Introduction

Thank you. We appreciate you joining us this morning.

Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities Laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the Company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now, let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our third quarter 2009 financial results. Richard will discuss expected trends in our direct costs, including benefits, workers' compensation and payroll taxes, and the impact of such trends on our pricing. Paul will then add his comments about the quarter and our ongoing strategy in the current macro environment. I will provide our financial guidance for the fourth quarter. We will then end the call with a Question & Answer session.

Now, let me begin today's call by discussing our third quarter results.

Today, we reported third quarter earnings per share of $0.23, which was slightly above the midpoint of the EPS range implied from our key metrics guidance.

As for our key metrics:

The number of paid worksite employees averaged 107,625 and, as expected, remained relatively flat throughout the quarter.

Gross profit per worksite employee per month averaged $220, within our expected range of $218 to $222.

And, effective operating expense management produced $1 million in savings from the midpoint of our Q3 forecast.

Our cash flow remains strong and our balance sheet continues to reflect significant liquidity and no debt. EBITDA plus stock-based compensation totaled $16 million in the quarter. Working capital increased by $4 million during Q3 to a balance of $130 million at September 30th .

Now, let's review further details of our third quarter results.

Third quarter revenues declined by 7% from 2008 to $391 million, as a result of a 10% decrease in the average number of paid worksite employees, partially offset by a 3% increase in revenue per worksite employee per month.

As for worksite employees, net hires vs. layoffs in our client base were relatively flat during the quarter, which was a positive sign considering the significant level of net layoffs from Q4 of 2008 through Q1 of 2009. Client retention continued to hold up well averaging 98.3% for the quarter, which was near our historical levels. Sales continued to be a challenge in this economic environment, however nearly offset those worksite employees lost through client attrition.

Looking at third quarter revenue contribution and year over year change, by region:

• The Southeast region, which represents 11% of total revenue, decreased by 2%;
• The Northeast region, which represents 22% of total revenue, decreased by 1%;
• The Central region, which represents 15% of total revenue, decreased by 4%;
• The West region, which represents 20% of total revenue, declined by 10%;
• And, the Southwest region which represents 32% of total revenue, declined by 12%.
• Larger declines in the West and Southwest regions were primarily a result of a disproportionate number of large clients that termed for financial reasons in Q1 of this year.

Moving to gross profit:

Gross profit per worksite employee per month averaged $220 for the quarter, which was within our expected range, as lower than expected workers' compensation costs offset higher than anticipated benefit costs.

As for benefit costs, y ou may recall that we forecasted additional benefit costs of $2 million per quarter for each of the third and fourth quarters due to increased COBRA participation. Actual third quarter COBRA claim costs came in as anticipated. However, we experienced increased claim costs from higher utilization of health plans by active participants during the quarter which Richard will address in a few minutes. Additionally, Q3 benefit costs included the impact of a retroactive tax imposed by the state of New York on health insurance premiums.

Workers' compensation costs were 0 .53% of non-bonus payroll for Q3 of 2009, below our forecasted level of 0.70% as we experienced favorable trends in both the frequency and severity of workers' compensation claims costs through September 30 th , which is the end of our policy period. Actuarial loss estimates resulted in a $3.6 million reduction in previously reported loss reserves. Richard will provide further details of these positive developments shortly.

As for our third component of direct costs, payroll taxes as a percentage of total payroll cost totaled 6.46 % for the quarter, a slight increase from 6.44% in Q3 of 2008.

Operating Expenses

Now, let’s move on to operating expenses which totaled $61.5 million for the quarter, a 10% decline from Q3 of 2008. These results correspond with the decline in worksite employee levels and reflect the execution of our 2009 operating plan which targeted various areas for cost reduction in response to the impact of weak economic conditions.

As for some of the details,

• Salaries and wages declined by 12% from Q3 of 2008. In accordance with our 2009 operating plan, we continue to experience cost savings through the targeted reduction of corporate headcount, a 50% reduction in the company’s 401K match and the deferral of merit increases of our corporate employees. Additionally, incentive compensation expense has declined from Q3 of 2008.
• General and administrative costs declined by 9% compared to Q3 of 2008. Costs were reduced in various areas, particularly those that are variable with worksite employee and corporate headcount levels.
• Sales commission cost has declined by 13% from Q3 2008, consistent with the decline in paid worksite employees and lower sales production.
• Advertising costs declined by 14%, as we’ve been able to take advantage of lower advertising rates, while achieving our gross rating point targets. We have also eliminated the least productive business promotion efforts in 2009.
• Depreciation and amortization increased by 5% due primarily to capital expenditures made throughout the prior year. We have scaled back capital expenditures in 2009, spending just $6.5 million year-to-date.

Interest Income

Interest income was slightly higher than expected, however decreased by approximately $1.3 million from Q3 of 2008 due to declining interest rates.

Tax Rate

Due to a revision in our full year effective tax rate from 40% to 40.5%, our effective tax rate for the third quarter included a year-to-date catch-up adjustment and was therefore approximately 42% on a stand-alone basis. This resulted in a drag on Q3 earnings of approximately $0.01 per share.

Balance Sheet and Cash Flows

As for our balance sheet and cash flow:

EBITDA, plus stock-based compensation, totaled $16.4 million for the third quarter. Cash outlays during Q3 included cash dividends of $3.3 million and capital expenditures of $2.1 million. While we did not repurchase any shares during the quarter, our balance sheet remains strong with working capital of $130 million, allowing us to resume buying shares as opportunities arise. We currently have 411,000 shares remaining under our current authorization.

At this time, I’d like to turn the call over to Richard.

Richard Rawson

Thank you Doug.

This morning, I am going to give you the details of our 3rd quarter gross profit results. Then I will update everyone on the current pricing and direct cost trends and how they will affect gross profit per worksite employee per month for the 4 th quarter. I will then wrap up my remarks by commenting on factors affecting our 2010 gross profit plan.

As you know, our gross profit comes from the service fee component of our markup combined with the surplus that is generated when the direct cost pricing allocation components of our markup exceeds the corresponding direct costs.

Doug just reported that our gross profit per WSEE per month was $220 for this quarter which was the midpoint of our expected range.

These results came from achieving $195 per WSEE per month of service fees and generating a surplus of $25 per WSEE per month or 2.5% of our total direct cost allocations.

The pricing of our service fee, for new accounts sold this quarter was $194 per WSEE employee per month. The pricing on our renewed business remained the same as Q3 of last year.

The service fee on our entire book of business is relatively flat compared to last quarter as we have continued to be sensitive to our clients needs while we all manage our way through these difficult times. These are great results, and we continue to be very pleased with our relative pricing strength.

Now let's review the details surrounding the $25 of gross profit per WSEE surplus that was earned.

We had an $11 per WSEE per month larger than expected surplus in the workers' compensation cost center offset by the combination of a $9 per WSEE worse than expected deficit in the benefits cost center and a $2 less than expected surplus in the payroll tax cost center. Let me give you the details of each cost center, beginning with the workers' compensation program.

You may recall that over the last 4 quarters I have been reporting the continually improving incidence and severity rates that we have experienced for this current policy year which expired on September 30 th 2009. Now that this policy year is over, we know that the number of claims filed during this year was significantly lower than the prior year and resulted in a 17.66% reduction in the number of claims filed compared to last year. This lower incidence rate is due to our effective safety service programs along with a fewer number of worksite employees that file those claims.

The severity rate, which is the average cost of these claims, was 16.3% lower than the prior policy year. It is these recent results that caused our workers' compensation expense to be .53% of non bonus payroll or $11 per worksite employee per month better than our original forecast.

Now on the benefits side of our direct costs, the story is quite different. This quarter our benefits cost per covered WSEE increased 9.3% over Q3 of 2008, to $757, which was $15 per covered employee higher than we were expecting for the quarter. This significant increase was primarily the result of increased utilization by worksite employees and their families, including some large loss claims. This spike in utilization may be due to a fear of loss of health insurance coverage in the midst of the recession combined with an increase in treatments for the swine flu.

During our last quarterly call we reported a significant increase in health care costs coming from the increase in COBRA enrollee's. We estimated that this would cause our health care costs to increase about $2,000,000 per quarter above our normal trended costs and that is what we experienced.

Additionally, the state of New York passed a retroactive premium tax on all plans that cover employees living in New York, which resulted in $2 per covered employee of additional expense for the quarter.

Lastly the payroll tax cost center generated a little less surplus than we forecasted mainly because the payroll average of worksite employees was slightly lower than previously expected.

In summary, our business model continues to demonstrate resiliency as the factors that affect our direct costs continue to counter balance each other.

Now let me update everyone on what our gross profit expectations are for the 4 th quarter beginning with benefits.

We are going to forecast a continuation of a 9% increase in benefits cost for Q4 over last year. This increase is due to the ongoing cost of COBRA participants and the recent pattern of higher utilization. As I mentioned last quarter, we had already built in allocation increases to match a 9% to 10% cost increase in benefits, so our deficit in this cost center should begin to improve next year.

Now as for the payroll tax cost center, our surplus should increase in Q4 as most employees have already reached their wage limits and year end accruals always add some extra surplus.

As for the workers' compensation cost center, our allocations have been declining over the past 4 quarters. We have not seen workers' compensation insurance companies raising their rates so until they do we will not be increasing our allocations.

On the expense side of this cost center, we recently renewed our workers' compensation insurance policy again with ACE Insurance Company. They slightly reduced our administrative fees and they also lowered their forecast of our losses for this new policy year. But as you all know, we always begin each new policy year with a conservative forecast and we let the positive results develop as we actively manage this cost. This year is certainly no different; therefore we will forecast a cost of .67% to .69% of non bonus payroll for Q4.

On the pricing side, we typically do not see much variation in Q4 of each year from Q3, therefore the service fee component of our markup should remain the same.

In summary, when we consider all of the above factors, our gross profit per worksite employee per month should be in the range of $220 to $222 for the quarter.

Now let's discuss 2010. As we look into next year, there a number of additional factors that we need to consider. First, in the area of pricing, when we begin to see improvement in the small business marketplace we should see the markup component of our service fee begin to increase.

Second, the unemployment fund in each state has been severely depleted. Most states are still working on how much of an increase they are going to assess employers next year. So we will have to wait until we get our new rates before we can complete our forecast. Keep in mind that whenever we do receive the state rates, we will adjust our allocations accordingly.

Third, the uncertainty about healthcare and what it means to employers adds to the difficulty in forecasting this cost for 2010. We do know that our administrative fees with United Healthcare will go down slightly next year. We also know that the minor plan design changes that we are implementing January 1 st should have a slightly positive effect on our trend for 2010.

But the bottom line is this: it's just too early to finalize 2010's gross profit picture.

At this point I would like to turn the call over to Paul.

Paul Sarvadi

Thank you Richard. Today I will comment on three primary topics to provide some color on recent results and our outlook going forward. First I will discuss sales, retention and employment metrics among our small business and mid market clients reflected in our third quarter results. Second I will cover our fall campaign selling and retention efforts underway and the climate we are facing in the marketplace including the specific impact of healthcare reform. And I will complete my remarks with a description of our approach to 2010 from a very high level considering the backdrop of the economic and political environment.

During the third quarter. Our key unit growth metric stabilized at expected levels from the decline we had experienced since October of last year. Layoffs and new hires in the client base continued at a very low level, similar to last quarter, and worksite employees paid from sales offset client attrition results. Client retention at 98.3% was just slightly lower than historical norms of 98.5% which I believe is exceptional considering the economic climate. These results reflect the hard work and dedication of our organization supporting our clients in very meaningful ways through the recession.

New sales during the quarter were below expectations at 70% of forecast, similar to Q2, reflecting a foxhole mentality among small business and mid market prospects. This mentality was reflected in the employment statistics from actual data within our system and from our most recent survey results. Business leaders continued to hold the line on compensation including base pay and overtime. Regular pay was flat on a year over year basis and overtime was 7% of base pay which is at a historically low level.

The one sign of recovery in the actual data from Q3 was the first increase in commissions paid to the sales staff of our clients we have seen in over a year. This indicator of the new business pipeline of our customers was up 4% over the same period one year ago and was stable compared to the prior quarter. This is a good sign but certainly not enough for business owners to jump on out of the foxhole and advance with hiring and investment.

Our quarterly survey released today provides further insight into the view of the economic climate from the perspective of the small business community. On the positive side, 48% of owners surveyed expect a sales increase for the balance of the year and into 2010. In addition, 65% of those polled believe the recovery has either already started or will happen in 2010 while 21% think it will be in 2011 and 13% are unsure.

However when it comes to making decisions to move ahead with hiring and compensation increases, there is still caution and reticence among business leaders to take action. 61% expect to keep employment levels the same next year while 28% expect to add employees and 11% expect to reduce staff. 54% expect no change in compensation levels and 24% expect an increase, 18% are still unsure and only 4% expect to reduce pay.

Apparently, long term concerns are weighing quite heavily on hiring and investment decisions in the small business community. Respondents rated the economy as the biggest short term concern followed by healthcare reform. However, the level of concern over potential tax increases, government expansion and the effect on business, and the federal deficit was greater for the long term than concern over the economy.

In addition, there is a significant level of uncertainty in the marketplace driven by healthcare reform legislation working its way through congress. This effort to completely overhaul a major sector of the entire economy has provided more cause for pause. Even though it remains to be seen what shape the final version healthcare reform may take and whether some form will pass at all, there is a considerable level of uncertainty regarding what this will mean to employers and everyone else for that matter.

For Administaff, healthcare reform as currently contemplated is a short term negative due to the uncertainty, but a long term positive due to the complexity. This is because there is nothing proposed that is going to simplify choices, make it less complicated to understand, or make it easier for businesses to implement the right solution. In fact, distilling the 2,000 page bill into understandable, specific options for clients and employees to choose from will be the first challenge Administaff will overcome.

One of Administaff's core competencies is helping clients comply with complicated government requirements, which allows clients to focus on their profit opportunities. We have experienced healthcare reform on a smaller scale when a pay or play mandate on employers was enacted in Massachusetts. Our efforts helping clients to analyze options and complete the paperwork necessary to comply added value to our current client relationships.

But the stakes are much higher for business owners from some elements being considered in Congress today. A public plan option with a potential 40% tax on so called “rich plans” is a recipe for driving major plan design and cost changes which will be very complex. In addition it is possible hiring and retaining key employees, which is the primary purpose for employer sponsored plans in the first place, may require new inducements or at a minimum new communication emphasizing other distinguishing elements beyond healthcare.

In any event Administaff has several competencies that will apply in dealing with healthcare reform. Our benefits and risk management services will help clients decide their best path and get the most for their hard earned dollars. Our compliance services will help them meet requirements, manage risk and avoid costly penalties for non-compliance. Our expansive benefit offerings beyond healthcare will help clients distinguish themselves in the marketplace and compete for the best employees. And we will help clients manage and communicate changes and use our technology to ease implementation. These skills and services will be highly attractive to prospects and more valued than ever by clients in the future.

At this time of year we are well underway with our critical Fall Campaign, which is a promotional period focused on selling new accounts and retaining clients at year end. This year, for the reasons I have already discussed, we find small and mid market prospects in the foxhole. However, the early signs of recovery are appearing and although they are not jumping out yet, many have placed their helmets on a stick and raised it in the air. If the helmet does not get shot off, they are ready to advance and take advantage of market opportunities which are great in a down economy. Our challenge in this climate is to reach in and help them out of the foxhole and see the opportunity we provide for them to be ahead of the pack as a recovery emerges.

Our current clients and target prospects are the best small businesses in America and our recent data points and survey information are distinguishable from other recent small business surveys. This year alone we have helped clients complete and integrate 25 competitive acquisitions with an average of 37 employees per company. Nearly an equal number are in the process at some stage.

Prior to the downturn we hypothesized our client base would respond differently through a recession in three ways. Layoffs would start later, cuts would not be as deep, and a rebound would occur sooner than other small businesses. The first assumption was true in hindsight. The second is likely but as yet unproven as statistics are not yet available. And the third should be in front of us over the next quarter or two.

As we look ahead to 2010, we believe our approach should be similar to the one we used this year to navigate successfully through a very difficult time. When this year began I explained we were taking a conservative, measured approach balancing the interest of company stakeholders. Even though our company had a very strong balance sheet and no debt, and we felt we would remain profitable through the downturn, we elected to tighten our belts and position our company to support our clients as much as possible, and to be prepared if economic conditions got even worse.

Fortunately our plan has been effective and we have remained profitable and even strengthened our financial position increasing working capital by over 30% to 130 million dollars since the beginning of the year. We are in an excellent position to be opportunistic in regard to acquisitions or new product or service additions that are consistent with our mission to help small and mid market businesses succeed.

We have been able to continue important technology development that will improve our competitive advantage as we move into 2010. This quarter we will be rolling out our online benefits enrollment platform which provides a state of the art decision support tool that models specific choices available to individuals to enroll in benefit programs.

We have also continued to develop our HR Tools performance management, job description development and HR information repository and reporting tool which will be launched next year on our software as a service platform. This will provide powerful new functionality for current clients and be available on a stand alone basis to prospective and former full service PEO clients.

We have also been able to maintain our trained sales staff throughout this down cycle with an average of 306 trained reps in the third quarter even with the number we had one year ago. In addition, at this time 55% of our sales professionals have over 18 months experience compared to 42% one year ago. This experience is likely to pay substantial dividends as business owner sentiment improves in tandem with an economic recovery over the next year.

Our recurring revenue business model is driven significantly by the January starting point of paid worksite employees and the associated pricing of those accounts as a new year begins. Every year there is a considerable change in January due to the influx of new accounts sold in the fall campaign and the concentration of year end renewals of current clients.

Normally at this time of year we take a shot at framing the starting point and bracketing the next year outlook based upon our years of experience. However last year we deferred providing specific guidance due to the financial crisis and associated uncertainty. This year for different reasons there is a similar level of uncertainty in the marketplace that makes that exercise less credible. In this environment we have determined it is better to work to obtain the desired results but shy away from providing early guidance with less than meaningful ranges of expectations. So we will repeat what we did last year and defer providing specific guidance to early next year once we have worked through the year end transition of new and renewing accounts.

As we look ahead to 2010 we are on solid financial footing and we are prepared for a range of possible economic eventualities. At this time we do not see anything exceptionally positive or dramatically negative on the horizon for next year. If the recovery takes hold and the marketplace responds favorably we will benefit tremendously and results will be obvious. If however, the economy stalls or continues to bounce along the bottom, we are positioned remain profitable, and to be opportunistic in accelerating our long term plan for growth and profitability.

At this time I would like to pass the call back to Doug to provide our specific guidance for the fourth quarter.

Doug Sharp

Thanks Paul.

Fourth Quarter 2009 Guidance

Now, before we open up the call for questions, I'd like to comment on our financial guidance for the fourth quarter of 2009.

In general, we continue to expect worksite employee levels to remain relatively flat over the remainder of the year, particularly if minimal hiring and layoffs in our client base continue to offset each other. We are lowering our gross profit per worksite employee forecast, primarily as a result of higher than anticipated 2009 healthcare cost trends, and expect a similar level of Q4 operating expenses as we had previously forecasted.

So, as for our fourth quarter key metrics guidance:

We are forecasting Q4 average paid worksite employees in a range of 107,250 to 107,750.

Based upon Richard's earlier comments, we expect gross profit per worksite employee per month to be in a range of $220 to $222 for the quarter.

As for operating expenses, we are forecasting a range of $65.0 to $65.5 million for the quarter or a year over year decline of approximately 11% from Q4 2008. The sequential increase of approximately $4 million from Q3 of 2009 is primarily attributable to additional business promotion and advertising costs focused around our fall sales campaign.

We are forecasting Q4 net interest income between $200,000 and $400,000, which is relatively the same as Q3 results.

And, we are forecasting a Q4 effective tax rate of 41%.

As for average outstanding shares, we are forecasting 25.2 million for Q4.

2010 Comments

Now, as Paul mentioned, normally at this time of the year we would provide our outlook for 2010. However, as you are aware, there is a high level of uncertainty surrounding the current macro environment, including the viability of an economic and labor market recovery, and the impact of government regulation, including healthcare reform and potential tax increases. Therefore, we will follow a similar approach as last year. We will finalize our 2010 operating plan as we approach year-end and have more clarity on the macro issues. We will also incorporate the results of our 2009 fall sales campaign and year-end client renewal period.

Detailed 2010 guidance will be provided during next quarter’s conference call to be held in early February.