risk primarily through diversification and low investment turnover. Our investment policy is designed to maximize after-tax interest income while preserving our principal investment. As a result, our marketable securities consist of tax-exempt short and intermediate-term debt securities, which are primarily prefunded municipal bonds that are secured by escrow funds containing U.S. Government Securities.

The following table presents information about our available-for-sale marketable securities as of December 31, 2010 (dollars in thousands):

	Principal Maturities		Coupon Interest Rate			Effective Yield

2011	$	32,480		5.75	%		0.57	%
2012		9,150		5.88	%		0.89	%
Total	$	41,630		5.78	%		0.64	%
Fair Market Value	$	43,367

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by this Item 8 is contained in a separate section of this Annual Report. See “Index to Consolidated Financial Statements” on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15a-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 December 31, 2010.

Design and Evaluation of Internal Control over Financial Reporting

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and effectiveness of our internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Ernst & Young, LLP, our independent registered public accounting firm, also attested to our internal control over financial reporting. Management’s report and the independent registered public accounting firm’s attestation report are included in our 2010 Consolidated Financial Statements on pages F-3 and F-4 under the captions entitled “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting,” and are incorporated herein by reference.

There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Some of the information required by this item is incorporated by reference to the information set forth under the captions “Proposal Number 1: Election of Directors – Nominees – Class III Directors (For Terms Expiring at the 2014 Annual Meeting),” “– Directors Remaining in Office,” and “– Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the “Administaff Proxy Statement”).

Code of Business Conduct and Ethics

Our Board of Directors adopted our Code of Business Conduct and Ethics (the “Code of Ethics”), which meets the requirements of Rule 303A.10 of the New York Stock Exchange Listed Company Manual and Item 406 of Regulation S-K. You can access our Code of Ethics on the Corporate Governance page of our website at www.administaff.com. Changes in and waivers to the Code of Ethics for the Company’s directors, executive officers and certain senior financial officers will be posted on our Internet website within five business days and maintained for at least 12 months.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference to the information set forth under the captions “Proposal Number 1: Election of Directors – Director Compensation” and “—Executive Compensation” in the Administaff Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Administaff Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information required by this item is incorporated by reference to the information set forth under the caption “Proposal Number 1: Election of Directors – Certain Relationships and Related Transactions” in the Administaff Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this item is incorporated by reference to the information set forth under the caption “Proposal Number 4: Ratification and Appointment of Independent Public Accountants – Fees of Ernst & Young LLP” and “—Finance, Risk Management and Audit Committee Pre-Approval Policy for Audit and Non-Audit Services” in the Administaff Proxy Statement.

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PART IV

ITEM 15. EXHIBITS FINANCIAL STATEMENT SCHEDULES.

(a)	1.	Financial Statements of the Company

		The Consolidated Financial Statements listed by the Registrant on the accompanying Index to Consolidated Financial Statements (see page F-1) are filed as part of this Annual Report.

(a)	2.	Financial Statement Schedules

		The required information is included in the Consolidated Financial Statements or Notes thereto.

(a)	3.	List of Exhibits

		3.1	Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (No. 33-96952)).
		3.2	Amended and Restated Bylaws of Administaff, Inc. dated November 13, 2007 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 16, 2007).
		3.3	Certificate of Designation of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock (included as Exhibit A to the Rights Agreement).
		4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (No. 33-96952)).
		4.2	Rights Agreement dated as of November 13, 2007 between Administaff, Inc. and Mellon Investor Services, LLC, as Rights Agent (the “Rights Agreement”) (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 16, 2007).
		4.3	Form of Rights Certificate (included as Exhibit B to the Rights Agreement).
		10.1†	Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
		10.2†	First Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
		10.3†	Second Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
		10.4†	Third Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.4 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
		10.5†	Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan (incorporated by reference to Exhibit 99.5 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
		10.6†	Administaff, Inc. 2001 Incentive Plan, as amended and restated (incorporated by reference to Appendix A to the Registrant’s definitive proxy statement on Schedule 14A filed on March 18, 2009 (No. 1-13998)).
		10.7†	Form of Incentive Stock Option Agreement (1997 Plan) (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-K filed for the year ended December 31, 2004).
		10.8†	Form of Incentive Stock Option Agreement (2001 Plan – 3 year vesting) (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K filed for the year ended December 31, 2004).
		10.9†	Form of Incentive Stock Option Agreement (2001 Plan – 5 year vesting) (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-K filed for the year ended December 31, 2004).

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	10.10†	Form of Director Stock Option Agreement (Initial Grant) (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-K filed for the year ended December 31, 2004).
	10.11†	Form of Director Stock Option Agreement (Annual Grant) (incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-K filed for the year ended December 31, 2004).
	10.12†	Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K filed for the year ended December 31, 2004).
	10.13	Administaff, Inc. Nonqualified Stock Option Plan (incorporated by reference to Exhibit 99.6 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)).
	10.14	First Amendment to Administaff, Inc. Nonqualified Stock Option Plan, effective August 7, 2001 (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K for the year ended December 31, 2002).
	10.15	Second Amendment to Administaff, Inc. Nonqualified Stock Option Plan, effective January 28, 2003 (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-K for the year ended December 31, 2002).
	10.16	Administaff, Inc. Amended and Restated Employee Stock Purchase Plan effective April 1, 2002 (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-K for the year ended December 31, 2002).
	10.17	First Amendment to Administaff, Inc. Amended and Restated Employee Stock Purchase Plan, effective July 31, 2002 (incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-K for the year ended December 31, 2002).
	10.18	Second Amendment to Administaff, Inc. Amended and Restated Employee Stock Purchase Plan, effective August 15, 2003 (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K for the year ended December 31, 2003).
	10.19†	Board of Directors Compensation Arrangements (incorporated by reference to Form 8-K dated February 7, 2005).
	10.20	Administaff, Inc. 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (No. 333-151275)).
	10.21(+)	Minimum Premium Financial Agreement by and between Administaff of Texas, Inc. and United Healthcare Insurance Company, Hartford, Connecticut (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002).
	10.22(+)	Minimum Premium Administrative Services Agreement by and between Administaff of Texas, Inc. and United Healthcare Insurance Company, Hartford, Connecticut (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002).
	10.23(+)	Amended and Restated Security Deposit Agreement by and between Administaff of Texas, Inc. and United Healthcare Insurance Company, Hartford, Connecticut (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002).
	10.24(+)	Amendment to Various Agreements between United Healthcare Insurance Company and Administaff of Texas, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005).
	10.25	Houston Service Center Operating Lease Amendment (incorporated by reference to Exhibit 10.27 to the Registrant’s Form 10-K for the year ended December 31, 2004).
	10.26(+)	Letter Agreement dated April 21, 2007, between Administaff of Texas, Inc. and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007).
	10.27(+)	Amendment to Minimum Premium Financial Agreement, as amended and restated effective January 1, 2005, by and between Administaff of Texas, Inc., and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007).

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	10.28(+)	Amendment to Minimum Premium Administrative Services Agreement, as amended and restated effective January 1, 2005, by and between Administaff of Texas, Inc., and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007).
	10.29(+)*	Letter Agreement dated October 1, 2010, between Administaff of Texas, Inc. and UnitedHealthcare Insurance Company.
	21.1*	Subsidiaries of Administaff, Inc.
	23.1*	Consent of Independent Registered Public Accounting Firm.
	24.1*	Powers of Attorney.
	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.
	101.INS**	XBRL Instance Document.
	101.SCH**	XBRL Taxonomy Schema Document.
	101.DEF**	XBRL Extension Definition Document.
	_____________________

	*	Filed herewith.

	**	Filed electronically with this report.

	(1)	Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008; (ii) the Consolidated Balance Sheets at December 31, 2010 and 2009; and (iii) the Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008. Users of this data are advised pursuant to Rule 406T of Regulation S-T this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, additionally the data is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under these sections.

	†	Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Administaff, Inc. has duly caused this report to be signed in its behalf by the undersigned, thereunto duly authorized, on

February 14, 2011.

	ADMINISTAFF, INC.

	By:	/s/Douglas S. Sharp
		Douglas S. Sharp
		Senior Vice President of Finance
		Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Administaff, Inc. in the capacities indicated on February 14, 2011:

Signature		Title

/s/Paul J. Sarvadi		Chairman of the Board, Chief Executive Officer
Paul J. Sarvadi		and Director
		(Principal Executive Officer)

/s/Richard G.Rawson		President and Director
Richard G. Rawson


/s/Douglas S.Sharp		Senior Vice President of Finance
Douglas S. Sharp		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

*		Director
Michael W. Brown


*		Director
Jack M. Fields, Jr.


*		Director
Eli Jones


*		Director
Paul S. Lattanzio


*		Director
Gregory E. Petsch


*		Director
Austin P. Young


* By: /s/ Daniel D. Herink
Daniel D. Herink, attorney-in-fact

- 49 -

Table of Contents

ADMINISTAFF, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2

Management’s Report on Internal Control	F-3

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	F-4

Consolidated Balance Sheets as of December 31, 2010 and 2009	F-5

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008	F-7

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008	F-8

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008	F-10

Notes to Consolidated Financial Statements	F-12

F-1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Administaff, Inc.

We have audited the accompanying Consolidated Balance Sheets of Administaff, Inc. as of December 31, 2010 and 2009, and the related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Administaff, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Administaff, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2011 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Houston, Texas

February 14, 2011

F-2

Table of Contents

MANAGEMENT’S REPORT ON INTERNAL CONTROL

The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2010 based on criteria established by Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’s independent registered public accountants that audited the Company’s financial statements as of December 31, 2010 have issued an attestation report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting, which appears on page F-4.

Internal control over financial reporting is a process designed 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. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over financial reporting as of December 31, 2010, based on criteria established in the COSO Framework.

/s/Paul J.Sarvadi		/s/Douglas S. Sharp
Paul J. Sarvadi		Douglas S. Sharp
Chairman of the Board and		Senior Vice President of Finance
Chief Executive Officer		Chief Financial Officer and Treasurer

F-3

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Administaff, Inc.

We have audited Administaff, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Administaff, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Administaff, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Administaff, Inc. as of December 31, 2010 and 2009, and the related Consolidated Statements of Operations, Stockholders’ Equity, and Cash Flows for each of the three years in the period ended December 31, 2010 of Administaff, Inc. and our report dated February 14, 2011 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Houston, Texas

February 14, 2011

F-4

Table of Contents

ADMINISTAFF, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

ASSETS

	December 31, 2010			December 31, 2009

Current assets:
Cash and cash equivalents	$	234,829		$	227,085
Restricted cash		41,204			36,436
Marketable securities		43,367			6,037
Accounts receivable, net:
Trade		1,194			2,899
Unbilled		134,187			106,601
Other		6,726			13,092
Prepaid insurance		24,978			14,484
Other current assets		8,528			6,317
Income taxes receivable		1,808			2,692
Deferred income taxes		1,267			2,578
Total current assets		498,088			418,221

Property and equipment:
Land		3,260			3,260
Buildings and improvements		64,953			64,692
Computer hardware and software		67,714			65,980
Software development costs		27,482			25,372
Furniture and fixtures		35,164			35,499
Aircraft		31,524			31,524
		230,097			226,327
Accumulated depreciation and amortization		(154,070	)		(145,153	)
Total property and equipment, net		76,027			81,174

Other assets:
Prepaid health insurance		9,000			9,000
Deposits – health insurance		2,640			2,785
Deposits – workers’ compensation		51,731			55,744
Goodwill and other intangible assets, net		21,251			8,487
Other assets		1,108			1,059
Total other assets		85,730			77,075
Total assets	$	659,845		$	576,470

F-5

Table of Contents

ADMINISTAFF, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	December 31, 2010			December 31, 2009

Current liabilities:
Accounts payable	$	3,309		$	1,857
Payroll taxes and other payroll deductions payable		145,096			127,597
Accrued worksite employee payroll cost		109,697			93,138
Accrued health insurance costs		15,419			6,374
Accrued workers’ compensation costs		42,081			37,049
Accrued corporate payroll and commissions		23,743			16,178
Other accrued liabilities		14,264			8,401
Total current liabilities		353,609			290,594

Noncurrent liabilities:
Accrued workers’ compensation costs		55,730			52,014
Other accrued liabilities		1,261			—
Deferred income taxes		8,850			10,702
Total noncurrent liabilities		65,841			62,716

Commitments and contingencies

Stockholders’ equity:
Preferred stock, par value $0.01 per share:
Shares authorized – 20,000
Shares issued and outstanding – none		—			—
Common stock, par value $0.01 per share:
Shares authorized – 60,000
Shares issued – 30,839 at December 31, 2010 and 2009		309			309
Additional paid-in capital		135,607			138,551
Treasury stock, at cost – 4,757 and 5,226 shares at December 31, 2010 and 2009, respectively		(124,464	)		(135,712	)
Accumulated other comprehensive income, net of tax		21			3
Retained earnings		228,922			220,009
Total stockholders’ equity		240,395			223,160
Total liabilities and stockholders’ equity	$	659,845		$	576,470

See accompanying notes.

F-6

Table of Contents

ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Year ended December 31,
	2010		2009		2008
Revenues (gross billings of $10.169 billion, $9.856 billion and $10.372 billion, less worksite employee payroll cost of $8.449 billion, $8.203 billion and $8.648 billion, respectively)	$	1,719,752	$	1,653,096	$	1,724,434
Direct costs:
Payroll taxes, benefits and workers’ compensation costs		1,421,216		1,365,129		1,380,695
Gross profit		298,536		287,967		343,739

Operating expenses:
Salaries, wages and payroll taxes		146,901		144,086		153,538
Stock-based compensation		8,126		10,064		9,970
General and administrative expenses		63,214		62,381		69,348
Commissions		11,881		11,800		12,665
Advertising		16,447		16,011		17,666
Depreciation and amortization		14,907		16,592		15,570
		261,476		260,934		278,757
Operating income		37,060		27,033		64,982

Other income:
Interest income		961		1,616		7,035

Income before income tax expense		38,021		28,649		72,017

Income tax expense		15,581		12,075		26,237

Net income	$	22,440	$	16,574	$	45,780

Basic net income per share of common stock	$	0.86	$	0.65	$	1.78

Diluted net income per share of common stock	$	0.86	$	0.65	$	1.76

See accompanying notes.

F-7

Table of Contents

ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock Issued				Additional Paid-In			Treasury			Accumulated Other Comprehensive Income			Retained
	Shares		Amount		Capital			Stock			(Loss)			Earnings			Total

Balance at December 31, 2007		30,839	$	309	$	138,640		$	(123,600	)	$	5		$	183,321		$	198,675
Purchase of treasury stock, at cost		―		―		―			(38,082	)		―			―			(38,082	)
Exercise of stock options		―		―		(2,415	)		5,606			―			―			3,191
Income tax benefit from stock-based compensation, net		―		―		821			—			―			―			821
Stock-based compensation expense		—		—		2,352			7,601			―			17			9,970
Other		―		―		17			523			―			―			540
Dividends paid		—		—		—			—			―			(12,411	)		(12,411	)
Change in unrealized loss on marketable securities, net of tax:
Unrealized loss		―		―		―			―			(5	)		―			(5	)
Net income		―		―		―			―			―			45,780			45,780
Comprehensive income		—		—		—			—			―			―			45,775
Balance at December 31, 2008		30,839	$	309	$	139,415		$	(147,952	)	$	―		$	216,707		$	208,479
Purchase of treasury stock, at cost		―		―		―			(2,024	)		—			―			(2,024	)
Exercise of stock options		―		―		(1,873	)		4,711			—			―			2,838
Income tax expense from stock-based compensation, net		―		―		(372	)		—			—			―			(372	)
Stock-based compensation expense		—		—		1,462			8,602			—			—			10,064
Other		―		―		(81	)		951			—			―			870
Dividends paid		—		—		—			—			—			(13,272	)		(13,272	)
Change in unrealized gain on marketable securities, net of tax:
Unrealized gain:		—		—		—			—			3			—			3
Net income		—		—		—			—			—			16,574			16,574
Comprehensive income		—		—		—			—			—			—			16,577
Balance at December 31, 2009		30,839	$	309	$	138,551		$	(135,712	)	$	3		$	220,009		$	223,160

F-8

Table of Contents

ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(in thousands)

	Common Stock Issued				Additional Paid-In			Treasury			Accumulated Other Comprehensive Income		Retained
	Shares		Amount		Capital			Stock			(Loss)		Earnings			Total
Balance at December 31, 2009		30,839	$	309	$	138,551		$	(135,712	)	$	3	$	220,009		$	223,160
Purchase of treasury stock, at cost		―		―		―			(7,852	)		—		―			(7,852	)
Exercise of stock options		―		―		(1,963	)		9,146			—		―			7,183
Income tax benefit from stock-based compensation, net		―		―		25			—			—		―			25
Stock-based compensation expense		—		—		(966	)		9,092			—		—			8,126
Other		―		―		(40	)		862			—		―			822
Dividends paid		—		—		—			—			—		(13,527	)		(13,527	)
Change in unrealized gain on marketable securities, net of tax:
Unrealized gain		—		—		—			—			18		—			18
Net income		—		—		—			—			—		22,440			22,440
Comprehensive income		—		—		—			—			—		—			22,458
Balance at December 31, 2010		30,839	$	309	$	135,607		$	(124,464	)	$	21	$	228,922		$	240,395

See accompanying notes.

F-9

Table of Contents

ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year ended December 31,
	2010			2009			2008

Cash flows from operating activities:
Net income	$	22,440		$	16,574		$	45,780
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,950			16,561			15,541
Amortization of marketable securities		1,650			—			—
Stock-based compensation		8,126			10,064			9,970
Deferred income taxes		1,179			(4,397	)		5,363
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash		(4,768	)		30			(1,148	)
Accounts receivable		(18,874	)		2,501			9,741
Prepaid insurance		(10,494	)		14,427			(6,516	)
Other current assets		(2,141	)		418			(462	)
Other assets		4,180			698			(4,722	)
Accounts payable		1,136			(1,150	)		(2,229	)
Payroll taxes and other payroll deductions payable		17,499			3,931			9,737
Accrued worksite employee payroll expense		16,559			(36,816	)		19,548
Accrued health insurance costs		9,045			(8,341	)		(4,582	)
Accrued workers’ compensation costs		8,748			4,446			8,351
Accrued corporate payroll, commissions and other accrued liabilities		9,556			(10,188	)		6,249
Income taxes payable/receivable		49			(7,927	)		7,169
Total adjustments		56,400			(15,743	)		72,010
Net cash provided by operating activities		78,840			831			117,790

Cash flows from investing activities:
Marketable securities:
Purchases		(60,003	)		(6,039	)		―
Proceeds from maturities		18,301			225			3,895
Proceeds from dispositions		2,748			―			70,746
Cash exchanged for acquisitions, net of cash acquired		(12,918	)		(720	)		(3,780	)
Property and equipment:
Purchases		(6,764	)		(8,019	)		(26,714	)
Proceeds from dispositions		54			36			124
Net cash provided by (used in) investing activities		(58,582	)		(14,517	)		44,271

F-10

Table of Contents

ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

	Year ended December 31,
	2010			2009			2008

Cash flows from financing activities:
Purchase of treasury stock	$	(7,852	)	$	(2,024	)	$	(38,082	)
Dividends paid		(13,527	)		(13,272	)		(12,411	)
Proceeds from the exercise of stock options		7,183			2,838			3,191
Principal repayments on capital lease obligations		—			(537	)		(629	)
Income tax benefit from stock-based compensation		860			706			1,727
Other		822			870			540
Net cash used in financing activities		(12,514	)		(11,419	)		(45,664	)

Net increase (decrease) in cash and cash equivalents		7,744			(25,105	)		116,397
Cash and cash equivalents at beginning of year		227,085			252,190			135,793
Cash and cash equivalents at end of year	$	234,829		$	227,085		$	252,190

Supplemental disclosures:
Cash paid for income taxes	$	13,492		$	23,694		$	11,978

See accompanying notes.

F-11

Table of Contents

ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

1.	Accounting Policies

Description of Business

Administaff, Inc. (the “Company”) is a human resource (“HR”) services company. Our primary HR service is our professional employer organization (“PEO”) service, which provides a comprehensive Personnel Management SystemSM encompassing a broad range of services, including benefits and payroll 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 services to small and medium-sized businesses in strategically selected markets. We were organized as a corporation in 1986 and have provided PEO services since inception.

In addition to our PEO service, we provide business performance improvement services and software solutions to assist small to medium size companies. These services include record keeping for defined contribution plans, recruiting and employee screening services, and software solutions for employee expense management, time and attendance, performance management, and organizational planning offered via desktop applications and software as a service (“SaaS”) delivery models.

The Company provides its comprehensive service by entering into a co-employment relationship with its clients, under which the Company and its clients each take responsibility for certain portions of the employer-employee relationship. The Company and its clients designate each party’s responsibilities through its Client Services Agreement (“CSA”), under which the Company becomes the employer of its worksite employees for most administrative and regulatory purposes.

As a co-employer of its worksite employees, the Company assumes most of the rights and obligations associated with being an employer. The Company enters into an employment agreement with each worksite employee, thereby maintaining a variety of employer rights, including the right to hire or terminate employees, the right to evaluate employee qualifications or performance, and the right to establish employee compensation levels. Typically, the Company only exercises these rights in consultation with its clients or when necessary to ensure regulatory compliance. The responsibilities associated with the Company’s role as employer include the following obligations with regard to its worksite employees: (i) to compensate its worksite employees through wages and salaries; (ii) to pay the employer portion of payroll-related taxes; (iii) to withhold and remit (where applicable) the employee portion of payroll-related taxes; (iv) to provide employee benefit programs; and (v) to provide workers’ compensation insurance coverage.

In addition to its assumption of employer status for its worksite employees, the Company’s comprehensive service also includes other human resource functions for its clients to support the effective and efficient use of personnel in their business operations. To provide these functions, the Company maintains a significant staff of professionals trained in a wide variety of human resource functions, including employee training, employee recruiting, employee performance management, employee compensation, and employer liability management. These professionals interact and consult with clients on a daily basis to help identify each client’s service requirements and to ensure that the Company is providing appropriate and timely personnel management services.

The Company provides its comprehensive service to small and medium-sized businesses in strategically selected markets throughout the United States. During 2010, 2009 and 2008, revenues from the Company’s Texas markets represented 28%, 29% and 31%, while California represented 15%, 15% and 16% of the Company’s total revenues, respectively.

F-12

Table of Contents

ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue and Direct Cost Recognition

The Company accounts for its PEO revenues in accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition, Principal Agent Considerations. The Company’s PEO revenues are derived from its gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues, which exclude the payroll cost component of gross billings, and therefore, consist solely of markup, are recognized ratably over the payroll period as worksite employees perform their service at the client worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on the Company’s Consolidated Balance Sheets.

In determining the pricing of the markup component of the gross billings, the Company takes into consideration its estimates of the costs directly associated with its worksite employees, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, the Company’s operating results are significantly impacted by the Company’s ability to accurately estimate, control and manage its direct costs relative to the revenues derived from the markup component of the Company’s gross billings.

Consistent with its revenue recognition policy, the Company’s direct costs do not include the payroll cost of its worksite employees. The Company’s direct costs associated with its revenue generating activities are primarily comprised of all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.

Segment Reporting

The Company operates one reportable segment under ASC 280, Segment Reporting.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Administaff, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Concentrations of Credit Risk

Financial instruments that could potentially subject the Company to concentration of credit risk include accounts receivable and marketable securities.

Cash, Cash Equivalents and Marketable Securities

The Company invests its excess cash in federal government and municipal-based money market funds and debt instruments of U.S. municipalities. 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.

F-13

Table of Contents

ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company accounts for marketable securities in accordance with ASC 320, Investments – 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 December 31, 2010 and 2009, all of the Company’s investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. The Company uses the specific identification method of determining the cost basis in computing realized gains and losses on the sale of its available-for-sale securities. Realized gains and losses are included in other income.

Fair Value of Financial Instruments

The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short-term maturities of these instruments. The carrying amount of the Company’s marketable securities approximate fair value due to the effective interest rates approximating market rates.

Property and Equipment

Property and equipment are recorded at cost and are depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:

Buildings and improvements		5-30 years
Computer hardware and software, and acquired technologies		1-5 years
Software development costs		3 years
Furniture and fixtures		5-7 years
Aircraft		20 years

Software development costs relate primarily to software coding, system interfaces and testing of the Company’s proprietary professional employer information systems and are accounted for in accordance with ASC 350-40, Internal Use Software. Capitalized software development costs are amortized using the straight-line method over the estimated useful lives of the software, generally three years.

The Company accounts for its software products in accordance with ASC 985-20, Costs of Software to be Sold. This Topic establishes standards of financial accounting and reporting for the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, whether internally developed and produced or purchased.

The Company periodically evaluates its long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events or circumstances were to indicate that any of the Company’s long-lived assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, the Company may record an impairment loss to the extent that 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 Intangible Assets

The Company’s goodwill and intangible assets are subject to the provisions of ASC 350, Intangibles – Goodwill and Other. Accordingly, goodwill and other indefinite-lived intangible assets are tested for impairment on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

an annual basis or when indicators of impairment exist, and written down when impaired. As of December 31, 2010 and 2009, no impairment write downs were necessary. Furthermore, ASC 350 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Administaff’s 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.

The following table provides the gross carrying amount and accumulated amortization as of December 31, 2010 and 2009, for each class of intangible assets and goodwill (in thousands):

	2010							2009
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Trademarks	$	1,785	$	(568	)	$	1,217	$	1,613	$	(394	)	$	1,219
Customer relationships		6,959		(1,252	)		5,707		2,190		(627	)		1,563
Goodwill		14,327		—			14,327		5,705		―			5,705
Total goodwill and intangible assets	$	23,071	$	(1,820	)	$	21,251	$	9,508	$	(1,021	)	$	8,487

PerformSmart (formerly HRTools.com)	$	5,058	$	(688	)		4,370	$	5,058	$	(547	)	$	4,511
USDatalink		4,450		(746	)		3,704		4,450		(474	)		3,976
ExpensAble		4,681		(208	)		4,473		—		—			—
Galaxy Technologies		8,882		(178	)		8,704		—		—			—
	$	23,071	$	(1,820	)	$	21,251	$	9,508	$	(1,021	)	$	8,487

The Company’s amortization expense related to purchased intangible assets other than goodwill was $799,000 in 2010, $408,000 in 2009 and $340,000 in 2008, and is estimated to be $1.2 million in 2011 and 2012, $1.1 million in 2013 and 2014, and $900,000 in 2015.

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 Shield of California, Hawaii Medical Service Association, Unity Health Plans and Tufts, all of which provide fully insured policies or service contracts.

The policy with United 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 each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

the Company would record an asset for the excess premiums in its Consolidated Balance Sheet. The terms of the arrangement require Administaff to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. As of December 31, 2010, Plan Costs were less than the net premiums paid and owed to United by $28.9 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $19.9 million balance is included in prepaid insurance, a current asset, in the Company’s Consolidated Balance Sheet. The premiums owed to United at December 31, 2010, were $12.1 million, which is included in accrued health insurance costs, a current liability in the Company’s Consolidated Balance Sheet.

Workers’ Compensation Costs

The Company’s workers’ compensation coverage has been provided through an arrangement with the ACE Group of Companies (“the ACE Program”) since 2007. The ACE Program is fully insured in that ACE has the responsibility to pay all claims incurred regardless of whether the Company satisfies its responsibilities. Through September 30, 2010, the Company bore the economic burden for the first $1 million layer of claims per occurrence and the insurance carrier was and remains responsible for the economic burden for all claims in excess of such first $1 million layer.

Effective for the ACE Program year beginning on October 1, 2010, in addition to the Company bearing the economic burden for the first $1 million layer of claims per occurrence, the Company will also bear the economic burden for those claims exceeding $1 million, up to a maximum aggregate amount of $5 million per policy year.

Because the Company bears the economic burden for claims up to the levels noted above, 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 health care 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 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 year ended December 31, Administaff reduced accrued workers’ compensation costs by $6.2 million and $5.7 million, respectively, in 2010 and 2009, 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 rates utilized in 2010 and 2009 were 1.4% and 1.8%, 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.

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The following table provides the activity and balances related to incurred but not reported workers’ compensation claims for the years ended December 31, 2010 and 2009 (in thousands):

	Year ended
	2010			2009

Beginning balance	$	88,450		$	83,055
Accrued claims		34,345			35,525
Present value discount		(1,675	)		(2,203	)
Paid claims		(24,186	)		(27,927	)
Ending balance	$	96,934		$	88,450

Current portion of accrued claims	$	41,204		$	36,436
Long-term portion of accrued claims		55,730			52,014
	$	96,934		$	88,450

The current portion of accrued workers’ compensation costs at December 31, 2010 and 2009, includes $877,000 and $613,000, respectively, of workers’ compensation administrative fees.

As of December 31, the undiscounted accrued workers’ compensation costs were $111.5 million in 2010 and $103.8 million in 2009.

The Company’s estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and included in short-term liabilities, while its estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on the Company’s Consolidated Balance Sheets.

Stock-Based Compensation

At December 31, 2010, the Company has three stock-based employee compensation plans. The Company accounts for these plans under the recognition and measurement principles of ASC 718, Compensation – Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

The Company generally makes annual grants of restricted and unrestricted stock under its stock-based incentive compensation plans to its directors, officers and other management. Restricted stock grants to officers and other management vest over three to five years from the date of grant. Annual stock grants issued to directors are

100% vested on the grant date. Shares of restricted stock are based on fair value on date of grant and the associated expense net of estimated forfeitures is recognized over the vesting period.

Company-Sponsored 401(k) Plans

Under the Company’s 401(k) plan for corporate employees (the “Corporate Plan”), the Company matched 50% of eligible corporate employees’ contributions, up to 6% of the employee’s eligible compensation in 2010 and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2009, and 100% of eligible corporate employees’ contributions, up to 6% of the employee’s eligible compensation in 2008. Under the Company’s separate 401(k) plan for worksite employees (the “Worksite Employee Plan”), the match percentage for worksite employees ranges from 0% to 6%, as determined by each client company. Matching contributions under the Corporate Plan and the Worksite Employee Plan are immediately vested. During 2010, 2009 and 2008, the Company made matching contributions to the Corporate and Worksite Employee Plans of $49.6 million, $47.7 million and $52.0 million, respectively. Of these contributions, $47.5 million, $45.1 million and $47.3 million were made under the Worksite Employee Plan on behalf of worksite employees. The remainder represents matching contributions made under the Corporate Plan on behalf of corporate employees.

Advertising

The Company expenses all advertising costs as incurred.

Income Taxes

The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2010 presentation.

Subsequent Events

The company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission.

New Accounting Pronouncements

We believe that we have implemented the accounting pronouncements with a material impact on our financial statements and do not believe there are any new or pending announcements that will materially impact our financial position or results of operations.

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ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2.	Cash, Cash Equivalents and Marketable Securities

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

	December 31,
	2010			2009
	(in thousands)
Overnight Holdings
Money market funds (cash equivalents)	$	157,680		$	152,402
Investment Holdings
Money market funds (cash equivalents)		72,258			93,517
Marketable securities		43,367			6,037
		273,305			251,956
Cash held in demand accounts		31,295			2,981
Outstanding checks		(26,404	)		(21,815	)
Total cash, cash equivalents and marketable securities	$	278,196		$	233,122

Cash and cash equivalents	$	234,829		$	227,085
Marketable securities		43,367			6,037
	$	278,196		$	233,122

The Company’s cash and overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the cash balance as of December 31, 2010 and December 31, 2009, are $128.8 million and $115.4 million, respectively, in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions, as well as $8.1 million and $13.1 million, respectively, in client prepayments.

The Company accounts for its financial assets in accordance with ASC 820, Fair Value Measurement. This standard 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.

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ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following tables summarize the levels of fair value measurements of the Company’s financial assets:

	Fair Value Measurements
			(in thousands)
	December 31,
	2010		Level 1		Level 2		Level 3

Money market funds	$	229,938	$	229,938	$	—	$	—
Municipal bonds		43,367		—		43,367		—
Total	$	273,305	$	229,938	$	43,367	$	—

	Fair Value Measurements
			(in thousands)
	December 31,
	2009		Level 1		Level 2		Level 3

Money market funds	$	245,919	$	245,919	$	—	$	—
Municipal bonds		6,037		—		6,037		—
Total	$	251,956	$	245,919	$	6,037	$	—

The municipal bond securities valued as Level 2 investments are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. government securities. Valuation techniques used by the Company to measure fair value for these securities during the period consisted primarily of third party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.

The following is a summary of the Company’s available-for-sale marketable securities as of December 31, 2010 and 2009:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
			(in thousands)
December 31, 2010:

Municipal bonds	$	43,330	$	63	$	(26	)	$	43,367

December 31, 2009:

Municipal bonds	$	6,034	$	4	$	(1	)	$	6,037

For the years ended December 31, 2010, 2009 and 2008, the Company had no realized gains or losses recognized on sales of available-for-sales marketable securities.

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ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of December 31, 2010, the contractual maturities of the Company’s marketable securities were as follows:

	Amortized Cost		Estimated Fair Value
	(in thousands)

Less than one year	$	33,503	$	33,537
One to five years		9,827		9,830
Total	$	43,330	$	43,367

3.	Accounts Receivable

The Company’s accounts receivable is primarily composed of trade receivables and unbilled receivables. The Company’s trade receivables, which represent outstanding gross billings to customers, are reported net of allowance for doubtful accounts of $988,000 and $1.3 million as of December 31, 2010 and 2009, respectively. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of specific accounts and by making a general provision for other potentially uncollectible amounts.

The Company makes an accrual at the end of each accounting period for its obligations associated with the earned but unpaid wages of its worksite employees and for the accrued gross billings associated with such wages. These accruals are included in accrued worksite employee payroll cost and unbilled accounts receivable; however, these amounts are presented net in the Consolidated Statements of Operations. The Company generally requires clients pay invoices for service fees no later than one day prior to the applicable payroll date. As such, the Company generally does not require collateral. Customer prepayments directly attributable to unbilled accounts receivable have been netted against such receivables as the gross billings have been earned and the payroll cost has been incurred, thus the Company has the legal right of offset for these amounts. As of December 31, 2010 and 2009, unbilled accounts receivable consisted of the following:

	2010			2009
	(in thousands)

Accrued worksite employee payroll cost	$	109,697		$	93,138
Unbilled revenues		32,613			26,537
Customer prepayments		(8,123	)		(13,074	)
Unbilled accounts receivable	$	134,187		$	106,601

Deposits

The contractual arrangement with United for health insurance coverage requires Administaff to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid health insurance. Please see Note 1 for a discussion of our accounting policies for health insurance costs.

As of December 31, 2010, the Company had $51.7 million of workers’ compensation long-term deposits. Please see Note 1 for a discussion of our accounting policies for workers’ compensation costs.

5.	Acquisitions

The Company accounts for its acquisitions in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on the fair value at the date of purchase. The purchase price in excess of the identifiable assets and liabilities is recorded to goodwill, $8.6 million in 2010. All acquisition related costs are expensed as incurred and recorded in operating expenses. The Company includes operations associated with acquisitions from the date of acquisition forward.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In June 2010, the Company acquired OneMind Connect, Inc. which conducts business under the name “ExpensAble”, and provides expense report management solutions delivered as both a Software as a Service (“SaaS”) and as a desktop software product. The acquisition of ExpensAble extends the sales opportunity of the Company’s human resource services as well as the solutions available to the Company’s current and prospective clients. The Company paid $5.5 million upon the closing of the transaction and expects to pay an additional $1.0 million in 2011 based on the terms of the agreement. Additional consideration, up to $3.0 million, may be paid during 2011 through 2013 if specific revenue levels are achieved.

In July 2010, the Company acquired certain assets from Galaxy Technologies, Inc. in an effort to expand the sales opportunity of its human resource services as well as the solutions available to the Company’s current and prospective clients. The primary assets acquired include time and attendance software solutions, which are delivered through a SaaS model and as a desktop software product, and the associated customer base. The Company paid $7.4 million upon the closing of the transaction. Additional consideration, up to $2.8 million, may be paid during 2011 and 2012 if specific revenue levels are achieved.

6.	Income Taxes

Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred tax assets and net deferred tax liabilities as reflected on the Consolidated Balance Sheets are as follows:

	December 31,
	2010			2009
	(in thousands)
Deferred tax liabilities:
Prepaid assets	$	(10,051	)	$	(6,021	)
Depreciation		(8,390	)		(7,842	)
Software development costs		(1,198	)		(1,270	)
Other		(751	)		(406	)
Total deferred tax liabilities		(20,390	)		(15,539	)

Deferred tax assets:
Accrued incentive compensation		3,100			—
Net operating loss carryforward		2,360			—
Workers’ compensation accruals		3,055			2,648
Long-term capital loss carry-forward		188			184
Accrued rent		1,260			1,343
Stock-based compensation		2,657			2,931
Uncollectible accounts receivable		375			493
Total deferred tax assets		12,995			7,599
Valuation allowance		(188	)		(184	)
Total net deferred tax assets		12,807			7,415

Net deferred tax liabilities	$	(7,583	)	$	(8,124	)

Net current deferred tax assets (liabilities)	$	1,267		$	2,578
Net noncurrent deferred tax liabilities		(8,850	)		(10,702	)
	$	(7,583	)	$	(8,124	)

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ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The components of income tax expense are as follows:

	Year ended December 31,
	2010		2009			2008
	(in thousands)
Current income tax expense:
Federal	$	12,668	$	14,478		$	19,171
State		1,734		1,994			1,703
Total current income tax expense		14,402		16,472			20,874
Deferred income tax (benefit) expense:
Federal		1,033		(4,162	)		5,111
State		146		(235	)		252
Total deferred income tax (benefit) expense		1,179		(4,397	)		5,363
Total income tax expense	$	15,581	$	12,075		$	26,237

As a result of nonqualified stock option exercises, disqualifying dispositions of certain employee incentive stock options and vesting of restricted stock awards, the Company had net income tax benefit of $25,000 in 2010, net income tax expense of $372,000 in 2009, and net income tax benefit of $821,000 in 2008, respectively. The income tax benefit or expense was reported as a component of additional paid-in capital.

The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported income tax expense from continuing operations is as follows:

	Year ended December 31,
	2010			2009			2008
	(in thousands)

Expected income tax expense at 35%	$	13,307		$	10,027		$	25,206
State income taxes, net of federal benefit		1,273			1,053			1,372
Nondeductible expenses		1,092			1,093			906
Tax-exempt interest income		(89	)		(103	)		(1,098	)
Other, net		(2	)		5			(149	)
Reported total income tax expense	$	15,581		$	12,075		$	26,237

The Company has capital loss carryforwards totaling approximately $510,000 that will expire during 2012, but can only be used to offset future capital gains. The Company has a valuation allowance of $510,000 against these related deferred tax assets as it is uncertain that the Company will be able to utilize the capital loss carryforwards prior to their expiration.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2010, 2009 and 2008, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax years 2007 through 2010 remain open to examination by the Internal Revenue Service of the United States.

7.	Stockholders’ Equity

The Company’s Board of Directors (the “Board”) has authorized a program to repurchase up to 13,500,000 shares of the Company’s outstanding common stock. The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions or other factors. The Company repurchased 271,739 shares under this program during 2010. In addition, 97,419 shares were withheld during 2010 to satisfy tax withholding obligations for the vesting of restricted stock awards. These purchases are not subject to the repurchase program. During 2009, the Company did not repurchase shares under the repurchase program; however, 87,932 shares were withheld during 2009 to satisfy tax withholding obligations for the vesting of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

restricted stock awards. As of December 31, 2010, the Company had repurchased 12,360,607 shares under this program at a total cost of approximately $243.7 million. As a result, the Company has the authorization to repurchase an additional 1,139,393 shares.

During each quarter of 2010 and 2009 the Board declared a dividend of $0.13 per share of common stock , resulting in a total of $13.5 million and $13.3 million in dividend payments paid by the Company in 2010 and 2009, respectively.

At December 31, 2010, 20 million shares of preferred stock were authorized and were designated as Series A Junior Participating Preferred Stock that is reserved for issuance on exercise of preferred stock purchase rights under Administaff’s Share Purchase Rights Plan (the “Rights Plan”). Each issued share of the Company’s common stock has one preferred stock purchase right attached to it. No preferred shares have been issued and the rights are not currently exercisable. The Rights Plan expires on November 13, 2017.

8.	Incentive Plans

The Administaff, Inc. 1997 Incentive Plan, as amended, and the 2001 Incentive Plan, as amended, (collectively, the “Incentive Plans”) provide for options and other stock-based awards that may be granted to eligible employees and non-employee directors of the Company or its subsidiaries. The 2001 Incentive Plan is currently the only Administaff plan under which stock-based awards may be granted. No new stock-based awards may be made under any other plan. The Incentive Plans are administered by the Compensation Committee of the Board of Directors (the “Committee”). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the date of grant), the number of shares and all of the terms of the awards. The Board may at any time amend or terminate the Incentive Plans. However, no amendment that would impair the rights of any participant, with respect to outstanding grants, can be made without the participant’s prior consent. Stockholder approval of amendments to the Incentive Plans is necessary only when required by applicable law or stock exchange rules. The 1997 Incentive Plan expired on April 24, 2005; therefore no new grants may be made under the Plan. At December 31, 2010, 1,041,716 shares of common stock were available for future grants under the 2001 Incentive Plan. The Incentive Plans permit stock options, including nonqualified stock options and options intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code (the “Code”), stock awards, phantom stock awards, stock appreciation rights, performance units, and other stock-based awards and cash awards, all of which may or may not be subject to the achievement of one or more performance objectives. The purposes of the Incentive Plans generally are to retain and attract persons of training, experience and ability to serve as employees of the Company and its subsidiaries and to serve as non-employee directors of the Company, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of the Company and its subsidiaries.

The Administaff Nonqualified Stock Option Plan (the “Nonqualified Plan”) provided for options to purchase shares of the Company’s common stock that were granted to employees who were officers. An aggregate of 3,600,000 shares of common stock of the Company were authorized to be issued under the Nonqualified Plan. Although there are unissued shares remaining, no new awards may be granted under the Nonqualified Plan. The Committee may at any time terminate or amend the Nonqualified Plan, provided that no such amendment may adversely affect the rights of optionees with regard to outstanding options.

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ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stock Option Awards

The following summarizes stock option activity and related information:

	Year ended December 31,
	2010					2009					2008
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
	(in thousands, except per share amounts)

Outstanding – beginning of year		1,409		$	26.02		1,610		$	24.76		1,823		$	23.48
Granted		9			23.20		12			27.87		13			28.69
Exercised		(381	)		18.86		(195	)		14.52		(223	)		14.27
Cancelled		(434	)		43.10		(18	)		39.76		(3	)		43.69
Outstanding – end of year		603			18.20		1,409			26.02		1,610		$	24.76
Exercisable – end of year		603			18.20		1,409			26.02		1,610		$	24.76
Weighted average fair value of options granted during year				$	23.20				$	27.87				$	28.69
Intrinsic value of options outstanding at year end				$	6,694				$	5,279				$	5,289
Intrinsic value of options exercised during the year				$	2,005				$	1,902				$	3,059

The following summarizes information related to stock options outstanding at December 31, 2010:

							Options Outstanding & Exercisable
Range of Exercise Prices					Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
(share amounts in thousands)

$	4.02	to	$	10.00		55		2.3	$	6.87
$	10.01	to	$	15.00		116		2.9	$	12.75
$	15.01	to	$	20.00		203		2.3	$	17.53
$	20.01	to	$	25.00		190		1.2	$	23.47
$	25.01	to	$	28.69		39		5.6	$	27.99
Total						603		2.3	$	18.20

Restricted Stock Awards

Restricted common shares, under fixed plan accounting, are generally measured at fair value on the date of grant based on the number of shares granted, estimated forfeitures and the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period, three to five years for the Company’s shares currently outstanding. The Company has recognized $8.1 million, $10.1 million and $10.0 million of compensation expense associated with the restricted stock awards in 2010, 2009 and 2008, respectively. As of December 31, 2010, unrecognized compensation expense associated with the unvested shares outstanding was $8.3 million and is expected to be recognized over a weighted average period of 22 months.

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ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following summarizes restricted stock awards as of December 31, 2010, 2009 and 2008:

	Year ended December 31,
	2010					2009					2008
	Shares			Weighted Average Market Value at Grant Date		Shares			Weighted Average Market Value at Grant Date		Shares			Weighted Average Market Value at Grant Date
	(in thousands, except per share amounts)

Non-vested — beginning of year		690		$	24.30		669		$	29.77		528		$	34.09
Granted		474			17.55		347			20.92		415			24.61
Vested		(336	)		19.96		(306	)		22.47		(267	)		26.21
Cancelled/Forfeited		(53	)		23.61		(20	)		25.64		(7	)		26.22
Non-vested — end of year		775		$	19.43		690		$	24.30		669		$	29.77

9.	Net Income Per Share

The Company utilizes the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which include unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.

The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations for the years ended December 31, 2010, 2009 and 2008:

	Year ended December 31,
	2010		2009		2008


Net income	$	22,440	$	16,574	$	45,780
Less income allocated to participating securities		657		462		889
Net income allocated to common shares	$	21,783	$	16,112	$	44,891

Weighted average common shares outstanding		25,254		24,768		25,233
Incremental shares from assumed conversions of common stock options		114		148		247
Adjusted weighted average common shares outstanding		25,368		24,916		25,480

Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect		372		541		692

The 2009 and 2008 net income per share amounts have been adjusted to reflect the utilization of the two-class method, resulting in a reduction to the basic and diluted net income per share of $0.02 and $0.01, and $0.03 and $0.03 per share, for the years ended December 31, 2009 and 2008, respectively.

F-26

Table of Contents

ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10.

Leases

The Company leases various office facilities, furniture, equipment and vehicles under operating lease arrangements, some of which contain rent escalation clauses. Most of the leases contain purchase and/or renewal options at fair market and fair rental value, respectively. Rental expense relating to all operating leases was $14.0 million, $14.1 million and $12.1 million in 2010, 2009 and 2008, respectively. At December 31, 2010, future minimum rental payments under noncancelable operating leases are as follows (in thousands):

	Operating Leases

2011	$	14,116
2012		12,148
2013		9,858
2014		6,536
2015		3,627
Thereafter		3,844
Total minimum lease payments	$	50,129

11.	Commitments and Contingencies

The Company enters into non-cancelable fixed purchase and service obligations in the ordinary course of business. These arrangements primarily consist of advertising commitments and service contracts. At December 31, 2010 future non-cancelable purchase and service obligations greater than $100,000 and one year were as follows (in thousands):

2011	$	4,861
2012		1,489
2013		1,282
2014		780
2015		630
Thereafter		3,150
Total obligations	$	12,192

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, except as set forth below, 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.

As a result of a 2001 corporate restructuring, we filed for a transfer of our state unemployment tax reserve account with the Employment Development Department of the State of California (“EDD”). The EDD approved our request for transfer of the reserve account in May 2002 and also notified the Company of its new contribution rates based upon the approved transfer. In December 2003, the Company received a Notice of Duplicate Accounts and Notification of Assessment (“Notice”) from the EDD. The Notice stated that the EDD was collapsing the accounts of the Company’s subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all of the Company’s California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, the Company filed petitions with an administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the validity of the Notice, asserting several procedural and substantive defenses. The Company’s appeal is still pending and no date has been set for a hearing.

One procedural defense included in the Company’s appeal asserts that EDD failed to meet the statutory requirement related to serving a proper notice within the stipulated time frame and that all of the statutes of

F-27

Table of Contents

limitations concerning EDD’s ability to reassess or modify unemployment tax rates for the periods addressed in the Notice had expired (“Notification Defense”). On November 18, 2010, the 3rd Circuit Court of California (the “Appeals Court”) issued a ruling in favor of EDD regarding a dispute involving a taxpayer who made arguments similar to the Company’s Notification Defense (“Screaming Eagle Case”). In the Screaming Eagle Case, the Appeals Court upheld a trial court decision which held that the EDD did follow proper procedures when it assessed the taxpayer. The taxpayer has appealed the Screaming Eagle Case to the Supreme Court of California. If the Appeals Court’s decision in the Screaming Eagle Case is ultimately upheld, it would potentially eliminate Administaff’s Notification Defense. While the specific facts and circumstances of the Company’s dispute are not identical to the Screaming Eagle Case, the Screaming Eagle Case does call into question the Company’s Notification Defense, pending final determination by the Supreme Court of California. In addition to the Notification Defense, the Company will continue to vigorously assert its additional defenses. If the Company does not ultimately prevail in its arguments and the assessment is upheld, the Company may recognize an increase in its payroll tax expense in a future period.

12.	Quarterly Financial Data (Unaudited)

	Quarter ended
	March 31		June 30		Sept. 30		Dec. 31
	(in thousands, except per share amounts)
Year ended December 31, 2010:

Revenues	$	457,662	$	412,418	$	414,146	$	435,526
Gross profit		72,685		71,357		73,686		80,808
Operating income		3,761		8,569		12,078		12,652
Net income		2,299		5,118		7,234		7,789
Basic net income per share		0.09		0.20		0.28		0.30
Diluted net income per share		0.09		0.20		0.28		0.30

Year ended December 31, 2009:

Revenues	$	461,979	$	404,312	$	390,908	$	395,897
Gross profit		83,561		71,967		71,101		61,338
Operating income (loss)		12,897		8,605		9,563		(4,032	)
Net income (loss)		8,166		5,385		5,832		(2,809	)
Basic net income (loss) per share		0.33		0.22		0.23		(0.11	)
Diluted net income (loss) per share(1)		0.33		0.21		0.23		(0.11	)

(1)	The 2009 net income per share amounts have been adjusted to reflect the utilization of the two-classEPS method, resulting in a reduction to diluted net income per share of $0.01 in the quarter ended June 30, 2009. See Note 9 on page F-26 for additional information related to the two-class method.

13.	Subsequent Event

In January 2011, the Company acquired certain assets from Human Concepts, a provider of workforce decision support solutions. Administaff acquired ownership of the OrgPlus desktop software product line, targeted at small and medium-sized businesses, and its associated customer base, as well as a source code license for a SaaS based version. OrgPlus facilitates creation, management and communication of detailed organizational charts. The acquisition represents Administaff’s continued business strategy to expand the sales opportunity of its human resource services as well as the solutions available to the Company’s current and target clients. The Company paid $10.8 million upon the closing of the transaction and expects to pay an additional $1.2 million in 2011 based on the terms of the agreement.

F-28

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

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

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

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share	New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred Stock	New York Stock Exchange

(Title of class)	(Name of Exchange on Which Registered)

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Part I

Item 1.	Business	2

Item 1A.	Risk Factors	17

Item 1B.	Unresolved Staff Comments	22

Item 2.	Properties	22

Item 3.	Legal Proceedings	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item S-K 401(b).	Executive Officers of the Registrant	24

Part II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26

Item 6.	Selected Financial Data	28

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	43

Item 8.	Financial Statements and Supplementary Data	44

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	44

Item 9A.	Controls and Procedures	44

Item 9B.	Other Information	44

Part III

Item 10.	Directors, Executive Officers and Corporate Governance	45

Item 11.	Executive Compensation	45

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45

Item 13.	Certain Relationships and Related Transactions, and Director Independence	45

Item 14.	Principal Accounting Fees and Services	45

Part IV

Item 15.	Exhibits, Financial Statement Schedules	46

Industry	% of Client Base

Computer and information services	21
Management, administration and consulting services	16
Finance, insurance and real estate	14
Manufacturing	8
Wholesale trade	8
Engineering, accounting and legal services	7
Medical services	6
Construction	5
Retail trade	5
Other	10

Market	Sales Offices	Initial Entry Date

Houston	5	1986
San Antonio	1	1989
Austin	1	1989
Orlando	1	1989
Dallas/Fort Worth	4	1993
Atlanta	4	1994
Phoenix	2	1995
Chicago	2	1995
Washington D.C.	3	1995
Denver	2	1996
Los Angeles	5	1997
Charlotte	1	1997
St. Louis	1	1998
San Francisco	3	1998
New York	4	1999
Baltimore	1	2000
New Jersey	2	2000
San Diego	1	2001
Boston	2	2001
Minneapolis	2	2002
Raleigh	1	2006
Jacksonville	1	2007
Kansas City	1	2007
Columbus	1	2010

· Internal Revenue Code (the “Code”); · Federal Income Contribution Act (FICA); · Federal Unemployment Tax Act (FUTA); · Fair Labor Standards Act (FLSA); · Employee Retirement Income Security Act, as amended (ERISA); · Consolidated Omnibus Budget Reconcilia- tion Act of 1985 (COBRA); · Immigration Reform and Control Act (IRCA); · Title VII (Civil Rights Act of 1964); · Americans with Disabilities Act (ADA); · Age Discrimination in Employment Act (ADEA)*; · Patient Protection and Affordable Care Act;		· The Family and Medical Leave Act (FMLA); · Health Insurance Portability and Accountability Act (HIPAA); · Drug-Free Workplace Act; · Occupational Safety and Health Act (OSHA); · Worker Adjustment and Retraining Notification Act (WARN); · Uniformed Services Employment and Reemployment Rights Act (USERRA); · State unemployment and employment security laws; · State workers’ compensation laws; and · Health Care and Education Reconciliation Act of 2010.

* And similar state laws

	Revenue Change			% of Total Revenues

Northeast		11.5	%		24.2	%
Southeast		0.7	%		10.8	%
Central		1.3	%		14.8	%
Southwest		0.7	%		30.7	%
West		3.1	%		19.5	%

Name	Age	Position

Paul J. Sarvadi	54	Chairman of the Board and Chief Executive Officer
Richard G. Rawson	62	President
A. Steve Arizpe	53	Executive Vice President of Client Services and Chief Operating Officer
Jay E. Mincks	57	Executive Vice President of Sales and Marketing
Douglas S. Sharp	49	Senior Vice President of Finance, Chief Financial Officer and Treasurer
Daniel D. Herink	44	Senior Vice President of Legal, General Counsel and Secretary

2010	High		Low		Dividends per Share

First Quarter	$	25.16	$	16.46	$	0.13
Second Quarter		27.52		21.05		0.13
Third Quarter		29.15		20.74		0.13
Fourth Quarter		29.72		25.07		0.13

2009

First Quarter	$	24.44	$	18.04	$	0.13
Second Quarter		30.63		20.18		0.13
Third Quarter		28.07		20.95		0.13
Fourth Quarter		27.30		21.90		0.13

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (2)		Maximum Number of Shares that May Yet be Purchased Under the Program (2)
10/01/2010 – 10/31/2010		—	$	—		12,360,607		1,139,393
11/01/2010 – 11/30/2010		—		—		12,360,607		1,139,393
12/01/2010 – 12/31/2010		—		—		12,360,607		1,139,393
Total		—	$	—		12,360,607		1,139,393

	12/05	12/06	12/07	12/08	12/09	12/10

Administaff, Inc.	100.00	102.61	68.72	53.82	59.94	76.20
S&P Smallcap 600	100.00	115.12	114.78	79.11	99.34	125.47
S&P 1500 Composite Human Resources and Employment Services	100.00	121.73	94.73	67.34	89.90	107.11