James Miller – Chief Financial Officer William Sherertz – Chief Executive Officer

Josh Vogel – Sidoti & Company [Bill Deguire – Private Investor] Jeff Martin – Roth Capital Partners [Sam Kidston – North and Webster] [Tim Cane – Olstein] [Frank Magland – The Robbins Group]

Good morning. This is Jim Miller with Bill Sherertz and Mike Elich.

Today we will provide you with our comments regarding the company's operating results for the second quarter ended June 30 and our outlook for the third quarter of 2009. At the conclusion of our comments, we will respond to your questions.

Our remarks during today's conference call may include forward-looking statements. These statements along with other information presented that are not historical facts are subject to a number of risks and uncertainties.

Actual results may differ materially from those implied by the forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

Page one of yesterday's earnings release reflecting our operating results summarizes the company's revenues and cost of revenues on a net revenue basis as required by generally accepted accounting principals. Most of our comments today however, will be based upon gross revenues and various relationships to gross revenues because management believes such information is one, more informative as to the level of our business activity, two, more useful in managing and analyzing our operations and three, adds more transparency to the trends within our business.

Comments related to gross revenues as compared to a net revenue basis of reporting have no affect on gross margin dollars, SG&A expenses, or net income. Turning now to the second quarter results, as reported, the company experienced a $0.65 loss per diluted in the second quarter as compared to earnings per share of $0.29 for the second quarter of 2008.

Without the impact of the additional worker's compensation charge of $11.8 million, net income per diluted share for the 2009 second quarter would have been $0.07. The decline in earnings on a quarter over quarter basis was primarily due to one, the $11.8 million increase in the worker's compensation expense resulting from the company's change in estimate of its worker's compensation reserves, secondly, a 7.9% decline in gross revenues, and thirdly, a $4.5 million decline in gross margin dollars.

And this is without the additional charge to worker's compensation expense. Total gross revenues for the second quarter of $248.2 million decreased $21.3 million or 7.9% from the 2008 second quarter which continues to reflect the challenging economic conditions in our markets, particularly in California and Oregon which continue to experience two of the highest unemployment rates in the nation.

California which comprised approximately 78% of our overall second quarter gross revenues declined 5.4% owing to a decrease in staffing revenues and a small decline in PEO revenues. Staffing revenues for the second quarter of 2009 decreased $12.6 million or 31% from the second quarter of 2008 primarily due to a decline in demand for our staffing services from existing customers in the majority of our markets.

PEO gross revenues declined $8.7 million or 3.8% on a quarter over quarter basis. Our new PEO business during the quarter from customers added since July 1 of 2008 exceeded our lost PEO business from the second quarter of 2008 from former customers.

However, the decline in overall PEO revenues was primarily due to a decrease in hours worked at existing customer work sites. Gross margin dollars for the 2009 second quarter declined $16.3 million primarily again due to the additional worker's compensation charge of $11.8 million as well as to the decline in revenue.

Gross margin percent on a gross revenue basis, without the impact of the additional worker's compensation charge was 3.9% compared to 5.2% for the prior year, primarily due to an increase in direct payroll cost and slightly higher employer payroll taxes. Direct payroll costs increased 110 basis points over the 2008 second quarter primarily due to a decline in our mix of staffing services which typically have a much lower payroll cost component than PEO services.

Payroll taxes and benefits for the 2009 second quarter as a percentage of gross revenues increased from 7.7% to 7.8% due to increased State unemployment tax rates in 2009 in the majority of states we do business in compared to 2008. The rate of increase for the 2009 second quarter compared to the prior year has declined compared to the first quarter of 2009 as statutory tax or wage ceilings have been reached for many employees, therefore reducing the overall effective payroll tax rates.

During the second quarter of 2009 the company engaged a new actuary to review its worker's compensation liabilities. Based upon discussions with the actuary and a thorough review of the company's reserving process, management elected to increase its liabilities to equal the new actuarial estimate as of June 30, 2009.

While recording reserves for self insured losses involves a considerable amount of judgment, management the use of the new actuary provides a preferable basis of estimating the ultimate cost of claims both now and in the future. Worker's compensation expense for the second quarter of 2009 as a percentage of gross revenues increased from 3.3% to 8.2% due to the additional charge.

Without the charge, worker's compensation expense would have been 3.4% of gross revenues. The 2009 second quarter selling, general and administrative, or SG&A expenses of $8.3 million decreased $829,000 or 9% from the 2008 second quarter.

The decrease is primarily due to lower branch management payroll and lower profit sharing commissions due to the decline in business activity and profitability. Looking at the balance sheet at June 30, cash and current marketable securities total $40.3 million at June 30, 2009 compared to $60.1 million at December 31, 2008.

The decrease was primarily due to $10.8 million used to purchase single issue corporate bonds in an attempt to improve the company's investment yield. $2.2 million in cash used to purchase 236,000 shares of the company's common stock, and $1.7 million used to pay quarterly cash dividends.

Trade accounts receivable at June 30 of $41.5 million increased $7.1 million over December 31, 2008 primarily due to an increase in accrued revenue at June 30 compared to December 2008. The day sales outstanding in accounts receivable or DSO of 14 days is up from the December 2008 amount of approximately 12 days, but down from 15 days on a seasonal basis from June 30 of 2008.

We continue to monitor our customer credit terms and closely track collections in light of the continued difficult environment. The increase in the long term portion of the worker's compensation claims liabilities primarily represent the impact of the $11.8 million worker's compensation adjustment.

The decrease in stockholders equity of $13.6 million at June 30, 2009 from December 31, 2008 is primarily due to a net loss of $9.9 million for the first six months of 2009, the company share repurchases of $2.2 million and cash dividends paid of $1.7 million. Turning now to our outlook for the 2009 third quarter, as reported yesterday we are expecting gross revenues to range from $258 million to$263 million for the third quarter of 2009.

This projection represents a likely mid point of decline of 7% from the $288.4 million in third quarter of 2008 gross revenues. The projected decline of 2009 third quarter gross revenue is based upon recent revenue trends and largely reflects the continued challenging economic climate in our markets.

Based upon the forgoing estimates for gross revenues diluted earnings per share for the 2009 third quarter to range from $0.17 to $0.20 per share as compared to diluted earnings per share of $0.06 for the 2008 third quarter. As you may recall, the third quarter of 2008 included a $3.5 million mark to market impairment charge on the company's investments in foreclosed and bond funds.

The 2009 third quarter projection compared to the 2008 third quarter represents one, lower projected revenues and two, higher projected payroll costs primarily resulting from a change in mix towards PEO services from staffing services. At this time, Bill Sherertz and Mike Elich will comment it further on the recently completed second quarter and our outlook for the third quarter of 2009.

We will then open the call up for questions.

All in all it wasn't a bad quarter. We feel like right now that we're at the bottom of the trough.

In fact, my overall feeling is that we started to turn up a little bit. And in that process, we wanted to make sure that our balance sheet was very clean and that we don't have ongoing issues in front of us, and we hired the actuarial firm to come in and look at every year separately, and it was determined that the years '05 and '06 had been misjudged as to the level of expense that we were going to record.

I think that represents the same thing that insurance companies and others that are pulling out of California have experienced, is that there was a change in overall plaintiff compensation and medical costs that sometimes doesn't show up for two or three years, and obviously we experienced that along with others in California as well and that's why the rates have gone up 15% and probably will continue to go higher in California. The two biggest issues facing the company are obviously the workman's comp issues, obviously going to be an issue and bad debts.

And we continue to see, and I'll talk in a minute about how many customers we've had to cancel as a result of non payment or the inability to pay. But in this environment those are the two main issues that are out in front of us.

During the quarter we signed 158 new customers on the PEO basis which is an all time record for us in terms of new customers, and the trend continues to be very solid in signing new customers. We're also seeing a trend in which the hours worked are not going down, and that's a very positive statement because up until this for two years, we've seen the hours decline in our customer's work base.

During the quarter we cancelled or had 46 customers leave us, which is a very good ratio. Nine of those were cancelled as a result of A/R.

Seven of them were cancelled as a result most likely of comp issues. 16 businesses were sold.

We had approximately 14 others decide to leave for pricing reasons, to payroll in house or just wanted another service which we only lost two customers for another service during the quarter. At this point in time where we've done some cost cutting I think we're going to be a lot more aggressive in terms of bringing people on and building out a credible market.

If you look at building a company, at least in my point of view, the last thing you want to do is be trying to build a company in a major downturn. But if you have something near the bottom or the upturn, and we did that very successfully over the years, and I think we're at that point now, it's much easier to gain market share and the quality of people available to bring in is very substantially higher than if the economy were good or you wait too long to try to increase your overall business.

So I'm relatively positive on the outlook. I certainly don't like taking those kinds of charges, however it does clean our balance sheet up and we think we have a better handle with the actuarial now on not getting blind sided.

We have four or five ways that we measure this, but the possibility always exists that things change that we don't see and because the comp is a long tail, things like this could happen again. And I won't try to sweep that under the rug.

But I am very positive. Right now we're starting to see a little pick up in business as I said.

New customers signing is very good. However our well staffed, our branches, the losses, the branches that are losing money are small branches.

Our big branches are making money and we could choose to close the small branches, but again if we are at the bottom or starting to make a move up, that would be the last thing in the world you want to do. It takes a long time to establish in a lot of these markets and they're good markets and we'll participate I think very strongly with an economic flattening of the economic cycle or an upturn.

At this point I'm going to take flat would be really positive, and I think that's kind of where we're at. We'll see what happens over the winter months and the first part of next year, but from our point of view, how we're looking at the world, we think there's a substantial opportunity here for us to gain market share and to build the company.

And if we get a little help from the market, we should do really well. And with that, we'll take your questions.

I was wondering if there were any reforms or legislation floating around California that you think is either making you nervous or making you more positive on the prospects of the business.

We're not taking IOU's. Business is business and the more the government continues to jump on the backs of small business and require them whether its health insurance or others, it's going to benefit us, and I think we're seeing a direct benefit from that.

There's no specific legislation going on that I know of that would have any major impact on us.

On the last call you mentioned something about California raising the worker's comp rates on July 1, and that was going to be a big positive to you in the back half of the year.

The State went up 15%. They backed it down from the 24%, and a lot of the insurers went up 5% to 10%.

So all that kind of plays into our hands as long as we pick carefully. That's the real key to it.

You also mentioned last quarter that you expect the gross margin to continue to improve throughout the year. Is that still your stance here in the back half?

Yes. One of the things that we really kind of push is what we call preferred payroll and that would be a direct competitor to Pay Checks and ADP.

It's a part of the company that's growing and we think it has great potential and will help our margins.

Looking at your guidance, the decline at the mid point in the range in gross revenue for Q3, it implies a rate of decline that's greater year over year than what we saw in Q2. I was wondering if there's some seasonal stuff going on here or are you just being super conservative.

You've got to give the numbers as you see them. You can't be super conservative or liberal or anything else.

You just do them as you see them. Let's just say we've got a month behind us and those are good numbers.

We're probably a little better than that.

Do you have any comments on the first couple of weeks of July, what you're seeing there year over year maybe versus April?

Actually in July we hit a breakeven week so far. I mean its better.

The fact that you're in the saddle with such a dire economic situation, I'm convinced you're going to live another 40 years or 50 and I'm glad to hear that. How many shares are there left for repurchase?

There are approximately 1.9 million shares authorized to be repurchased.

You mentioned hours worked being down a couple of times on the call. How far off the top are we?

In other words how much could you grow organically just regaining those hours?

30%.

Are you starting to see that pick up?

I think the process you're going to see, and we're going to see it and we've already started to see a little bit of it is the number of hours worked. The unemployment rate will probably still be a little higher, but the average hours worked will go higher as well.

So they'll start using up, the process will be people will work more hours. Then they'll start working more overtime.

And then they'll start hiring. So in the process, what you look for as the first signs are that the hours are not declining.

What's your best guess on how quickly you could get that 30% back?

It will happen very fast if the economy improves. We're still, even though I'm pretty upbeat about the company, we're still fighting issues of people can't pay us and businesses closing their doors.

So it's not all a panacea out here yet, but we think, it feels like we've turned the corner on it. It doesn't feel like it's been in the past where it's just going to get worse from here.

And I think a lot will just depend, you live in California. You know.

You can look around. The new home sales were good.

That's very positive. We're operating down in California where some of the places are 13% and 14% unemployment.

Could you put into perspective, obviously you're signing a huge number of clients. To put that into perspective, are those all PEO?

You mentioned the preferred payroll. Are you doing some things just to get clients on board and then add other PEO services on top of that?

Is 158 clients half of them only payroll, or is it all PEO?

That was all PEO. That's a number that if you went back over that we report each quarter, that's all PEO.

And no, we are not cutting our prices to bring people on board. We're not trying to gain market share and start a price war.

I have no desire to do that.

By my account, you're probably adding 7%, 8%, 9% a quarter on a gross basis and two-thirds of that on a net basis here to your existing client base. That's pretty significant.

Look back at what we did in 2001 and 2002 and 2003. It feels very similar to that in that we were adding a lot of customers and then the economy got hot and everybody started doing a lot of overtime and hiring people and then boom.

It went pretty fast. I knew that exact date.

We'd go into the market and we'd just buy every share we can and we'd run. But I don't know that exact date.

On the worker's comp side of things, we seem to be in pretty good shape now that the charges are behind us and if you had to say what kind of time frame this could ever happen again, are we free and clear for a few years now?

I think we have better information. It's always been a struggle trying to get a good number of what these ultimate claims have been.

I'm very comfortable with the new actuarial firm that we hired. They're the ones that also do the State of Oregon.

I would think that we're good for at least five years. Now that barring that something dramatic doesn't change again.

But we certainly don't see that and we have four or five benchmarks that we're using that would have been nice to have been using back in '05 and '06. Our numbers would have been different.

We didn't have any problems with '07, '08 and the first part of '09. We had them go through all years, every year since '01 and take a look at where we were.

So it primarily was those two years that really kind of got us.

To speak to the staffing business a little bit, a lot of your staffing peers are calling a bottom here. Is it time to go out and start looking at acquisition opportunities again?

No. If it were exactly right we certainly would do it, but I think hiring management talent in some of our bigger markets and sort of forcing the market is really going to play better into our hands and it's a lot less expensive way to build.

At this level, going into the Denver market, the Phoenix market, and adding a few hundred thousand dollars in management salary I think is going to really give us a great return as opposed to buying a company and the distraction with it, again unless it's just a perfect fit.

Could you give us a sense on '05 and '06, you said that you've gone to the actuarial number, but where in the actuarial range are you actually booking those reserves at this point?

I believe we're booking them right at the top end. There isn't a low, high and most likely.

We took it right at the high end. If you're going to take the charge, don't screw with it.

There's no point in it.

Was it an actuarial issue?

No. It's a real cost issue.

We saw in the first six months of the year, particularly in April and May that claims in those years were starting to creep up and that caused us some concerns, and we hired an actuarial firm to come in and start looking at the years to see where the problem was. And the problem was '05 and '06 primarily.

Also coupled with the State of California audit earlier in the year that started to give rise to us wanting to take a closer look at it.

Is the issue the number of claims, the length of the claims, where are you really seeing the issue there?

It's the length and the cost of the claims. We have almost no claims that are unknown.

It's an issue of a finger, or an arm or an ankle that you think is going to settle for $10,000 and you find it's not going to settle for $100,000.

How many open claims do you have from those years at this point?

We still have anywhere from 50 to 100 open for those years. They're ones of severity and they have a long tail.

The big question is, does this cause you to cause any change in your ideas of self insuring?

The loss ratio is still very positive. The only thing that makes us change is we want to be a lot more conservative with our comp numbers, that's all.

It's just one of those things where you say you're comp can't possibly triple or double. Well, it can.

Does it affect how you're going to buy re-insurance at all?

No. Again, we're looking at an issue that's almost three years old now, three and four years old.

We made those changes in '07 and '08 in terms of our re-insurance. So really we're talking about old issues here.

Do you have a rotating actuarial engagement program, or how does that work exactly when you look for a different actuary?

We were getting numbers from the actuarial that were stupid and couldn't be used. There was no value to us.

So through some personal contacts, Rich Sherman's firm here in Oregon, we brought them in and had them take a look and see what they thought. And it was simply having another set of eyes on the numbers to come in and his analysis made a lot of sense to us.

Not only did it make sense, it allowed us to run the company as well.

We were looking to get information not only on the past but looking out in the future on a better way of estimating claim costs.

Then this is like you said in the last three months or so, right?

And that hasn't changed your view about this specific self insurance business?

No. Again, the loss ratios are relatively very low, but we just need to be a lot more conservative with our numbers and I think we have that ability with the new firm and how we're looking at it and a sense of payroll and a lot of different ways to come up with numbers that should last over long periods of time.

Have you implemented any of those types of maybe a little bit more conservatism into your pricing model in terms of new business or anything like that?

Yes.

Have you seen any change there or no?

I know there's not much change there. Again, if you go back and look at '05 and '06, we made $1.00 something.

We shouldn't have made quite that much money if we'd have been using a different methodology. So the model is not broken.

A lot of the pricing issue is more of market driven.

You're going to see our margins over time probably increase with the comp rates going up. Remember, comp rates in California have been going down for the last three years.

On the PEO's that you're signing up, is there a significant difference in the size of the people or companies that you're signing up now than you were two or three years ago.

To make our numbers look good, we went out and got a whole bunch of one person accounts. Not really.

We're not signing any really big ones, but they're nice sized accounts on average.

Which would be what now in today's environment?

Up 30.

No material change there and I think beaten up the workman's comp well enough to know that we shouldn't expect any problems for the '07 and '08 estimates.

If we do, shame on me, but we've looked at it with the best set of eyes we know how to look at it and so that's all we can do.

Since you took the high end of the estimate, if you're lucky you manage those right and bring it back to earnings a little bit later on.

I've had people including our accountants talk about that. Comp being what it is, that's a tough deal to bring it back in.

I wanted to just get a sense are we going to see Q4 seasonality like we normally do or could Q4 be up over Q3?

If the economy turns, that will be a real harbinger. Q4 will go over Q3.

But I would expect there would be some seasonality on a normal basis.

Thank you very much and we'll join you next quarter and we look for better and brighter things ahead.