John Morphy - SVP and CFO Jon Judge - President and CEO

Rod Bourgeois - Sanford Bernstein Adam Frisch - UBS Charlie Murphy - Morgan Stanley Pat Burton - Citigroup Jim Kissane - Bear Stearns Liz Grausam - Goldman Sachs Glenn Greene - CIBC Dave Grossman - Thomas Weisel Gary Bisbee - Lehman Brothers Mark Marcon - RW Baird T.C. Robillard - Banc of America Tien-Tsin Huang- JP Morgan Sanil Daptardar - Sentinel Asset Michael Baker - Raymond James

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's conference call is being recorded, so if you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, the Senior Vice President and Chief Financial Officer of Paychex, Mr. John Morphy. Sir, you may begin.

Thank you for joining us today for our fiscal year-end earnings release. Also here is Jon Judge, our President and CEO. The teleconference call will be comprised of three sections: a review of our fiscal 2007 financial results, including comments and guidance for fiscal year 2008; an overview with Jon; and lastly, a Q&A session. Yesterday afternoon after the market closed, we released our financial results for the fiscal year ended May 31, 2007. The press release can be obtained by accessing our Investor Relations page at www.paychex.com. We have also filed our Form 8-K with the SEC, which provides additional discussion and analysis of the results for the year. This filing is also available on our website. In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website until July 27th, 2007. This morning, we released the year-end Investor Relations presentation, which can be found on our website, as well as all recent press releases, current financial information and SEC filings. Fiscal 2007 was another excellent year and our 17th consecutive year of record revenues and earnings. We look forward to continuing this streak well into the future. We continued our history of successfully selling, retaining and servicing clients, with our comprehensive portfolio of payroll and human resource service offerings continuing to provide opportunities and value to our clients. In fiscal 2007, we made investments to broaden our portfolio of services. This included enhancing our 401(k) record-keeping service, expanding health insurance nationwide, and introducing Paychex Premier and HR Online to our MMS clients. During fiscal 2007, we experienced record levels of client retention and satisfaction, with client retention exceeding 80% of our beginning client base for the first time ever. Our customer survey results are also at an all-time high, while our client base grew 3.4% to approximately 561,000 clients. Year-end and fourth-quarter highlights: total revenue growth was 13% for the fiscal year and 11% for the fourth quarter. Total revenues for fiscal 2007 were nearly $1.9 billion. Payroll service revenues increased 9% for both the year and the fourth quarter. Revenue for Human Resource Services increased 22% for the year and 16% for the fourth quarter. The fourth quarter of fiscal 2007 and the first quarter of fiscal 2008 will be adversely affected by changes in workers’ compensation revenue from our PEO located in Florida; I will discuss that in a little more detail later in the call. Operating income, excluding interest on funds held for clients, stock-based compensation costs and an increase to our litigation reserve, increased 15% to $631.1 million for fiscal 2007. Net income increased 14% to $531.6 million for the fiscal year. For the fourth quarter, net income increased 12% to $137.2 million and diluted earnings per share were $1.39 for the fiscal year versus $1.22 a year ago, up 14% on an unrounded basis. Additionally, diluted earnings per share were $0.36 for the fourth quarter, versus $0.32 for the prior year fourth quarter. We will now refer to the consolidated income statement. Payroll service revenue growth was 9%. This growth was again driven primarily by client-based growth, higher check volume, price increases and growth in utilization of our ancillary payroll services. As of May 31, 2007, 93% of all clients utilized our payroll tax administration services, and nearly all of our new clients purchased these services. Employee payment service utilization was 71% and more than 80% of new clients select these services, which include Direct Deposit, Access Cards and Readychex. Human Resource Services revenue increased 22% for the fiscal year to $396.2 million. This growth was generated from the following: our client base of retirement services increased 16% to 44,000 clients, comprehensive human resource outsourcing services increased 26% to 373,000 client employees served, and our workers' compensation services client base increased 19% to 62,000 clients. Additionally, the asset value of retirement services client employees' funds, increased 34% to $8.5 billion. As we have discussed previously, workers' compensation revenue is more volatile between accounting periods than our other revenue streams. This occurred again in the fourth quarter of fiscal 2007, as lower than normal HRS revenue growth in the fourth quarter of fiscal 2007 was a result of lower workers' compensation revenue from our PEO operations in Florida. The reduction in PEO workers' compensation revenue was a result of Florida Tort Reform that was enacted in October 2003, which was subsequently accompanied by reductions in worker compensation insurance rates initiated in January of 2006, with more price decreases initiated in January of 2007. The Tort Reform initially increased our profit margins and workers’ compensation, whereas the subsequent rate reductions reduced them. Human Resource Services revenue growth for the fourth quarter of fiscal 2007 would have been 20%, excluding the PEO services revenue. To a lesser extent, the same phenomenon will occur in the first quarter of 2008 with little or no effect anticipated in subsequent quarters in fiscal 2008. Interest on funds held for clients increased 33% for fiscal 2007 to $134.1 million. This was due to higher average interest rates earned and higher average investment balances. The higher average portfolio balances for fiscal 2007 were driven by client base growth, wage inflation, check volume growth within our current client base, as well as increased utilization of our payroll tax administration and employee payment services. The average interest rate earned on funds held for clients increased to 4.0% from 3.2% a year ago. The effective increase in the average rates is expected to end in the first quarter of fiscal 2008, as the federal funds rate has remained unchanged since June 29, 2006. Please refer to our Form 8-K for further information on the effective interest rates and interest on funds held for clients. Consolidated operating and selling, general and administrative expenses increased 13% for fiscal 2007. Our stock-based compensation costs, including compensated-related expenses, were $25.7 million, excluding stock-based compensation costs and the $13 million expense charge in the third quarter to increase litigation reserve, total expense growth would have been 9% for fiscal 2007 compared with 12% for fiscal 2006. This increase was a result of our continued investment in personnel and other costs related to retaining clients, promoting new services, and creating more efficient systems for selling and servicing through the use of new and enhanced technology. In addition, total expenses for fiscal 2006 were affected by a strong sales year, as our sales force exceeded their targets, resulting in higher than normal levels of sales expenses for fiscal 2006. As of May 31, 2007 our number of employees increased 7% from 10,900 employees one year ago, to 11,700 employees today. Investment income net increased 60% for the fiscal year to $41.7 million, due to higher average interest rates earned and higher average portfolio balances resulting from cash investments generated from ongoing operations. Our effective income tax rate was 30.8% for fiscal 2007 compared with 31.1% for fiscal 2006. The decrease in our effective income tax rate was primarily the result of higher levels of tax-exempt income, which is derived primarily from municipal debt securities and the funds held for clients in corporate investment portfolios, and a lower effective state income tax rate. For fiscal 2007, the effective tax rate was also unfavorably impacted by non-deductible compensation related to incentive stock options grants. Moving on to the balance sheet. Cash and total corporate investments were $1.2 billion as of May 31, 2007. Our cash flows from operations were again strong at $631 million for fiscal 2007, an increase of 11% or approximately $62 million from the same period a year ago. Last October, we raised our dividend by 31% and we will continue to evaluate the best means for Paychex and its shareholders to benefit from our superior ability to generate cash. For fiscal 2007, 57% of net income was returned to shareholders in the form of dividends. Our total available for sale investments, including corporate investments and funds held for clients, reflected a net unrealized loss position of $15 million as of May 31, 2007, compared with a net unrealized position of $22 million by May 31, 2006. The three-year AAA municipal securities yield increased to 3.71% on May 31, 2007 from 3.65% on May 31, 2006. The net unrealized loss position was $22 million as of June 22, 2007. So, it has not changed too much. Client fund deposits as of May 31, 2007 were $4 billion as compared to $3.6 billion as of May 31, 2006. Client fund deposits vary widely on a day-to-day basis, with the average balance increasing approximately 6% for fiscal 2007. The growth in client fund deposits of 6% is less than the 12% we experienced a year ago due to several factors (which were also mentioned in our last teleconference call). Continued wage inflation accompanied by no index change in the federal deposit rules since 1993 means more and more clients are required to pay their taxes weekly versus monthly. The fund balances benefit from Readychex was not as great as in prior years, as the growth of this product is now much closer to that of direct deposit. Readychex is a service whereby we pay the clients' employees with checks drawn on Paychex bank accounts. Total stockholders’ equity increased to $2 billion as of May 31, 2007 with $301 million in dividends paid. Our return on equity for the past 12 months was 29%. During the third quarter of fiscal 2007, we recognized $13 million of additional expense related to the Rapid Payroll litigation that commenced in August of 2001, and has been previously disclosed. At the present time, we have fully reserved our licensing responsibility and settled all disputes with 74 of the 76 licensees who were provided services by Rapid Payroll. A verdict favorable to Paychex, Inc. was issued with respect to our dispute with one of the remaining two licensees. That licensee is currently appealing the verdict. A verdict was issued yesterday, but in respect to the litigation brought by the other remaining licensee. In that case, a jury awarded $15 million to the plaintiffs in compensatory damages and allowed for an additional finding of punitive damages. On Monday, July 2, 2007 the jury will begin to determine what amount, if any, to award for punitive damages. Fiscal 2008 guidance, our current outlook for the fiscal year ending May 31, 2008, is based upon current economic and interest rate conditions continuing with no significant changes, and is summarized as follows: Payroll serviced revenue growth is projected to be in the range of 9% to 10%. Human Resource Services revenue growth is projected to be in the range of 20% to 23%. Total service revenue growth is projected to be in the range of 11% to 13%. Interest on funds held for clients is projected to increase approximately 6% to 9%. Total revenue growth is projected to be in the range of 11% to 13%. Corporate investment income is projected to increase approximately 20% to 25%. Effective income tax rate is projected to approximate 31.5% and net income growth is projected to be in the range of 14% to 16%. Purchases of property and equipment in fiscal 2008 are expected to be in the range of $80 million to $85 million. Fiscal 2008 depreciation expense is projected to be approximately $65 million, and we project amortization of intangible assets for fiscal 2008 to be approximately $17 million. Certain written and oral statements made by management constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements should be evaluated in light of certain risk factors, which could cause actual results to differ materially from anticipated results. Please review our Safe Harbor statement on page three of the press release for a discussion of forward-looking statements and related risk factors. I will now turn the meeting over to Jon Judge.

Thanks John. Good morning everyone, and thank you again for taking the time to discuss our company 2007 results and our 2008 outlooks. I just have a few comments and then we'll get to your questions. As John mentioned, fiscal 2007, another record-breaking year, is now in the books, and we are very proud of the solid results that were accomplished by our employees and business partners, especially given the tough year-to-year comparisons we faced. John covered the key financial results, all of which fell comfortably within our guidance, which produced our 17th year in a row of record revenue and profit. Some quarters were stronger than others on a year-to-year comparison as predicted; the year came together very nicely and very close to how we planned. Beyond the impressive financial results, we had very good execution in several of our key business initiatives and investments, and I wanted to give you a sense of some of them. We focused on growing our client base, both through organic means and acquisition. We did this through investing in more salespeople, we worked on lower employee attrition rates and better rep productivity through the introduction of some new tools and management systems. We continued the acquisition of clients at a reasonable price that allowed the acquisitions to not only produce revenue but to produce profit growth. And while we finished slightly below last year, we had a very good finish and we entered the year with a good sense of momentum for growing our client base. We focused on growing our ancillary product penetration as well, both in the installed base and with new clients, and succeeded in both areas as evidenced by higher revenue growth and unit growth. We've focused on growing our portfolio of offerings. We added enhanced retirement service offerings like the open-architected 401(k) solution. We added significant investments in the health benefits area, both in sales and operations manpower, as well as back office systems and processes. We continued to add health providers and strengthen our relationship with these important business partners. We expanded our HR Online product and introduced Paychex premier offering to our MMS clients. We've remained focused on client satisfaction and client retention and as already mentioned by John, had an incredible set of results in both, including a new client retention record that broke through 80% for the first time ever, and the highest customer satisfaction ratings we've ever achieved, both in Core and in MMS. These are just some of the examples of the initiatives that we undertook in the investments that we've made, ensuring that we've kept the business model producing the top line and bottom line growth, as well as impressive margins. Just as the year was winding down, we went into the budget planning for fiscal 2008, which we've concluded and successfully committed ourselves to new initiatives and investments that will get us to the results outlined in our 2008 guidance. We're proud of the year we just concluded and the terrific dedication, hard work and results achieved by our employees. Looking beyond fiscal 2008, we'll continue to focus on the key strategies that got us here, namely aggressive but achievable planning, followed by a commitment process by our senior management team. We will continue superb business execution from our sales, operations, organizational development, training, finance and planning teams, ongoing product enhancements and new product development, business development especially in the areas of client acquisition and future products and service offerings, and continued focus on expense management and margin expansion. We'll follow this roadmap in 2008 and we fully intend to deliver another record year, hopefully our 18th in a row, of excellent financial returns. Again, we are very proud of the results that we put up this year, and John and I would now be happy to take any of your questions.

(Operator Instructions). Our first question comes from Rod Bourgeois of Bernstein. Go ahead please. Rod Bourgeois - Sanford Bernstein: I will start a question with John Morphy first. John, I just wanted to confirm the basis for your fiscal '08 growth guidance. Are you guiding off of the pro forma fiscal '07 earnings number or the GAAP number?

We are buoying the guidance off of the actual numbers that are shown on the bottom of the income statement and the financial statements. Rod Bourgeois - Sanford Bernstein: So, you are guiding off a GAAP?

Yes. Rod Bourgeois - Sanford Bernstein: Okay. All right, and then the other question is the Core Payroll business had decelerated in the February quarter. It looks like it reaccelerated here in the May quarter and the guidance for next year signals further acceleration in that Core Payroll business. Can you talk about what's happening there and was it giving you the conviction that that business will reaccelerate here?

You use the word acceleration, I wouldn't use that word. I'd use it again as continued very good. We talked on the last call about the lower than anticipated Payroll number. I wouldn't call that de-acceleration, it was again the result of some tough comparisons year-over-year. It really didn't matter so much to what I would call the ongoing momentum of the daily business. So, we again are really in the same place, continued and stuck in a good place, and we believe the payroll revenue would be right in line with what we expect and we did not see as much aberration as you did. And I understand why you all felt that way, because you saw a number in the third quarter that was less than you anticipated. So that's where we are. Rod Bourgeois - Sanford Bernstein: So, there is no real change there. You kind of had a tough comparison and some issues last quarter and things are just normal at this point in your guidance?

This is Jon Judge. This part of our business is really sort of the spade and shovel, hard-worked business. It's just all the basic blocking and tackling. It's keeping the territories filled, it's keeping the reps in the territory longer. We have measurements on this part of our business that are pretty finite, that actually get down to the number of reps there are in the territory per week, which looks at where we are in vacation schedules on open territories and so on. It's really just continuing a hard focus on the day-to-day operation of that business, because that is the part of our business that actually is sort of the hardest by the numbers business. And, we had a slight hiccup in the course of the year that we've told you about before, we don't really watch the quarter-to-quarter as closely as you guys do, we watch the full year and we felt pretty comfortable that we would get through it. And we came out of the fourth quarter with pretty good momentum in that business and we feel pretty good about where we are and we feel pretty strongly about the fact that our guidance is going to be extremely closer than it has been for the last 10 or 12 years. Rod Bourgeois - Sanford Bernstein: Great. And then one final question on the returning cash to shareholders. Is dividend still the priority over the share buybacks? And if so, can you help us get to an idea of what the magnitude the dividend increase might be when the Board meets later this year?

We've made a commitment that we will come up with something on what we think about our cash position and the time period I asked for was through the end of October, because there are two Board meetings before then. We are going to talk to the Board about it and dividend is generally our preferred method, but we're looking at all the alternatives, and I wouldn't rule anything out. Rod Bourgeois - Sanford Bernstein: Thank you guys.

Next question comes from Adam Frisch of UBS. Adam Frisch - UBS: Thanks guys. Good morning. I think you should not be too bent out of shape about third quarter, I just view it, kind of like you did, Jon Judge, there is a kind of like a little bit of a hiccup. But the business is obviously going great. Guidance for '08, steady as she goes in terms of revenue growth. Is there anything there that can materially change your current guidance one way or the other, you talked about economic changes and so forth. But outside of like, crazy events like 9/11 or something like that, is there anything out there that you are tracking that could materially change what your outlook is today?

Nothing off the top of my head, the business model that we have and the type of business that we have is so different from others. So much of our business is by the numbers, I mean, we literally sit down with our sales reps every year and go through how much they want to make and what level of recognition they want to achieve. And that tells us, it tells the rep exactly how much booked revenue they need. And we have a model in the way that we run sales, so that we can back off of that, exactly how many presentations they have to make and how many calls they have to make on existing clients to harvest referrals and how many calls they have to make on CPAs, the harvest referrals and we perhaps trap the closed rates by territories. So, it's a fairly scientific, but very work-intensive product. And as long as we continue with the basics, as I mentioned earlier, it's very difficult for me to see something that would materially change us. Certainly for the negative, we don't see a lot to the positive. It's pretty much the same. I don't really see anything that would materially change. If something happened that would cause a significant uptake in the acceptance rate by clients in the territory, obviously that's pretty hard, I think it's going to be pretty steady as it goes. Adam Frisch - UBS: Okay. Key checks on revenue growth. May pricing increases, were they around the same 4% that you've got historically?

Yes, boring but the same. Adam Frisch - UBS: I'll take 4%. It's not too boring. And then, an update on the healthcare and 401(k) initiatives, I know there has been a lot out there, some expectations have been way off base. We are still looking at that as good growth, good opportunities, not something that's going to affect necessarily fiscal '08. But something that's still moving along enough to enforce your views on 12%-ish kind of growth on the top-line?

Well, I guess the first thing I would say is that we do fairly significant modeling as you do. We somewhat have an advantage over you in that we know what all the numbers are, and we only share some of them with you. But, when we release our guidance, it's very detailed planning that goes in behind the guidance. So, all of the things that you mentioned are in our models. And on the insurance and on the 401(k), both of those areas are extremely important areas for us. We are making significant investments in both. I mean you know the base line model of our business. We will grow the payroll side of our business in 8%, 9% or 10% range. And then, we'll get ourselves to the 12% by growing our HRS revenue far more aggressively than we grow the base client revenue and that's where the 401(k) plays, that's where the insurance plays and the other product offerings that we have in the HRS world. The 401(k), you know that we just introduced a new product. It's an open-architected product. It was really in its first year of implementation this year. Well, we don't give you the specific numbers what I have said at a couple of the Analyst Conferences is that in this past year, we were somewhat surprised with the tech upgrade of the new offering. It came in almost three times what we had planned. So, it's caused us to do some fairly aggressive planning on both the back-office systems to be able to take the enhanced volume, as well as what we are going to do with the reps, adding reps into that world. But that's something that we think long term is going to be, one of the smartest moves that we've made in terms of continuing to own the 401(k) businesses, as you know, we have. We write more 401(k) products in a year than probably the next three combined. On the health side of it, we have talked quite a bit about that in the course of the last year, we're going to probably double our reps again in the next year. We're putting a lot of investment into the back-office systems and processes, as I mentioned earlier. That business to us, all of the work that we've done on that business says that, that field is wide open for a player like us, and we believe that we are extremely advantaged in that world, because of the existing distribution channel that we have, the familiarity that we have with insurance products, the contact that we have with literally 100s of 1000s of potential buyers every year. We think that we're extremely advantaged in that area and we're moving out of this as aggressively as we can to drive the growth of it. And we've told you what we think that growth is going to be over the next four to five yeas. If we get lucky and we are able to grow faster and get a better uptake than is in our pro forma, then the minute that happens when we see that will tell you. But both of those areas obviously are extremely important areas to our HRS world and they are definitely inside of our model. Adam Frisch - UBS: Okay. Great, thanks well that covers that. One last thing that I had for you is on the LBO speculation that's out there. Obviously, there's been, I got a cold glass of water throwing on at this week or in the past few days, but there is still a lot of speculation out there in process really and then, what I wanted to ask you is, do you guys need to be a public company at this point or are there any issues, be it operational or regulatory or something with the ratings agencies, considering the fact that your payroll company prevented you from taking the flood of leverage to go private?

I think that the decisions that were made in our company go almost back to the time that we went public in '83. Things about how open and transparent we were going to be with the markets and the work that John's done in the last 9 or 10 years to get all of our filings done at the same time that we do our press releases and so on. When things started to occur in the Sarbanes world and others that caused angst and consternation in some other public companies, those things didn't really affect us as much as they affected others. So, the first thing I guess I would tell you is that we don't feel the issues, I know there is a lot of talk right now about companies that would rather be private than public from either Sarbanes standpoint or the ability to do long-term investments and not worry about quarterly or annual return to shareholders and so on. In our particular case, we've talked about this quite a bit internally; there are very few things that we would modify if we were private versus public. The one thing you might consider doing differently is maybe the way that you've invested your money in terms of short-term versus long-term returns. But even in that, it wouldn't be a lot different and quite frankly, we think a lot of the discipline that we have in the way that we make our decisions on investments and manage our P&L are healthy ways to manage our business regardless of whether it's public or private. On the LBO side, the two things that typically would drive in LBO that we don’t believe are present in our company are under par performance, sustained under par performance in a business that's easily divisible, so that you could sell parts of the assets off. The part that's made it more interesting I think or has caused some of the discussion is the fact that there's so much money out there, right now, looking for interesting places to go and there appears at least in discussions that some of you all have had with us, there appears to be a belief that the LBO world is going to start being more attracted to investments that could be in a 12% to 15% return range versus the 25% to 30% and that when you get down into that range, some companies like ours look pretty good, more from a whole standpoint than from a improve the performance and trying to resell them. The long and short of it is, we have no activity to report on, so we've not made any reports. We sort of find this to be more curious than anything else and don’t necessary think it's all that applicable to us. Adam Frisch - UBS: Okay. Last question here. Do you think the dividend could get to a 90% to 100% kind of payout?

We are going to answer those questions over the next six months. Adam Frisch - UBS: Okay.

It depends on what you do in all the areas and I think for us that would be conjecture and the board is obviously been saying that but we don't really feel confined by any percent but that doesn't mean we would go that high. Adam Frisch - UBS: Great, alright guys. Thanks so much.

Next question comes from Charlie Murphy of Morgan Stanley. Charlie Murphy - Morgan Stanley: Thanks. I was wondering if I could maybe get a little bit more detail on the drivers behind the Human Resource Services forecast for FY '08 and in particular maybe if we could get what PEO revenue was for FY '07 and FY '06?

We haven't disclosed the PEO revenue and so we won't disclose it here. Basically, the same drivers we've always had. The biggest driver right now in terms of growth is Paychex Premier, in worksite employees when you take the PEO and Premier combined we are almost equal to ADP, Gevity, and Administaff combined. 401(k) is going to pick up some more momentum with the new fund offerings, which is going to enable us to continue to maintain I believe our number one position in selling 401(k). Workers' comp remains strong, so it's pretty much the same things with the [filler] of healthcare coming along to pick up some of the slack when a few of those slow down a bit, so we feel pretty good. Charlie Murphy - Morgan Stanley: Okay. And on investment income, what are the key drivers behind the 20 to 25% growth in the quarter?

That is for the growth in our cash balances and obviously whatever we do on the dividend or any other strategies could affect that number. But, it would be the result of the cash going somewhere. So I don't see that as a problem. But basically, the reason that when it grows fast and when funds help the clients, is we have better growth on the balances on investments, our cash when [we are doing] funds to help our clients. Charlie Murphy - Morgan Stanley: Great. Thanks.

Next question comes from Pat Burton of Citi. Pat Burton - Citigroup: Hi, congratulations on the year. Another outstanding year. Two-part question, the first would be regarding the balance sheet, the follow-up on the earlier question. Do you guys have an aversion to putting any debt on the balance sheet or optimally as some small amount of debt maybe a good thing for your shareholders? That's the first question.

We don't have an aversion to it. As we have said in the past, we have very little sort of religious convictions around here relative to the balance sheet. We don't have an aversion to stock repurchase, and if the numbers worked out for us, then it's something that we would be interested in doing. I guess the only thing I would say that there has been a demonstrative aversion to is a one-time dividend. But as John said earlier, we are aware of the fact that we have got a capital accumulation that's occurred on the balance sheet and then the fact that we are a cash flow engine, we have started having more serious discussions with our Board and consulted with some outside parties as to what the appropriate capital structure for the company should be going forward. And as John said, those are scheduled to be talked about with the Board in the next couple of Board meetings and hopefully we will have a resolution on that by the end of October at the latest. Pat Burton - Citigroup: Okay. And the follow-up is just, what are you earning on a pre-tax and after-tax basis, for John Morphy, on your cash balances right now?

It's [late] of what we disclosed, I think the cash balance on the long-term portfolio was around 3.7, the exact specific numbers in the 8-K. Pat Burton - Citigroup: Okay. So I could trade that off against an equity buyback and do the analysis myself. Thanks and congratulations again. I don't think the stock price is reflecting the results you guys have delivered the last few years, but we will wait on the dividend and the capital allocation strategy. Thanks.

Thanks Pat.

And Pat to answer it, so you put a few words back in there, I would use 3.5% as the tax free rate when you do that analysis.

Next question comes from Jim Kissane of Bears Stearns Jim Kissane - Bear Stearns: Thanks. Jon, what's your target for net new client growth in fiscal '08?

We don't talk about that Jim, other than the general discussion that we have with you about what our model is. And the model is 5%. Jim Kissane - Bear Stearns: Okay. I'm just trying to get a sense of the sales force productivity in terms of adding just new clients. Because you had the record retention over 80%, but your net new client add growth slowed to 3.4%?

Yeah. But, the way that I look at that is—and first of all I look at both. We actually, when you think about new client growth or you think about—we call them units—inside the business, that's one measurement. But in some respect that's a surrogate measurement to get you the revenue. The key thing that we drive obviously is the revenue. So the part of the new client that's important to us, is to give us a place to not only retain, but to grow over time with new offerings. So, that's the reason, I would push that pretty hard and as we've said, if we stay in the 3.5 range, we will be okay as long as we continue to drive the penetration rates of ancillaries into the existing base and a richer configuration of new clients that we bring in, which is exactly what happened in '07. Ideally, what we would like to do is get that number up closer to the 5% and that's what we are going to continue to push for. Jim Kissane - Bear Stearns: Okay, great. And thanks for bringing up, but will you be appealing the Rapid Payroll ruling in California?

That thing is so new, that literally came out about two hours before we went to the press, when we issued our press release yesterday. There is another leg that's to happen as John mentioned yet on Monday and Tuesday, probably perhaps even Wednesday. So, what I would suggest, let us get the thing rolled out first. Let us have the chance to analyze it, which we really haven't had a chance to do, because it's ongoing and then we would be happy to comment on it. Jim Kissane - Bear Stearns: Right, thanks Jon.

My pleasure.

Next question comes from Liz Grausam of Goldman Sachs. Liz Grausam - Goldman Sachs: Thank you. In term of your HRS product strategy, can you help us understand if you have kind of anything in the hopper, in terms of innovative new products that you are expecting to launch in 2008 and where you stand in that product launch?

I think the best thing I can do to tell about what we are up to Liz, is that people have made it very clear that that is one of the growth drivers of our business. It's the area where we've done the majority of the expansion from a product standpoint in our total portfolio. If you think about payroll as our base business and then the expansion is coming to all of the other offerings, either payroll related or HR related, is coming to the HRS world, and we're committed to continue that. We typically though do not talk about things that we are working on until we are ready to introduce them. And so what we've talked about so far is what we are prepared to talk about. But I would tell you that we are constantly looking at, and working on new offerings, both developed internally as well as potentially purchased in the marketplace. Liz Grausam - Goldman Sachs: And in terms of the addressable market within your customer base of these new products, you think of Direct Deposit obviously being very well adopted. When you think about the healthcare insurance products, what do you see as the addressable penetration within your customer base?

It varies by the products, and I would start with the thing that we continually be amazed or amazed by, is the fact that the ones that everyone knows about and have been viewed, it has had saturation for some time now and that would be Tax Pay and Employee Pay. Those two continue to defy gravity. We are now in a situation where Tax Pay is coming in, it is almost 99% or 99% plus of the new clients that we bring in. Employee Pay is up in the 80 range. The installed base obviously is less than that. So, we still continue to get lift out of those two offerings. When you go, I mean just go to the other ones, you have to go one by the next 401 (k) is different than insurance. But in general, we tend to think of that as somewhere in the 25% or 30% range would probably be a fair general statement about what the addressable market is and of course that will change from one to the next. So, for example, a large part of our market is in the one to four. It's probably not reasonable to assume that you are going to have a 30% penetration rate of 401(k) or health benefits in the one to four. But the latter health benefits perhaps could change some legislation that way. But as you get into the larger clients, the MMS clients as an example, the penetration rates would be north of what I've talked to you about. So the addressable market would be north of what I talked to you about. But in general, I'd say if you are thinking in terms of the 20% to 25% range, it would probably be close. Liz Grausam - Goldman Sachs: Thank you.

Next question comes from Glenn Greene of CIBC. Glenn Greene - CIBC: Thank you and good morning guys. The first question I wanted to, for Jon Judge, talk about sales force turnover churns. I know that was a sort of a focus of yours, since you sort of came on-board. Could you sort of update us where we are there and how we exited the year?

It's not just sales forces it's the two key ones for me with sales force and Payroll specialist and for fairly simple reasons, which I talked about it. It has a lot to do with the productivity of the individuals in the field, more experienced, more tenured people particularly in a referral-based business as the sales side is, tend to be more productive. And on the payroll specialists, since we are service providing company and that is the point of service delivery, the reason why that is important is pretty evident. In both cases in both sides over the past couple of years, we have made steady progress, we are not actually calling the numbers out but we've had progress in both areas, in the 1% or 2% range improvement and our intent is to keep this on until we get to the point we were at when we started the sales. When I first looked at the sales, the numbers were in high 30s, low 40s, they are in the 20s, now. When we looked at the payroll specialist numbers, when I first started looking at them, they were in the mid-to-high 20s and they are in the very low 20s now and in the case of both of them, I often get, asked the question, where do you think the bottom is and I don't know but it's a long place from where we are right now. I mean, I think we can continue to improve those numbers and when we improve those numbers the results should be pretty evident. Glenn Greene - CIBC: That's helpful. And then just quickly on, just sort of the yield on the macro employment environment. Obviously you have great data and sort of good view into that but what are your sort of saying and looking in for client data and talking to your clients in terms of the overall employment environment?

I made a couple comments and John will do the same but anecdotally the current economy, then I'll step outside of our frame for a second and go into the specifics of our framework, but anecdotally the economy looks a little schizophrenic to me its when you look at housing starts, when you look at the sub-prime loans that part of the market looks a little bit to be in a mess at the moment. But when you look beyond that, when I talked to some of our clients and obviously other business leaders that I work with; the spending outside of those two areas appears to be relatively normal and even despite the fact that you got gas prices rising where they are. When we look at the specifics of the things that we have a visibility to and the main number that we look at is the new hire transactions per client and the change in that from a growth year-to-year basis. Night of 2007 ended up at 4.2% for the full year and 5.1% for the fourth quarter. So, those are two very healthy numbers. Last year as an example was 3.1% on the full year. So, John has often talked about it has been the economy stuck in a good place and the stuck that we, the elements of the equation that we see specifically new hire transactions because we do the compliance reporting. Bonuses paid is other one that we look at and at the year end the bonus is paid by our clients to their employees were also up. And we look at checks per client, that was also up on a year-to-year basis, although modestly. So, the things that we look at suggest to us that the economy at least the one that we're addressing, seems to be okay and it doesn't seem to be moving dramatically one way or the other. John?

I would say the same, the last time we saw what I would say was meaningful change was in the August 2005 quarter. Since then, we've seen tremendous stability, you might see a little downtick and a little uptick but nothing that indicates much is changing. So, we think it's again stuck in a good place and doing well. Glenn Greene - CIBC: Alright. That's great, thanks.

And it is moving. Glenn Greene - CIBC: Alright. Thank you.

Next question comes from Dave Grossman of Thomas Weisel Dave Grossman - Thomas Weisel: Thanks. I know this has come up a few times in other questions but it just seems that there is a lot of moving pieces impacting growth whether it would be quarter-to-quarter or year-over-year. You know, on one hand, you've got record retention and it sounds like better sales performance and a very positive fiscal '08 outlook. And then, on the other hand, it looks like client adds are tracking little bit below your target. Just based on the trend in payroll, I know it's within range, but still down a little bit I think from where you thought just come up in the fourth quarter if I remember right, you are hoping for 9% or better and I am not sure if the 20% on the non-PEO, HRS is consistent with the prior quarters, but it looks like that might be a little lower than what you'd seen in the other three quarters of the year. So, can you just help us maybe understand the different dynamics that may be affecting those numbers and how we should think about that going forward?

I guess that first thing I would say and I will give you my thoughts, and John will give you his. The first thing I would say is that I completely agree with the first part of your statement, which is, this is a model that has lots of moving pieces. And the interesting thing about our business is that it tends to be extremely predictable on an annual basis, not necessarily as predictable on a quarterly basis. And so, what we've talked in the past is, about is the fact that while the quarter-to-quarter moves either up or down may be interesting and they want to give you reason to either celebrate or frown. The reality is that, if you look at what our performance has been relative to our guidance over the past 10 or 12 years, I think what you'll find is that, we've been plus or minus 1% through all that period, with the exception of when we've change guidance and there's evidence even recently that whenever, we see the model changing from what we've given guidance on, we change our guidance. So, our quarter-to-quarter movement is not going to be even. It's not going to be as predictable as you'd like the annual movement is very predictable and I think we've got a pretty strong track record upon it, pretty closely. So, that's why we tend to tell you that, we don’t pay as much attention to the quarter-to-quarter moves as I think some of you guys do. We pay a lot of attention to the annual budgeting process and the annual commitment delivery process and that's sort of where we are. John?

We look at payroll revenue to me, anything between 8.5 and 9.25 is then what I would call a good norm, you know, we take the economy or something generally to kick us out of that. The HRS revenue, although its getting up there it's about $400 million for the year, it just doesn’t take many millions to move that thing. And HRS revenue because there's more upfront signup fees and some other things just isn’t going to be as predictable and as consistent as payroll revenue. It's just something that is going to happen, but again, I think we are very good at predicting for the year, once in a while, we are going to get over a quarterly blip. The other thing you know, when you look at the blip, you look at the revenue blip, the thing we watched very hard is that you don't want the profit blip. The revenues in this business pretty much are going to be what they are going to be, they can move a little bit and then we just know how much we've got to spend. Well, we put a lot of focus on revenue, a lot of focus, we need more focus on making sure we make the bottom line. Dave Grossman - Thomas Weisel: So, as I look at new client growth is given normalized retention on your 4% price increases. Is that adequate to grow, is the payroll business about 8% or 9%?

I think 3.5 is again, we get caught up in this thing where, client growth versus revenue growth, we were very happy with the revenue growth, gets to be a difficult shore and we keep pushing the units but we know that units are not always the best measurement of what's going on.

Let me give you a very specific example, to help you with this. A lot of times, when people look at our unit growth, they are assuming that all units are the same. Here's a very practical example, if we moved our measurement system exclusively to units, I would predict that we would be signing up nannies at a record rate. And likewise, which means, you get one unit, but you get almost no revenue for it. When we moved to a very heavy emphasis on revenue, what we ended up getting was fewer units but much more rich revenue with the units. So what we want is a balance. We want to be able to get the rich revenue mix, but we want to get the units. So, that we have sort of the envelopes, if you will, to sell additional products in the future. And that's why we push both of them. But my strong encouragement to you is, don't get too hung up on the unit number specifically, because typically what happens and it happened in this past year, when the unit was down a little bit, we still got our revenue growth and we did it by doing a little bit better job on client retention and doing a much better job on moving the penetration, the ancillary penetration of our existing customers and our new customers. Dave Grossman - Thomas Weisel: Okay. That's very helpful. Thanks. And let me ask you one other thing, Jon, just looking at the sales numbers, the headcount, is there any segment that you are in that, may be not mature, but maturing that provides a benchmark on sales productivity that would be a useful benchmark for the insurance business, the health insurance business?

We are already in several health businesses today. So I am not sure I understand exactly what your question is. Dave Grossman - Thomas Weisel: Well, if I am looking at, for example, the number of salespeople and the number of clients, for example, in the retirement services area. Is there any relationship that's useful and helping to estimate the sales productivity that we would see in the health insurance business as that business develops and grows?

I think the health insurance productivity is going to be close to a 401(k) rep. It's too early too tell. Dave Grossman - Thomas Weisel: Okay. Great. Thank you.

Next question comes from Gary Bisbee of Lehman Brothers. Gary Bisbee - Lehman Brothers: Hi, guys. I guess looking at the 8-K last night, one thing I noticed was you are projecting slower sales force headcount growth in retirement, Paychex Premier, PEO and workers' comp area. I guess, can you give us any sense as to why you're thinking about that and maybe how you are confident in the same general revenue growth from HR Services despite lower headcount?

It's really nothing more than sort of the ebbs and flows. There were some years that we hire more in some areas, some years we hire a less. And part of it obviously has to do with where we do financial planning in general, which is where we think the market opportunity is for us, what we feel is affordable given the revenue. We're confident that we can capture. On the sales piece itself, really has more to do with what we think we can absorb, or conversely where we are at the time. We finished this past year slightly above where the headcount was paid for on the sales side. And so, the requirements that we had going into the next year, tended to be less in some of our areas. And that's probably what you're seeing. But, our model is one that has been pretty consistent, which is, we put as many salespeople in as we believe that we can get continued returns and not diminishing returns, which has happened to us in the past, where we put too many people in, with the exception of some of the investment areas. In the case of an insurance, as an example, we are doing pretty significant adds. Last year, we did a significant add. This year we're going to do another significant add and that's an entirely subject, that's growing a new business. Gary Bisbee - Lehman Brothers: What's the average and does it change by product in terms of the timing it takes new salespeople to get up to productivity. So, is it safe to say, you had really rapid growth in several of those products areas last year in the sales force, and so that you are still, in fiscal '08 can you get the benefit of these guys continuing to become more productive?

The second part of the question is, yes. The way that we do it is, we take a look at the territory structure we have, the reps that we have in the territory, what we are experiencing from an attrition level, which tells us, what the ideal scenario would be in terms of people in the pipeline that are getting ready to get into a territory. It takes, I would say, it does vary a little bit by product and obviously by the experience of the person that you've hired. But, it probably takes someone in neighborhood of three months, you get him trained up in the territory and probably another three to six months to get him run at acceptable levels of productivity. So, we do have a lag time between identifying a higher and getting them higher and getting them in place and productive. The more important part that we've been focusing on is not so much of that, its keeping them in territory for three, four, five years and when we look at, our most productive reps and again its sort of obvious, because we are in a referral business. But, our most productive reps or the reps that have been in the field for a significant amount of time and in the same territory for significant amount of time, and have very deep relationships both with the existing client base as well as the CPA community. So, it's really the model on how we deal with sales is around where are we on territory structure, where are we on the strength of the people that we have in territory, where are we are on open territories or projected open territories if there is going to be any reorganization in territories, and then we hire accordingly. We are pretty comfortable by the way with where we are, with our plans on the new hires versus or in support of our plans for the financial results. So, we have no questions about that. Gary Bisbee - Lehman Brothers: Okay. Can you give us a quick update just on the status in Germany and whether you are, as you look over the next 12 to 18 months, whether you'll be at the point to enter another country if it’s still expanding in that market?

My guess and I don't have a specific answer for the 18 months; but my guess is that 18 months from now we will still be growing in Germany. And it's for the reason that I mentioned on prior calls, when we look at the incremental investment of a dollar in an international territory, given the fact that we are not the dominant player in Germany at this point. It is far more profitable for us to make that investment in Germany versus start the development of a new country. So, we will stay on the path with the Germany, and it would be reasonable for you to assume that the incremental investments that we make over the next 12 to 18 months would be in Germany. The only thing that would really, I think, that could change that is if we came across acquisition opportunity in one or the other countries that we have an interest in that was a favorable one for us. But to be honest, we have not found one that fits that profile yet. So, our focus right now is on Germany. Gary Bisbee - Lehman Brothers: Okay. And then will the normalizing of the yield curve over the last month or so, the long end rate moving back up. Is that likely to have any impact on the yield you are earning or is it just too small?

Minimal. Some positive, but not very big. Gary Bisbee - Lehman Brothers: Yeah. Okay. And then just lastly is it safe to assume you are still around 17 or 18 clients in terms of the average client employee stock?

Up 17 employees. Gary Bisbee - Lehman Brothers: 17. Okay. Thank you.

Next question comes from Mark Marcon of RW Baird. Mark Marcon - RW Baird: Just wondering if you were going to potentially tweak the sales force compensation package in order to, may be get that growth rate in terms of the units, closer to the 5%. I've heard everything you said so far and it all makes a ton of sense. But I was just wondering if you'd like it to be a little bit higher and therefore would tweak things around a little bit.

We tweak the, both the measurement system and the compensation system every year, based on where we are and where we're trying to get things, either due to a course correction in places where we would liked more focus and more achievement quite frankly as well as to [incent] new areas that we are trying to get into. So, we constantly look at that each year and we are definitely making more aggressive moves both in the management system and the compensation system to try and drive higher unit productivity. Mark Marcon - RW Baird: Okay. So, getting back up to kind of a 4% range or may be even higher would be a reasonable assumption on our part for this coming year?

The trick is really to listen to what I said earlier. I could get the unit growth up to probably 6%. Mark Marcon - RW Baird: I understand that.

Nannies. Mark Marcon - RW Baird: Yeah.

You know, that’s not what we want. We want a balance between the units and the revenue. Mark Marcon - RW Baird: Okay, great. And then with regards to, one thing that you are going to have is a positive this year is this last year you absorbed $25.7 million in the options expense. Is there going to be any incremental increase in terms of the options expense John, in this year relative to last year?

Basically, where we are on option expenses in the first year obviously it's a year-over-year thing. Mark Marcon - RW Baird: Sure

Okay. Now, we were little bit fortunate in the fact that the higher than normal growth and float income was pretty close to offsetting the negativity of stock-based compensation. Now, when you go forward, we won't exclude stock-based compensation anymore, it's just an expense. Mark Marcon - RW Baird: Sure.

And we would rate that with other things. Now, when you talk about stock-based compensation, you got to look at how many options you can grant etcetera, but you also got to look at your other employee benefit programs and balance them. So, I don't think, while we won't disclosure on stock base, we look at managing the whole business completely together and if we were to do a little more in stock-based compensation costs we got to take something out of something else and vice versa. So, I wouldn't look at it individually any more, but you want to see the impact of options, it will be disclosed and I think as you are aware, our options dilution is lower than most. Mark Marcon - RW Baird: Sure. But I just meant simply from the standpoint that we had a tough comp this year because we obviously won't reflecting it into prior year and now its seems like if we put together your price increase, the anniversarying of the options expense, a slower growth in the overall sales force. All those factors together, that should lead to a nice resumption in the overall operating margin or the fee operating margin, on a year-over-year basis, that would be in line with your historical trends, I just want to make sue that's a correct assumption?

Correct. We're still living with the assumption that we got to do 12 and 15 and the stock-based compensation more than excluded that it will be back in and the 12 and 15 to remember though is, I can go to the board meeting and I can be at 11.5 and be at 15 and I am probably done. I walk in the board meeting I'm at 12.5, I am at 14 I'm not done. So, the number we really focused on is the bottom line number. We do as much as we can on the revenue number and we try to keep driving it to as closer to 12 as possible. But we are going to keep going forward but no you'll see margin improvement. Mark Marcon - RW Baird: Okay, great. And then, this is a really small line item but just curious about it. On the time and attendance solutions, the growth rate, was that impacted this year by kind of switching over to kind of a softer as a service model?

No. We had a big push in that group, which you get in all groups time to time and they pushed hard at the end of last fiscal year and the growth last year was probably higher than normal. And then, they really had depleted, their backlog and they struggled a little bit in the beginning of the year to get going, but they had a good end, then though, they did well, and we're pretty happy with where they are. Mark Marcon - RW Baird: Great, thank you.

Next question comes from T.C. Robillard of Banc of America T.C. Robillard - Banc of America: Thanks. I think you guys certainly have overly addressed all the key issues. Just one because I know it's not overly material but more out of curiosity. With respect to the litigation on the Rapid Payroll side, I know it's the ink is still drying on the recent licensee. But did your insurance cover any of the compensatory or punitive damages that may get awarded to the plaintiffs?

No. T.C. Robillard - Banc of America: Okay. And I am assuming the reserves that you guys took last quarter already through to your cash flow statement?

In the cash flow statement, the book to reserve that really isn't cash. When you go pay the expense, the cash goes out. T.C. Robillard - Banc of America: Okay. Yeah, that's where I was going. So, that certainly something that's ahead of you guys but obviously not material.

We got to wait and see what happens on the facts. T.C. Robillard - Banc of America: Okay, great. Thank you.

Next question comes from Tien-Tsin Huang of JP Morgan. Go ahead. Tien-Tsin Huang- JP Morgan: Thanks. Can you comment, how much cash do you need to run the business?

A buck. Tien-Tsin Huang- JP Morgan: Very basic one, right. Obviously you--

Why don't you ask your real question? Tien-Tsin Huang- JP Morgan: Let me ask you a separate question then. I guess on the sales force side, Premier and PEO, I think you commented on sales force in general. But look like you are cutting your growth there in half. How much of that is a function of the emphasizing growth in PEO perhaps or just having ample sales coverage in all the territories there?

We look at that from year-to-year. If you look at the growth last year, we accelerated it. We were very successful with it. In this year, we decided we can't strain the whole thing as much we did again. We need to get experienced reps, and you got to remember we take all these sales people out of our various sales forces and it's a balancing act. So, we looked at it and this year we decided to go with what we had and we feel just as good about the sales force growth this year as we did a year ago it's just a little bit in a different place. Tien-Tsin Huang- JP Morgan: Can you just comment probably on pricing for Paychex Premier and if there's any notable change in the competitive landscape and also if you can just give us the average number of employees for a typical Premier client, that would be helpful for our modeling?

I don’t actually know they are typical, the average number of employees for Premier, it's probably north of 20, it's between 20 and 40. But basically on pricing, no change in the environment, we continue to be the price leader, so after the change, we are the ones who will be changing it, and we kind of like it the way it is, us and ADP we compete very favorably on pricing, we can discount, but we believe the pricing environment is still pretty much the same as it has been. Tien-Tsin Huang- JP Morgan: Are you seeing interest in Premier from companies that are not already Paychex's clients?

Yes, but half of those sales are non-Paychex clients. Tien-Tsin Huang- JP Morgan: Got it. Thanks.

Next question comes from Mr. Sanil Daptardar of Sentinel Asset. Sanil Daptardar - Sentinel Asset: Yeah, all the questions got answered thanks.

Next question comes from Michael Baker of Raymond James. Michael Baker - Raymond James: Yes, I had a question from the perspective of your health offering. I was wondering given the health insurers perspective, from their perspective, the segment of the market in which you reside is the key growth area collectively for them and it has increasingly being so, I was wondering if you are seeing that reflected in rise in commission levels or placement fees?

The first part of your statement is accurate as we see the world, I mean the discussions that we've had with the providers are that they see this as essentially a hole in their coverage because the normal way that their products get to market is through the independent agents and the agents who are not that interested in spending time with smaller clients. So, the first part of your statement is definitely accurate there is some of consternation on the part of the providers about that the markets itself, they worry that or they tell us that they worry that they have a greater exposure to adverse claims at the smaller companies than the larger companies. When they talk with us because they know the rigor with which we operate in this business, they feel pretty comfortable that now that it will be a good enforcement agent to make sure that adverse claims don't happen. So all of that has been good on the commissions side, the commission structure of the industry is such that they are going to pay us the same as they pay anyone else. I mean from time to time, there may be some arrangements that are made where they will pay higher commission rates to try to influence us to go into certain markets to sell certain lines and will evaluate those as they come but our model does not expect that we will get higher commission rates than anybody else. Michael Baker - Raymond James: I appreciate the commentary, thanks

All right, then we show no further questions now sir. We will now turn the meeting back over to you for further comments.

Okay. Well thank you very much. Again we felt real good about the year and we really appreciate your interest and we look forward to more great results in months to come so take care.

This concludes today's conference call we thank you for your participation, you may disconnect at this time.