UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007.

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File No. 0-22701

GEVITY HR, INC.

(Exact name of registrant as specified in its charter)

Florida	65-0735612
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
9000 Town Center Parkway
Bradenton, Florida	34202
(Address of principal executive offices)	(Zip Code)

(Registrant’s telephone number, including area code): (941) 741-4300

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ     No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  o Accelerated filer  þ Non-accelerated filer  o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  o     No  þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class of common stock	Outstanding as of July 31, 2007
Par value $0.01 per share	23,337,261

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (unaudited).		3
Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)		4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)		6
Notes to Condensed Consolidated Financial Statements (unaudited)		7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		33
ITEM 4. Controls and Procedures		33
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings		33
ITEM 1A. Risk Factors		33
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		34
ITEM 4. Submission of Matters to a Vote of Security Holders		34
ITEM 6. Exhibits		35
SIGNATURE		36
EX-10.1 UnitedHealthcare Group Benefits Agreement
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32 Section 906 Certification of CEO and CFO

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GEVITY HR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(in $000’s, except share and per share data)

	For The Three Months Ended						For The Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues	$	150,408		$	161,208		$	311,523		$	330,897
Cost of services (exclusive of depreciation and amortization shown below)		102,857			112,910			218,578			232,997
Gross profit		47,551			48,298			92,945			97,900
Operating expenses:
Salaries, wages and commissions		20,391			19,507			42,929			40,375
Other general and administrative		15,657			12,801			30,450			25,675
Reinsurance contract loss		—			4,650			—			4,650
Depreciation and amortization		4,201			3,536			7,936			6,833
Total operating expenses		40,249			40,494			81,315			77,533
Operating income		7,302			7,804			11,630			20,367
Interest income		251			184			416			436
Interest expense		(697	)		(162	)		(996	)		(426	)
Other expense, net		(9	)		(5	)		(23	)		(148	)
Income before income taxes		6,847			7,821			11,027			20,229
Income tax provision		2,157			917			3,823			5,131
Net income	$	4,690		$	6,904		$	7,204		$	15,098
Net income per common share:
- Basic	$	0.20		$	0.26		$	0.30		$	0.58
- Diluted	$	0.19		$	0.26		$	0.29		$	0.56
Weighted average common shares outstanding:
- Basic		23,930,779			26,244,029			24,178,740			26,253,075
- Diluted		24,523,901			27,074,808			24,779,752			27,130,556

See notes to condensed consolidated financial statements.

3

GEVITY HR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(in $000’s, except share and per share data)

	June 30,		December 31,
	2007		2006
ASSETS
Current assets:
Cash and cash equivalents	$	11,243	$	36,291
Marketable securities — restricted		5,989		4,478
Accounts receivable, net		120,481		126,936
Short-term workers’ compensation receivable, net		30,300		35,354
Other current assets		11,735		15,927
Total current assets		179,748		218,986
Property and equipment, net		24,663		23,847
Long-term marketable securities — restricted		3,839		3,747
Long-term workers’ compensation receivable, net		108,269		85,872
Intangible assets, net		18,164		20,856
Goodwill		14,658		8,692
Deferred tax asset, net		12,816		11,938
Other assets		1,176		622
Total assets	$	363,333	$	374,560

See notes to condensed consolidated financial statements.

4

GEVITY HR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
UNAUDITED
(in $000’s, except share and per share data)

	June 30,			December 31,
	2007			2006
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accrued payroll and payroll taxes	$	134,660		$	163,410
Accrued insurance premiums and health reserves		14,629			17,287
Customer deposits and prepayments		17,454			11,893
Accounts payable and other accrued liabilities		6,571			10,243
Deferred tax liability, net		19,748			24,583
Dividends payable		2,130			2,223
Total current liabilities		195,192			229,639
Revolving credit facility		39,967			—
Other long-term liabilities		4,412			2,869
Total liabilities		239,571			232,508
Commitments and contingencies (see notes)
Shareholders’ equity:
Common stock, $.01 par value, 100,000,000 shares authorized, 32,061,038 and 31,962,314 issued and outstanding as of June 30, 2007 and December 31, 2006, respectively		321			320
Additional paid-in capital		180,355			177,949
Retained earnings		86,275			84,110
Treasury stock (8,393,883 and 7,260,175 shares at cost, respectively)		(143,189	)		(120,327	)
Total shareholders’ equity		123,762			142,052
Total liabilities and shareholders’ equity	$	363,333		$	374,560

See notes to condensed consolidated financial statements.

5

GEVITY HR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in $000’s)

	For the Six Months Ended
	June 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,204		$	15,098
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		7,936			6,833
Deferred tax (benefit) provision, net		(5,712	)		348
Stock compensation		1,434			1,881
Excess tax benefits from share-based arrangements		(290	)		(3,638	)
Provision for bad debts		593			12
Other		140			175
Changes in operating working capital:
Accounts receivable, net		5,862			1,957
Other current assets		4,756			4,734
Workers’ compensation receivable, net		(17,342	)		(16,237	)
Other assets		(112	)		52
Accrued insurance premiums and health reserves		(2,658	)		1,754
Accrued payroll and payroll taxes		(28,855	)		(21,317	)
Accounts payable and other accrued liabilities		(2,499	)		1,786
Customer deposits and prepayments		5,561			(400	)
Other long-term liabilities		137			(87	)
Net cash used in operating activities		(23,845	)		(7,049	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities and certificates of deposit		(1,603	)		(130	)
Capital expenditures		(3,875	)		(9,285	)
Business acquisition		(9,495	)		—
Net cash used in investing activities		(14,973	)		(9,415	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility		39,967			—
Proceeds from exercise of stock options		751			5,421
Excess tax benefits from share-based arrangements		290			3,638
Dividends paid		(4,420	)		(4,204	)
Purchase of treasury stock		(22,818	)		(13,561	)
Net cash provided by (used in) financing activities		13,770			(8,706	)
Net decrease in cash and cash equivalents		(25,048	)		(25,170	)
Cash and cash equivalents — beginning of period		36,291			52,525
Cash and cash equivalents — end of period	$	11,243		$	27,355
Supplemental disclosure of cash flow information:
Income taxes paid	$	4,396		$	3,210
Interest paid	$	968		$	428

Supplemental disclosure of non-cash transactions:

Capital expenditures for the six months ended June 30, 2007 exclude approximately $530 of capital items purchased by the Company in the second quarter of 2007 and not paid for until the third quarter of 2007.

Capital expenditures for the six months ended June 30, 2006 exclude approximately $3,132 of capital items purchased by the Company in the second quarter of 2006 and not paid for until the third quarter of 2006.

See notes to condensed consolidated financial statements.

6

GEVITY HR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in $000’s, except share and per share data)

1. GENERAL

     The accompanying unaudited condensed consolidated financial statements of Gevity HR, Inc. and subsidiaries (collectively, the “Company” or “Gevity”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission (the “Form 10-K”). These financial statements reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.

     The Company’s significant accounting policies are disclosed in Note 1 of the Company’s consolidated financial statements contained in the Form 10-K. The Company’s critical accounting estimates are disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Form 10-K. On an ongoing basis, the Company evaluates its policies, estimates and assumptions, including those related to revenue recognition, workers’ compensation receivable/reserves, intangible assets, medical benefit plan liabilities, state unemployment taxes, allowance for doubtful accounts, and deferred taxes. During the first half of 2007, there have been no material changes to the Company’s significant accounting policies and critical accounting estimates except as described below.

     Certain prior period amounts have been reclassified to conform to current period presentation.

Recent Accounting Pronouncements

     The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions and requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. The disclosure requirements and cumulative effect of adoption of FIN 48 are presented in Note 10.

     In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact this standard may have on its financial position and results of operations.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for the measurement of assets and liabilities that use fair value and expands disclosures about fair value measurements. SFAS 157 will apply whenever another accounting principle generally accepted in the United States requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact this standard may have on its financial position and results of operations.

7

2. MARKETABLE SECURITIES — RESTRICTED

     At June 30, 2007 and December 31, 2006, the Company’s investment portfolio consisted of restricted money market funds classified as available-for-sale.

     Restricted money market funds relate to collateral held in connection with the Company’s workers’ compensation programs, collateral held in connection with the Company’s general insurance programs and amounts held in escrow related to purchase price contingencies associated with the Company’s acquisition of HRAmerica, Inc. (“HRA”) on February 16, 2007 (see Note 5). These securities are recorded at fair value, which is equal to cost. The interest earned on these investments is recognized as interest income in the Company’s condensed consolidated statements of operations.

     For the three and six months ended June 30, 2007 and 2006, there were no realized gains or losses from the sale of marketable securities. As of June 30, 2007 and December 31, 2006, there were no unrealized gains or losses on marketable securities.

3. ACCOUNTS RECEIVABLE

     At June 30, 2007 and December 31, 2006, accounts receivable from clients consisted of the following:

	June 30,			December 31,
	2007			2006
Billed to clients	$	8,299		$	10,622
Unbilled revenues		112,907			116,937
		121,206			127,559
Less: Allowance for doubtful accounts		(725	)		(623	)
Total	$	120,481		$	126,936

     The Company establishes an allowance for doubtful accounts based upon management’s assessment of the collectibility of specific accounts and other potentially uncollectible amounts. The Company reviews its allowance for doubtful accounts on a quarterly basis.

4. WORKERS’ COMPENSATION RECEIVABLE/ RESERVES

     The Company has maintained a loss sensitive workers’ compensation insurance program since January 1, 2000. The program is insured by CNA Financial Corporation (“CNA”) for the 2000, 2001 and 2002 program years. The program is currently insured by member insurance companies of American International Group, Inc. (“AIG”) and includes coverage for the 2003 through 2007 policy years. In states where private insurance is not permitted, client employees are covered by state insurance funds.

     Under the 2007 workers’ compensation program with AIG, AIG is responsible for paying the claims; the Company is responsible for paying to AIG the first $500 per occurrence of claims and AIG is responsible for amounts in excess of $500 per occurrence. In addition, the AIG policy provides $20,000 of aggregate stop loss coverage once claims in the deductible layer exceed $136,700.

     Similar to the prior years’ workers’ compensation programs with AIG, the Company, through its wholly-owned Bermuda-based insurance subsidiary, remits premiums to AIG to cover claims to be paid within the Company’s $500 per occurrence deductible layer. AIG deposits the premiums into an interest bearing loss fund collateral account for reimbursement of paid claims up to the $500 per occurrence amount. Interest on the loss fund collateral account (which will be reduced as claims are paid out over the life of the policy) will accrue to the benefit of the Company at a fixed annual rate. Under the 2007 program, the Company will pay $66,500 of loss fund collateral premium, subject to certain volume adjustments, and is guaranteed to receive a 5.01% per annum fixed return so long as the program and the interest accrued under the program remain with AIG for at least 10 years. If the program is terminated early, the interest rate is adjusted downward based upon a sliding scale. The 2007 program provides for an initial loss fund collateral premium true-up 18 months after the policy inception and annually

8

thereafter. The true-up is based upon a pre-determined loss factor times the amount of incurred claims in the deductible layer as of the date of the true-up.

     The Company reviews its estimated cost of claims in the deductible layer on a quarterly basis. The determination of the estimated cost of claims is based upon a number of factors, including but not limited to: actuarial calculations, current and historical loss trends, the number of open claims, developments relating to the actual claims incurred, and the impact of acquisitions, if any. The Company uses a certain amount of judgment in this estimation process. During the three months ended June 30, 2007 and 2006, the Company revised its ultimate loss estimates for prior open policy years, which resulted in a net reduction of workers’ compensation expense of approximately $6,794 and $1,049, respectively. During the six months ended June 30, 2007 and 2006, the Company revised its ultimate loss estimates for prior open policy years, which resulted in a net reduction of workers’ compensation expense of approximately $8,043 and $1,882, respectively. These revisions were based upon continued favorable claims development that occurred during the periods.

     The balance in the loss fund collateral account (including accrued interest) in excess of the net present value of the Company’s liability to AIG with respect to claims payable within the deductible layer is recorded as a workers’ compensation receivable. Returns to the Company of amounts held in the loss fund collateral account are recorded as reductions to the workers’ compensation receivable, net. During the first quarter of 2007, AIG released approximately $5,000 of cash from the 2003 loss fund collateral account in advance of the annual loss provision adjustment. The Company expects to receive an additional amount of approximately $30,300 during the third quarter of 2007 relating to the annual loss provision true-up and the finalization of outstanding prior year premium audits.

     The Company accrues for workers’ compensation costs based upon:

• premiums paid for the layer of claims in excess of the deductible;

• estimated total costs of claims that fall within the Company’s policy deductible calculated on a net present value basis;

• the administrative costs of the programs (including claims administration, state taxes and surcharges); and

• the return on investment for loss fund premium dollars paid to AIG.

     At June 30, 2007 and December 31, 2006, the weighted average discount rate used to calculate the net present value of the claim liability was 4.19% and 3.70% respectively. Premium payments made to AIG related to program years 2000 through 2007 are in excess of the net present value of the estimated claim liabilities. This has resulted in a workers’ compensation receivable, net, at June 30, 2007 and December 31, 2006 of $138,569 and $121,226, respectively, of which $30,300 and $35,354 was classified as short-term at June 30, 2007 and December 31, 2006, respectively. This receivable represents a significant concentration of credit risk for the Company.

5. INTANGIBLE ASSETS

     On February 16, 2007, the Company acquired certain assets, including the client portfolio, of HRA, a human resource outsourcing firm that offers fundamental employee administration solutions including payroll processing to approximately 145 clients (as measured by Federal Employer Identification Number) with approximately 16,000 client employees. Approximately 14,700 non-coemployed client employees were acquired as of the date of the acquisition and approximately 1,300 co-employed client employees (8 clients) were acquired with an effective date of April 1, 2007. The acquisition provides the Company with technology and processes to enhance its non-coemployment model, Gevity Edge ^TM Select.

     The purchase price for the acquired assets was approximately $10,895 (including direct acquisition costs of approximately $652), which the Company paid in cash from its revolving credit facility. Of this amount, $1,400 is being held in an escrow account and is included in marketable

9

securities — restricted at June 30, 2007. The amounts held in escrow represent purchase price contingencies related to potential earn outs and the achievement of certain client retention percentages up through the first anniversary date of the acquisition. Unearned escrow amounts, if any, will be returned to the Company.

     The HRA acquisition was accounted for by the purchase method in accordance with SFAS No. 141, Business Combinations. The results of operations for HRA are included in the Company’s statement of operations for the period February 17, 2007 through June 30, 2007. The effects of the HRA acquisition on the historical financial statements of the Company had it occurred January 1, 2006 are not material and therefore pro forma information is not presented. The purchase price of $9,495 (excluding $1,400 of contingent purchase price included with marketable securities-restricted as of June 30, 2007) was preliminarily allocated to assets and liabilities acquired based upon their preliminary fair value on the date of acquisition as follows:

	June 30,
	2007
Other current assets	$	275
Software		800
Property and equipment		327
Client service agreements		2,300
Goodwill		5,966
Other current liabilities		(36	)
Other long-term liabilities		(137	)
Net value of purchased assets	$	9,495

The client service agreements intangible asset is being amortized on a straight-line basis over its estimated useful life of 5 years.

     The Company is currently reviewing the preliminary fair value determinations. The ultimate allocation of the purchase price may differ from the amounts included in these financial statements. Adjustments to the purchase price allocations, if any, are expected to be finalized prior to December 31, 2007 and will be reflected in future filings. Management does not expect these adjustments, if any, to have a material effect on the Company’s financial position or results of operations. Resolution of the purchase price contingency may result in additional amounts allocated to goodwill.

     At June 30, 2007 and December 31, 2006, intangible assets consisted of the following:

	June 30,			December 31,
	2007			2006
Purchased client service agreements	$	50,229		$	47,929
Accumulated amortization		(32,065	)		(27,073	)
Intangible assets, net	$	18,164		$	20,856

     Amortization expense for the three months ended June 30, 2007 and 2006 was $2,525 and $2,410, respectively. Amortization expense for the six months ended June 30, 2007 and 2006 was $4,992 and $4,819, respectively. Estimated amortization expense for the remainder of 2007 and for each of the remaining years is $5,049, $10,098, $2,039, $460, $460 and $58, respectively.

6. HEALTH BENEFITS

     Blue Cross Blue Shield of Florida (“BCBSFL”) is the Company’s primary healthcare partner in Florida, delivering medical care benefits to approximately 21,000 Florida-based client employees. The Company’s policy with BCBSFL is a minimum premium policy expiring September 30, 2008. Pursuant to this policy, the Company is obligated to reimburse BCBSFL for the cost of the claims incurred by

10

participants under the plan, plus the cost of plan administration. The administrative costs per covered client employee associated with this policy are specified by year and aggregate loss coverage is provided to the Company at the level of 110% of projected claims. The Company’s obligation to BCBSFL under its current contract may require an irrevocable letter of credit (“LOC”) in favor of BCBSFL if the coverage ratio, as set forth in the BCBSFL agreement, is not maintained. The coverage ratio is calculated quarterly. If the Company’s coverage ratio does not meet the minimum requirement, the Company must provide an LOC valued at up to two months of projected claims (average monthly claims approximated $9,200 for the last twelve months). As of June 30, 2007, the minimum coverage ratio was met and no LOC was required.

     Aetna Health, Inc. (“Aetna”) is the Company’s largest medical care benefits provider for approximately 17,000 client employees outside the state of Florida. The Company’s 2006/2007 policy with Aetna provides for an HMO and PPO offering to plan participants. The Aetna HMO medical benefit plans are subject to a guaranteed cost contract that caps the Company’s annual liability. The Aetna PPO medical benefit plan is a retrospective funding arrangement. For the 2007 plan year Aetna has agreed to eliminate the callable feature of the PPO plan that previously existed and differences in actual plan experience versus projected plan experience for the year will factor into subsequent year rates.

     In 2006, the Company announced the addition of UnitedHealthcare as an additional health plan option. As of June 30, 2007, UnitedHealthcare provides medical care benefits to approximately 7,000 client employees. The UnitedHealthcare plan is a fixed cost contract expiring September 30, 2008, that caps the Company’s annual liability.

     The Company provides coverage under various regional medical benefit plans to approximately 1,000 client employees in various areas of the country. Included in the list of medical benefit plan providers are Kaiser Foundation Health Plan, Inc. and Harvard Pilgrim Healthcare. These regional medical plans are subject to fixed cost contracts.

     The Company’s dental plans, which include both a PPO and HMO offering, are provided by Aetna for all client employees who elect coverage. All dental plans are subject to fixed cost contracts that cap the Company’s annual liability.

     In addition to dental coverage, the Company offers various fixed cost insurance programs to client employees such as vision care, life, accidental death and dismemberment, short-term disability and long-term disability. The Company also offers a flexible spending account for healthcare, dependent care and a qualified transportation fringe benefit program.

     Part-time employees of clients are eligible to enroll in limited benefit programs from Star HRG. These plans include fixed cost sickness and accident and dental insurance programs, and a vision discount plan.

     Included in accrued insurance premiums and health reserves at June 30, 2007 and December 31, 2006 are $9,874 and $13,066, respectively, of short-term liabilities related to the Company’s health benefit plans. Of these amounts $9,803 and $10,609, respectively, represent an accrual for the estimate of claims incurred but not reported at June 30, 2007 and December 31, 2006.

     Health benefit reserves are determined quarterly by the Company and include an estimate of claims incurred but not reported and claims reported but not yet paid. The calculation of these reserves is based upon a number of factors, including but not limited to actuarial calculations, current and historical claims payment patterns and medical trend rates.

     During the six months ended June 30, 2007 and 2006, the Company reduced its reserve for incurred but not reported claims by approximately $2,601 and $3,200, respectively, which decreased its cost of services and resulted in a health plan surplus for each period. These reductions were based upon favorable claims development. There were no changes to the health plan reserves during the three months ended June 30, 2007 and 2006 that impacted cost of services.

11

7. REVOLVING CREDIT FACILITY

     The Company maintains a $100,000 unsecured credit facility with Bank of America, N.A., (“BOA”). On May 7, 2007, the Company entered into the First Amendment to the Amended and Restated Credit Agreement dated August 30, 2006, which increased the amount of aggregate revolving commitments of the credit facility from $50,000 to $75,000 and allows the Company to repurchase up to $125,000 of its capital stock during the term of the agreement. On June 14, 2007, the Company entered into the Second Amendment to the credit agreement, which increased the amount of aggregate revolving commitments from $75,000 to $100,000. Certain of the Company’s subsidiaries named in the credit agreement have guaranteed the obligations under the credit agreement. The credit facility has a five-year term that expires August 30, 2011. Loan advances bear an interest rate equal to an Applicable Rate (which ranges from 1.25% to 1.75% for Eurodollar Rate Loans, and from 0.00% to 0.25% for Prime Rate Loans, depending upon the Company’s Consolidated Leverage Ratio) plus one of the following indexes: (i) Eurodollar Rate or (ii) the Prime Rate (each as defined in the credit agreement). Up to $10,000 of the loan commitment can be drawn through letters of credit issued by BOA. With respect to outstanding letters of credit, a fee determined by reference to the Applicable Rate plus a fronting fee of 0.125% per annum will be charged on the aggregate stated amount of each outstanding letter of credit. A fee ranging from 0.20% to 0.30% (based upon the Company’s Consolidated Leverage Ratio) is charged on any unused portion of the loan commitment. At June 30, 2007, the Company had outstanding advances of $39,967 at a weighted average interest rate of 6.57%. There were no outstanding advances under the credit agreement at December 31, 2006.

     The credit agreement includes financial covenants and affirmative and negative covenants, including the maintenance of minimum Consolidated Net Worth, a minimum Consolidated Fixed Charge Coverage Ratio of 1.5:1.0 and a maximum Consolidated Leverage Ratio of 2.0:1.0 (each as defined in the credit agreement). The covenants in the credit agreement also restrict, among other things, the Company’s ability to incur liens, make certain investments, incur additional indebtedness, engage in certain fundamental corporate transactions, dispose of property or make certain restricted payments. Pursuant to the terms of the credit agreement, the obligations of the Company may be accelerated upon the occurrence and continuation of an Event of Default. Such events include the following: (i) the failure to make principal, interest or fee payments when due (beyond applicable grace periods); (ii) the failure to observe and perform certain covenants contained in the credit agreement; (iii) any representation or warranty made by the Company in the credit agreement or related documents proves to be incorrect or misleading in any material respect when made or deemed made; and (iv) other customary events of default. The Company was in compliance with all covenants under the credit agreement at June 30, 2007.

     The Company recorded $684 and $140 of interest expense for the three months ended June 30, 2007 and 2006, respectively, related to the amortization of loan costs, unused loan commitment fees and interest on advances. Interest expense for the six months ended June 30, 2007 and 2006 was approximately $963 and $215, respectively.

8. COMMITMENTS AND CONTINGENCIES

Litigation

     The Company is a party to certain pending claims that have arisen in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the consolidated financial position, results of operations, or cash flows if adversely resolved. However, the defense and settlement of these claims may impact the future availability of, and retention amounts and cost to the Company for, applicable insurance coverage.

Regulatory Matters

     The Company’s employer and health care operations are subject to numerous federal, state and local laws related to employment, taxes and benefit plan matters. Generally, these rules affect all companies in the United States. However, the rules that govern professional employer organizations

12

constitute an evolving area due to uncertainties resulting from the non-traditional employment relationship among the professional employer organization, the client and the client employees. Many federal and state laws relating to tax and employment matters were enacted before the widespread existence of professional employer organizations and do not specifically address the obligations and responsibilities of these professional employer organization relationships. If the Internal Revenue Service concludes that professional employer organizations are not “employers” of certain client employees for purposes of the Internal Revenue Code of 1986, as amended, the tax qualified status of the Company’s defined contribution retirement plans as in effect prior to April 1, 1997 could be revoked, its cafeteria plan may lose its favorable tax status and the Company may no longer be able to assume the client’s federal employment tax withholding obligations and certain defined employee benefit plans maintained by the Company may be denied the ability to deliver benefits on a tax-favored basis as intended.

California Unemployment Tax Assessment

     In May of 2007, the Company received a Notice of Assessment from the State of California Employment Development Department (“EDD”) relative to the Company’s practice of reporting payroll for its subsidiaries under multiple employer account numbers. The notice stated that the EDD was collapsing the accounts of the Company’s subsidiaries into one account number for payroll reporting purposes and retroactively reassessed unemployment taxes due at a higher overall rate for the 2004-2006 tax years resulting in an assessment of $4,684. On May 30, 2007, the Company filed a petition with the Office of the Chief Administrative Law Judge for the California Unemployment Insurance Appeals Board asking that the EDD’s assessment be set aside. The petition contends in part that the EDD has exceeded the scope of its authority in issuing the assessment by failing to comply with its own mandatory procedural requirements and that the statute of limitations for issuing the assessments has expired as the Company’s activities within the state were compliant with California statutes and regulations. The Company believes that it has valid defenses regarding the assessments and intends to vigorously protest these claims. However, the Company cannot estimate at this point in time what amount, if any, will ultimately be due with respect to this matter.

9. EQUITY

Share Repurchase Program

     On August 15, 2006, the Company announced that the board of directors authorized the repurchase of up to $75,000 of the Company’s common stock under a new share repurchase program. Share repurchases under the new program may be made through open market purchases, block trades or in private transactions at such times and in such amounts as the Company deems appropriate, based on a variety of factors including price, regulatory requirements, overall market conditions and other corporate opportunities. As of March 31, 2007, the Company had purchased 1,650,684 shares of its common stock under this new program at a total cost of $36,527. On April 20, 2007, the Company’s board of directors authorized an increase to this share repurchase program bringing the repurchase amount authorized back up to $75,000. As of June 30, 2007, the Company had purchased 2,466,884 shares of its common stock at a total cost of $52,659. All repurchased shares are included in treasury shares at June 30, 2007.

10. INCOME TAXES

     The Company records income tax expense using the asset and liability method of accounting for deferred income taxes. Under such method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and the income tax bases of the Company’s assets and liabilities. The Company’s effective tax rate provides for both federal and state income taxes. For the three months ended June 30, 2007 and 2006, the Company’s effective rate was 31.5% and 11.7%, respectively. The Company’s effective tax rate for the six months ended June 30, 2007 and 2006 was and 34.7% and 25.4%, respectively. The Company’s effective tax rates differed from the statutory federal tax rates because of state taxes and federal tax credits. Additionally, in connection with the filing of a change in accounting method with the Internal Revenue Service in the second quarter of 2006, the Company reversed a tax reserve of approximately

13

$1,973 which favorably impacted the Company’s effective tax rate for the three and six month periods ended June 30, 2006.

     On January 1, 2007, the Company adopted the provisions of FIN 48, which clarifies the accounting for uncertainty in tax positions. As a result of the implementation of FIN 48, the Company recognized a net increase in its liability for unrecognized tax benefits of $712, which was accounted for as a decrease to the January 1, 2007 balance of retained earnings. Following the adoption on January 1, 2007, the Company had $1,095 of unrecognized tax benefits, the recognition of which would affect the Company’s effective tax rate. At June 30, 2007, the Company has $1,268 of unrecognized tax benefits.

     It is reasonably possible that the gross unrecognized tax benefit, including interest, of $1,268 ($1,095 at the adoption date of January 1, 2007) will decrease in its entirety within twelve months. The Company is pursuing a ruling to clarify an uncertain position with respect to state income recognition.

     The Company and its subsidiaries are subject to tax in the U.S. federal and various state and local jurisdictions. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities in material jurisdictions for tax years beginning prior to January 1, 2002. The Internal Revenue Service commenced an examination of the Company’s U.S. income tax returns for 2002 through 2004 in July 2006.

     The Company will continue to recognize interest and penalties related to its uncertain tax positions in income tax expense. The Company had $33 of interest and no penalties accrued in the unrecognized tax benefit as of January 1, 2007.

11. EARNINGS PER SHARE (“EPS”)

     The reconciliation of net income attributable to common shareholders and shares outstanding for the purposes of calculating basic and diluted earnings per share for the three and six months ended June 30, 2007 and 2006 is as follows:

	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the Three Months Ended June 30, 2007:
Basic EPS:
Net income	$	4,690		23,930,779	$	0.20
Effect of dilutive securities:
Options to purchase common stock				580,467
Non-vested stock				12,655
Diluted EPS:
Net income	$	4,690		24,523,901	$	0.19

     For the three months ended June 30, 2007, 1,009,410 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.

14

	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the Three Months Ended June 30, 2006:
Basic EPS:
Net income	$	6,904		26,244,029	$	0.26
Effect of dilutive securities:
Options to purchase common stock				805,913
Non-vested stock				24,866
Diluted EPS:
Net income	$	6,904		27,074,808	$	0.26

     For the three months ended June 30, 2006, 467,642 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.

	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the Six Months Ended June 30, 2007:
Basic EPS:
Net income	$	7,204		24,178,740	$	0.30
Effect of dilutive securities:
Options to purchase common stock				585,892
Non-vested stock				15,120
Diluted EPS:
Net income	$	7,204		24,779,752	$	0.29

     For the six months ended June 30, 2007, 1,004,272 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.

	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the Six Months Ended June 30, 2006:
Basic EPS:
Net income	$	15,098		26,253,075	$	0.58
Effect of dilutive securities:
Options to purchase common stock				851,984
Non-vested stock				25,497
Diluted EPS:
Net income	$	15,098		27,130,556	$	0.56

     For the six months ended June 30, 2006, 416,483 options to purchase common stock, weighted for the portion of the period they were outstanding, were excluded from the diluted earnings per share computation because the exercise price of the options was greater than the average price of the common stock.

15

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

     The following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties (some of which are beyond the Company’s control), other factors and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission (the “Form 10-K”). See “Cautionary Note Regarding Forward-Looking Statements” below in this Item 2. The following discussion should be read in conjunction with the Company’s condensed consolidated financial statements and related notes contained in this report. Historical results are not necessarily indicative of trends in operating results for any future period.

OVERVIEW AND INTRODUCTION

     Gevity HR, Inc. (“Gevity” or the “Company”) delivers the Gevity Edge^tm, a comprehensive employment management solution comprised of innovative management and administration services, helping employers:

• Streamline human resource (“HR”) administration. Gevity takes the stress and effort out of payroll management and administration, benefits and benefits administration.

• Optimize HR practices. Gevity works with the client’s team to build structure — policies, procedures and communications — for effective employment management, hiring practices and risk management over time.

• Maximize people and performance. Gevity helps hone the skills and capabilities of clients’ staff and management for long-term employee retention and business success.

     Gevity’s employment management solution is designed to positively impact its clients’ business results by:

• increasing clients’ productivity by improving employee performance and generating greater employee retention;

• allowing clients and their employees to focus on revenue producing activities rather than HR matters; and

• reducing clients’ exposure to liabilities associated with non-compliance with HR-related regulatory and tax matters.

     Essentially, Gevity serves as the full-service HR department for these businesses, providing each employee with support previously only available at much larger companies.

     The Company focuses on the professional service fees that it earns from its clients as the primary source of its net income and cash flow. When delivering its human resource outsourcing solution to its clients through a co-employment relationship, the Company is also responsible for providing workers’ compensation and unemployment insurance benefits to its clients’ employees as well as health and welfare benefits. In so doing, the Company has an opportunity to generate additional net income and cash flow but does not believe that this should be a significant portion of its long-term overall business profitability.

     While many clients benefit from the added insurance protection offered by the co-employment business model, the demand for the Company’s Gevity Edge full-service HR solution on a stand-alone basis separate from insurance coverage is increasing. In response, the Company has developed a new delivery option that allows it to deliver the Gevity Edge solution detached from insurance coverage and without entering into a co-employment arrangement with the client. Now available as an additional option, Gevity Edge^tm Select, the non co-employed version of Gevity Edge, serves the needs of broader markets. The Company’s long-term strategy is to provide clients with two delivery options to receive the Gevity Edge. The first option is the original co-employed offering with participation in Gevity’s master insurance policies. The second option is the non co-employed offering in which clients can choose from a variety of insurance carriers and establish a direct policy either through their own broker or through a

16

licensed Gevity affiliate. With both options, Gevity will deliver the Gevity Edge while establishing and managing its carrier relationships in a way that over time reduces the Company’s exposure to related insurance risk. This transitioned business model creates expanded market potential. It also provides for improved quality and predictability of financial results as earnings from insurance margins are expected to decrease over time.

     In the first quarter of 2007, the Company made further progress toward the development of its non co-employment delivery option with the purchase of HRAmerica, Inc. (“HRA”) on February 16, 2007. The Company acquired certain assets, including the client portfolio, of HRA, a human resource outsourcing firm that offers fundamental employee administration solutions including payroll processing to approximately 145 clients (as measured by Federal Employer Identification Number) with approximately 16,000 client employees. Approximately 14,700 non co-employed client employees were acquired as of the date of the acquisition and approximately 1,300 co-employed client employees were acquired with an effective date of April 1, 2007. The acquisition provided the Company with technology for the enhancement of its non-coemployment model, Gevity Edge Select. In addition to the purchase of HRA, contracts with national providers for benefits administration and insurance distribution have been signed in support of Gevity Edge Select.

     The Company believes that the primary challenge it faces in delivering its human resource outsourcing solutions is its ability to convince small- and medium-sized businesses to accept the concept of human resource outsourcing. The Company believes that most small- and medium-sized businesses outsource certain aspects of the Company’s total solution, including payroll administration, health and welfare benefits administration and providing workers’ compensation insurance, but that only a small number of businesses outsource the entire offering that the Company provides.

     The Company continues to focus on increasing the profitability of each client employee as well as on increasing the overall number of client employees serviced. The Company believes that it can increase the overall number of client employees serviced through: (i) capitalizing on the growth opportunities within the existing client portfolio through pricing and retention; (ii) further penetration of existing markets from increased production and sales person productivity, supported by increased brand awareness, database management, insurance choice and the enhanced Gevity Edge Select platform; (iii) targeting clients having more than 500 employees; (iv) the opening of new offices as experience and production guide the timing and location of these new offices; and (v) supporting growth with strategic acquisitions.

     The following table provides information that the Company utilizes when assessing the financial performance of its business, the fluctuations of which are discussed under the “Results of Operations”:

	Three Months Ended June 30,
	2007		2006		% Change
Statistical data:
Client employees at period end		141,017		138,022		2.2	%
Clients at period end (1)		7,404		8,018		(7.7	)%
Average number of client employees/clients at period end		19.05		17.21		10.7	%
Average number of client employees paid by month (2)		133,292		128,338		3.9	%
Annualized average wage per average number of client employees paid by month (3)	$	43,408	$	39,790		9.1	%
Annualized professional service fees per average number of client employees paid by month (3)	$	1,111	$	1,311		(15.3	)%
Annualized gross profit per average number of client employees paid by month (3)	$	1,427	$	1,505		(5.2	)%
Annualized operating income per average number of client employees paid by month (3)	$	219	$	243		(9.9	)%
Annualized adjusted operating income per average number of client employees paid by month (3) (4)	$	219	$	388		(43.6	)%

17

	Six Months Ended June 30,
	2007		2006		% Change
Statistical data:
Client employees at period end		141,017		138,022		2.2	%
Clients at period end (1)		7,404		8,018		(7.7	)%
Average number of client employees/clients at period end		19.05		17.21		10.7	%
Average number of client employees paid by month (2)		128,597		127,947		0.5	%
Annualized average wage per average number of client employees paid by month (3)	$	43,466	$	39,800		9.2	%
Annualized professional service fees per average number of client employees paid by month (3)	$	1,149	$	1,265		(9.2	)%
Annualized gross profit per average number of client employees paid by month (3)	$	1,446	$	1,530		(5.5	)%
Annualized operating income per average number of client employees paid by month (3)	$	181	$	318		(43.1	)%
Annualized adjusted operating income per average number of client employees paid by month (3) (4)	$	181	$	391		(53.7	)%

(1)	Clients measured by individual client Federal Employer Identification Number (“FEIN”).
(2)	The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(3)	Annualized statistical information is based upon actual period-to-date amounts, which have been annualized (divided by three or six and multiplied by twelve) and then divided by the average number of client employees paid by month.
(4)	For purposes of calculating this statistic, operating income for the three and six months ended June 30, 2006, has been adjusted to exclude the effect of a $4.7 million loss related to a reinsurance contract as a result of the liquidation proceedings that were commenced against the Company’s reinsurer for its workers’ compensation program and related termination of the reinsurance contract. See “Use of Non-GAAP Financial Measures.”

     The Company believes that the primary challenges to its ability to increase the overall number of client employees serviced include the following:

• the amount of time required for sales personnel to begin to acquire new client employees may be longer than anticipated;

• the current client employee retention levels may decrease if clients decide to use alternative providers to service their HR outsourcing needs;

• other HR outsourcing client employee portfolios or service providers may not be available for acquisition due to price or quality;

• the Company (under its co-employed service option) may not be able to continue to provide insurance-related products of a quality to acquire new client employees and to retain current client employees; and

• the time to achieve acceptance by prospective clients of the Company’s Gevity Edge Select option may be longer than anticipated.

18

RESULTS OF OPERATIONS

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

Revenue

     The following table presents certain information related to the Company’s revenues for the three months ended June 30, 2007 and 2006:

	Three Months Ended
	June 30,			June 30,			%
	2007			2006			Change
	(in thousands, except statistical data)
Revenues:
Professional service fees	$	37,031		$	42,058			(12.0	)%
Employee health and welfare benefits		87,340			88,037			(0.8	)%
Workers’ compensation		21,312			25,855			(17.6	)%
State unemployment taxes and other		4,725			5,258			(10.1	)%
Total revenues	$	150,408		$	161,208			(6.7	)%
Statistical data:
Gross salaries and wages (in thousands)	$	1,446,481		$	1,276,627			13.3	%
Average number of client employees paid by month (1)		133,292			128,338			3.9	%
Annualized average wage per average client employees paid by month (2)	$	43,408		$	39,790			9.1	%
Workers’ compensation billing per one hundred dollars of workers’ compensation wages (3)	$	1.96		$	2.27			(13.7	)%
Workers’ compensation manual premium per one hundred dollars of workers’ compensation wages (3), (4)	$	2.17		$	2.74			(20.8	)%
Annualized professional service fees per average number of client employees paid by month (2)	$	1,111		$	1,311			(15.3	)%
Client employee health benefits participation		33	%		38	%		(13.2	)%

(1)	The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2)	Annualized statistical information is based upon actual quarter-to-date amounts, which have been annualized (divided by three and multiplied by twelve), and then divided by the average number of client employees paid by month.
(3)	Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(4)	Manual premium rate data are derived from tables of member insurance companies of American International Group, Inc. (“AIG”) in effect for 2007 and 2006, respectively.

     For the three months ended June 30, 2007, total revenues were $150.4 million compared to $161.2 million for the three months ended June 30, 2006, representing a decrease of $10.8 million or 6.7%. This decrease was primarily a result of the reduction in professional service fees and workers’ compensation revenue as described below.

     As of June 30, 2007, the Company served approximately 7,400 clients, as measured by each client’s FEIN, with over 141,000 active client employees. This compares to approximately 8,000 clients, as measured by each client’s FEIN, with over 138,000 active client employees at June 30, 2006. The average number of client employees paid by month was 133,292 for the second quarter of 2007 compared to 128,338 for the second quarter of 2006. The June 30, 2007 client and employee counts were favorably impacted by the HRA acquisition. At June 30, 2007, approximately 134 clients and 16,800 client employees were attributable to HRA. For the quarter ended June 30, 2007, approximately 17,100 of the average number of employees paid by month were attributable to HRA. Excluding the impact of the HRA

19

acquisition, client and client employee counts declined when compared to the quarter ended June 30, 2006. This decline is attributable to the departure of legacy clients during the fourth quarter of 2006 (and to a lesser extent in the first two quarters of 2007) primarily as a result of the Company’s 2006 initiative to bring healthcare premiums up to retail rates. The Company believes that the clients that left were generally comprised of clients whose primary objective was to seek relief from healthcare premiums under the traditional professional employer organization business model. The Company expects to grow its client employee base during the remainder of 2007.

     The annualized average wage of paid client employees for the three months ended June 30, 2007 increased 9.1% to $43,408 from $39,790 for the three months ended June 30, 2006. This increase is due, in part, to the HRA acquisition, to raises received by existing client employees and is also consistent with the Company’s strategy of focusing on clients that pay higher wages to their employees.

     Revenues from professional service fees decreased to $37.0 million for the three months ended June 30, 2007, from $42.1 million for the three months ended June 30, 2006, representing a decrease of $5.0 million or 12.0%. The decrease was primarily due to the overall decrease in the average number of client employees paid (excluding the impact of the HRA acquisition). The addition of the HRA clients did not significantly impact professional service fees earned during the second quarter of 2007 as HRA clients acquired have a lower average professional service fee for a basic level of service. Accordingly, the decrease in annualized professional service fees per average number of client employees paid by month of 15.3%, from $1,311 for the three months ended June 30, 2006 to $1,111 for the three months ended June 30, 2007 was primarily attributable to the HRA acquisition. Excluding the impact of the HRA acquisition in the second quarter of 2007, annualized professional service fees decreased approximately 4.5% to $1,252 primarily as a result of an accumulation of pricing concessions taken since the third quarter of 2006, a by-product of the adjustments made to bring healthcare premiums to retail rates.

     Revenues for providing health and welfare benefits for the three months ended June 30, 2007 were $87.3 million as compared to $88.0 million for the three months ended June 30, 2006, representing a decrease of $0.7 million or 0.8%. Health and welfare benefit plan revenues decreased due to the decrease in the number of participants in the Company’s health and welfare benefit plans of approximately 9% and were partially offset by the increase in health insurance premiums as a result of higher costs to the Company to provide such coverage for client employees and the Company’s approach to pass along all insurance-related cost increases. Client’s acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not contribute to the Company’s health and welfare benefit revenues.

     Revenues for providing workers’ compensation insurance coverage decreased to $21.3 million for the three months ended June 30, 2007, from $25.9 million for the three months ended June 30, 2006, representing a decrease of $4.5 million or 17.6%. Workers’ compensation billings, as a percentage of workers’ compensation wages for the three months ended June 30, 2007, were 1.96% as compared to 2.27% for the same period in 2006, representing a decrease of 13.7%. Workers’ compensation charges decreased in the second quarter of 2007 primarily due to a decrease in billings for Florida clients reflecting a reduction in Florida manual premium rates beginning in January 2007 and a decrease in the number of clients that participate in the Company’s workers’ compensation program. The manual premium rates for workers’ compensation applicable to the Company’s clients decreased 20.8% during the three months ended June 30, 2007 as compared to the three months ended June 30, 2006. Manual premium rates are the allowable rates that employers are charged by insurance companies for workers’ compensation insurance coverage. The decrease in the Company’s manual premium rates primarily reflects the reduction in the Florida manual premium rates. Client’s acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and do not significantly contribute to the Company’s worker’s compensation revenues.

     Revenues from state unemployment taxes and other revenues decreased to $4.7 million for the three months ended June 30, 2007 from $5.3 million for the three months ended June 30, 2006, representing an decrease of $0.5 million or 10.1%. The decrease was primarily due to the net effect of a decrease in co-employment wages that provide unemployment tax revenue to the Company and was

20

partially offset by increases in the state unemployment tax rates that were passed along to clients. Client’s acquired in the HRA acquisition are primarily non co-employed clients that do not provide state unemployment tax revenue to the Company.

Cost of Services

     The following table presents certain information related to the Company’s cost of services for the three months ended June 30, 2007 and 2006:

	Three Months Ended
	June 30,		June 30,		%
	2007		2006		Change
	(in thousands, except statistical data)
Cost of services:
Employee health and welfare benefits	$	87,340	$	88,046		(0.8	)%
Workers’ compensation		8,904		18,533		(52.0	)%
State unemployment taxes and other		6,613		6,331		4.5	%
Total cost of services	$	102,857	$	112,910		(8.9	)%
Statistical data:
Gross salaries and wages (in thousands)	$	1,446,481	$	1,276,627		13.3	%
Average number of client employees paid by month (1)		133,292		128,338		3.9	%
Workers compensation cost rate per one hundred dollars of workers’ compensation wages (2)	$	0.82	$	1.63		(49.7	)%
Number of workers’ compensation claims (3)		1,241		1,593		(22.1	)%
Frequency of workers’ compensation claims per one million dollars of workers’ compensation wages (2)		1.14x		1.40x		(18.6	)%

(1)	The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2)	Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(3)	The number of workers’ compensation claims reflects the number of claims reported by the end of the respective period and does not include claims with respect to a specific policy year that are reported subsequent to the end of such period.

     Cost of services, which includes the cost of the Company’s health and welfare benefit plans, workers’ compensation insurance, state unemployment taxes and other costs, was $102.9 million for the three months ended June 30, 2007, compared to $112.9 million for the three months ended June 30, 2006, representing a decrease of $10.1 million, or 8.9%. This decrease was primarily due to the reduction in workers’ compensation expense as described below.

     The cost of providing health and welfare benefits to clients’ employees for the three months ended June 30, 2007 was $87.3 million as compared to $88.0 million for the three months ended June 30, 2006, representing a decrease of $0.7 million or 0.8%. This decrease was primarily attributable to the decrease in the number of client employees participating in the health and welfare benefit plans and was partially offset by higher cost of health benefits. Client’s acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not impact the Company’s health and welfare benefit costs.

     Workers’ compensation costs were $8.9 million for the three months ended June 30, 2007, as compared to $18.5 million for the three months ended June 30, 2006, representing a decrease of $9.6 million or 52.0%. Workers’ compensation costs decreased in the second quarter of 2007 due to: (a) the reduction in the prior years’ workers’ compensation loss estimates of approximately $6.8 million as a result of continued favorable claims development, and (b) the reduction in 2007 program year costs as a

21

result of a decrease in premium costs and favorable claims experience through the second quarter of 2007. During the three months ended June 30, 2006, the Company recorded a net reduction in prior year’ workers’ compensation loss estimates of $1.0 million due to favorable claims development and a reduction in workers’ compensation expense of $1.4 million as a result of the completion of a premium expense audit. Client’s acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and therefore do not impact the Company’s worker’s compensation costs.

     State unemployment taxes and other costs were $6.6 million for the three months ended June 30, 2007, compared to $6.3 million for the three months ended June 30, 2006, representing an increase of $0.3 million or 4.5%. The decrease in the Company’s client employees and related taxable wages (excluding the impact of the HRA acquisition) were substantially offset by an increase in state unemployment tax rates beginning January 1, 2007, as well as an increase in costs associated with expanded client service offerings. Client’s acquired in the HRA acquisition are primarily non co-employed clients that do not impact the Company’s state unemployment tax expense.

Operating Expenses

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

	Three Months Ended
	June 30,		June 30,
	2007		2006		% Change
	(in thousands, except statistical data)
Operating expenses:
Salaries, wages and commissions	$	20,391	$	19,507		4.5	%
Other general and administrative		15,657		12,801		22.3	%
Reinsurance contract loss		—		4,650		n/a
Depreciation and amortization		4,201		3,536		18.8	%
Total operating expenses	$	40,249	$	40,494		(0.6	)%
Statistical data:
Internal employees at quarter end		980		1,016		(3.5	)%

     Total operating expenses were $40.2 million for the three months ended June 30, 2007 as compared to $40.5 million for the three months ended June 30, 2006, representing a decrease of $0.2 million or 0.6%.

     Salaries, wages and commissions were $20.4 million for the three months ended June 30, 2007 as compared to $19.5 million for the three months ended June 30, 2006, representing an increase of $0.9 million or 4.5%. The increase is primarily a result of an overall increase in base wages associated with annual merit increases, which exceeded the impact on salaries and wages of the reduction in internal employees.

     Other general and administrative expenses were $15.7 million for the three months ended June 30, 2007 as compared to $12.8 million for the three months ended June 30, 2006, representing an increase of $2.9 million or 22.3%. This increase is primarily a result of costs associated with investments in marketing and information technology which are expected to benefit operations for the remainder of 2007 and beyond, relating to improvements in service delivery and sales including costs associated with the launch and development of Gevity Edge Select and the integration of HRA.

     During the second quarter of 2006, the Company recorded a $4.7 million loss on a reinsurance contract related to its workers’ compensation program. The Company determined that, as a result of the liquidation proceeding related to the Bermuda reinsurance company responsible for covering the layer of its workers’ compensation claims between $0.5 million and $2.0 million per occurrence and the related termination of its reinsurance contract, a loss should be recorded as of June 30, 2006, which represented the entire premium paid for coverage in 2006. In light of the liquidation proceeding, the Company secured

22

comparable coverage for the layer of claims between $0.5 million and $2.0 million from AIG retroactively effective to January 1, 2006. The cost of the replacement coverage related to the first six months of 2006 (approximately $2.5 million), was included in cost of services for the three and six months ended June 30, 2006 and replaced the cost incurred from the original policy.

     Depreciation and amortization expenses were $4.2 million for the three months ended June 30, 2007 compared to $3.5 million for the three months ended June 30, 2006, an increase of 18.8%. The increase is primarily attributable to the amortization of technology assets capitalized during 2007. Also included in the increase was the amortization of the intangible assets related to the HRA acquisition.

Income Taxes

     Income taxes were $2.2 million for the three months ended June 30, 2007 compared to $0.9 million for the three months ended June 30, 2006. The Company’s effective tax rate for the three months ended June 30, 2007 and 2006 was 31.5% and 11.7%, respectively. The Company’s effective tax rates differed from the statutory federal tax rates because of state taxes and federal tax credits. In addition, during the three months ended June 30, 2006, the Company’s effective tax rate was favorably impacted as a result of the filing of a change in accounting method with the Internal Revenue Service in the second quarter of 2006 and the related reversal of a tax reserve of approximately $2.0 million.

Net Income and Diluted Earnings Per Share

     As a result of the factors described above, net income decreased 32.1% to $4.7 million for the three months ended June 30, 2007 compared to $6.9 million for the three months ended June 30, 2006. Net income per common share on 24.5 million diluted shares was $0.19 for the three months ended June 30, 2007, compared to net income per common share of $0.26 on 27.1 million diluted shares for the three months ended June 30, 2006.

     Excluding the impact of the $4.7 million loss on the reinsurance contract for the three months ended June 30, 2006 ($2.8 million net of income tax), net income would have decreased 51.7% from $9.7 million to $4.7 million for the three months ended June 30, 2006 and 2007, respectively, and diluted earnings per share would have decreased 47.2% from $0.36 to $0.19, respectively. See “Use of Non-GAAP Financial Measures.”

23

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

Revenue

     The following table presents certain information related to the Company’s revenues for the six months ended June 30, 2007 and 2006:

	Six Months Ended
	June 30,			June 30,			%
	2007			2006			Change
	(in thousands, except statistical data)
Revenues:
Professional service fees	$	73,900		$	80,920			(8.7	)%
Employee health and welfare benefits		176,092			177,296			(0.7	)%
Workers’ compensation		42,512			53,270			(20.2	)%
State unemployment taxes and other		19,019			19,411			(2.0	)%
Total revenues	$	311,523		$	330,897			(5.9	)%
Statistical data:
Gross salaries and wages (in thousands)	$	2,794,777		$	2,546,149			9.8	%
Average number of client employees paid by month (1)		128,597			127,947			0.5	%
Annualized average wage per average client employees paid by month (2)	$	43,466		$	39,800			9.2	%
Workers’ compensation billing per one hundred dollars of workers’ compensation wages (3)	$	1.95		$	2.35			(17.0	)%
Workers’ compensation manual premium per one hundred dollars of workers’ compensation wages (3), (4)	$	2.17		$	2.76			(21.4	)%
Annualized professional service fees per average number of client employees paid by month (2)	$	1,149		$	1,265			(9.2	)%
Client employee health benefits participation		33	%		38	%		(13.2	)%

(1)	The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2)	Annualized statistical information is based upon actual quarter-to-date amounts, which have been annualized (divided by six and multiplied by twelve), and then divided by the average number of client employees paid by month.
(3)	Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(4)	Manual premium rate data are derived from tables of member insurance companies of American International Group, Inc. (“AIG”) in effect for 2007 and 2006, respectively.

     For the six months ended June 30, 2007, total revenues were $311.5 million compared to $330.9 million for the six months ended June 30, 2006, representing a decrease of $19.4 million or 5.9%. This decrease was primarily a result of the reduction in professional service fees, workers’ compensation revenue and the reduction in health and welfare benefits revenue as described below.

     The average number of client employees paid by month was 128,597 for the six months ended June 30, 2007 compared to 127,947 for the six months ended June 30, 2006. The average number of client employees paid by month for the six months ended June 30, 2007, was favorably impacted by the HRA acquisition. For the six months ended June 30, 2007, approximately 12,400 of the average number of client employees paid by month were attributable to HRA. Excluding the impact of the HRA acquisition, the average number of client employees paid by month declined when compared to the period ended June 30, 2006. This decline is attributable to the departure of legacy clients during the fourth quarter of 2006 (and to a lesser extent in the first two quarters of 2007) primarily as a result of the

24

Company’s 2006 initiative to bring healthcare premiums up to retail rates and lower than expected production levels during 2007. The Company believes that the clients that left were generally comprised of clients whose primary objective was to seek relief in healthcare premiums under the traditional professional employer organization business model. The Company expects to grow its client employee base during the remainder of 2007.

     The annualized average wage of paid client employees for the six months ended June 30, 2007 increased 9.2% to $43,466 from $39,800 for the six months ended June 30, 2006. This increase is due, in part, to the HRA acquisition, to raises received by existing client employees and is also consistent with the Company’s strategy of focusing on clients that pay higher wages to their employees.

     Revenues from professional service fees decreased to $73.9 million for the six months ended June 30, 2007, from $80.9 million for the six months ended June 30, 2006, representing a decrease of $7.0 million or 8.7%. The decrease was primarily due to the overall decrease in the average number of client employees paid (excluding the impact of the HRA acquisition). The addition of the HRA clients did not significantly impact professional service fees earned during the first six months of 2007 as HRA clients acquired have a lower average professional service fee for a basic level of service. Accordingly, the decrease in annualized professional service fees per average number of client employees paid by month of 9.2%, from $1,265 for the six months ended June 30, 2006 to $1,149 for the six months ended June 30, 2007, was primarily attributable to the HRA acquisition. Excluding the impact of the HRA acquisition in the first six months of 2007, annualized professional service fees decreased approximately 0.7% to $1,256 primarily as a result of an accumulation of pricing concessions taken since the third quarter of 2006, a by-product of the adjustments made to bring healthcare premiums to retail rates.

     Revenues for providing health and welfare benefits for the six months ended June 30, 2007 were $176.1 million as compared to $177.3 million for the six months ended June 30, 2006, representing a decrease of $1.2 million or 0.7%. Health and welfare benefit plan revenues decreased due to the decrease in the average number of participants in the Company’s health and welfare benefit plans of approximately 8.3% and were partially offset by the increase in health insurance premiums as a result of higher costs to the Company to provide such coverage for client employees and the Company’s approach to pass along all insurance-related cost increases. Client’s acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not contribute to the Company’s health and welfare benefit revenues.

     Revenues for providing workers’ compensation insurance coverage decreased to $42.5 million for the six months ended June 30, 2007, from $53.3 million for the six months ended June 30, 2006, representing a decrease of $10.8 million or 20.2%. Workers’ compensation billings, as a percentage of workers’ compensation wages for the six months ended June 30, 2007, were 1.95% as compared to 2.35% for the same period in 2006, representing a decrease of 17.0%. Workers’ compensation charges decreased in the first two quarters of 2007 primarily due to a decrease in billings for Florida clients reflecting a reduction in Florida manual premium rates beginning in January 2007 and a reduction in the number of clients that participate in the Company’s workers’ compensation program. The manual premium rates for workers’ compensation applicable to the Company’s clients decreased 21.4% during the six months ended June 30, 2007 as compared to the six months ended June 30, 2006. Client’s acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and do not significantly contribute to the Company’s worker’s compensation revenues.

     Revenues from state unemployment taxes and other revenues decreased to $19.0 million for the six months ended June 30, 2007 from $19.4 million for the six months ended June 30, 2006, representing a decrease of $0.4 million or 2.0%. The decrease was primarily due to the net effect of increases in the state unemployment tax rates that were passed along to clients and more than offset by a decrease in co-employed client employees and related taxable wages. Client’s acquired in the HRA acquisition are primarily non co-employed clients that do not provide state unemployment tax revenue to the Company.

25

Cost of Services

     The following table presents certain information related to the Company’s cost of services for the six months ended June 30, 2007 and 2006:

	Six Months Ended
	June 30,		June 30,		%
	2007		2006		Change
	(in thousands, except statistical data)
Cost of services:
Employee health and welfare benefits	$	173,491	$	174,117		(0.4	)%
Workers’ compensation		23,920		37,882		(36.9	)%
State unemployment taxes and other		21,167		20,998		0.8	%
Total cost of services	$	218,578	$	232,997		(6.2	)%
Statistical data:
Gross salaries and wages (in thousands)	$	2,794,777	$	2,546,149		9.8	%
Average number of client employees paid by month (1)		128,597		127,947		0.5	%
Workers compensation cost rate per one hundred dollars of workers’ compensation wages (2)	$	1.10	$	1.67		(34.1	)%
Number of workers’ compensation claims (3)		2,306		3,008		(23.3	)%
Frequency of workers’ compensation claims per one million dollars of workers’ compensation wages (2)		1.06x		1.33x		(20.3	)%

(1)	The average number of client employees paid by month is calculated based upon the sum of the number of paid client employees at the end of each month divided by the number of months in the period.
(2)	Workers’ compensation wages exclude the wages of clients electing out of the Company’s workers’ compensation program.
(3)	The number of workers’ compensation claims reflects the number of claims reported by the end of the respective period and does not include claims with respect to a specific policy year that are reported subsequent to the end of such period.

     Cost of services, which includes the cost of the Company’s health and welfare benefit plans, workers’ compensation insurance, state unemployment taxes and other costs, was $218.6 million for the six months ended June 30, 2007, compared to $233.0 million for the six months ended June 30, 2006, representing a decrease of $14.4 million, or 6.2%. This decrease was primarily due to the reduction in workers’ compensation expense as described below.

     The cost of providing health and welfare benefits to clients’ employees for the six months ended June 30, 2007 was $173.5 million as compared to $174.1 million for the six months ended June 30, 2006, representing a decrease of $0.6 million or 0.4%. This decrease was primarily attributable to a decrease in the number of client employees participating in the health and welfare benefit plans and partially offset by the higher cost of health benefits. In addition, during the six months ended June 30, 2007, the Company recorded a $2.6 million reduction in health benefit costs due to favorable claims development compared to a $3.2 million reduction in health benefit costs recognized during the first two quarters of 2006 related to the finalization of prior year premium recalls and a reduction in the incurred but not reported claim reserves based upon favorable claims experience. Client’s acquired in the HRA acquisition are not covered under the Company’s health and welfare benefit plans and therefore do not impact the Company’s health and welfare benefit costs.

     Workers’ compensation costs were $23.9 million for the six months ended June 30, 2007, as compared to $37.9 million for the six months ended June 30, 2006, representing a decrease of $14.0 million or 36.9%. Workers’ compensation costs decreased in the first six months of 2007 primarily due to the reduction in the prior years’ workers compensation loss estimates of approximately $8.0 million

26

during the first six months of 2007 compared to the reduction in the prior years’ loss estimates of $1.9 million during the first six months of 2006. Workers’ compensation costs also decreased as a result of the overall decline in co-employed client employees (excluding the impact of the HRA acquisition) and the impact that has had on the 2007 program year costs. Client’s acquired in the HRA acquisition are not covered under the Company’s workers’ compensation plans and therefore do not impact the Company’s worker’s compensation costs.

     State unemployment taxes and other costs were $21.2 million for the six months ended June 30, 2007, compared to $21.0 million for the six months ended June 30, 2006, representing an increase of $0.2 million or 0.8%. The decrease in co-employed client employees and related taxable wages were substantially offset by an increase in state unemployment tax rates beginning January 1, 2007, as well as an increase in costs associated with expanded client service offerings. Client’s acquired in the HRA acquisition are primarily non co-employed clients that do not impact the Company’s state unemployment tax expense.

Operating Expenses

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

	Six Months Ended
	June 30,		June 30,		%
	2007		2006		Change
	(in thousands, except statistical data)
Operating expenses:
Salaries, wages and commissions	$	42,929	$	40,375		6.3	%
Other general and administrative		30,450		25,675		18.6	%
Reinsurance contract loss		—		4,650		n/a
Depreciation and amortization		7,936		6,833		16.1	%
Total operating expenses	$	81,315	$	77,533		4.9	%
Statistical data:
Internal employees at quarter end		980		1,016		(3.5	)%

     Total operating expenses were $81.3 million for the six months ended June 30, 2007 as compared to $77.5 million for the six months ended June 30, 2006, representing an increase of $3.8 million or 4.9%.

     Salaries, wages and commissions were $42.9 million for the six months ended June 30, 2007 as compared to $40.4 million for the six months ended June 30, 2006, representing an increase of $2.6 million or 6.3%. The increase is primarily a result of an overall increase in base wages associated with annual merit increases and $1.4 million of severance expense recognized in the first six months of 2007, principally related to the elimination of 40 support positions. These increases exceeded the impact on salaries and wages of the reduction in internal employees.

     Other general and administrative expenses were $30.5 million for the six months ended June 30, 2007 as compared to $25.7 million for the six months ended June 30, 2006, representing an increase of $4.8 million or 18.6%. This increase is primarily a result of costs associated with investments in marketing and information technology which are expected to benefit operations for the remainder of 2007 and beyond, relating to improvements in service delivery and sales including costs associated with the launch and development of Gevity Edge Select and the integration of HRA.

     During the second quarter of 2006, the Company recorded a $4.7 million loss on a reinsurance contract related to its workers’ compensation program. The Company determined that, as a result of the liquidation proceeding related to the Bermuda reinsurance company responsible for covering the layer of its workers’ compensation claims between $0.5 million and $2.0 million per occurrence and the related termination of its reinsurance contract, a loss should be recorded as of June 30, 2006, which represented the entire premium paid for coverage in 2006. In light of the liquidation proceeding, the Company secured

27

comparable coverage for the layer of claims between $0.5 million and $2.0 million from AIG retroactively effective to January 1, 2006. The cost of the replacement coverage related to the first six months of 2006 (approximately $2.5 million), was included in cost of services for the three and six months ended June 30, 2006 and replaced the cost incurred from the original policy.

     Depreciation and amortization expenses were $7.9 million for the six months ended June 30, 2007 compared to $6.8 million for the six months ended June 30, 2006, an increase of 16.1%. The increase is primarily attributable to the amortization of technology assets capitalized during the first six months of 2007. Also included in the increase was the amortization of the intangible assets related to the HRA acquisition.

Income Taxes

     Income taxes were $3.8 million for the six months ended June 30, 2007 compared to $5.1 million for the six months ended June 30, 2006. The decrease is primarily due to a reduction in taxable income for the first half of 2007 compared to the first half of 2006. The Company’s effective tax rate for the six months ended June 30, 2007 and 2006 was 34.7% and 25.4%, respectively. The Company’s effective tax rates differed from the statutory federal tax rates because of state taxes and federal tax credits. In addition, during the six months ended June 30, 2006, the Company’s effective tax rate was favorably impacted as a result of the filing of a change in accounting method with the Internal Revenue Service in the second quarter of 2006 and the related reversal of a tax reserve of approximately $2.0 million.

Net Income and Diluted Earnings Per Share

     As a result of the factors described above, net income decreased 52.3% to $7.2 million for the six months ended June 30, 2007 compared to $15.1 million for the six months ended June 30, 2006. Net income per common share on 24.8 million diluted shares was $0.29 for the six months ended June 30, 2007, compared to net income per common share of $0.56 on 27.1 million diluted shares for the six months ended June 30, 2006.

     Excluding the impact of the $4.7 million loss on the reinsurance contract for the six months ended June 30, 2006 ($2.8 million net of income tax), net income would have decreased 59.8% from $17.9 million to $7.2 million for the six months ended June 30, 2006 and 2007, respectively, and diluted earnings per share would have decreased 56.1% from $0.66 to $0.29, respectively. See “Use of Non-GAAP Financial Measures.”

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

     General

     The Company periodically evaluates its liquidity requirements, capital needs and availability of capital resources in view of its collateralization requirements for insurance coverage, purchases of shares of its common stock under its share repurchase program, plans for expansion of its HR outsourcing portfolio through acquisitions, possible acquisitions of businesses complementary to the business of the Company, and other operating cash needs. As a result of this process, the Company has in the past sought, and may in the future seek, to obtain additional capital from either private or public sources.

     The Company currently believes that its current cash balances, cash flow from operations and the existing credit facility will be sufficient to meet its operational requirements for the next 12 months, excluding cash required for acquisitions, if any. The Company has an available unsecured credit facility for $100.0 million with Bank of America, N.A. of which $40.0 million was outstanding as of June 30, 2007. See Note 7 to the condensed consolidated financial statements contained in this report for additional information regarding the Company’s credit facility.

28

     The Company’s primary short-term liquidity requirements relate to the payment of accrued payroll and payroll taxes of its internal and client employees and the payment of workers’ compensation premiums and medical benefit plan premiums. The Company’s billings to its clients include: (i) each client employee’s gross wages; (ii) a professional service fee, which is primarily computed as a percentage of the gross wages; (iii) related payroll taxes; (iv) workers’ compensation insurance charges (if applicable); and (v) the client’s portion of benefits, including medical and retirement benefits, provided to the client employees based on coverage levels elected by the client and the client employees. Included in the Company’s billings during the first six months of 2007 were salaries, wages and payroll taxes of client employees of $3.0 billion. The billings to clients are managed from a cash flow perspective so that a matching generally exists between the time that the funds are received from a client to the time that the funds are paid to the client employees and to the appropriate tax jurisdictions. As a co-employer, and under the terms of each of the Company’s professional services agreements, the Company is obligated to make certain wage, tax and regulatory payments even if the related payments are not made by its clients. Therefore, the objective of the Company is to minimize the credit risk associated with remitting the payroll and associated taxes before receiving the service fees from the client and generally, the Company has the right to immediately terminate the client relationship for non-payment. To the extent this objective is not achieved, short-term cash requirements can be significant. In addition, the timing and amount of payments for payroll, payroll taxes and benefit premiums can vary significantly based on various factors, including the day of the week on which a payroll period ends and the existence of holidays at or immediately following a payroll period-end.

     Restricted Cash

     The Company is required to collateralize its obligations under its workers’ compensation and health benefit plans and certain general insurance coverage. The Company uses its marketable securities to collateralize these obligations as more fully described below. Marketable securities used to collateralize these obligations are designated as restricted in the Company’s condensed consolidated financial statements.

     At June 30, 2007, the Company had $21.1 million in total cash and cash equivalents and restricted marketable securities, of which $11.2 million was unrestricted. At June 30, 2007, the Company had pledged $8.4 million of restricted marketable securities in collateral trust arrangements issued in connection with the Company’s workers’ compensation and health benefit plans and had $1.4 million held in escrow in connection with various purchase price contingencies related to the HRA acquisition as follows:

	June 30,		December 31,
	2007		2006
	(in thousands)
Short-term marketable securities — restricted:
General insurance collateral obligations — AIG	$	4,589	$	4,478
HRA escrow		1,400		—
Total short-term marketable securities — restricted		5,989		4,478
Long-term marketable securities restricted:
Workers’ compensation collateral — AIG		3,839		3,747
Total long-term marketable securities — restricted		3,839		3,747
Total restricted assets	$	9,828	$	8,225

     The Company’s obligation to Blue Cross/Blue Shield of Florida (“BCBSFL”), under its current contract, may require an irrevocable letter of credit (“LOC”) in favor of BCBSFL if a coverage ratio, as set forth in the BCBSFL agreement, is not maintained. The coverage ratio is calculated quarterly. If the Company’s coverage ratio does not meet the minimum requirements, the Company must provide an LOC valued at up to two months of projected claims (average monthly claims approximated $9.2 million during the last twelve months). As of June 30, 2007, the minimum coverage ratio was met and no LOC was required. The Company was not required to collateralize the Aetna program for 2007.

29

     The Company does not anticipate any additional collateral obligations to be required in 2007 for its workers’ compensation arrangements.

     As of June 30, 2007, the Company has recorded a $138.6 million receivable from AIG representing workers’ compensation premium payments made to AIG related to program years 2000 through 2007 in excess of the present value of the estimated claims liability. This receivable represents a significant concentration of credit risk for the Company.

     Cash Flows from Operating Activities

     At June 30, 2007, the Company had a net working capital deficit of $15.4 million, including restricted funds classified as short-term of $6.0 million, compared to a net working capital deficit of $10.7 million as of December 31, 2006, including $4.5 million of restricted funds classified as short-term. The decrease in working capital during the first six months of 2007 was primarily due to the reduction in cash related to timing differences, the acquisition of HRA and stock repurchases under the Company’s repurchase program.

     Net cash used in operating activities was $23.8 million for the six months ended June 30, 2007 as compared to net cash used in operating activities of $7.0 million for the six months ended June 30, 2006, representing an increase in net cash used in operating activities of $16.8 million. Cash flows from operating activities are significantly impacted by the timing of client payrolls, the day of the week on which a fiscal period ends and the existence of holidays at or immediately following a period end. The overall increase in cash used in operating activities was primarily due to net timing differences as well as the overall reduction in net income.

     If current workers’ compensation trends continue, the Company expects to receive approximately $30.3 million from AIG during the third quarter of 2007 as a net return of premiums in connection with the true-ups related to the 2000-2006 program years. Additional releases of premiums by AIG are also anticipated in future years if such trends continue. The Company believes that it has provided AIG a sufficient amount of cash to cover its short-term and long-term workers compensation obligations related to open policy years.

     Cash Flow from Investing Activities

     Cash used in investing activities for the six months ended June 30, 2007 of $15.0 million, includes approximately $10.9 million related to the February 16, 2007 acquisition of HRA ($9.5 million of cash and related acquisition costs and $1.4 million included in marketable securities purchases for purchase price contingencies held in an escrow account). In addition the Company spent approximately $3.9 million for capital expenditures primarily for technology-related items including approximately $1.7 million of capital expenditures made by the Company in 2006 and paid for in 2007. Cash used in investing activities for the six months ended June 30, 2006 of $9.4 million primarily related to capital expenditures. The Company plans to spend approximately $12.0 million on capital expenditures (primarily technology related) during 2007, including the $3.9 million spent through June 30, 2007. Capital expenditures are expected to be funded through operations, leasing arrangements or from the Company’s revolving credit facility.

     Cash Flow from Financing Activities

     Cash provided by financing activities for the six months ended June 30, 2007 of $13.8 million was a result of $40.0 million of net borrowings under the revolving credit facility; $0.8 million received upon the exercise of 67,992 stock options and the purchase of 11,293 shares of common stock under the Company’s employee stock purchase plan; and $0.3 million related to excess tax benefits received by the Company for its share-based arrangements. These amounts were partially offset by the use of $22.8 million to repurchase 1,123,121 shares of the Company’s common stock under its stock repurchase programs (see “Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for a discussion of the current stock repurchase program) and $4.4 million of cash dividends paid.

30

     Cash used in financing activities for the six months ended June 30, 2006 of $8.7 million was a result of the net effect of $13.6 million used to repurchase 558,404 shares of the Company’s common stock under its stock repurchase programs, including $3.4 million related to stock repurchase made in 2005 and paid for in 2006; $4.2 million of cash dividends paid; $5.4 million received from directors, officers and employees of the Company upon the exercise of 533,452 stock options and the purchase of 12,235 shares of common stock under the Company’s employee stock purchase plan; and $3.6 million related to excess tax benefits received by the Company for its share-based arrangements.

Commitments and Contractual Obligations

     Off-Balance Sheet Arrangements

     The Company does not have any off-balance sheet arrangements.

     Contractual Obligations

     There have been no material changes to the Company’s contractual obligations from those disclosed in the Form 10-K under “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

CRITICAL ACCOUNTING ESTIMATES

     The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Accounting estimates related to workers’ compensation receivables/reserves, intangible assets, medical benefit plan liabilities, state unemployment taxes, allowance for doubtful accounts, share-based payments and deferred income taxes are those that the Company considers critical in preparing its financial statements because they are particularly dependent on estimates and assumptions made by management that are uncertain at the time the accounting estimates are made. While management has used its best estimates based upon facts and circumstances available at the time, different estimates reasonably could have been used in the current period, which may have a material impact on the presentation of the Company’s financial condition and results of operations. Management periodically reviews the estimates and assumptions and reflects the effects of revisions in the period they are determined to be necessary. The discussion under “Item 7 — Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in the Form 10-K describes the significant accounting estimates used in the preparation of the Company’s financial statements.

     The Company has adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions and requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. See Note 1 and Note 10 to the condensed consolidated financial statements contained elsewhere in this Form 10-Q for information regarding the Company’s implementation and impact of this new accounting standard as well as information on the impact of other recently issued accounting standards.

California Unemployment Tax Assessment

In May of 2007, the Company received a Notice of Assessment from the State of California Employment Development Department (“EDD”) relative to the Company’s practice of reporting payroll for its subsidiaries under multiple employer account numbers. The notice stated that the EDD was collapsing the accounts of the Company’s subsidiaries into one account number for payroll reporting purposes and

31

retroactively reassessed unemployment taxes due at a higher overall rate for the 2004-2006 tax years resulting in an assessment of $4.7 million. On May 30, 2007, the Company filed a petition with the Office of the Chief Administrative Law Judge for the California Unemployment Insurance Appeals Board asking that the EDD’s assessment be set aside. The petition contends in part that the state has exceeded the scope of its authority in issuing the assessment by failing to comply with its own mandatory procedural requirements and that the statute of limitations for issuing the assessments has expired as the Company’s activities within the state were compliant with California statutes and regulations. The Company believes that it has valid defenses regarding the assessments and intends to vigorously protest these claims. However, the Company cannot estimate at this point in time what amount, if any, will ultimately be due with respect to this matter.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Statements made in this report, including under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are not purely historical may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Company’s expectations, hopes, beliefs, intentions or strategies regarding the future. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates”, and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements are based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those that the Company has anticipated. Forward-looking statements involve a number of known and unknown risks, uncertainties (some of which are beyond the Company’s control) and other factors and assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements, including those described in “Item 1A. Risk Factors” of the Company’s Form 10-K and the risks that are described in other reports that the Company files with the Securities and Exchange Commission.

     Forward-looking statements speak only as of the date on which they are made and you should not place undue reliance on any forward-looking statement. Except as required by law, the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors. Further, management cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Use of Non-GAAP Financial Measures

     The non-GAAP data contained in this Quarterly Report on Form 10-Q presents net income, earnings per share and statistical information based upon operating income for the three and six months ended June 30, 2006 that is adjusted for the impact of the reinsurance contract loss. The Company has included non-GAAP financial information for the three and six month periods ended June 30, 2006 because it believes generally that such information provides management and investors a more complete and transparent understanding of the Company’s results and trends and allows management and investors to compare the actual GAAP results for the three and six months ended June 30, 2007 and 2006 on a consistent basis. In addition, management uses the non-GAAP financial information for forecasting, budgeting and other analytical purposes.

     The three and six months ended June 30, 2006 is adjusted to exclude the impact of the loss on the reinsurance contract previously described as the Company believes that this was a one-time loss due to the unusual nature of the liquidation proceedings pertaining to the Bermuda reinsurer.

32

The reconciliation of the GAAP to non-GAAP disclosures is as follows:

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2007		2006		2007		2006
Operating income — GAAP	$	7,302	$	7,804	$	11,630	$	20,367
Reinsurance contract loss		—		4,650		—		4,650
Operating income — non-GAAP	$	7,302	$	12,454	$	11,630	$	25,017
Net income — GAAP	$	4,690	$	6,904	$	7,204	$	15,098
Reinsurance contract loss		—		2,813		—		2,813
Net income — non-GAAP	$	4,690	$	9,717	$	7,204	$	17,911
Net income per common share — diluted — GAAP	$	0.19	$	0.26	$	0.29	$	0.56
Reinsurance contract loss		—		0.10		—		0.10
Net income per common share — diluted — Non-GAAP	$	0.19	$	0.36	$	0.29	$	0.66

The non-GAAP financial information provided may not be the same as similarly titled measures used by other companies, should not be construed as alternatives to their nearest GAAP equivalents and should be only used in conjunction with results reported in accordance with GAAP.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

     There have been no material changes from the information previously reported under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K.

ITEM 4. Controls and Procedures

     As of the end of the period covered by this report, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives. Based upon that evaluation and subject to the foregoing, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures were effective to accomplish their objectives.

     Additionally, no changes in the Company’s internal controls over financial reporting were made during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

     See Note 8 to the condensed consolidated financial statements contained elsewhere in this Form 10-Q for information concerning the Company’s legal proceedings.

ITEM 1A. Risk Factors

     There have been no material changes from the information previously provided under “Item 1A. Risk Factors,” in the Form 10-K. See also “Cautionary Note Regarding Forward-Looking Statements” included in “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

33

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table provides information about Company purchases during the three months ended June 30, 2007, of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934:

					Total Number of
					Shares Purchased		Approximate Dollar
	Total				as Part of		Value of Shares That
	Number of				Publicly		May Yet Be Purchased
	Shares		Average Price		Announced		Under the Program
Period	Purchased (1)		Paid per Share		Program (1)		($000’s) (1), (2)
4/01/2007 — 4/30/2007		—		—		—	$	75,000
5/01/2007 — 5/31/2007		816,200	$	19.74		816,200	$	58,868
6/01/2007 — 6/30/2007		—		—		—	$	58,868
Total		816,200	$	19.74		816,200

(1)

On August 15, 2006, the Company announced that the board of directors had authorized the purchase of up to $75.0 million of the Company’s common stock under a new share repurchase program. Share repurchases under the new program are to be made through open market repurchases, block trades or in private transactions at such times and in such amounts as the Company deems appropriate based upon a variety of factors including price, regulatory requirements, market conditions and other corporate opportunities.

(2)

On April 20, 2007, the Company’s board of directors authorized an increase to its current share repurchase program of approximately $36.5 million, which brings the current repurchase amount authorized back up to $75.0 million.

ITEM 4. Submission of Matters to a Vote of Security Holders

     The annual meeting of shareholders of the Company was held on May 16, 2007. Holders of 21,963,251 shares of common stock were present in person or by proxy at the meeting. At the meeting, the Company’s shareholders elected a board of directors to serve until the next annual meeting of shareholders or until their respective successors are duly elected or appointed. The votes of the shareholders were as follows:

	For		Withheld
Erik Vonk		21,579,535		383,716
George B. Beitzel		21,051,781		911,470
Darcy E. Bradbury		21,301,520		661,731
Paul R. Daoust		21,898,994		64,257
Jonathan H. Kagan		21,160,918		802,333
David S. Katz		21,894,794		68,457
Michael J. Lavington		21,898,423		64,828
Jeffrey A. Sonnenfeld		21,892,125		71,126
Daniel J. Sullivan		21,925,534		37,717

34

ITEM 6. Exhibits

3.1	Third Articles of Amendment and Restatement of the Articles of Incorporation, as filed with the Secretary of State of the State of Florida on August 12, 2004 (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 filed November 9, 2004 and incorporated herein by reference).
3.2	Third Amended and Restated Bylaws, dated February 16, 2005 (filed as Exhibit 3.01 to the Company’s Current Report on Form 8-K filed February 22, 2005 and incorporated herein by reference).
10.1	UnitedHealthcare Group Benefits Agreement effective as of June 1, 2006 (certain confidential information contained in this document, marked by asterisks and brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended).*
10.2	First Amendment to the Amended and Restated Credit Agreement with Bank of America, N.A. dated May 7, 2007 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 10, 2007 and incorporated herein by reference).
10.3	Second Amendment to the Amended and Restated Credit Agreement with Bank of America, N.A. dated June 14, 2007 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 19, 2007 and incorporated herein by reference).
10.4	Letter Agreement dated June 28, 2007 between the Company and ValueAct Capital Management, L.P. (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 29, 2007 and incorporated herein by reference).
31.1	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32	Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed electronically herewith.

35

SIGNATURE

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

	GEVITY HR, INC.
Dated: August 9, 2007	/s/ GARRY J. WELSH
	Garry J. Welsh
	Chief Financial Officer (Principal Financial and Accounting Officer)

36