Welcome to the Administaff second quarter 2008 earnings conference call. (Operator Instructions) Now on today’s call we have Richard Rawson, President of the company; Paul Sarvadi, Chairman of the Board. And I would now like to turn the call over to Douglas Sharp, the Chief Financial Officer.

Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself, that are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company’s filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plan for this morning’s call: First I’m going to discuss our second quarter financial results; Richard will discuss trends in our direct cost, including benefits, workers’ compensation and payroll taxes and the impact of such trends on our pricing; then Paul will add his comments about the quarter, and on our outlook for the remainder of the year. I will return to provide financial guidance for the third quarter in the remainder of 2008. We will then end the call with a question-and-answer session. Now let me begin by summarizing the financial highlights from the second quarter. We reported second quarter earnings per share of $0.43, compared to $0.50 in the 2007 period. For purposes of comparison, you may recall that a health care administrative fee credit contributed $0.08 per share to earnings in the 2007 period. This year’s earnings were driven by positive outcomes in unit growth, pricing and direct cost management. The average number of worksite employees paid increased just over 7% for the quarter to 116,149, above the high end of our expected range. Gross profit for worksite employee per month averaged $241 for the…

This morning I am going to discuss the details of our excellent second quarter gross profit results. Then I will update you on the pricing and direct-cost trends we are seeing and how they will affect gross profit for worksite employee per month for the balance of the year. Our gross profit comes from the mark-up that we earn on our HR services, combined with the surplus that is generated when our direct cost pricing allocation exceed the corresponding direct cost. Doug just reported that our gross profit for worksite employee per month was $241, which is above the top end of our forecasted range of $235 to $238. These results came from achieving $198 per worksite employee per month of service fees, and generating a surplus of $43 per worksite employee per month, or 4.3% of our total direct cost allocations. Pricing on both new and renewing business in the second quarter increased more than $4 per worksite employee per month over the second quarter of last year. I believe this fact continues to demonstrate the value proposition that we bring to prospects and current clients. This quarter’s better than expected surplus of $5 per worksite employee per month came from better than expected results from our payroll tax and workers’ compensation direct cost centers. Let’s begin with payroll taxes. A better than expected surplus in this cost center came as a result of having a greater spread between our allocation and the actual payroll tax expense, which was applied to a larger amount of taxable payroll, than what we had originally forecasted. This cost center contributed approximately $2 of the additional surplus to the gross profit of per worksite employee per month. The balance of the better than expected surplus of approximately $3 came from out workers’ compensation…

My comments today will focus on our sales and service expansion and our continuing solid execution of our 2008 operating plan. I will highlight the drivers of our consistent financial performance in spite of the challenging economic environment and I will summarize the initatives that are paving the way for growth acceleration and greater profitability as we look ahead to 2009. Our excellent first half results demonstrate our ability to grow profitably with a surprisingly modest impact from the turbulent economic environment. 12% year-over-year revenue growth and a 19% increase in operating income in the first half of this year drives home the point that the Administaff business model and strategy can produce consistent, predictable growth and profitability even when there is little or no economic growth. The cash flow dynamic of our business model also allows for continued investment when many other companies have to batten down the hatches. We have been able to continue to invest in sales expansion, service enhancements, and new products and services to leverage the PEO business. We have achieved 8% unit growth over the first half of the year and exceeded the high end of our unit growth range in the second quarter by fighting through the difficult sales climate, renewing our focus on client retention, and benefiting from our strategic client selection. The sales climate has been more difficult and as anticipated, our closing rates have been lower than historical levels experienced in favorable economic conditions. As a result, sales for the quarter in our core business were 89% of budget and year-to-date sales were at 84% of budget. We are continuing to make progress in our mid-market initiatives as we train sales staff and transition current accounts to the new service model. At the end of the second quarter we were…

At this time I would like to provide financial guidance for the third quarter and an update to our full year forecast. We are essentially reiterating our full-year worksite employee growth guidance, although we have narrowed the low and high end of our range, which is typical at mid-year. Our gross profit for worksite employee forecast has been increased to the high end of our previously forecasted range due to favorable trends and pricing in direct cost management. Our revised operating expense guidance includes the impact of hiring and retention of our sales staff ahead of our initial plan. We have lowered our forecast of interest income and increased the estimate of our effective income tax rate due to the impact of a declining interest rate environment on our tax-exempt investments. Now let’s discuss the detailed metrics, beginning with unit growth. Based upon Paul’s remarks, our updated forecast assumes an increase in the average paid worksite employees of $700 to $1,400 each month for the remainder of the year, with the exception of December. This produces a range of $117,500 to $118,500 average paid worksite employees for the full year, and a range of $119,750 to $120,250 for the third quarter. As Richard mentioned, we now expect full-year guidance for gross profit per worksite employee per month to be in a range of $242 to $244, an increase from our previous range of $239 to $243 based upon an improved outlook in our direct cost program. As for the third quarter, we expect gross profit per worksite employee per month to be $233 to $235. This is sequentially down from the second quarter due primarily to the unemployment tax refund received from the State of Texas in Q2, equating to $4 per worksite employee. As for operating expenses, we now…

(Operator Instructions) Your first question comes from Tobey Sommer with SunTrust Robinson Humphrey.

I wanted to ask a question about what you’re seeing in payrolls and bonuses and overtime, if you have some sort of an update. I think last time we heard from you on a conference call you were on the heels of one of your surveys, but maybe you have an update of what June and July trends, kind of more recent data, suggest is going on in your small-business customer base.

Sure, I can do that for you, Tobey. Like I said in the script, we are seeing some nominal net gain in employment, which is the key factor. But behind that, when you look at some of the other factors, for example average pay or compensation is up about just under 6% year-over-year in our client base. Commission, which is really our leading indicator, has been lower than it was a year ago. I mentioned it dropped off dramatically in the fourth quarter, it rebounded a little bit in the first quarter, in the second quarter it was down a little, but we’re around 4% year-over-year increase in commissions. Which to me means companies are still doing business, they’ve still got sales but they’re not robust like they were a year ago. But they are also not falling out of bed so I think kind of a steady state going forward is what we anticipate out of that number. Also, the overtime as a percentage of base pay is still running at 10%, so businesses, at least in our client base, are being pretty smart about this. They’re operating kind of at capacity but the degree to which they’re using overtime is still on the high end, because the commissions aren’t high enough to say that growth is really coming back strong yet, so they’re not hiring more people to lower that overtime number. But we think we’re pretty much in the steady-state mode, at least in the third quarter.

And I wanted to ask you a question about your levers that you get to look at internally to drive the unit growth. It looks like you’re going to step on the gas a little bit more relative to sales people and try to take advantage of the talent that’s available to you, given the economic conditions. And I wanted to get a sense for how you approach the balance between additional marketing dollars in additional kind of feet on the street.

We’re up year-to-date considerably on both the marketing dollars that we’ve spent and obviously the investment in our sales force, which is the biggest factor in increased operating expenses. But we think it is perfectly appropriate because we’ve been able to make those investments and still be at the top of our original range in terms of our operating income targets for the year. You know, when you add in the out-performance in the first half of the year and our guidance for the balance of the year. So, the balance, like we’ve said many times, is our balance between growth and profitability. When we can still meet our profitability targets and invest further in growth, that’s what we like to do. Because I can’t overemphasize how well positioned we are going into this fall campaign and having the number of trained reps up well ahead of schedule. I think that means that if the economy continues to kind of move along kind of the way it, hey, we’re in great position to out-perform. And if the economy comes back at all, I mean, you’ll see this thing come out of the water in a big way. So, we’re excited about where we are and I think we’ve found and struck that balance between growth and profitability. That was really the key question at the beginning of the year, was how much would sales be affected by the economic environment and what would we have to do to at least stay close to our budget number and be able to continue to grow. And I think we found that balance quite well.

Last question for me will be on working capital, kind of where you are in that in the quarter and maybe, Paul, if you could address what opportunities you may see to continue to drive the contribution from non-PEO business, maybe in the form of acquisitions, if you’re seeing anything interesting out on the horizon.

On the working capital, it’s still very healthy. It was $85.0 million at the end of the second quarter. If you remember, we had a discussion back in the first quarter about some of the auction rate securities which we had re-classed down into long-term because they were dealing with a bond fund that was more liquid than some of the others, however, there is some good news on that front in that they are making progress in redeeming that fund. So, I think we’ve taken a conservative position on that, but that could, in the future, also be added to that working capital position. So, therefore, probably north of $90.0 million as we see it today.

Now, on the acquisition front, you will notice that we did make a small acquisition that’s having a nice impact on the operation. We purchased US Datalink, which is a very strong kind of boutique shop for employee screening, background checks, etc, and we’ve been able to transition our own corporate background checking to that service and then are in the process now of moving our client base to that service. That will save a lot of dollars and improve the service to the customer all in one whack, so we’ll add to our bottom line relative to our non-PEO initiative. And in fact, when you add up the market place that we have with our customer base and HRTools and the progress we’re making there, and add in the US Datalink, you know, Richard mentioned in his script that we’re starting to see a contribution from these things. And I’ve talked about this for a couple of years now, that what’s going to be exciting, as we start to talk about three components to our gross profit: the mark up for the HR services, the surplus component from managing the pricing and cost of the direct costs; and then this third component, which now has kind of gone up from about $1.30 or so a year ago to closer to around $3.00. So, as we start to see that move up, there is some tremendous potential to increase our gross profit per employee as we add services and actually get some more momentum and some more traction within these current programs.

Your next question comes from Mark Marcon with Robert W. Baird. Mark Marcon - Robert W. Baird & Co., Inc.: I was wondering if you can talk a little bit about what you’re seeing regionally. Looks like the Western portion is finally starting to up-tick after a number of challenging quarters. Are you seeing improvement there with regards to your Northern California branch? What are you seeing over there?

Well, you notice the West, which represents about 20% of our base, increased only 5% year-over-year. A lot of that was due to we had a large mortgage-related client out there that obviously had the expected effect of what happened in the mortgage business. And so that was the primary reason. But we still have some challenges in Northern California but I think we’ve got that well underway now, of turning things around up there. We feel good about that, especially as we go into this fall selling season. Mark Marcon - Robert W. Baird & Co., Inc.: I thought the 5% was an improvement relative to the year-over-year growth we ended up seeing last quarter.

It was an improvement but we’re certainly not happy at that level and expect to make a difference going forward. Mark Marcon - Robert W. Baird & Co., Inc.: It’s getting better so I just wanted to know, do you think the momentum is going to continue to get better over there?

I do. I think we’ve got a lot of fundamental things in place right now, in California, both from a pricing and direct cost side and in the actual sales management and sales organization out there, so we’re pretty excited about where we’re going. Mark Marcon - Robert W. Baird & Co., Inc.: How about fighting competitive inroads? ADP mentioned yesterday that they have been expanding aggressively, obviously no secret to anybody who has been paying attention, in California. Looks like whatever storm that created, you’re more than weathering it.

In the long run we’re happy to see folks spend some more money building the market out there. Because we do very well, compare very favorably, and for our target customer, no one does what we do for them, so we like to see that going on. Mark Marcon - Robert W. Baird & Co., Inc.: What about the mid-market initiative. Can you talk a little bit about what you’re seeing in terms of client retention on that front and the success that you may be having?

The 1.4% attrition we had in the second quarter was exactly the same in both mid-market and core business. So we are really excited. These stewardship meetings that we’re having are going very well. We’ve worked some issues with clients that relate to a better understanding of our pricing and invoicing and that seems to be received extremely well. We are now in the process of, like I said, transitioning the rest of our mid-market clients to our service model, but also transitioning to them to some of this new information. And it looks like we’re probably going to let that move down a little bit toward what we call our emerging growth client, which are the 51-150 range. We think we’ve got some things we’ve figured out with the mid-market that are really going to help retention in that group, so that’s part of what we plan to implement over the last half of the year that we hope will affect January 1 renewals. Mark Marcon - Robert W. Baird & Co., Inc.: So that lower attrition rate was a function of just the partial implementation of the programs and it hasn’t been fully implemented as yet.

Absolutely. We started in February just organizing and getting everyone focused on what we can do to improve and we incentived ideas and formed committees to focus on specific aspects and those groups have been working to devise changes and put them in place. And I would say we’re probably not 20% to 25% implemented on the changes that we’ve come up with. So we’re pretty excited about attacking that retention issue. Because like I said in my script, the most significant thing we can do to impact both growth and profitability is to improve client retention. Mark Marcon - Robert W. Baird & Co., Inc.: In terms of the actual mark up for the service, so not the surplus, but just the fee mark up, is the $198 down relative to what it was before?

It is. From the end of last year, we averaged $200. And then when we came into the first quarter, because of attrition and year-end attrition that took place, we actually started the year, in the first quarter we were at $198. And so we’ve maintained that now, that $198 number, so far through the first half of the year and you know, that was by design because if you’re unsure about the economic climate, you don’t need to be pushing margin. So we kept it at the same level. We’re not seeing the kind of pressure that we saw in the first quarter and so we think that that number will actually go up to $199 for the average for the full year. We are pleased about that, we think that’s really solid stuff. Mark Marcon - Robert W. Baird & Co., Inc.: So if it goes to $199 for the full year, that implies $200 for the second half.

That’s correct. Mark Marcon - Robert W. Baird & Co., Inc.: And then do you think that could go up next year?

Yes, I think so. Right now we’re just focused on the balance of this year, but by the time we get through the third quarter into renewals for January, which will start in November, we’ll start to see what that looks like for 2009. And I think as we see what happens in the rest of the economy, that will also give us another indicator as to how much we can go up in 2009. Mark Marcon - Robert W. Baird & Co., Inc.: And during the first half, what sort of yield were you averaging on your corporate investments?

Probably 2.0% to 2.5%. That’s tax-exempt Mark Marcon - Robert W. Baird & Co., Inc.: And now it’s going to be?

We’re probably looking at more around 2.0% at this point, based on today’s environment. Mark Marcon - Robert W. Baird & Co., Inc.: Do you think as we look out towards next year, if things settle down, that we could move back into the old structure and that the old tax rate could come back or should we think that this is kind of a permanent change?

I think for the moment we’ve taken the approach that we’re going to focus more on the liquidity in our investments and so therefore we’ve moved out of the higher yielding into these tax-exempt money market funds just due to the volatility in the market out there. Should things settle back down, we would hope to make more money on our investments. And we’ll have to see whether it makes sense to go the route of tax-exempt going forward or taxable, on our investments. So it’s a little early to tell, Mark. Mark Marcon - Robert W. Baird & Co., Inc.: One last question. Any thoughts in terms of if there’s a change in the administration and the parties that control all three, or at least the legislative and the executive branch, there’s been a proposal for increasing payroll taxes. Can you talk a little bit about how that might impact you?

Well, I’ll tell you what, the impact on us I don’t think would be significant. We do make a surplus in the payroll tax area. So it might be a little bit of a benefit. But more importantly is the effect that would have throughout the economy would be, I think, dramatic. You know, if you just take off the limits, you know, the FICA limit, you just take a lot of spendable income out of the economy and hand it to the government. I think it would be bad for the economy but I don’t it would necessarily be bad for us. We’re in a business that basically, whenever the government gets involved, that’s a reason you have up, but we translate and interpret what the government’s requiring on employers and we’re able to help them manage it and deal with whatever the government is requiring.

Your next question comes from Jim Macdonald with First Analysis Corp.

We’ve heard a lot about the sales force but I can’t find a number anywhere. What was the average number for the quarter?

292 for the quarter. Up 15% year-over-year.

What kind of attrition are you seeing of the sales force? Any change in that in this environment?

The growth sooner than expected was impacted by both our ability to hire new and also having some pretty good success on retention.

Are you hiring any kind of different type of person in this environment?

Our recruiters and our sales management would say that we’ve been able to hire a better, a higher quality, there have been more quality people available. We do recruiting a lot out of the financial services world. You know better than I do what kind of turmoil there has been out there. So we have been able to bring some really great people into our operation.

And you know the caliber of people in your industry anyway, Jim. They’re just first class.

One other question. On the repurchase activity, it was a little bit less than we would have expected. What are your thoughts on share repurchases here?

I think we did want to hold our powder a little bit, kind of see what happened throughout the second quarter. We knew we had an acquisition coming down and some other things with the US Datalink. Not a bit number, but we though it was best to kind of hold the powder a little bit. But at this point, we’re pretty confident about where things are going and we’re going to continue to be active repurchasing shares. And the Board will meet on that again in August and we’ll kind of get a flavor for how aggressively we’re going to be. I really don’t know the answer to that at this point.

Your next question is follow-up from Tobey Sommer with SunTrust Robinson Humphrey.

Paul, I wanted to get your perspective on some news out in the space, but not necessarily your own. A competitor out there said they’re going to look for extra strategic alternatives and I know historically you’ve kind of shied away from looking at competitive PEOs’ books of business that don’t really line up all that well with your own. But I wanted to get your perspective on the opportunity there, on the PEO side, kind of outside of the Datalink type opportunities in the market.

We continue to look at PEO acquisition opportunities when they come up. But like you said, we typically find that the client base doesn’t really line up, the pricing doesn’t line up. And most importantly, the service offering doesn’t really line up. Therefore, we’ve not been able to find PEOs to acquire that would really be a net add, or least appreciable enough to make it worth our while. So we still are hopeful that there are some out there. We know there are companies out there that kind of patterned their business after our model and as we locate those we would certainly be open to integrating those in if it really makes sense. But that’s not certainly even central or even on the edge of what our real strategy is.

And I wanted to ask a specific question on Texas, your home state and home market. Have the results of the book of business, in terms of net job growth and kind of things that would impact the existing customer base, has that been noticeably better than the rest of the country.

A little. Of course, you know, Houston is obviously counter-cyclical and driven by the energy business. I will remind you that we don’t have a lot of client base directly in the energy business and that’s why we’re not seeing a big bump in net employment in that group. But the Houston economy in general, and Texas largely, is affected by the higher energy costs of pricing and so we’re getting some benefit there. More than other parts of the country but not as much as you might think, with the weighting of how heavily the energy sector is to the total economy in Texas.

This concludes our Q&A session. I would like to turn the call over to Paul Sarvadi for closing remarks.

We would like to thank everybody for joining us today and we look forward to continuing the kind of performance we had over the first half of this year and we’ll be in touch with you next quarter.