John Morphy – SVP, CFO & Secretary Jon Judge – President & CEO

Jason Kupferberg – UBS Kelly Flynn – Credit Suisse Julio Quinteros – Goldman Sachs David Grossman – Thomas Weisel Chris Mammone – Deutsche Bank Adam Frisch – Morgan Stanley Jim Kissane – Bank of America Ashwin Shirvaikar – Citi Tien-Tsin Huang – JPMC Tim McHugh – William Blair Mark Marcon – R.W. Baird Gary Bisbee – Barclays Tim Willi – Wells Fargo Jim Macdonald – First Analysis Rod Bourgeois – Bernstein Barry Haimes – SAGE Asset Management Jennifer Dugan [ph] – Lazard Capital Markets

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. (Operator instructions) Now I’ll turn the meeting over to John Morphy, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you for joining us today for our third quarter earnings release. Also with us is Jon Judge, our President and CEO. The teleconference call will be comprised of three sections, a review of our third quarter 2010 financial results, including comments and guidance for full year fiscal year 2010, an overview from Jon Judge, and lastly a Q&A session. Yesterday afternoon after the market closed we released our financial results for the third quarter ended February 28, 2010 and we have filed our Form 10-Q with the SEC, which provides additional discussion and analysis of the results for the quarter. These are available by accessing our Investor Relations page at www.paychex.com. In addition this teleconference is being broadcast over the internet and will be archived and available on our website for approximately one month. Quarter highlights. You have noted in the third quarter, we recognized $18.7 million of additional expense related to our Rapid Payroll litigation. On March 9, the Court of Appeal in California upheld a jury verdict issued in June 2007. While we are disappointed with the Court’s decision, we intend to satisfy the judgment including statutory interest without further appeal. The litigation results will not have any effect on future financial performance, as there have been no business transactions between Paychex and the plaintiffs since February 2007. Excluding this expense charged to increased litigation reserve, our earnings were slightly better than expected. Our guidance for the full year fiscal 2010 remains unchanged. Achieving our revenue goals has proven a bit more difficult due to the adverse impact the economic headwinds have had on new client sales and client retention. Our client base has declined 2.1% is May 31, 2009. The selling season was a difficult one as our new sales units for the nine months were down 6% from last year, primarily due to declines in new business formation and fewer companies moving to outsourcing. On a positive note, exclusive of certain items, we have achieved our earnings goals in each of the first three quarters, our key indicators have shown stabilization for three consecutive quarters, and our year-over-year comparisons continued to improve throughout fiscal 2010. Some comments are as follows. Our checks per client decreased 2.2% for the third quarter, compared to the same quarter last year. This is an improvement over the declines of 3.7%, 5.0% and 5.2% in the past three consecutive quarters. Client retention, while less favorable than normal began to show improvement as clients’ loss were down 5% year-to-date compared to last year. A meaningful statistic is we have seen a slight improvement in client losses as a percentage of the beginning of the year client base. Throughout this challenging economic period, we have continued to focus on providing excellent customer service, investing for our future and maintaining a strong financial position. Our investment efforts in health and benefits have been rewarded with greater than 50% growth in related service revenues. We are generating positive cash flows from operations, and maintain a balance sheet without debt. We remain focused on investing in our products, people and service capabilities positioning us to capitalize on opportunities for long-term growth. Continued investment in our business, including our technological infrastructure is critical to our success. In the third quarter, we completed the implementation of an enhanced platform for our core payroll processing capability. We have successfully completed conversion of over 470,000 clients to this platform. We invested over $60 million in this project, and anticipate seeing return on our investment through efficiencies in our processes, and building a product platform that will perform well into the future. I will now move on to a discussion of results as presented in the income statement. Payroll service revenues decreased 6% for both the third quarter and the nine months. This is the result of the economic impacts on our client base and check volume, which were discussed in my opening comments. Human Resource Services revenue increased 3% to $135 million for the third quarter, and 2% to $400 million for the nine months. I will give you more on HRS service revenue in a few moments, where you will notice our revenue growth was actually much stronger than those two numbers. Combined interest on funds held for clients and investment income decreased 13% for the quarter and 33% year-to-date. Yields available on high-quality securities continue to remain low. Three-year AAA muni yield was 84 basis points as of February 28, 2010 compared to 135 basis points as of May 31, 2009. Operating income decreased 15% to $168 million for the third quarter and 13% to $551 million for the nine months. Operating income, net of certain items, which excludes interest on funds held for clients and the expense charged to increase the litigation reserve decreased 4% to $173 million for the third quarter and decreased 7% to $529 million for the nine months. Operating income, net of certain items as a percentage of total service revenue was better than expected in the third quarter at 35.0%. Net income and diluted earnings per share decreased 14% to $112 million and $0.31 per share for the third quarter. For the nine months, net income was $361 million diluted earnings per share was $1.00 per share. The expense charge related to litigation impacted our diluted earnings per share by $0.03. HRS revenue growth was affected by a couple of non-recurring items. In October, we sold Stromberg time and attendance to Kronos. While Stromberg operations were not material to our results, the sale did have a modest impact on our HRS revenue growth rates. Also in fiscal 2009 we had non-recurring buildings for statutory retirement plan restatements that are required about once every six years. Excluding both Stromberg revenue and the non-recurring retirement revenue, our HRS revenue growth would have been 7% versus 2% reported for the nine months, and 10% versus 3% reported for the third quarter. On the same basis, fiscal 2009 HRS revenue growth would have been 8% versus reported 11%. Highlighting contributions to HRS revenue growth were Comprehensive Human Resource outsourcing services client employee served increased 9% to 472,000 employees as of February 28. You have seen positive results from expanding our PEO offering throughout the country this past year. Our Health and Benefit Services revenue increased 54% to $8 million for the third quarter and 49% to $22 million for the first nine months of fiscal 2010. Human Resource Services products that primarily support our Major Market Services clients have experienced growth for the third quarter and nine months compared to the same periods last year. Our Major Market Services area with software as a service solution continues to be a strong area of opportunity for us. Dampening our revenue growth is the influence of weak economic conditions and client base, especially on retirement services. Our retirement services client base is flat compared to year ago. As we mentioned, we are still earning low yields on our high quality investments. In November 2009, we began to invest in select first tier variable rate demand notes for the first time since we had divested these back in September 2008. Variable rate demand notes are municipal issuers with liquidity or letter of credit enhancements provided by U.S. Government agencies, highly rated corporations and higher education or highly rated banks. Variable rate demand notes have daily or weekly liquidity to investors. In September 2008 we divested our holdings in these securities as a result of the market turmoil and began to utilize U.S. agency discount notes as our primary short term investment vehicle. We have gradually seen improvement in certain money market sectors, and therefore have been investing in variable rate demand notes again, although at considerably lower rates than in the past. For the third quarter, we earned 18 basis points after tax for variable rate demand notes compared to approximately 3 basis points for U.S. agency discount notes. While a move in the right direction, meaningful improvement to yields is much more dependent on higher general rates with higher yield instruments. We continue to maintain a conservative investment strategy emphasizing maximum liquidity and principal protection first and then investment yield. Our priority towards liquidity is to ensure we can meet all of our cash commitments to clients that take place as we transfer cash balances from their accounts. Please refer to our most recent Form 10-Q for additional information relating to our investment of funds held for clients and corporate investments. In spite of the economic environment and volatility in the financial markets, we have maintained a strong financial position with cash and total corporate investments of $689 million and no debt. Cash flow from operations was $503 million compared to $563 million a year ago. Funds held for clients as of the end of the third quarter were $4.1 billion compared to $3.5 billion as of May 31, 2009. Funds held for clients vary widely on a day-to-day basis and they average $3.5 billion for the third quarter and $3.1 billion for the nine months with year-over-year declines of 4% and 7% respectively. In fiscal 2010, we have been experiencing lower average invested balances, primarily a result of the economic impacts on our clients. Approximately 2% of the decrease related to lower withholdings for client employees with the American Recovery and Reinvestment Act of 2009 or the so called stimulus package. The stimulus package went into effect last April and the impact on year-over-year comparisons related to that should abate in the fourth quarter. In the third quarter, we experienced a pickup in balances as a result of recent increases in various state unemployment rates that went into effect for the 2010 calendar year. For the full fiscal year, average balances of our client funds are expected to be down 5%, which is an improvement from our previous expectations because of the slow [ph] rate increases. Our stockholders equity increased to $1.4 billion as of February 28, 2010. Our return on equity for the last 12 months was 34%. Our guidance philosophy has been in place for a long time and that has been to provide guidance based upon what we are experiencing in financial terms, and quantifying our expectations for the current fiscal year. While we do not change this deepness of trend lines, we do project current trends into future periods of time. We believe it is extremely difficult if not impossible to accurately predict significant upturns, downturns in the economy and even more difficult to forecast increases, decreases to short term interest rates. We believe our guidance philosophy assists the many people developing and evaluating expectations for our future financial results. That being said, our current outlook for the full year fiscal 2010 is based upon current economic and interest rate conditions and assumes these conditions will continue throughout the remainder of fiscal 2010. Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates. Projected changes in revenue and net income for fiscal 2010 remain unchanged from last quarter and are as follows. Payroll service revenue is projected to decrease in the range of 5% to 7%. Human Resources Services revenue growth is projected to be in the range of 3% to 6%. Total service revenue is projected to decrease in the range of 2% to 5%. Interest on funds held for clients is expected to decrease by 25% to 30%. Total revenue is projected to decrease in the range of 2% to 5%. Investment income net is projected to decrease by 30% to 35% and lastly net income is projected to decrease in the range of 10% to 12%. Anticipating some guidance questions in this call, we like to in advance provide a little color on the above guidance. The net income guidance reflects the RPI litigation charge of 18.7 million or 12.2 million net income effect. Prior to this event, we expected to be slightly above the net income guidance. In improving conditions, why would we experience a reduction in fourth-quarter EPS compared to the prior year in the first three quarters of fiscal 2010? Excluding the RPI litigation, the rate of negative year-over-year EPS growth has been improving, as it was 17% negative in Q1, 10% negative in Q2, 6% negative in Q3, and we expect it to improve again in Q4, but probably not yet reflect an increase over the prior year. As we have previously discussed, sequential earnings per share is not applicable to our business as it may be for others. While we do not experience significant seasonality, our quarters tend to match up better with the prior year quarter versus the sequential quarter. The timing of price increases, expenses, selling new clients, sales commissions, and funds held for client balances all contribute to differences in sequential revenue and earnings. Essential decreases between the third and fourth quarters, however, are expected to be less than fiscal 2010 than we experienced in fiscal 2009. Refer to the outlook section in our MD&A of our 10-Q for more information on guidance for full year fiscal 2010. Safe harbor, you should be aware that 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 in the press release for our discussion of forward-looking statements and the related risk factors. At this time, I’ll turn the meeting over to Jon Judge.

Thanks, John, and good morning everyone. So, we exception of the one-time litigation reserve increase the quarter played out pretty closely to what we had predicted. Revenue was slightly lower than planned, but certainly in the ballpark and the key drivers for the softness continue to be less sales than normal due to lower levels of new business formation, and more losses than normal, both directly tied to the economic headwinds. Earnings was slightly higher than expected, driven mostly by excellent expense management and cost controls. I remain very impressed and proud of our employees and their disciplined execution of expense containment in this difficult economic time. EPS beat the Street by a penny, excluding the one-time item. Operating income was down slightly, but much improved over Q1 and Q2 and definitely moving in the right direction. Same is true for checks. Sales in the quarter were mixed. Core payroll continued to be affected by less new business formation or origination, but MMS and HRS were pretty much right at that plan. Year-end closed for our clients went very smoothly. We cut nearly 10 million W-2s, all on time or early. Our operations team continues to do great work for our clients. So all things considered a pretty good quarter. The important takeaways I think in this quarter, at least for me were revenue close to estimates, excellent expense controls, profit slightly better than expected, beat EPS, and probably the big headline I think was the economic indicators continue to improve, suggesting the recovery is definitely underway. Let me cover a few of those indicators that are important to us. New hire activity down 11% in the quarter, averaged monthly, down 11% in the quarter versus 31% a year ago, 26% in the first quarter, 21% in the quarter just before this. So, 31% a year ago, 26% in the first quarter, 21% last quarter, 11% this quarter, excellent improvement. Federal fund rates steady at 0 to 25 bps. You know, the Fed is saying that they are going to hold it for some time. Inflation obviously is not yet a concern for them. There is some talk now though amongst the heads of some of the individual Federal Reserve Banks about raising rates are certainly not being tied to time frames, but rather to the key economic indicators, which at least for me was nice to hear. Checks per clients as John mentioned down 2.2% versus 4% last year. It was down 5% in the first quarter, down 3.7% in the second quarter, down 2.2% this quarter. Fourth quarter could be flat or just slightly below flat. So we are feeling like we are getting closer to the turn there. Job creation, 57,000 jobs was the average monthly loss this past quarter versus 726,000 last year, 128,000 in the second quarter, 357,000 in the first quarter. So 357,000; 128,000; 57,000; you can see that we are making pretty good progress there, and that it would clearly look like we are getting close to turning positive. Unemployment stayed flat for the last couple of months, down about 9.7%, averaging in the quarter about 9.8%. Payroll client growth down 3.6% versus 1.6% last year third quarter and 3% for the full year. Sales from new business turn positive 1.2% for the first time in 7 quarters. So that would be 1.2% positive versus minus 12% last year in the third quarter, minus 4% in the second quarter, minus 8% in the first quarter. So, again pretty good trend there. Losses due to business failures, actually improved 17% year-to-year versus declining 21% in the third quarter of last year. So it improved 9% in the second quarter and improved 1% in the first quarter and 17 this past one. So 1%, 9%, 17% pretty good trend there. Losses from price value also improved a little bit. Business failures by the way are about where they were in 2008. So it really looks like that thing is starting to get under control. Check volume noticeably better for Q2 and Q1. Obviously, still not where we want it, but mostly driven by the client base declines and check per payrolls. That is a pretty good sign as well. Ancillaries, which I mentioned, still very strong with no issue there in penetration. Employee pay is actually a little stronger than last year. Payroll revenue growth minus 6% versus plus 1.9% last year, but minus 6% versus – minus 6.4% in the first quarter, 6.7% in the second quarter. So, the trend again continues to be good. HRS revenue John covered that, 3.4% positive in the quarter. It would have been 9%, excluding Stromberg [ph]. Good performance given the economic headwinds in the small client base. So we felt reasonably good about what is going on in HRS. Total service revenue down 3.6%, versus down 4% in Q2, and 4.6% in Q1, definitely going in the right direction. Interest on funds held for clients, minus 14% versus minus 56%. So it looks like we're almost through the huge negatives. (inaudible), I am certainly ready for the huge positives. Those of you that have any influence on the Fed, talk it up, have them raise those rates for us. Great job of managing expense. You know, down 3.1% versus a year ago. Margin is essentially flat for last year, but extremely good discipline by our team as I mentioned earlier. So, net-net I felt like it was pretty good quarter. Good progress on recovery. All key indicators are moving in the right direction. So as we said, given the economic headwinds that we're fighting we felt pretty good about the way the core played out. With that, why don't I open it up to your questions? John and I will be happy to entertain them.

(Operator instructions) Jason Kupferberg with UBS. Your line is open. Jason Kupferberg – UBS: Thanks. Good morning guys.

Good morning.

How are you doing? Jason Kupferberg – UBS: I am doing well. Thanks. I had a question about some language in the press release and in the 10 Q last night, but I don't think you guys elaborated on your prepared remarks, but there was some talk about fewer companies moving to outsourcing, and I don't necessarily recall in the past seeing that language from you guys. I was hoping you can elaborate on that a little bit as there is something structurally you see going on. Is that observation causing you to do anything differently in terms of how you are running the business, just some additional flavor around that commentary would be great?

Yes, it is not. You know, there is no big message there. I guess what I would say, and this is Jon Judge. What I would say is the – the way to think about it is what is happening we believe is probably what is happening in our own households. I mean when you get an economy that tightens up like this, what essentially happens is some decisions tend to get deferred. When we look at our business coming in, when we make new sales, we categorize every sale that we bring in whether it is brought by its source, whether it is coming from a competitor, whether it is coming from a business that started that year or a new business origination, whether that is a conversion from a client that is doing it in-house and so on. When we talk about the move to outsourcing, typically that is referring to a client that is doing it in some form or fashion, but not with like in ADP or one of our other competitors. They are doing it in-house in some form or fashion, and they moved it out to an outsourcer. And so as we do the analysis on our source of new sales, you know one of the things that became obvious to us is that that particular source of new sale, you know, was showing up as not as robust as it has been in the past. And so that is clearly an indication that people are just delaying decisions and that is really all it was.

Another reason Jason, it verifies, it is probably not secularism. When you look at new business starts, we are still gaining the same percentage of new business starts to outsource as you were before this started. So, it doesn't appear we believe any change in what peoples’ preferences are. Jason Kupferberg – UBS: Okay. And then just a question on a couple of the metrics, I think you guys had indicated that your total number of clients’ loss is down 5% year-over-year on a fiscal year to date basis?

Yep. Jason Kupferberg – UBS: And I think the other statistic was that the client loss due to out of business is down about 8% if I average the last three quarters of each quarters year-over-year change. So does that suggest that there is more clients being lost due to other reasons besides (inaudible) competitors?

Yes, we are swapping more clients with ADP. In other words, the price competition we are still winning more clients from ADP then we are losing. So we're swapping more of them.

When you say you lost them. Jason Kupferberg – UBS: Okay. But you don't feel like your win rate is changing?

No. We still – no, we track what we got from them. We track what we lose with them, and we are still winning more. It is just there is more of it. Jason Kupferberg – UBS: Okay, and just last question on the OpEx, it was down 6% in the quarter, and you guys talked about some of the cost control. Can you get specific or more specific on the types of expenses you had, and how much of that do you feel will need to come back into the P&L when the top line starts to turn positive again.

Only two actions. We’ve heard that we will come back. The first thing is we had a wage freeze that we put in on March 1 year ago. That has been put back in now. That was worth about $15 million, and we have a 401(k) match that was taken off last April. That is about 15 million. A decision has not been made on that one yet. We are not sure we are going to do. The rest of it, the cost reductions are simply just continuing to manage our business better and better. There is no one single thing now, an area that we have not cut cost at all is in the sales area. So, basically all of the cost reduction has come out of G&A and operations through making more productive.

But the one thing Jason, we have talked about this in prior calls. The one thing that you can be sure of is we have a mentality that expenses is earned by revenue. So it is reasonable to assume that as revenue improves, the gross expense will improve. But we are also pretty careful of watching what our margin percentages are. So they will be more expensive, and will come back into the system as more business comes back into the system. But we watch our margins pretty closely. So you shouldn't assume that all of a sudden expense money is going to pop back in without revenue. We just flat-out won’t allow it to happen. Jason Kupferberg – UBS: Okay. Makes sense, thanks.

Yeah.

Thank you.

Our next question comes from Kelly Flynn with Credit Suisse. Your line is open. Kelly Flynn – Credit Suisse: Thanks. A couple of questions that are actually somewhat follow ups to Jason’s, also on your press release comments, I wanted to refer to what you said about the selling season, it is difficult. Could you go into more detail there on what you mean, specifically was it disappointing or was it difficult, and then if you could just kind of qualify those comments relative to what you said on the call, which is pretty much, you know, it is pretty optimistic most metrics seem to be actually improving.

: As it relates to the selling season, I don't know really how to calibrate. I'm not sure what you are after with the difference between disappointing and difficult. The term difficult, the reason we use that and there was a ton of thought given to it. It is not we are trying to stimulate anything, but it flat-out has to do with the number of sales that we make one year versus another, and what is happening is what we have been talking about. The source of our sales over the years has been pretty constant. You know, we get a certain amount of our sales from companies that are formed that year. We get a certain number of our sales that come from people that are already outsourcing, but with a different outsourcer and we are happy with them. We get a certain number of our sales from clients that are doing it themselves, either manually or using a software package in-house or using a QuickBooks type of application or something, and then come over to a fully outsourced solution, which is what our business is. And so the comment was referring to the fact that the robustness of the amount of people that were in the market buying, and therefore making decisions you know, was not as robust as we would have liked it to be. So that is what we're referring to. Any time that your sales are less one year to the next or flat one year to the next, you are probably going to be disappointed, but we were more reflecting on the fact that it was still pretty tough sledding, and it is mostly in as I mentioned, it is mostly in our core payroll business. Our major markets business, which are the larger clients had a very good year last year, and it is in the midst of a very good year this year. That is mostly taking clients, almost exclusively taking clients from other payroll providers. Some of them are clients that are growing up from the core or moving up, excuse me, from the core platform. But most of them are clients that we are taking from other providers. And in our HRS businesses is doing pretty well as well, and that is well as it normally does, but the HRS business is pretty dependent on what happens in core. I mean our HRS business for the most part sells into, sells ancillaries and other products into existing clients of Paychex and so to the extent that those client numbers are lower or flat, then their opportunity to sell into that will be lower or flat. But most of the comments that we're talking about referred to the largest part of our business, but it refers to the core business. Kelly Flynn – Credit Suisse: Okay. Yeah, I guess what I was just trying to get at was the selling season, was it worse than you expected or was it kind of par for the course given the overall kind of disappointing economy?

And that is a hard one to answer because the way we expect them, we always when we book plans, we always book plans to get better, right. We would never book a plan to get worse. Kelly Flynn – Credit Suisse: Okay.

And so, we booked a plan, and it was – I would say it was a little bit less than what we had planned for. It is not that I am – I wouldn't say that I was disappointed in the performance of our people or in the results that they got. I just, you know, I am – it is like I am – I'm not happy with the economy. Right? I wish that the economy is a little bit more robust, because we can see exactly where the sales are missing, and that is why we have talked about this in the past. We are not losing to competition. We are not having business taken away. We are not struggling with somebody who invented a better mousetrap. We are struggling like most of the world with the fact that the economy is just more sluggishly than is normal. Kelly Flynn – Credit Suisse: Okay. It makes sense. And then just a follow up question on the expenses, I just want to clarify John Morphy what you said about lifting the wage freeze, did you say that there is a $15 million increase this quarter due to that?

No, no. The wage increase got lifted March 1, and it is outside the quarter. There will be some impact in the fourth quarter. But the fourth quarter – they won’t all be the same, and the fourth will be the least.

But the $15 million is an annual number; it is not a quarterly number.

Right. Kelly Flynn – Credit Suisse: Okay, great. Thank you very much.

Sure.

Our next question comes from Julio Quinteros from Goldman Sachs. Your line is open. Julio Quinteros – Goldman Sachs: Hi guys.

Hi. Julio Quinteros – Goldman Sachs: Really quickly on the – the margin commentary for the full year, the 34 to 35 range, the release says that it is net of certain items, but I just want to make sure that are you excluding the litigation charges from that, or is that included?

Well, we exclude it. Julio Quinteros – Goldman Sachs: So the 34 to 35 for fiscal ’10 excludes the litigation charges. So, if I look at that on an apples to apples basis, excluding – in the February quarter excluding the litigation charges, I'm getting an operating margin of around 35%, excluding full revenue.

Yes, excluding 35.3 now go ahead and keep going. I can anticipate (inaudible). Julio Quinteros – Goldman Sachs: Okay, I'm just trying to figure out, from there to get to 35 to 34 given where you have been for the first three quarters of the month, what is the implication for the May quarter, because it sounded like you actually expect an improvement in the May quarter, did I extrapolate it correctly?

Improvement, we don't expect improvement in margin. The lowest margin quarter for us is almost always the fourth. Julio Quinteros – Goldman Sachs: Correct.

There are a few reasons for that. One is as I talked about earlier we have some seasonality. I mean, basically the third quarter has a lot of unusual income and expense. So the revenues drop sequentially, although we don't think the sequential drop is going to be great as it was a year ago, when it was very big. We also have the issue where our selling people are pushing it to the end of the year making quota, they don't all miss, a lot of them do make it. And we have to pay higher commission figures based on over a quarter numbers. We also start to staff up some of the sales forces early because we want to build optimistically what we need. We haven't exactly said how many we are going to add, but in areas like healthcare, major markets we add them. So you have some things that happen. For the fourth quarter typically is the lowest margin quarter of the year and the highest margin quarter is the first. Julio Quinteros – Goldman Sachs: Okay. So basically an improvement year-over-year but a little bit down or something like that on a quarter-over-quarter basis for seasonality, normal seasonality?

It'll be very close year-over-year. Julio Quinteros – Goldman Sachs: Okay, got it and then you know, all these ramps, getting folks on board, as you guys start thinking about 2011, you know any sense on what types of improvements would you need to see on some of these key metrics to really get to the sort of 8% to 10% or so revenue growth trajectory into fiscal ’11. How fast do these things need to come back or kind of the certain state that we are in right now, you know, we're just – we're probably still working our way through it do the improvements in fiscal ’11. Is there some way to maybe weigh some of the metrics in terms of which ones need to come back first to really think about the improvements in revenue growth as we move into fiscal ’11.

We won't give guidance on ’11, until we get to June and we’ve had our operating plan completely finished, but you have to do or have to recognize, we don't get significant revenue ramp ups. I mean, you need to do big. That one is pretty simple. The economy has got to ramp up. If the economy ramps up suddenly then we’ll get it, but if the economy doesn't ramp up suddenly we’re going to keep working on continued improvement. We think things are happening but you're not going to see something that is that big and the reason is we have our business of small transactions. You know, companies that have large transactions in quick things they get ramp ups, they also get bigger down decreases. So, you know, sometimes unfortunately we don't have much volatility but it happens both ways. Julio Quinteros – Goldman Sachs: Okay, understood. Great. Thanks guys. Good luck.

Yes, Jason – I am sorry. Julio Quinteros – Goldman Sachs: Julio.

It's because of the size of the recurring revenue in our model. Julio Quinteros – Goldman Sachs: Right.

The goodness about this type of a company is you're not going to get dramatic downs, and as a consequence here also the same thing that drives that to happen will drive, you’re not going to get dramatic ups. Julio Quinteros – Goldman Sachs: Yes, understood.

Okay.

Our next question comes from David Grossman with Thomas Weisel. Your line is open. David Grossman – Thomas Weisel: Thank you. You know, recognizing that you don't want to get too much into fiscal ’11, and just to respect that, but just to follow up Julio’s question, based on the current trends in the business that you have and the comparisons that you face, you know, what would be the obstacles to get into more normalized retention and some new client growth over the next several quarters?

Well, the retention piece, we are getting pretty close to now. I mean, we are making good progress in the retention. The thing that's driving the retention and it's pretty clear when we look at the data. The thing that really is driving the retention the most is the clients – the increased number of clients going out of business because of the pressures that the economy has put on them and their inability you know to make their business work. So, when you get back to a more normal economy, we're going to go be right back into the 19%, 20%, you know, client loss, 80% to 81% retention levels. There is nothing that tells us that that won't happen. We're pretty confident of that and so that piece I think is going to take care of itself. The part of it that's driving it the most, we really can't do anything about, and I can't do anything about clients going out of business. I can do things about clients that leave us for other reasons, whether, you know, they're leaving us because you know, we are not providing a certain level of service or certain type of functionality or they want a different prize model or something. And those are things that we can do something about, and we are very geared up to do that. We have been for quite some time and we make conscious decisions on all of those. So that one I think will take care of itself. On the new business, I mean there are things in this particular economy that we can control and there are things that we can't control. On the things that we can control, you know, as you guys know we have a new head of sales in our company. He's doing a phenomenal job. I mean he is very strong on board. He has taken a very solid approach to understanding our business and our industry, and I'd say in a fairly short period of time he is completely up to speed on our business, and on our industry. And as it relates to sales, he has taken a very systematic and very data intensive approach to understanding all of the things that we do, and particularly in core by the way, but understanding all of the things that we do. He has run focus groups with you know, external parties that are important to us like the CPA community and banks and so on. You know, he used to run focus groups with sales reps and managers. He has looked at all of the sales collaterals, all the material that we use. He has looked at all of the training. He has looked at all of the reasons why we lose sales reps that we want to retain, so regretted losses. All of those different pieces of the sales puzzle, he has done a very, very solid piece of work. He has come up with a lot of different conclusions on it, and he is in the process of launching you know, a whole new revamped approach to market that is very detailed, it's very pragmatic, it's very focused on you know, doing the right things or doing that things that are important, stop doing the things that aren't important. I'm very optimistic about how this is all going to play out. He has had a national sales meeting for all of his, all of our first line managers across the country. He’s kind of laid out all of his findings, he has laid out the new approach that we are going to take going forward and so I feel very, very comfortable that the things that we can control that we've got a renewed you know, emphasis and reinvigorated approach to. I feel great about that. On the things that we can't control like new business formations and so on, you just flat out can’t control that and to me the things that we have to do, we have to be careful about doing is making sure that you know, that we are weathering the storm that we are being responsible about the ways that we spend our money and therefore generate our profits that we don't cut anything that’s vital to us in the short-term or in the intermediate term, and that we just keep moving forward. So you know, I feel like where we need to be, the things that we can improve, I feel like we've had good energy on those and that we are going to try hard to improve them, and the things that we can improve, you know, we are not spending a lot of time or emotion on those things because they are outside of our control. So let's just focus on the things we can control and do the very best we can and I feel pretty good about where we are. David Grossman – Thomas Weisel: Right, and just to clarify John a couple of things you said. So, it sounds like the retention that is pretty close to back towards the 79% to 80% level right now. Did I understand that right?

No, no, but it's – where we are on that is that the decline has stopped. I mean it stopped getting worse, and we are moving towards getting better. So we're not back in 20 yet, but we’ll get back to 20 as soon as we get – as soon as you know, these losses get under control. David Grossman – Thomas Weisel: Okay, and then just the mechanics of the new client growth given that you know, a lot of that comes from sales this year, if the retention stabilizes over the next six months and new sales do turn positive, is it reasonable to think that you could see new client growth in the next fiscal year or is that going to be challenging just given the mechanics of the timing of new sales and when retention comes back?

Well, you could get new client growth whether how large it will be is not a question, but no, I can say for a fact that we are doing well in the fact [ph] that we will not have a plan for next year that has no client. David Grossman – Thomas Weisel: Okay.

And I can say it's going to be healthy number, a number we don’t like to have but we will not be at negative. David Grossman – Thomas Weisel: Okay, and just one other question, you talked in your comments, and it was in the release about the investment that you have made in some new systems, and can you just help us understand you know, how much of that investment is really addressing your existing markets, and what if any amount of the investment of the new system may address incremental market opportunities, and perhaps weren’t available prior to the system upgrade?

Yeah, David, I'd say there's three things to think about on that. One, the system that we replaced was about 20 years old. So – and it's one of, you know, it's the system that drives the core payroll platform. So it’s sort of a heart transplant if you will, and you know, in a business like this or any business for that matter, you know, I spent almost 26 years in IBM. You know, all of your core systems at some point you know, you're going to need to upgrade those core systems. You can’t stay on a platform forever, and so part of it was just getting the system upgraded and getting it into you know, all of the latest and greatest in terms of databases and system architectures and so on. So part of it is that. Part of it is as you put the new system in place, you obviously replace everything you have and then you make whatever improvements you can that will affect you know, the targeted audience. So in this case as we built the new system, we put lots of workflow improvements into it. We put lots of usability function into it. It will be far easier for us to train new payroll specialists on this system than on our old one. The system has got lots of feature functionalities that will make the data they worked of a payroll specialist in our company go easier because of some of these work flow things that we did. And then the third piece, which is some can argue is the most important, anybody who has older systems knows that one of the biggest problems with older systems is it is incredibly difficult to interface or integrate them with anything new you want to do because you're using, you're dealing with older technologies, you got very difficult user interfaces that you're dealing with and so on, and so part of – with the new system part of what you're doing is you're creating a platform that you can use to go and create a whole series of new functionality that will drive you into new markets. So in the existing system as we just put it in does it have a lot of functionality that is geared specifically at new markets? No. It has a lot of functionality that’s geared at making our existing world better and more productive and you know, the early return so far would say that we are getting about an 8% to 10% bump on the productivity of our existing payroll specialists, and that's just based on the number of clients that can handle and the work they can get done in a day. We haven't got a hard number yet on what it is doing for us in terms of how fast we can get people up to speed, as our new hires in the payroll world, but the main thing as I said going forward is it’s a new system and by definition it's got interfaces and architectures that will allow us to add new things into it and improve our functionality going forward. So that's pretty much what it's about. David Grossman – Thomas Weisel: Right, and actually just specifically is there anything about the system that would allow you to more aggressively pursue larger business and it's perhaps in the middle market?

It's not so much in the system about the system pursuing it but the system will be the base for all of the functional enhancements that will do for what we call middle market for the larger clients. So, yes. David Grossman – Thomas Weisel: Okay, very good. Thank you.

My pleasure.

Thank you. Our next question comes from Chris Mammone of Deutsche Bank. Your line is open. Chris Mammone – Deutsche Bank: Thank you. I guess just back to another metric, I think, from the press release, I think you said that the client base declined 2.1% since the beginning of the fiscal year, and I think the comparable number through the first six months was less than 1%. Does that imply a wave of (inaudible), a wave of attrition that happened in the February quarter. But that doesn't really reconcile with some of your other comments about retention getting a little bit better. So, can you help me on this?

It almost mirror images what happened a year ago. The selling season in the last season are the heaviest in the third quarter that one is going on. We talked about client base being relatively flat in the first six months. It was relatively flat a year before, and we basically the experience was very close to the same we got that was we are hoping to do a little better, but we know we are optimistic, and based on what actually happened if we really got reasonable what happens is pretty close to what we should have expected to happen.

It's a prime example of – and this isn't true for all things, but it's a prime example of one data point, where if you look it sequentially, you’d come to the wrong conclusion. Chris Mammone – Deutsche Bank: Right, now that makes sense. Okay, and then I think follow up question from just reading through the 10-Q last night, it looked like there was a sort of change in town based on our read, I mean in the previous Q, you sort of talk about still in cost control mode, capital preservation mode, and it seems like the language would have changed in last night’s Q towards more aggressive investing ahead of growth over the next couple of years. Am I reading that the right way or there is sort of a significant change in tone there or approach maybe leveraging what you did complete with the new payroll system upgrade, and is that – I guess, what are the implications for potential for margin expansion because of that more aggressive investing over the next couple of years?

I think that's when you're – you're just trying to read too much and I'd say we haven't changed dramatically. You know, this is the time you will be thinking more about future investments, some are dealing with the sales forces. We're looking for the coming year because we are continuing to run our business on an optimistic basis that the future will get better. So I wouldn't say there was any significant change, but we feel better, but while we feel better we still got a couple of things where you'd say disappointed. So we're still optimistic. Chris Mammone – Deutsche Bank: Okay, thanks guys.

Yes.

Our next question comes from Adam Frisch of Morgan Stanley. Your line is open. Adam Frisch – Morgan Stanley: Thanks guys. Good morning. Lots of things were already asked. Just wanted to dig in a couple of things, John, you said the competition with ADP, you are swapping more, is there anything different than what we have seen in the past. We tend to see some flare ups every now and then, but is it anything different for things that are changing between the two of you guys that we should think may change the landscape in the industry in terms of the pricing or anything like that?

Yes, I don't think so. I mean, there was nothing you know, noticeable or dramatic that happened through the sales season. I mean, there is no question we've talked about it before. There's no question that they've gotten a lot more aggressive in discounting. They've gotten a lot more aggressive in using price as a weapon and you know, we haven't changed what I've told you in the past. I mean, we're not going to use price as a weapon, but we're not going to allow somebody to take share from us. So, you know, we are careful about you know, existing clients. We are careful about how we battle with new clients. I will tell you that you know, to the extent that occasionally we’ll see a situation, and then look at ADP to be one of our other competitors, but we'll see a situation where they put a price at it to guarantee that you'll not make a nickel worth of profit with that client through its entire life, and we will walk away from those. But, you know, we've been pretty aggressive in terms of holding market share and maintaining our clients, but we've not been aggressive – we've not been aggressive in terms of – we have not been the aggressor, I guess is the easy way to say it, but as I think about the quarter, I mean it was, you know, it is natural when there are less buyers in the market than is normal and the same number of sellers. You know, it's normal that you're going to see some tussles in the marketplace, but there is nothing that has happened that I'm aware of during the selling season that would suggest there is anything, you know, usually different than what has been going on in the past. Adam Frisch – Morgan Stanley: Okay, sounds good, and just the other question, obviously sales were down, you said it was the weaker season than you were expecting. Talk about the sales force a little bit, retention rates, turnover, whatever, however you want to put it, how the morale is there, any change in compensation strategy or anything because obviously you don't want to lose them at what is likely the bottom. Who knows how long we will be bouncing along the bottom, but you don't want to lose momentum there, or have a lot of turnover there at this stage of the game.

No, that's right, and we are pretty careful about that. Our retention on the sales force is about the same as where was last year. It's a lot higher than I like and so there is still work to be done there, but the thing about our business, it's a little different than others. Most of the retention issues that we have are with employees that are within one or two years of having joined our company. Technically, when our sales people get into three, four years and, you know, they've got success under their belt, those we don't tend to have a great deal of trouble with. So, you know, my way of thinking is that it's got more to do with who we are hiring and how we are onboarding them, and then how we are managing them in their early years. So we've got lots of things that we're doing to try to improve that process, but on your initial – on the meat of the point that you're making there which is, are you doing the things that you have to do and make sure that you keep, you will keep players. I would say the answer to that is yes. Now, you know, the type of company that we are, we care a great deal about our employees and, you know, we know that the difference between us being great, and us being mediocre, has everything to do with our people and their morale, and how they support one another and so on. And so we work pretty hard around here to create an environment that allows us to compete for the best town in the marketplace and allows them once they get here to stay here, and it has a lot to do with you know, making sure that we are listening to them, that they understand that their opinions are valued and you know, where we need to make changes, we make those changes that we, you know, we train them and give them the skills that they need to be successful and that – the way that we manage them that you know, we make sure that we're there to help them be successful as opposed to supervise them or watch clocks and so on. So I feel like we're in pretty good shape there. I mean there is always room to get better, no question about that but I feel like we are in pretty good shape. Adam Frisch – Morgan Stanley: Okay cool, and then I guess it is the last question. Ancillaries have been such a big part of the growth in the margin, Paychex and ADP for that matter over the last several years. You guys did release some numbers on it and so forth, but maybe qualitatively if you could just give us a little flavor of what is going on in the ancillary market in the mindset of the buyer. I'm sure most small businesses are just feeling good to be holding on at this point. But can you talk about where their mindset is in terms of ancillaries, and how high in the priority list or low in the priority list that maybe for them?

Well, first in use of term ancillaries you have to change it a little bit, I think we all have is they used to talk about tax pay and direct deposit being in ancillaries. They are not anymore because they are buried in the payroll products sold in… Adam Frisch – Morgan Stanley: Yes, I'm talking about the other stuff John.

You take HRS; we're getting good traction in every area. The only area lacking a lot of client attraction will be 401(k), but we are doing okay on 401(k) because we’ve put in some better plans, and we are getting better swaps, and you know, the clients are coming in with larger plans. So that's the only one I would say we are not quite on the unit volume we like, but the one that has been a great surprise for us has been adding the PEO across the country and Paychex Premier. Now that the most expensive product we have, the one you would think they would avoid the most, and that product continues to do well. So I think that HRS products are continuing to do well, and we are really encouraged to see that HRS revenue growth, and I take out just two non-recurring items. Actually got to double digits this quarter, and I hope we will stay there and get a little higher. So, overall I think the acceptance from the client base is still pretty good. Adam Frisch – Morgan Stanley: Okay, great. Thanks guys._____

Yes.

Thank you. Our next question comes from Jim Kissane of Bank of America. Your line is open. Jim Kissane – Bank of America: Yes, thanks. John can you just give us a little better sense of where retention is currently running, and given you think you think you can get back up to 80%, 81%. Can you kind of give us where the base is now?

Basically, we ended last year right around 23%, and we hope it will be slightly better. You could gather that from what the comments were because I said that we are slightly better than a year ago on the BCB. That's that calculation. Jim Kissane – Bank of America: Okay, got you. And for Jon Judge, over a more normal cycle, you know, how fast do you think Paychex is going to grow top line and bottom line, and I guess kind of incorporating in the new platform. It sounds like it can drive margins. At the same time, you want to invest in growth longer term.

When you say in more normal times, you mean, a more normal economy? Jim Kissane – Bank of America: That's right. Assuming that the last two years are, you know, very abnormal, so a more normal cycle rate environment.

Sure. So we’ve talked a little bit about that when we did last year at year-end, because what we've done is we've, you know, we tried to bridge from where we were to a more normal -- and our financial model is 12 and 15. So if you look at where we were and then we looked at 12 and 15 we try, and then we did a GAAP analysis to see what was driving the difference in performance. It turned out that that's where I said that the thing that makes us feel so good about where we were was that the things that were causing us to be off of the 12 and 15 were almost entirely explainable in the economy, and I’m not talking about you know, excuses or anything else. We’ve lost $65 million to $70 million on our bottom line from floater loan. The difference between the funds rate being at 4 or 4.5 and being in zero or essentially zero, with the yield for us of I don’t know 2% or whatever it is. So I mean, we did a straight thing on that. When we looked at the difference in the volume of new businesses that we brought on-board versus the volume that would be normal, you know, a very large percentage of that came from the fact that there were less new business formations now. You know, we go and look at the new business formations. We looked at the percentages of those that we get to convert to our platform. The percentages over the last four or five years have stayed almost exactly the same. The only difference is there is less new businesses in play than they were three or four years ago. So what that tells us is that the (inaudible) the source is still there. The issue is a volume issue and so once that thing rises we will be better. We looked at the economic impact that the losses at 23% had on us versus losses at 20% and you know, from following us, our historic loss rate has been right around 20% for a very long time and it's roughly you know, 11% or 12% from companies going out of business and then, you know, the other piece is that add up to them. You know, you take the difference between the 20% and 23% and the economic impact on us and put it into the model. So, the net of it is that when we go through the key things that are affecting our business that come out of the economy, you can bridge it almost 100% and so the real, that's why I keep saying the $64,000 question here is how long is this dig out going to be, because we are absolutely convinced that you know, if the economy returned to normal tomorrow, we would be right back at the 12 and 15 business model, and would we get there immediately maybe not, but we will get there pretty quick. So it all comes back to that. In the meantime, you know, we are trying – you know, we are looking at all the different things that we can do the different levers that we can pull to try and drive it. Some of it I was talking with you about was some of the changes that we're planning on implementing with Del, the new sales leader. Some of the things he is going to do is try and get better with the things we can control. You know, we are constantly trying to figure out ways to get new products into the market place, and then drive them when there are things like time and labor management, which we put in place in a better HRS product and so on. So there is lots of different things we are trying, but the short cut answer to your question is will we get the economy back to where it was, you are going to see Paychex back to where it was? Jim Kissane – Bank of America: Okay. That was very helpful. Thanks.

My pleasure.

Our next question comes from Ashwin Shirvaikar of Citi. Your line is open. Ashwin Shirvaikar – Citi: Hi John and Jon. Most of my questions have been answered. I've got a couple, one is the benefit that you talked about, is that something that benefits client funds through the year or is that just – it will be part of the year kind of [ph]…

It will be on in the early part. Ashwin Shirvaikar – Citi: I mean…

And should people get over the limits. So the biggest impact will be right in the first quarter. It was bigger than I thought, but we will take whatever little bit we can get. Ashwin Shirvaikar – Citi: Right. And then any quick read on the impact from both the IR [ph] Act and healthcare reform?

Well, the IR Act is something that will clearly benefit our employees, and obviously we will help them both with the recording of the potential benefit, and then the filing for the potential benefit. So you know, one would hope that you know that that would cause more hires, I mean, the benefit is not huge. I'm sure you probably read the jobs bill. You know you are talking about 6% or 6.2% of the payroll tax that the employer gets to keep plus if they keep the employee for 52 weeks, an additional 1000 dollars. So the total I'm not sure, but if you did a quick calculation, the total would probably be in the $3000 to $4000 range in terms of a benefit for the employer. You know, anything that will help would be great. So to the extent that that will help some of our clients bring on more people that is obviously good for us because more employees in our client base is definitely good for us at Paychex. So that part will help. On the health bill, the health bill if you think about is probably more geared towards individual health insurance than it is geared towards a small group which is where we are. In that the 39 million people that are going to come in to this system. That is the right number, 32 or 39; I think it might be 39 that are geared to come back into the system. You know, some large number of those or some percentage of those will be on subsidy. My guess would be that they will probably be coming into the individual rate versus not. But you know the way we look at it, we think it is going to be a modest improvement for our business in the small group. We think it is probably going to be a bigger hit for the individual than not, and beyond that the only thing where we could get hurt is if there was any commission compression. But again, if you look at the bill, the opportunity for commission compression is not really in the group. It is in the – if it is going to happen at all, it will probably happen in the individual. Will they pay much larger commissions to get the attention of the individual, the independent agents that sell the product? So, you know overall when we look at it we think it is a modest improvement to our health business, and the jobs bill to the extent that it puts new employees into the workforce that will be helpful to us. Ashwin Shirvaikar – Citi: Okay. Great. Thank you.

My pleasure.

Our next question comes from Tien-Tsin Huang of JPMC. Your line is open. Tien-Tsin Huang – JPMC: Thanks. I will ask a couple of quick ones if you don't mind. Just the conversion of the new – to the new platform, now that that is completed, what kind of savings should we expect from that going forward, and secondly maybe you can talk to how it compares to ADPs new RUN platform that they talked about earlier.

Basically the savings will be ongoing to productivity, but we are – that our usual convert on the cheap, but not give up the service, our people did a great job doing this conversion without adding all kinds of people. We did it, and we did it in a very timely manner. I'm not sure anybody has ever converted 470,000 plus clients to anything. On RUN, I will let John talk about it.

There is really no comparison to that. I am Ron. What we're talking about is the new – it is a new payroll platform for 500,000 plus clients, you know, versus RUN is a new capability for them to go after the new market, but it is much smaller, it is a much smaller – the two are 500 apples and one orange. Tien-Tsin Huang – JPMC: Got it. So from a saving standpoint it sounds like we shouldn’t John a step down, because you didn't hire any incremental people to…

No, we are not continuing to take any more, plus we got to amortize the cost of it over the one or two years.

We should, I mean we should be able to do our business without having the hire, as our business improves we probably wouldn’t have to hire as many payroll specialists. Getting them to be proficient should be quicker, which has impacts on client service and so those are definitely things that will happen to help the business. But we didn't do it with that in mind. I mean we did it for other reasons. Tien-Tsin Huang – JPMC: Good. It is good to know. I'm sure the incremental margins will be better. Last one just the – it does sound like you are confident you are going to get back to the 20% attrition and some of the old targets, but just to be clear do you feel confident you can get back to the 3% to 5% pricing benefit as well as we’ve seen in…

You know, that is interesting – it is an interesting question and it is – we have this debate every year. And you know it is always it is interesting to me that when we get to the debate, there is people who believe you can, and people who believe you can’t. I would say this. I would say that there was more pressure on price in the last seven or eight quarter than we have seen in a long time. But I would also say that two years ago we put in a price increase that yielded 5% or something like that, maybe even a little bit more. Last year we put in a price increase near 3% or something in that range. You know, we haven't had our discussions yet about next year whether we are going to put a price increase in or not, but there is nothing that I can see that would tell me that if I am back in the normal environment that we would have issues with that. And the reason, remember is that if you look at price increases in this segment of the industry, on a percentage basis you get to one conclusion. You say, there is no way you can increase price 3% or 5% every year forever. But if you look at it from another perspective, which is you are talking about $80 to $100 spread over 26 pay periods, it is really not that big a deal. So we have the luxury of having a large number of clients that have a small number of employees, but when you multiply the large number of clients with a small number of employees, you get to the point where you are paying 10 million people every pay period. And you know if you could do something that would increase that a penny a pay period; you know that is $10 million to pay period. I mean there are certain things that you can do with a lot of large numbers that is just helpful to us in the aggregate, and it is not very noticeable or irritating at the individual side, and it is just something that works well. Tien-Tsin Huang – JPMC: Right. So, John it sounds like the decision will be made based on the shape of the economy, and you typically do it in May, correct?

We typically do it in May, and it is not really, I mean the economy and is there, and the economy will color it, but it is really done more from the standpoint of what we think the market will bear, and obviously a functionality that we add in service, that we add in how we feel that we are positioned competitively and so on. So it is really more to do with that than not. But perhaps we are saying the same thing. I mean if everybody else decided to cut their prices by 30%, and we decided to raise it, you probably would think I ought to get fit for a straight jacket. Tien-Tsin Huang – JPMC: All right. We will stay tuned for that as we get closer to May. I appreciate the time.

But the one thing I would say since then that it is – the thing that has been amazing to me is that every year we have these discussions, and every year there is a lot of hand wringing in some quarters and so on. And you know we put the price increases in, and we’ve gotten literally almost no flashback at all. Tien-Tsin Huang – JPMC: Yeah, well that is why we ask it every year.

Yeah. Tien-Tsin Huang – JPMC: Thanks.

I am with you.

Our next question comes from Tim McHugh of William Blair. Your line is open. Tim McHugh – William Blair: Hi, yes. Most of my questions have been answered, just one I will throw on quickly would be if you can update us on uses of cash on how the acquisition environment looks, and if you start to consider repurchases again maybe for the next 6 to 12 months?

We're in the same position where the last time we talked about this. We are acquisitive. We didn't find the right thing. Share repurchases are not high in our list that this time because cash is too valuable. It doesn't mean we wouldn't do it, but not looking at doing it. Tim McHugh – William Blair: Okay, thanks.

Our next question comes from Mark Marcon of R.W. Baird. Your line is open. Mark Marcon – R.W. Baird: Just wondering if you could give a little bit more commentary with regards to MMS, how big it is at this point, and how big it could get?

Well, it is basically 450 million-ish, growing in double digits because that is the market that was very outsourced, but we don't own most of it, although we have come a long way from where we were. Last year they had new power revenue, now we have some HRS products in it that actually grew just slightly under 20%. This year it might not be quite that high, but it is certainly going to be double digits. I'm going to say 14%, 15%. So we see a good future for it, and we are continuing to combine our stuff and put new products in there, and it has just been a great situation. Mark Marcon – R.W. Baird: And then with regards to the productivity enhancements from the new platform, you mention 8% to 10% productivity improvement, how much of that have you seen thus far?

You know, I'm going to come back here because this is one of the things we are very open, which we want to be, now when it gets there. We were committed to increasing margins every year, okay. And we are going to keep doing that. Maybe this platform will help us get it, but we are not going to be greedy on getting it because we know we got to keep investing in the business. So it is a balance. So it isn’t like 35% is going to suddenly go to 40%. The other thing is when you look at the profit levels we are at. As I said (inaudible) one day, it was in the last recession back in 2002, Jon wasn’t here yet, he said, while we were going to cut. One of the biggest things we had is profit. We don't want to cut that. So we're going to keep cutting costs and watching. But you're not going to see anything exponential. What you are going to see is continuing to do what we have always done. Mark Marcon – R.W. Baird: Okay. And then can you – the new services that you could potentially offer through the new platform, are those already in development or those are things that you are kind of green fielding in terms of what you were mentioning.

What I was referring to Mark was more of the architecture of the technology, and its ability to take on new functionality, new systems that would be the backbone. I mean, you know, our world depends on the IT infrastructure. So it is sort of our factory. When you have old systems, in the case of this last one 20-year-old system, what you have is you have a horribly difficult IT environment when you want to add new features, new functionality and so on. And so the thing that this new system will do, it is not that we're building new systems that we are ready to talk to you about. The point I was trying to make was more one-off, a modern architecture, a modern infrastructure that will make it easy for us to add new systems and new functionality integrated into this platform. Mark Marcon – R.W. Baird: Got it. And then John, can you just give some more color about the sales from new business. You said that it was up 1.2% for the first time in 7 quarters, and the trend has been positive. But I wasn't sure if you meant year-over-year or sequentially because I thought there was also a different number in the 10-Q.

That was referring to was when we look at the physical volumes of new sales that we get from different sources. So we get a large part of our new sales come from businesses that were formed in that year. Mark Marcon – R.W. Baird: Sure. Understand that.

Last seven quarters, that number, the physical number was declining. The physical number went north this past quarter for the first time. That is what I was referring to. Mark Marcon – R.W. Baird: Physical number meaning number of clients or revenue?

Comparable sales. So if I, for argument sake if I did 50,000 new sales from businesses in ‘09, and I did 51,000 in ’08 I did less sales. So the physical number of new sales, think about it as companies that came on to our platform that the source of that sale to a company that originated in that fiscal year that is the number I was referring to. Mark Marcon – R.W. Baird: So, client retention is stabilizing and that is improving, and the employment is improving. Then the remaining variable would be pricing as it relates to core payroll.

Yeah, we are onto different things. So, this is new sales. So this system we are talking about selling new clients into the… Mark Marcon – R.W. Baird: Yes, and I know there are still established companies out there, and what their proclivity will be in terms of outsourcing that would be the other variable.

Right, but I don’t want to mix with them. So, when you are talking about new sales, which is important to us normally in the out years. When you talk about new sales that come from multiple sources, the important number is how many new sales did you get. Now when you go underneath it, it is – you kind of segment those sales, how many of them came from new businesses, many of them came from the installed zone. That is the number that I was talking about. Things like retention, now you are looking at our total business model. Mark Marcon – R.W. Baird: I understand, understand, but obviously sales from new businesses is the majority of your new sales. So that's the majority.

Yeah. It is typically north of 50%, you know it is not 70%, it is slightly north of 50%, but it is an important part of our business model, and subsequently when new business formation is down it hurts us. Mark Marcon – R.W. Baird: Got it. Great. Thank you.

Yep, my pleasure.

You are welcome.

Our next question comes from Gary Bisbee of Barclays. Your line is open. Gary Bisbee – Barclays: Hi. Good morning. Just one question, you know I guess as we think about the potential at some point, and hopefully six or nine months for interest rates to start going up. When I look to last recession, it looks like when the Fed funds rate moved up for the first time in one year quarter, your yield that you earned on the client flow started to move up sequentially that same quarter. But when I then look at some of the data in your 10-Q last night, specifically talking about rough half of the portfolio that is unavailable for sale of securities. The likelihood of a notch down, you know, when you have the reinvestment rate risk over the next year, are we likely to see similar pattern in the last time, or has the duration been lengthened such that there might be some sort of a lag between Fed fund and a return to…

That will be immediate. As soon as you change that thing, it affects us now. Long-term rates, when you look at the spring right now, there’s some reinvestment risk on long-term, but I don’t think it is significant. Talking about the portfolio, we went back and looked at what rates would be on an average basis over the last 10 years, I guess (inaudible) basis. If you do that, the long-term portfolio yield would be at the low end of what you would normally expect, but I wouldn't call abnormally low. Gary Bisbee – Barclays: Okay.

You look at the short-term thing when you're getting five basis points. That’s – I came and described that as abnormal. That is basically it, so they're not going to recognize you in cash. So, basically when those rates go up, the short-term portfolio will move almost immediately. Gary Bisbee – Barclays: And so, on an overall blended basis you’d expect that to happen as well, and then just the second part of the question, this quarter if you back out the realized gains over the last few quarters, the average yield notched down quite a bit more than it has over the past few quarters. I guess I thought that was somewhat curious given that you are earning somewhat more in the variable demand rate notes.

Taxables, non-taxables, you’re bouncing all over. Gary Bisbee – Barclays: So, is your expectation for the next couple of quarters if we assume there are rate increases, it is probably more a modest fleeting lower, but not another like 40 basis points move or is that too tough to tell right now?

Tough to tell, but probably with no changes modest, slight bleeding but not very big. Gary Bisbee – Barclays: Okay, great. Thank you.

Thank you. Our next question comes from Tim Willi of Wells Fargo. Your line is open. Tim Willi – Wells Fargo: My questions have been answered. Thank you.

Thank you.

Thanks, Tim.

We like those.

Our next question comes from Jim Macdonald for First Analysis. Your line is open. Jim Macdonald – First Analysis: Yes, just one quick follow-up on Tien-Tsin’s question. If you, you know, thinking about pricing, but looking at sort of disconnect if your checks per client is down 2.2%, and your number of clients is down 3%, and you have a 3% price increase, could you talk about how you get to a 6% payroll decline. Is the delta discounting or is there some other delta there, and it is discounting, can you talk about your thoughts on that going forward?

You got all kinds of factors in there. First off, you can’t, I wish you worked that simply, with dozens on timing, but no there are four variables you got. Obviously, the client growth, price increase, checks per client, which that variable doesn’t always move because that last revenue check that loses the lowest revenue check, might be most profitable check. The lowest revenue check, which also puts pressure on margins and discounting. We’re not going to talk too much about discounting specifically only because we've got a competitor out there that I'm sure is paying attention to what we say and we're trying to hold our prices as much as we can and we are not beating the discounting and we're not going to quantify it anymore. Jim Macdonald – First Analysis: Do you think – you think that formula get back to it has been closer to kind of you know, normal where you added up and you get to your goal.

I think you will get back to that because I think when the economy gets a little bit stronger that might be ADP’s discounting is related to whatever difficult they see in the market. I'm not sitting there with them so I don't know, but I think they are trying to sell as much as they can and for some reason they feel a need to discount more than we do and I think if you get back to more normal conditions, I think that will go away, but I don't know that for a fact, but I think it will. Jim Macdonald – First Analysis: And besides the last check being kind of the least valuable check, any impact of ancillaries. I think ancillaries are doing well, right. So there is no other –

One or two checks that may be affecting sales. It affects them a little bit, but off the mark [ph] in other words, one or two checks off doesn't change an HR service. It does change tax pay and direct pay, basically and I want to make sure that last check is the lowest revenue check, but it probably is the most profitable check. Jim Macdonald – First Analysis: Okay.

Incremental positive doing is near zero. Jim Macdonald – First Analysis: Right. Okay, thanks very much.

Yes.

Our next question comes from Rod Bourgeois of Bernstein. Your line is open. Rod Bourgeois – Bernstein: Hi guys, so when you look at the commentary across the table or market in the last few months, you can't help but help that ADP’s commentary about the demand environment and their small business segment has been reasonably good, and definitely better than the commentary from you guys that the selling season was difficult, and still struggling to be better than what it was a year ago, where there was a lot of macro turmoil. So I guess what I am wondering is there something in terms of timing or competitive position that ADP has done in recent history is giving them may be a little more momentum as things turn, and what you guys are currently experiencing, I mean could it be something related to the timing of the platform roll-out or something else in terms of how they are going to market?

What I can tell you is this. I can – I don't, you know, I can't really speak for or explain ADPs comments, but we know what their numbers are and we know what our numbers are, and our numbers are better than theirs, in some cases materially better than theirs. So in terms of explaining some of the attitudes they use, I leave that up to you. Rod Bourgeois – Bernstein: Is there anything –

Drawing a conclusion that they are beating us in the marketplace. It's absolutely the wrong conclusion. Rod Bourgeois – Bernstein: All right. So would you say that their aggressions with discounting in the last year has not really resulted in a big impact on your own revenues?

No, it has got some impact on my revenue. It hasn't changed the marketplace. They might have got more clients from others. I mean, I think we just leave it. You can go look up and see with their client growth is down in the last 12 months, and I don't think it's the same as ours. So if you look at the quote because I don't want to quote their data because I wasn't there when I gave it. I only can read it, but we don't understand exactly how they are seeing exactly what they are seeing, but I'm sure they're seeing something, but –

Right. You know, at the end of last year, right. They were down something like 10% to 12%. We were roughly flat on a year-to-year basis of new business brought into the company. But if you look at the numbers, I mean, my suggestion to you is if you're trying to rationalize it, don't listen to the attitudes, go look at the numbers. Rod Bourgeois – Bernstein: Okay, well, I mean, when we kind of look at the numbers and we don't have you know, pure numbers here, but it sounds like your sales and your client losses are still struggling to be better than the year ago period where the macro environment was in outright turmoil. So are you guys feeling it's a little odd that we're still struggling to sort of do meaningfully better than a year ago period, you know, when in fact you know, a lot of the macro indicators have really improved. So is there a reason for that disconnect or if you guys have been somewhat surprised with that?

Do you think they’re doing better? Rod Bourgeois – Bernstein: Well, I mean, there is a lot of evidence that their bookings activity in the small-business segment has picked up better at the beginning of this year and –

If you look at the adjectives, that is the adjectives, the client – but their client growth is down. I don’t understand. The client growth is down and client growth has to be down in the small sector because they're running up clients in the upper sector to affect. Rod Bourgeois – Bernstein: All right. So your view is that there is really, no one in this market is seeing a meaningful turn in bookings in the small-business base?

I don't think so. Rod Bourgeois – Bernstein: Okay, but are you guys surprised that we're not doing better than, you know, meaningfully better than a year ago period in clearly the macro environment, and even the decision-making environment and a lot of outsourcing segments has improved in the last year. You guys aren't quite seeing it yet. Is that it is surprising to you guys?

You know, again I’ll go back to the way that we look at the market is we look particularly as it relates to what you're calling bookings is the source of where it's coming from, right. I mean, in all cases when you put a campaign together that go to market to sell, you know, you have a – you segment the markets you are going after and you have a pretty good view of who the buyers are by segment, and we do that, and we've been doing it for a very long time. And we have a pretty good understanding of what those segments are, and which ones of those segments are doing well and which ones of those are not doing well vis-à-vis the past and I’ve talked to you about those. The new business formation is not running that well. The – you know, there is a little bit of softness in the proclivity to outsource, in other words companies that are sort of holding intact for the time being, and not at all unusual given the economy that we are in. I can't talk to about what the other guys were telling you. I mean, you are going to have to go figure that out yourself, but I do know the numbers and the numbers do not – leads to the conclusion that you started your comment with. Rod Bourgeois – Bernstein: Great. Thanks guys. That's helpful.

Okay.

Our next question comes from Barry Haimes with SAGE Asset Management. Your line is open. Barry Haimes – SAGE Asset Management: Hi, yes, hi good morning. The question I had given that there was so much weather going on in January and February, March perhaps is a little bit of a cleaner month, and if you just looked at checks per client, can you give us any sense of how March has gone so far?

I won't look at checks per client on a one-month basis because in payroll, the calendar is irregular. The thing I will say is though, and we've been very pleased with this, checks per clients have held very constant since May 31. There has been a little seasonality thing, but it is the most optimistic thing we have and this is what the thing normally does, if finally takes place and holds. And it tells you the good stuff, the other good stuff should be coming, but sometimes it takes a while, but with checks per client, I don't expect any surprises there. Barry Haimes – SAGE Asset Management: Okay, and then one other separate question. Just in terms of the competitors set out there as we've gone through the economic downturn, you know, obviously there is one big competitor, but in terms of small or other competitors out there, have there been any that have gone out of business or struggling or is it pretty much the same competitive set that we were looking at before the downtown? Thanks.

Same because the only payroll companies that really go out of business are the ones where the owners basically steal the flow funds, and they can't balance it, and a payroll business is very unique. When times get hard, one way to revert to make money, stop selling new clients. It's a heavy expense and these owners are kind of the salespeople. So I think most of the payroll companies are not making as much money because of the fact the float money isn’t there, but we're not seeing a lot of companies going out for under. You know, they're not publicly held companies. The owner owns them. It has generally been very profitable. They got to dig in their pockets, they are digging their pockets. So I think the competitive landscape is pretty much a stable thing. Barry Haimes – SAGE Asset Management: Thank you.

Thank you. Our last question comes from Jennifer Dugan [ph] with Lazard Capital Markets. Your line is open. Jennifer Dugan – Lazard Capital Markets: Thanks, this is Jenny in for David Parker [ph]. I have a question, in a normal year what percentage of your sales occur in Q3, and I guess my reason for asking that is that, you know, do we basically need to wait until you know, the beginning of the next calendar year to really see, you know, hopefully see a pickup in new clients?

Well, 25% take place in the month of January. I don't know the exact number for the quarter, but I'm going to guess the numbers between – at thirty something. The next good quarter is the fourth. Jennifer Dugan – Lazard Capital Markets: And the next one is the fourth. So it does seem like you will probably need to wait a while before we see any, before we can really tell whether new sales are improving. We’ll probably need to wait until early next year.

Yes, I mean I don't know the exact numbers either but it’s you know, it's 25% on average; an average month is probably in the 7% to 8%. So what would that be, 15%, 25% to 40%. Somewhere in the high 30s, low 40s will be I guess. Jennifer Dugan – Lazard Capital Markets: I would imagine the remainder of the year, you know, probably will have a higher percentage of new clients coming from new business formations, maybe a new business formation does pick up. We do see some pickup, would you agree with that?

There is no question that if we see new business formation pickup that we will get more clients. And that's a point I made earlier that you know, when we look at what's going on in the new business formation and what percentage of new businesses are formed, we end up getting these clients in that year. That number has stayed very constant through the recession, and so as the number of new businesses fell, our yield from them fell, but as a percentage of the total new businesses, it stayed constant. So what that says is proclivity to outsource hasn't changed, our competitiveness and ability to capture those clients hasn't changed, the raw number is just down. If you bring the raw number back up and our number will come back up with it. Jennifer Dugan – Lazard Capital Markets: Okay, great. Thanks.

Thank you.

We have no other questions at this time.

Okay. I want to thank everybody for joining us today. It's always interesting and a lot of great questions and good going back and forth, and the good news from my perspective is -- I'm looking out; there is not white stuff on the ground. So, as I see, we are on the right side of the mountain for the golf season. So take care.

Thank you. That concludes today's conference. Thank you for your participation.