Edgar Filing: PITNEY BOWES INC /DE/

(Dollars in thousands)

Three Months Ended

September 30,

Preferred stock dividends of subsidiaries

c55520_10q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended	Commission File Number 1-3579
September 30, 2008
PITNEY BOWES INC.
Incorporated in Delaware	I.R.S. Employer Identification
	No. 06-0495050

World Headquarters
1 Elmcroft Road, Stamford, Connecticut 06926-0700

(203) 356-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell Company (as defined in Rule12b-2 of the Exchange Act).
Yes o No þ

There were 206,128,495 shares of common stock outstanding as of October 30, 2008.

PITNEY BOWES INC.
INDEX


		Page Number
Part I - Financial Information:

Item 1:	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2008 and 2007	3

	Condensed Consolidated Balance Sheets September 30, 2008 and December 31, 2007	4

	Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2008 and 2007	5

	Notes to Condensed Consolidated Financial Statements	6 – 22

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 – 34

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4:	Controls and Procedures	34

Part II - Other Information:

Item 1:	Legal Proceedings	35

Item 1A:	Risk Factors	35

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3:	Defaults Upon Senior Securities	35

Item 4:	Submission of Matters to a Vote of Security Holders	36

Item 5:	Other Information	36

Item 6:	Exhibits	36

Signatures		37

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in thousands, except per share data)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Revenue:
Equipment sales	$	296,520		$	307,897		$	910,883		$	961,868
Supplies		96,864			95,497			305,750			292,197
Software		100,092			92,256			314,617			223,580
Rentals		182,850			183,452			553,658			552,433
Financing		195,632			201,241			591,834			586,658
Support services		193,516			185,520			579,996			564,597
Business services		482,199			442,414			1,452,978			1,284,215

Total revenue		1,547,673			1,508,277			4,709,716			4,465,548

Costs and expenses:
Cost of equipment sales		157,593			164,659			484,988			481,873
Cost of supplies		26,382			27,061			80,673			77,909
Cost of software		25,917			21,749			80,107			54,373
Cost of rentals		36,252			42,630			114,227			128,312
Cost of support services		113,581			108,011			343,507			320,832
Cost of business services		375,949			345,024			1,138,249			1,008,647
Selling, general and administrative		478,914			479,772			1,473,098			1,393,289
Research and development		53,008			47,691			156,176			138,364
Interest, net		54,560			60,386			167,464			179,654
Restructuring charges and asset impairments		49,229			4,300			85,137			4,300
Other expense (income)		-			(380	)		-			(380	)

Total costs and expenses		1,371,385			1,300,903			4,123,626			3,787,173

Income from continuing operations before income taxes and minority interest		176,288			207,374			586,090			678,375
Provision for income taxes		69,456			73,272			215,389			234,566
Minority interest (preferred stock dividends of
subsidiaries)		6,540			4,862			16,134			14,404

Income from continuing operations		100,292			129,240			354,567			429,405
Loss from discontinued operations, net of tax		(2,063	)		(1,565	)		(8,726	)		(4,695	)

Net income	$	98,229		$	127,675		$	345,841		$	424,710

Basic earnings per share of common stock:
Continuing operations	$	0.48		$	0.59		$	1.70		$	1.96
Discontinued operations		(0.01	)		(0.01	)		(0.04	)		(0.02	)
Net income	$	0.47		$	0.58		$	1.65		$	1.94

Diluted earnings per share of common stock:
Continuing operations	$	0.48		$	0.58		$	1.68		$	1.93
Discontinued operations		(0.01	)		(0.01	)		(0.04	)		(0.02	)
Net income	$	0.47		$	0.58		$	1.64		$	1.91

Dividends declared per share of common stock	$	0.35		$	0.33		$	1.05		$	0.99

Note: The sum of the earnings per share amounts may not equal the totals above due to rounding.

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share data)


	September 30,				December 31,
	2008				2007
*ASSETS*
Current assets:
Cash and cash equivalents	$	458,786		$	377,176
Short-term investments		22,597			63,279
Accounts receivables, less allowances of $47,871 and $49,324 at September 30, 2008 and December 31, 2007, respectively		829,963			841,072
Finance receivables, less allowances of $42,227 and $45,859 at September 30, 2008 and December 31, 2007, respectively		1,450,981			1,498,486
Inventories		204,606			197,962
Current income taxes		76,633			83,227
Other current assets and prepayments		256,346			258,411
Total current assets		3,299,912			3,319,613

Property, plant and equipment, net		591,940			627,918
Rental property and equipment, net		407,220			435,927
Long-term finance receivables, less allowances of $26,189 and $32,512 at
September 30, 2008 and December 31, 2007, respectively		1,459,957			1,533,773
Investment in leveraged leases		237,417			249,191
Goodwill		2,311,588			2,299,858
Intangible assets, net		411,086			457,188
Non-current income taxes		43,580			28,098
Other assets		611,678			598,377
Total assets	$	9,374,378		$	9,549,943

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current liabilities:
Accounts payable and accrued liabilities	$	1,876,174		$	1,965,567
Current income taxes		159,939			96,851
Notes payable and current portion of long-term obligations		985,196			953,767
Advance billings		547,401			540,254
Total current liabilities		3,568,710			3,556,439

Deferred taxes on income		470,506			472,240
FIN 48 uncertainties and other income tax liabilities		303,881			285,505
Long-term debt		3,872,580			3,802,075
Other non-current liabilities		408,823			406,216
Total liabilities		8,624,500			8,522,475

Preferred stockholders’ equity in subsidiaries		374,165			384,165

Stockholders’ equity:
Cumulative preferred stock, $50 par value, 4% convertible		7			7
Cumulative preference stock, no par value, $2.12 convertible		977			1,003
Common stock, $1 par value (480,000,000 shares authorized & 323,337,912 shares issued)		323,338			323,338
Capital in excess of par value		253,993			252,185
Retained earnings		4,260,150			4,133,756
Accumulated other comprehensive (loss) income		(7,112	)		88,656
Treasury stock, at cost (117,197,935 and 108,822,953, respectively)		(4,455,640	)		(4,155,642	)
Total stockholders’ equity		375,713			643,303
Total liabilities and stockholders’ equity	$	9,374,378		$	9,549,943

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)


		Nine Months Ended September 30,
		2008			2007
Cash flows from operating activities:
Net income	$	345,841		$	424,710
Restructuring and other charges, net of tax		61,864			2,472
Restructuring and other payments		(65,858	)		(24,445	)
Loss on redemption of preferred stock issued by a subsidiary		1,777			-
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		288,589			285,322
Stock-based compensation		19,563			18,482
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable		(2,634	)		44,621
Net investment in internal finance receivables		74,288			(76,366	)
Inventories		(17,035	)		(4,523	)
Other current assets and prepayments		2,383			1,785
Accounts payable and accrued liabilities		(94,858	)		(56,510	)
Current and non-current income taxes		93,471			85,968
Advanced billings		16,259			8,358
Other, net		18,052			(13,106	)

Net cash provided by operating activities		741,702			696,768

Cash flows from investing activities:
Short-term and other investments		21,682			727
Capital expenditures		(169,978	)		(202,013	)
Net investment in leveraged leases		(831	)		(5,011	)
Acquisitions, net of cash acquired		(68,976	)		(559,907	)
Reserve account deposits		16,617			26,506

Net cash used in investing activities		(201,486	)		(739,698	)

Cash flows from financing activities:
Increase in notes payable, net		423,899			58,896
Proceeds from long-term obligations		245,582			490,765
Principal payments on long-term obligations		(574,585	)		(14,044	)
Proceeds from issuance of stock		16,561			99,020
Payments to redeem preferred stock issued by a subsidiary		(11,777	)		-
Stock repurchases		(333,231	)		(279,996	)
Dividends paid		(219,447	)		(217,199	)

Net cash (used in) provided by financing activities		(452,998	)		137,442

Effect of exchange rate changes on cash		(5,608	)		5,149
Increase in cash and cash equivalents		81,610			99,661
Cash and cash equivalents at beginning of period		377,176			239,102
Cash and cash equivalents at end of period	$	458,786		$	338,763

Interest paid	$	209,601		$	195,481
Income taxes paid	$	125,745		$	139,036

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

1. Basis of Presentation

The terms “we”, “us”, and “our” are used in this report to refer collectively to Pitney Bowes Inc. and its subsidiaries.

The accompanying unaudited Condensed Consolidated Financial Statements of Pitney Bowes Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2007 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In our opinion, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly our financial position at September 30, 2008 and December 31, 2007, our results of operations for the three and nine months ended September 30, 2008 and 2007 and our cash flows for the nine months ended September 30, 2008 and 2007 have been included. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2008.

These statements should be read in conjunction with the financial statements and notes thereto included in our 2007 Annual Report to Stockholders on Form 10-K.

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

2. Nature of Operations

We are a provider of leading-edge, global, integrated mail and document management solutions for organizations of all sizes. We operate in two business groups: Mailstream Solutions and Mailstream Services. Mailstream Solutions includes worldwide revenue and related expenses from the sale, rental, and financing of mail finishing, mail creation, shipping equipment and software; production mail equipment; supplies; mailing support and other professional services; payment solutions; and mailing, customer communication and location intelligence software. Mailstream Services includes worldwide revenue and related expenses from facilities management services; secure mail services; reprographics, document management, and other value-added services for targeted customer markets; mail services operations, which include presort mail services and international mail services; and marketing services. See Note 7, “Segment Information,” to the Condensed Consolidated Financial Statements for details of our reporting segments and a description of their activities.

3. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), to define how the fair value of assets and liabilities should be measured in accounting standards where it is allowed or required. In addition to defining fair value, the Statement established a framework within GAAP for measuring fair value and expanded required disclosures surrounding fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date by one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP is effective immediately and includes those periods for which financial statements have not been issued. We adopted this Statement for financial assets and financial liabilities on January 1, 2008, and the adoption did not have a material impact on our financial position, results of operations, or cash flows. We do not expect the adoption of this Statement for nonfinancial items effective January 1, 2009 to have a material impact on our financial position, results of operations, or cash flows. We currently do not have any financial assets that are valued using inactive markets, and as such are not impacted by the issuance of FSP 157-3. See Note 16, “Fair Value Measurements,” to the Condensed Consolidated Financial Statements for additional discussion on fair value measurements.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

of a business combination. SFAS 141(R) requires fair value measurements at the date of acquisition, with limited exceptions specified in the Statement. Some of the major impacts of this new standard include expense recognition for transaction costs and restructuring costs. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The most significant impacts of adopting SFAS 141 (R) will be the requirement for us to expense transaction and restructuring costs. We do not expect the adoption of this Statement to have a material impact on our financial position, results of operations, or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 addresses the accounting and reporting for the outstanding noncontrolling interest (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. It also establishes additional disclosures in the consolidated financial statements that identify and distinguish between the interests of the parent’s owners and of the noncontrolling owners of a subsidiary. SFAS 160 requires changes in ownership interest that do not result in deconsolidation to be accounted for as equity transactions. This Statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This gain or loss is measured using the fair value of the noncontrolling equity investment. This Statement is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 are applied prospectively. We do not expect the adoption of this Statement to have a material impact on our financial position, results of operations, or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this Statement will require us to present currently disclosed information in a tabular format and will also expand our disclosures concerning where derivatives are reported on the balance sheet and where gains/losses are recognized in the results of operations. The Company will comply with the disclosure requirements of this Statement beginning in the first quarter of 2009.

In April 2008, the FASB issued FASB FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 removed the requirement of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modification to the existing terms and conditions associated with the intangible asset. FSP FAS 142-3 replaces the previous useful-life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. This should lead to greater consistency between the useful life of recognized intangibles under SFAS 142 and the period of expected cash flows used to measure fair value of such assets under SFAS No. 141, “Business Combinations”. FSP FAS 142-3 will be applied prospectively beginning January 1, 2009. We do not expect the adoption of this Statement to have a material impact on our financial position, results of operations, or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board (“PCAOB”) amendments to auditing standards (AU Section 411). We do not expect the adoption of this Statement to result in a change in current practice.

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. The FSP amends SFAS 133 to require a seller of credit derivatives, including credit derivatives embedded in a hybrid instrument, to provide certain disclosures for each statement of financial position presented. These disclosures are required even if the likelihood of having to make payments is remote. To make the disclosures consistent with the disclosures that will now be required for credit derivatives, FIN 45-4 was issued to require guarantors to disclose the current status of the payment/performance risk of the guarantee. This FSP also clarifies that SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

FSP is effective for reporting periods after November 15, 2008 for the amendments and on September 12, 2008 for the effective date of SFAS 161. The Company does not sell credit derivatives. The Company will comply with the additional disclosure requirement for guarantees beginning in the fourth quarter of 2008.

4. Discontinued Operations

The following table shows selected financial information included in discontinued operations for the three and nine months ended September 30, 2008 and 2007, respectively:


	Three Months Ended				Nine Months Ended
	September,				September 30,
Discontinued Operations	2008		2007		2008		2007

Loss from discontinued operations, net of tax	$	2,063	$	1,565	$	8,726	$	4,695

Net loss for the three and nine months ended September 30, 2008 and 2007 relates to the accrual of interest on uncertain tax positions.

5. Acquisitions

On April 21, 2008, we acquired Zipsort, Inc. for $39 million in cash, net of cash acquired. Zipsort, Inc. acts as an intermediary between customers and the U.S. Postal Service. Zipsort, Inc. offers mailing services that include presorting of first class, standard class, flats, permit and international mail as well as metering services. We assigned the goodwill to the Mail Services segment.

On September 12, 2007, we acquired Asterion SAS for $29 million in cash, net of cash acquired. Asterion is a leading provider of outsourced transactional print and document process services in France. We assigned the goodwill to the Management Services segment.

On May 31, 2007, we acquired the remaining shares of Digital Cement, Inc. for a total purchase price of $52 million in cash, net of cash acquired. Digital Cement, Inc. provides marketing management strategy and services to help companies acquire, retain, manage, and grow their customer relationships. We assigned the goodwill to the Marketing Services segment.

On April 19, 2007, we acquired MapInfo Corporation for $436 million in cash, net of cash acquired. Included in the assets and liabilities acquired were short-term investments of $46 million and debt assumed of $14 million. MapInfo is a global company and a leading provider of location intelligence software and solutions. We assigned the goodwill to the Software segment. As part of the purchase accounting for MapInfo, we aligned MapInfo’s accounting policies for software revenue recognition with ours. Accordingly, certain software revenue that was previously recognized by MapInfo on a periodic basis has now been recognized over the life of the contract.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

The following table summarizes selected financial data for the opening balance sheet of acquisitions in 2008 and 2007:


		2008		2007
					Asterion			Digital			MapInfo
		Zipsort, Inc.			SAS			Cement, Inc.			Corporation
Purchase price allocation:
Short-term investments	$	-		$	-		$	-		$	46,308
Current assets		156			52,309			2,146			40,121
Other non-current assets		12,617			34,228			932			35,826
Intangible assets		8,613			8,285			6,600			113,000
Goodwill		23,985			20,277			42,583			327,219
Current liabilities		(3,214	)		(55,933	)		(213	)		(63,012	)
Debt		-			-			-			(13,866	)
Non-current liabilities		(2,885	)		(30,345	)		-			(50,060	)
Purchase price	$	39,272		$	28,821		$	52,048		$	435,536

Intangible assets:
Customer relationships	$	8,291		$	6,766		$	6,100		$	75,900
Mailing software and technology		-			-			-			29,500
Trademarks and trade names		-			1,519			500			7,600
Non-compete agreements		322			-			-			-
Total intangible assets	$	8,613		$	8,285		$	6,600		$	113,000

Intangible assets amortization period:
Customer relationships		15 years			7 years			7 years			10 years
Mailing software and technology		-			-			-			5 years
Trademarks and trade names		-			2 years			2 years			5 years
Non-compete agreements		4 years			-			-			-
Total weighted average		15 years			6 years			7 years			8 years

Allocation of the purchase price to the assets acquired and liabilities assumed has not been finalized for Zipsort, Inc. The purchase price allocation will be finalized upon the completion of working capital closing adjustments and fair value analysis. Final determination of the purchase price and fair values to be assigned may result in adjustments to the preliminary estimated values assigned at the date of acquisition.

During the nine months ended September 30, 2008, we also completed five smaller acquisitions. The aggregate cost of these acquisitions was $29.7 million. These acquisitions did not have a material impact on our financial results.

The amount of tax deductible goodwill added from acquisitions for the nine months ended September 30, 2008 and September 30, 2007 was $27.4 million and $23.2 million, respectively.

Consolidated impact of acquisitions

The Condensed Consolidated Financial Statements include the results of operations of the acquired businesses from their respective dates of acquisition. These acquisitions increased our revenue and earnings but, including related financing costs, did not materially impact earnings either on an aggregate or per share basis.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

The following table provides unaudited pro forma consolidated revenue for the three and nine months ended September 30, 2008 and 2007 as if our acquisitions had been acquired on January 1 of each year:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2008		2007		2008		2007
Total revenue	$	1,548,296	$	1,552,700	$	4,736,282	$	4,597,852

The pro forma earnings results of these acquisitions were not material to net income or earnings per share. The pro forma consolidated results do not purport to be indicative of actual results that would have occurred had the acquisitions been completed on January 1, 2008 and 2007, nor do they purport to be indicative of the results that will be obtained in the future.

6. Earnings per Share

A reconciliation of the basic and diluted earnings per share computations for the three months ended September 30, 2008 and 2007 is as follows:


	2008							2007
				Weighted							Weighted
				Average	Per						Average	Per
	Income			Shares	Share			Income			Shares	Share
Net income	$	98,229						$	127,675
Less:
Preferred stock dividends		-							-
Preference stock dividends		(19	)						(20	)
Basic earnings per share	$	98,210		207,309	$	0.47		$	127,655		218,299	$	0.58

Effect of dilutive securities:
Data for basic earnings per share	$	98,210		207,309				$	127,655		218,299
Preferred stock		-		3					-		3
Preference stock		19		598					20		634
Stock options and stock purchase plans		-		648					-		1,989
Other stock plans		-		98					-		103
Diluted earnings per share	$	98,229		208,656	$	0.47		$	127,675		221,028	$	0.58

					Per							Per
Basic earnings per share of common stock:					Share							Share
Continuing operations					$	0.48						$	0.59
Discontinued operations						(0.01	)						(0.01	)
Net income					$	0.47						$	0.58

Diluted earnings per share of common stock:					Per							Per
					Share							Share
Continuing operations					$	0.48						$	0.58
Discontinued operations						(0.01	)						(0.01	)
Net income					$	0.47						$	0.58

Note: The sum of the earnings per share amounts may not equal the totals above due to rounding.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

A reconciliation of the basic and diluted earnings per share computations for the nine months ended September 30, 2008 and 2007 is as follows:


	2008							2007
				Weighted							Weighted
				Average	Per						Average	Per
	Income			Shares	Share			Income			Shares	Share
Net income	$	345,841						$	424,710
Less:
Preferred stock dividends		-							-
Preference stock dividends		(58	)						(62	)
Basic earnings per share	$	345,783		209,113	$	1.65		$	424,648		219,247	$	1.94

Effect of dilutive securities:
Data for basic earnings per
share	$	345,783		209,113				$	424,648		219,247
Preferred stock		-		3					-		3
Preference stock		58		602					62		643
Stock options and stock
purchase plans		-		784					-		2,279
Other stock plans		-		85					-		108
Diluted earnings per share	$	345,841		210,587	$	1.64		$	424,710		222,280	$	1.91

					Per							Per
Basic earnings per share of common stock:					Share							Share
Continuing operations					$	1.70						$	1.96
Discontinued operations						(0.04	)						(0.02	)
Net income					$	1.65						$	1.94

Diluted earnings per share of common stock:					Per							Per
					Share							Share
Continuing operations					$	1.68						$	1.93
Discontinued operations						(0.04	)						(0.02	)
Net income					$	1.64						$	1.91

Note: The sum of the earnings per share amounts may not equal the totals above due to rounding.

In accordance with SFAS No. 128, Earnings per Share, approximately 2.5 million and 0.4 million common stock equivalent shares for the three months ended September 30, 2008 and 2007, respectively, and 2.1 million and 0.4 million common stock equivalent shares for the nine months ended September 30, 2008 and 2007, respectively, issuable upon the exercise of stock options were excluded from the above computations because the exercise prices of such options were greater than the average market price of the common stock and therefore the impact of these shares was anti-dilutive.

On February 11, 2008, we made our annual stock compensation grant which consisted of approximately 2.0 million stock options and 0.5 million restricted stock units.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

7. Segment Information

We conduct our business activities in seven business segments within the Mailstream Solutions and Mailstream Services business groups. We calculate earnings before interest and taxes (“EBIT”) by deducting from revenue the related costs and expenses attributable to the segment. Segment EBIT excludes general corporate expenses, restructuring charges and asset impairments.

As a result of certain organizational changes made during the first quarter of 2008, we have reclassified certain prior year amounts to conform to the current year presentation. The amounts reclassified did not have a material impact to our segment disclosures.

Mailstream Solutions:

U.S. Mailing: Includes the U.S. revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions.

International Mailing: Includes the non-U.S. revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions.

Production Mail: Includes the worldwide sale, financing, support and other professional services of our high-speed, production mail systems and sorting equipment, and related software.

Software: Includes the worldwide sale and support services of our non-equipment-based mailing, customer communication and location intelligence software.

Mailstream Services:

Management Services: Includes worldwide facilities management services; secure mail services; reprographic, document management services; and litigation support and eDiscovery services.

Mail Services: Includes presort mail services and our international mail services.

Marketing Services: Includes direct marketing services for targeted customers; web-tools for the customization of promotional mail and marketing collateral; and other marketing consulting services.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

Revenue and EBIT by business segment for the three and nine months ended September 30, 2008 and 2007 are as follows:


		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Revenue:
U.S. Mailing	$	549,360		$	575,782		$	1,652,794		$	1,793,830
International Mailing		271,727			254,001			882,145			764,241
Production Mail		154,554			151,857			439,358			426,393
Software		94,221			88,437			296,134			209,809
Mailstream Solutions		1,069,862			1,070,077			3,270,431			3,194,273

Management Services		287,989			278,167			891,078			825,878
Mail Services		139,689			111,785			399,875			321,842
Marketing Services		50,133			48,248			148,332			123,555
Mailstream Services		477,811			438,200			1,439,285			1,271,275

Total revenue	$	1,547,673		$	1,508,277		$	4,709,716		$	4,465,548

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
EBIT: (1)
U.S. Mailing	$	223,141		$	226,061		$	667,622		$	734,208
International Mailing		41,123			33,424			142,520			116,311
Production Mail		23,183			16,877			47,116			42,462
Software		3,167			5,159			15,962			17,033
Mailstream Solutions		290,614			281,521			873,220			910,014

Management Services		16,064			17,140			52,931			53,929
Mail Services		15,467			15,702			49,836			38,472
Marketing Services		6,126			5,310			11,405			6,449
Mailstream Services		37,657			38,152			114,172			98,850

Total EBIT		328,271			319,673			987,392			1,008,864

Unallocated amounts:
Interest, net		(54,560	)		(60,386	)		(167,464	)		(179,654	)
Corporate expense		(48,194	)		(47,993	)		(148,701	)		(146,915	)
Restructuring charges and asset
impairments		(49,229	)		(4,300	)		(85,137	)		(4,300	)
Other, net		-			380			-			380
Income from continuing operations before
income taxes and preferred dividends	$	176,288		$	207,374		$	586,090		$	678,375

(1) EBIT excludes general corporate expenses, restructuring charges, and asset impairments.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

8. Inventories

Inventories are composed of the following:


	September 30,		December 31,
	2008		2007
Raw materials and work in process	$	87,737	$	87,053
Supplies and service parts		64,848		52,895
Finished products		52,021		58,014
Total	$	204,606	$	197,962

9. Fixed Assets


	September 30,			December 31,
	2008			2007
Property, plant and equipment	$	1,907,206		$	1,877,893
Accumulated depreciation		(1,315,266	)		(1,249,975	)
Property, plant and equipment, net	$	591,940		$	627,918

Rental property and equipment	$	1,076,029		$	1,189,675
Accumulated depreciation		(668,809	)		(753,748	)
Rental property and equipment, net	$	407,220		$	435,927

Depreciation expense was $76.3 million and $77.9 million for the three months ended September 30, 2008 and 2007, respectively. Depreciation expense was $235.2 million and $236.2 million for the nine months ended September 30, 2008 and 2007, respectively.

10. Intangible Assets and Goodwill

Intangible assets are composed of the following:


	September 30, 2008							December 31, 2007
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount

Customer relationships	$	437,373	$	(151,881	)	$	285,492	$	427,487	$	(119,652	)	$	307,835
Supplier relationships		29,000		(9,667	)		19,333		29,000		(7,492	)		21,508
Software & technology		173,238		(80,676	)		92,562		176,558		(65,032	)		111,526
Trademarks & trade names		24,776		(12,124	)		12,652		32,661		(17,202	)		15,459
Non-compete agreements		2,731		(1,684	)		1,047		5,491		(4,631	)		860
Total intangible assets	$	667,118	$	(256,032	)	$	411,086	$	671,197	$	(214,009	)	$	457,188

Amortization expense for intangible assets for the three months ended September 30, 2008 and 2007 was $18.4 million and $18.5 million, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2008 and 2007 was $53.4 million and $49.1 million, respectively. For the nine months ended September 30, 2008, we recorded restructuring charges for an intangible asset impairment of $4.6 million associated with older technology equipment in France. We also recorded other asset impairments of $10.0 million associated with the loss of a customer in our Marketing Services business and the ongoing shift in market conditions for litigation support vertical in our Management Services business. These impairments are included in the restructuring charges and asset impairments line of the Consolidated Statement of Income. See Note 13, “Restructuring Charges and Asset Impairments,” to the Condensed Consolidated Financial Statements for further details.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

The estimated future amortization expense related to intangible assets is as follows:


		Amount
Remaining for year ended December 31, 2008	$	19,000
Year ended December 31, 2009		67,000
Year ended December 31, 2010		60,000
Year ended December 31, 2011		54,000
Year ended December 31, 2012		45,000
Thereafter		166,086
Total	$	411,086

Changes in the carrying amount of goodwill by business segment for the nine months ended September 30, 2008 are as follows:

Balance at

Acquired

Balance at

December 31,

during the

September 30,

2007 (1)

period

Other (2)

2008

U.S. Mailing

131,807

3,580

1,494

136,881

International Mailing

403,828

7,579

(20,031

)

391,376

Production Mail

137,855

(2,070

)

135,785

Software

669,436

(5,365

)

664,071

Mailstream Solutions

1,342,926

11,159

(25,972

)

1,328,113

Management Services

461,589

(10,361

)

451,228

Mail Services

227,163

33,611

(189

)

260,585

Marketing Services

268,180

3,482

271,662

Mailstream Services

956,932

33,611

(7,068

)

983,475

Total

2,299,858

44,770

(33,040

)

2,311,588

(1)	We have reclassified prior year amounts to conform to the current year presentation.
(2)	“Other” includes post closing acquisition and foreign currency translation adjustments.

11. Long-term Debt and Preferred Stockholders' Equity in Subsidiary Companies

On March 4, 2008, we issued $250 million of 10 year fixed rate notes with a coupon rate of 5.60% . The interest is paid semi-annually beginning September 2008. The notes mature on March 15, 2018. We simultaneously entered into two interest rate swaps for a total notional amount of $250 million to convert the fixed rate notes to a floating rate obligation bearing interest at 6 month LIBOR plus 111.5 basis points. The proceeds from these notes were used for general corporate purposes, including the repayment of commercial paper and repurchase of our stock. See Note 16, “Fair Value Measurements,” to the Condensed Consolidated Financial Statements for further detail on the interest rate swaps.

As of September 30, 2008, we had $350 million available under an existing shelf registration statement filed in February 2005 with the SEC. This shelf registration statement is set to expire on December 1, 2008. In anticipation of this expiration, we filed a “Well-known Seasoned Issuer” registration statement with the SEC on June 18 permitting the issuance of debt securities, preferred stock, preference stock, common stock, purchase contracts, depositary shares, warrants and units.

At December 31, 2007, a subsidiary of the Company had 100 shares or $10 million of 9.11% Cumulative Preferred Stock, mandatorily redeemable in 20 years, owned by an institutional investor. In August 2008, we redeemed 100% of this Preferred Stock resulting in a net expense of $1.8 million.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

12. Comprehensive (Loss) Income

Comprehensive (loss) income for the three and nine months ended September 30, 2008 and 2007 are as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
		2008			2007		2008			2007
Net income	$	98,229		$	127,675	$	345,841		$	424,710
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (1)		(144,453	)		88,978		(106,340	)		159,282
Amortization of retiree benefit costs		3,505			6,382		10,636			16,665
Net unrealized loss on investment securities		(178	)		-		(253	)		-
Net unrealized gain (loss) on derivatives		(614	)		1,826		189			(787	)
Comprehensive (loss) income	$	(43,511	)	$	224,861	$	250,073		$	599,870

(1) Includes a net deferred translation loss of $13.7 million and a net gain of $2.3 million for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, a net loss of $3.7 million and a net gain of $15.3 million, respectively, were recorded. These amounts are associated with inter-company loans denominated in a foreign currency that have been designated as a hedge of net investment.

13. Restructuring Charges and Asset Impairments

Pre-tax restructuring reserves at September 30, 2008 are composed of the following:

Balance at

December 31,

Cash

Non-cash

September 30,

2007

Expenses

payments

charges

2008

Severance and benefit costs

81,251

54,584

(58,071

)

77,764

Asset impairments

20,205

(20,205

)

Other exit costs

5,795

10,348

(5,606

)

10,537

Total

87,046

85,137

(63,677

)

(20,205

)

88,301

We recorded pre-tax restructuring charges and asset impairments of $85.1 million in the nine months ended September 30, 2008. These charges primarily relate to a program we announced in November 2007 to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line. For the nine months ended September 30, 2008, the asset impairment charges included in restructuring activities related to older technology equipment of $9.9 million primarily in France and other assets of $0.3 million. Additional asset impairments, unrelated to restructuring, were also recorded. These other impairment charges are related to intangible assets of $10.0 million principally due to a loss of a customer in our Marketing Services business and the ongoing shift in market conditions for the litigation support vertical in our Management Services business.

As a result of this program, we originally targeted a net reduction of about 1,500 positions. About half of these reductions were to be outside the U.S. As of September 30, 2008, 1,272 terminations have occurred under this program and approximately 300 additional positions have been eliminated. We expect to incur approximately $15 million of restructuring charges in the fourth quarter 2008 associated with actions identified to date; however, we continue to evaluate additional actions in conjunction with this program. We expect to complete the majority of this program by the end of 2008. The majority of the liability at September 30, 2008 is expected to be paid by mid-2009 from cash generated from operations.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

14. Pensions and Other Benefit Programs

Defined Benefit Pension Plans

The components of net periodic benefit cost for defined benefit pension plans for the three months ended September 30, 2008 and 2007 are as follows:


	United States						Foreign
	Three Months Ended						Three Months Ended
	September 30,						September 30,
		2008			2007			2008			2007
Service cost	$	7,583		$	7,000		$	2,688		$	3,444
Interest cost		23,993			24,505			7,436			7,485
Expected return on plan assets		(33,175	)		(32,645	)		(9,362	)		(10,029	)
Amortization of transition cost (credit)		-			-			31			(178	)
Amortization of prior service cost (credit)		(628	)		(561	)		164			176
Amortization of net loss		4,652			8,631			1,015			1,983
Settlement/curtailment		-			-			-			279
Net periodic benefit cost	$	2,425		$	6,930		$	1,972		$	3,160

The components of net periodic benefit cost for defined benefit pension plans for the nine months ended September 30, 2008 and 2007 are as follows:


	United States						Foreign
	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
		2008			2007			2008			2007
Service cost	$	21,487		$	21,151		$	8,266		$	9,702
Interest cost		72,259			70,616			22,915			21,001
Expected return on plan assets		(99,567	)		(95,309	)		(28,864	)		(28,102	)
Amortization of transition cost (credit)		-			-			95			(502	)
Amortization of prior service cost (credit)		(1,922	)		(1,623	)		504			497
Amortization of net loss		14,418			22,394			3,129			5,589
Settlement/curtailment		-			-			-			624
Net periodic benefit cost	$	6,675		$	17,229		$	6,045		$	8,809

As we previously disclosed in our Consolidated Financial Statements for the year ended December 31, 2007, we expect to contribute up to $10 million to each of our U.S. and foreign pension plans during 2008. At September 30, 2008, $6.8 million and $6.7 million of contributions have been made to the U.S. and foreign pension plans, respectively.

Our pension funds’ actual asset returns have declined in line with the market indices. Our funded status will be highly dependent on the market returns and the prevailing discount rate used to value our year-end obligations. The funds’ 2008 year-end asset values and year-end assumptions will affect the Company’s pension expense beginning in 2009.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

Nonpension Postretirement Benefit Plans

The components of net periodic benefit cost for nonpension postretirement benefit plans for the three and nine months ended September 30, 2008 and 2007 are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2008			2007			2008			2007
Service cost	$	919		$	713		$	2,703		$	2,382
Interest cost		3,704			2,706			10,619			9,936
Amortization of prior service credit		(618	)		(466	)		(1,854	)		(1,381	)
Amortization of net loss		911			474			2,388			1,897
Net periodic benefit cost	$	4,916		$	3,427		$	13,856		$	12,834

For the three months ended September 30, 2008 and 2007, we made $6.6 million and $9.1 million of contributions representing benefit payments, respectively. Contributions for benefit payments were $23.7 million and $24.8 million for the nine months ended September 30, 2008 and 2007, respectively.

15. Income Taxes

The effective tax rate for the three months ended September 30, 2008 and 2007 was 39.4% and 35.3%, respectively. The increase in the tax rate is principally due to a low tax benefit associated with restructuring expenses recorded in the three months ended September 30, 2008. The effective tax rate for the nine months ended September 30, 2008 and 2007 was 36.8% and 34.6%, respectively. The increase in the year-to-date tax rate is principally due to the low tax benefit associated with restructuring expenses recorded in 2008, and an additional tax accrual of $6.5 million in the first quarter of 2008 associated with lease refunds in the U.K. and Ireland.

Tax authorities continually examine our tax filings. On a regular basis, we conclude tax return examinations, statutes of limitations expire, and court decisions interpret tax law. We regularly assess tax uncertainties in light of these developments. As a result, it is reasonably possible that the amount of our unrecognized tax benefits will increase or decrease in the next 12 months, but we expect this change to be less than 5% of our unrecognized tax benefits. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes or discontinued operations as appropriate. We recorded $8.7 million and $4.7 million during the nine months ended September 30, 2008 and 2007, respectively, in interest and penalties and this amount was included in discontinued operations. We had $122.3 million and $113.6 million accrued for the payment of interest and penalties at September 30, 2008 and December 31, 2007, respectively.

We estimate the IRS will complete its current examination of tax years 2001-2004 in 2009. In connection with the 2001-2004 audit, we have recently received notices of proposed adjustments to our filed returns. We have accrued our best estimate of the probable tax, interest and penalties that may result from these proposed adjustments. We are also disputing a formal request from the IRS in the form of a civil summons to provide certain company workpapers. We believe that certain documents being sought should not be produced because they are privileged. In a similar case, the U.S. District Court in Rhode Island ruled that certain company workpapers were privileged. The IRS has appealed that decision. Also in connection with the 2001-2004 audits, we have entered into a settlement with the IRS regarding the tax treatment of certain lease transactions related to the Capital Services business that we sold in 2006. Prior to 2007, we accrued and paid the IRS the additional tax and interest associated with this settlement. A variety of post-1999 tax years remain subject to examination by other tax authorities, including the U.K., Canada, France, Germany and various U.S. states. We have accrued our best estimate of the probable tax, interest and penalties that may result from these tax uncertainties in these and other jurisdictions. However, the resolution of such matters could have a material impact on our results of operations, financial position and cash flows.

During 2009, we expect to accrue additional tax of approximately $11 to $13 million associated with the expiration of vested stock options and the vesting of restricted stock units previously granted to our employees. This write-off of deferred tax assets will not require us to pay any taxes.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

16. Fair Value Measurements

Effective January 1, 2008, we adopted SFAS 157 for financial assets and liabilities. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. SFAS 157 emphasizes that an entity’s valuation technique for measuring fair value should maximize observable inputs and minimize unobservable inputs.

Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, and those non-recurring nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination. The new fair value definition and disclosure requirements for these specific nonfinancial assets and nonfinancial liabilities will be effective January 1, 2009.

SFAS 157 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy as defined by SFAS 157 are as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities. Examples of Level 1 assets include money market securities and U.S. Treasury securities.

Level 2 – Observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities; quoted prices in markets that trade infrequently; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Examples of Level 2 assets and liabilities include derivative contracts whose values are determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable market data, such as mortgage-backed securities, asset backed securities, U.S. agency securities, and corporate notes and bonds.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. These inputs may be derived with internally developed methodologies that result in management’s best estimate of fair value. During the nine months ended September 30, 2008, we had no Level 3 recurring measurements.

The following table shows, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2008. As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels.


	Recurring Fair Value Measurements At September 30, 2008 By Level
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities
Money market funds	$	204,430	$	-	$	-	$	204,430
U.S. Government and agency
Issued debt		23,582		11,830		-		35,412
Corporate notes and bonds		-		3,812		-		3,812
Asset backed securities		-		4,864		-		4,864
Mortgage-backed securities		-		25,152		-		25,152
Derivative instruments
Interest rate swaps		-		8,594		-		8,594
Foreign exchange contracts		-		10,240		-		10,240
Total assets	$	228,012	$	64,492	$	-	$	292,504

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

Investment Securities

For our investments, we use the market approach for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.

The following information relates to our classification into the fair value hierarchy:

• Money market funds: Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies and other highly liquid and low-risk securities. Money market funds are principally used for overnight deposits and are classified in Level 1 of the fair value hierarchy.

• U.S. Government Issued Debts: U.S. Governmental securities are valued using active, high volume trades for identical securities. Valuation adjustments are not applied so these securities are classified in Level 1 of the fair value hierarchy.

• U.S. Agency Issued Debt: U.S. Agency issued debt is based on active, high volume trades for identical or comparable securities. Non-callable agency issued debt securities are generally valued using quoted market prices. To the extent that the securities are actively traded, they are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities are valued through benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities. Callable agency issued debt securities are categorized in Level 2 of the fair value hierarchy.

• Corporate Notes and Bonds: The fair value of corporate securities is estimated using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified in Level 2 of the fair value hierarchy.

• Asset Backed Securities (“ABS”) and Mortgage-Backed Securities (“MBS”): These securities are valued based on external pricing indices. When external index pricing is not observable, ABS and MBS are valued based on external price/spread data. If neither pricing method is available, we then utilize broker quotes. We verify that the unadjusted indices or broker quotes are reasonable and that the market is active by comparing prices across multiple (three or more) dealers. When inputs are observable and supported by an active market, asset backed securities and mortgage-backed securities are classified as Level 2 of the fair value hierarchy.

Investment securities are primarily composed of investments by The Pitney Bowes Bank (PBB). PBB, our wholly-owned subsidiary, is a Utah-chartered Industrial Loan Company (ILC). Our investments are all classified as “available-for-sale securities”. The bank’s investments at September 30, 2008 were $198.5 million. We reported these investments in the Condensed Consolidated Balance Sheet as cash and cash equivalents of $130.9 million, short-term investments of $19.4 million and long-term investments of $48.2 million.

We have no investments either directly or indirectly in the sub-prime mortgage market. We have not experienced any write-offs in our investment portfolio. The majority of our mortgage-backed securities are either guaranteed or supported by the U.S. government. The recent market events have not caused our money market funds to experience declines in their net asset value below $1.00 dollar per share or to incur imposed limits on redemptions.

We have no investments in inactive markets which would warrant a possible change in our pricing methods or classification within the fair value hierarchy. Further, we have no investments in auction rate securities.

Derivative Instruments

In the normal course of business, we are exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits these risks by following established risk management policies and procedures, including the use of derivatives. We use derivatives to manage the related cost of debt and to limit the effects of foreign exchange rate fluctuations on financial results. We do not use derivatives for trading or speculative purposes.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

As required by SFAS 157, we have incorporated counterparty risk into the fair value of our derivative assets and our credit risk into the value of our derivative liabilities. We derive credit risk from observable data related to credit default swaps. In light of the current market events, we have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.

The valuation of our interest rate swaps is based on the income approach using a model with inputs that are observable or that can be derived from or corroborated by observable market data. Our foreign exchange derivatives are measured at fair value using observable market inputs, such as forward rates.

Interest Rate Swaps

Derivatives designated as fair value hedges include interest rate swaps related to fixed rate debt. Changes in the fair value of both the derivative and item being hedged are recognized in income. In April 2003, we entered into an interest rate swap for an aggregate notional amount of $350 million. The interest rate swap effectively converted the fixed rate of 4.75% on $350 million of our notes, due 2018, into variable interest rates. The variable rates payable by us are based on six month LIBOR less a spread of 22.8 basis points. At September 30, 2008 and December 31, 2007, the fair value of the derivative was an asset of $10.1 million and $6.8 million, respectively. Long-term debt was increased by $10.1 million and $6.8 million at September 30, 2008 and December 31, 2007, respectively.

In March 2008, we entered into two interest rate swaps for an aggregate notional amount of $250 million to effectively convert the fixed rate of 5.60% on $250 million of our notes, due 2018, into variable interest rates. The variable rates payable by us are based on six month LIBOR plus 111.5 basis points. At September 30, 2008, the fair value of the derivatives was a liability of $1.5 million. Long-term debt was reduced by $1.5 million at September 30, 2008.

Foreign Exchange Contracts

We enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on inter-company loans and related interest that are denominated in a foreign currency. The revaluation of the short-term inter-company loans and interest and the mark-to-market on the derivatives are both recorded to income. At September 30, 2008, we had 20 outstanding foreign exchange contracts to buy or sell various currencies with an asset value of $9.9 million. The contracts will expire by March 19, 2009. At December 31, 2007, the asset value of these derivatives was $1.9 million.

We also enter into foreign currency exchange contracts arising from the anticipated purchase of inventory between affiliates. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on the cash flow hedges is included in other comprehensive income in the period that the change in fair value occurs and is reclassified to income in the same period that the hedged item is recorded in income. At September 30, 2008, we had 9 outstanding contracts with a notional amount of $14.8 million associated with these anticipated transactions and a derivative asset of $0.2 million. We had no outstanding contracts at December 31, 2007.

17. Commitment and Contingencies

In the ordinary course of business, we are routinely defendants in or party to a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with customers; or disputes with employees.

Ricoh Corporation et al. v. Pitney Bowes Inc. (United States District Court, District of New Jersey, filed November 26, 2002). On September 8, 2008, the Court of Appeals for the Federal Circuit affirmed the District Court’s decision in the company’s favor in this patent litigation. Unless Ricoh successfully petitions the United States Supreme Court to hear a further appeal, this case is concluded.

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

Imagitas, Inc., Drivers’ Privacy Protection Act Litigation, MDL Docket No. 1828 (United States Court of Appeals, Eleventh Judicial Circuit, on appeal from the United States District Court, Middle District of Florida). On April 9, 2008, the District Court granted Imagitas’ motion for summary judgment in one of the coordinated cases, Rine, et al. v. Imagitas, Inc. (United States District Court, Middle District of Florida, filed August 1, 2006). On July 30, 2008, the court issued a final judgment on the Rine litigation and stayed all of the other cases filed against Imagitas pending an appellate decision on the Rine litigation. On August 27, 2008, the plaintiffs in the Rine litigation filed an appeal of the District Court’s decision. The appellate process in this case is proceeding.

We expect to prevail in these lawsuits; however, as litigation is inherently unpredictable, there can be no assurance in this regard. If the plaintiffs do prevail, the results may have a material effect on our financial position, future results of operations or cash flows, including, for example, our ability to offer certain types of goods or services in the future.

18. Guarantees

We apply FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to our agreements that contain guarantees or indemnifications. As part of the sale of the Capital Services business in the second quarter of 2006, we indemnified the buyer for certain guarantees by posting letters of credit at the date of sale. At September 30, 2008, the outstanding balance of these guarantees was $4.3 million.

We provide product warranties in conjunction with certain product sales, generally for a period of 90 days from the date of installation. Our product warranty liability reflects our best estimate of probable liability for product warranties based on historical claims experience, which has not been significant, and other currently available evidence. Accordingly, our product warranty liability at September 30, 2008 and December 31, 2007, respectively, was not material.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Forward-Looking Statements” and elsewhere in this report.

The following analysis of our financial condition and results of operations should be read in conjunction with Pitney Bowes’ Condensed Consolidated Financial Statements contained in this report and Pitney Bowes’ Form 10-K for the year ended December 31, 2007.

Overview

For the third quarter, revenue grew 3% over the prior year to $1.5 billion. Excluding acquisitions and foreign currency translation which contributed 3% and 1%, respectively, revenue was down 1%. U.S. Mailing revenue declined primarily due to lower mailing equipment sales as large enterprise accounts and some government agencies elected to either defer upgrade decisions for new equipment or extend leases on existing equipment because of uncertainty about how the economy may impact their operations. As a result of lower equipment placements, rental and financing revenue also declined. Partially offsetting the decline was growth in Mail Services, International Mailing and Marketing Services.

Income from continuing operations for the third quarter of 2008 was $100.3 million or $0.48 per diluted share as compared with $0.59 earnings per diluted share in the third quarter of 2007. Income from continuing operations in the third quarter of 2008 included restructuring charges and asset impairments of 19 cents per diluted share. Income from continuing operations in the third quarter of 2007 was reduced approximately 2 cents per diluted share due to the purchase accounting alignment for MapInfo, 2 cents due to a non-cash tax charge, primarily related to a tax rate change in Germany, and 1 cent due to an impairment charge for intangible assets in our legal solutions business.

Performance for the quarter reflects the impact of our transition initiatives, which helped offset continued economic weakness, particularly in the financial services sector.

The Company generated $281 million in cash from operations during the third quarter and $742 million during the nine months ended September 30, 2008.

See “Results of Operations – Third Quarter of 2008 Compared to Third Quarter of 2007” for a more detailed discussion of our results of operations.

Outlook

While we anticipate that the remainder of 2008 will present challenges for all of our businesses, our products and services are designed to provide efficiencies, cost savings and revenue growth opportunities for our customers. We believe we are well positioned to continue to grow our earnings in the fourth quarter and during 2009 despite the challenging economic environment due to our business model of high recurring revenue and our diverse customer base.

We will continue to execute our transition initiatives that we began in the fourth quarter of 2007. We expect to incur approximately $15 million of restructuring charges in the fourth quarter of 2008 associated with actions identified to date; however, we continue to evaluate additional actions in conjunction with this program. We will continue to focus on operational efficiency, cash flow and expense management. We remain committed to meet and potentially exceed our original target of $150 million in pre-tax benefits in 2009.

We expect our mix of revenue to continue to change, with a greater percentage of the revenue coming from diversified revenue streams associated with fully featured smaller systems and a smaller percentage from larger system sales. In addition, we continue to expect a greater percentage of revenue growth from our Software, International Mailing and Mail Services segments. We expect to derive further synergies from our recent acquisitions, to remain focused on enhancing our productivity, and to allocate capital in order to optimize our returns.

Results of Operations – Third Quarter of 2008 compared to Third Quarter of 2007

Business segment results

The following table shows revenue and earnings before interest and taxes (“EBIT”) by segment for the three months ended September 30, 2008 and 2007. Prior year results have been reclassified to conform to the current year presentation. Refer to Note 7 to the Condensed Consolidated Financial Statements for further detail on these changes.


(Dollars in thousands)	Revenue						EBIT(1)
	Three Months Ended September 30,						Three Months Ended September 30,
		2008		2007	% change			2008		2007	% change
U.S. Mailing	$	549,360	$	575,782	(5	)%	$	223,141	$	226,061	(1	)%
International Mailing		271,727		254,001	7	%		41,123		33,424	23	%
Production Mail		154,554		151,857	2	%		23,183		16,877	37	%
Software		94,221		88,437	7	%		3,167		5,159	(39	)%
Mailstream Solutions		1,069,862		1,070,077	-	%		290,614		281,521	3	%

Management Services		287,989		278,167	4	%		16,064		17,140	(6	)%
Mail Services		139,689		111,785	25	%		15,467		15,702	(1	)%
Marketing Services		50,133		48,248	4	%		6,126		5,310	15	%
Mailstream Services		477,811		438,200	9	%		37,657		38,152	(1	)%

Total	$	1,547,673	$	1,508,277	3	%	$	328,271	$	319,673	3	%

(1) See reconciliation of segment amounts to Income from continuing operations before income taxes and preferred dividends in Note 7 to the Condensed Consolidated Financial Statements.

During the third quarter of 2008, Mailstream Solutions revenue was flat and EBIT increased 3% compared with the prior year. U.S. Mailing’s revenue decreased 5% due to lower mailing equipment placements and rental revenues in core mailing of 2%, lower financing revenues due to lower lease portfolio levels of 2% and lower supplies revenue of 1%. The lower revenues were driven by the wind-down of meter migration and by customer buying decisions influenced by uncertainty created by weak economic conditions. U.S. Mailing’s EBIT decreased 1% principally due to the lower revenue growth, but was partly offset by positive impacts of our transition initiatives. International Mailing’s revenue grew by 7% and benefited 4% from favorable foreign currency translation and 2% from acquisitions. Revenue growth was also impacted by increased rentals in France; increased equipment sales in Norway and other parts of Europe; and continued growth in supplies. International Mailing’s EBIT margins were favorably impacted by an improving cost structure in Europe. Revenue for Production Mail grew by 2% driven by positive foreign currency translation. Revenue growth from higher equipment placements in the U.K., Germany, and other parts of Europe were offset by lower equipment sales in the U.S. where economic uncertainty has slowed large-ticket investment for many companies, especially in the financial services sector. Production Mail’s EBIT, however, increased 37% due to a consistent focus on improving the cost structure. Software revenue increased 7%. Revenue was flat, when compared with the prior year, after excluding the effect of acquisitions. Software sales increased outside of the U.S., but declined within the U.S. as a result of the economic uncertainty, which has resulted in certain large customers delaying their purchasing decisions. Software’s EBIT decreased 39% due to the lower revenue growth, planned global investment in sales and marketing, and increase in research and development.

During the third quarter of 2008, Mailstream Services revenue grew 9% and EBIT decreased 1% compared with the prior year. The Management Services revenue growth of 4% was driven by acquisitions of 6%, partially offset by a decline in revenue of 3% due to lower transaction volumes for some customers, especially in the U.S. financial services sector. Management Services EBIT decreased 6% due to acquisition costs in France and fewer, high margin volume-related transactions. These decreases were partially offset by cost reductions in the U.S. through several productivity initiatives. Mail Services revenue grew 25%. Continued growth in presort and international mail services contributed 11% and acquisitions contributed 14% to this revenue growth. The Mail Services EBIT benefits from operating leverage were more than offset in the quarter by the costs associated with the acquisition of a multi-site presort operation in the U.S. and two U.K. international mail services sites. Marketing Services revenue grew 4% and EBIT increased by 15%. The segment’s results benefited from higher volumes in our mover-source program. The company’s phased exit from the motor vehicle registration services program adversely affected the segment’s revenue growth by $1.1 million, while positively impacting EBIT margins versus prior year by $2.0 million.

Revenue by source

The following table shows revenue by source for the three months ended September 30, 2008 and 2007:


(Dollars in thousands)	Three Months Ended September 30,
		2008		2007	% change

Equipment sales	$	296,520	$	307,897	(4	)%
Supplies		96,864		95,497	1	%
Software		100,092		92,256	8	%
Rentals		182,850		183,452	-	%
Financing		195,632		201,241	(3	)%
Support services		193,516		185,520	4	%
Business services		482,199		442,414	9	%
Total revenue	$	1,547,673	$	1,508,277	3	%

Equipment sales revenue decreased 4% compared to the prior year. Sales of equipment in U.S. Mailing were lower primarily due to weak economic conditions, the wind-down of meter migration and the product shift toward smaller, fully featured postage machines. Foreign currency translation had a favorable impact of 1%.

Supplies revenue increased by 1% from the prior year, principally due to foreign currency translation. Increased demand internationally was offset by lower revenue in the U.S.

Software revenue increased by 8% compared to the prior year. The revenue growth was primarily driven by acquisitions of 7% and higher international demand for our products. We experienced strong revenue growth in Asia Pacific and Europe, which was offset by a decrease in U.S. revenue. U.S. revenue was adversely impacted by the ongoing weak economic conditions causing some large enterprise accounts to postpone their purchase decisions.

Rentals revenue was flat compared to the prior year. A decrease in U.S. Mailing rental revenue was principally offset by strong rental demand in France.

Financing revenue decreased 3% mainly due to a reduction in equipment placements.

Support services revenue increased 4% from the prior year. The increase is primarily attributable to higher service revenue on older equipment as customers defer their upgrade decisions, partly due to the weak economic conditions. Foreign currency translation had a favorable impact of 2%.

Business services revenue increased 9% from the prior year. This growth was driven by higher revenue in the mail and management services businesses. Acquisitions contributed 7% to this growth.

Costs and expenses


(Dollars in thousands)	Three Months Ended September 30,
		2008		2007

Cost of equipment sales	$	157,593	$	164,659
Cost of supplies	$	26,382	$	27,061
Cost of software	$	25,917	$	21,749
Cost of rentals	$	36,252	$	42,630
Cost of support services	$	113,581	$	108,011
Cost of business services	$	375,949	$	345,024
Selling, general and administrative	$	478,914	$	479,772
Research and development	$	53,008	$	47,691

Cost of equipment sales decreased as a percentage of revenue to 53.1% in the third quarter of 2008 compared with 53.5% in the prior year, primarily due to actions taken pursuant to the Company’s transition initiatives.

Cost of supplies as a percentage of revenue decreased to 27.2% in the third quarter of 2008 compared with 28.3% in the prior year driven by favorable product mix in the U.S., which was offset by an increase of lower margin international sales.

Cost of software as a percentage of revenue increased to 25.9% in the third quarter of 2008 compared with 23.6% in the prior year primarily due to a change in the mix of business.

Cost of rentals as a percentage of revenue decreased to 19.8% in the third quarter of 2008 compared with 23.2% in the prior year primarily due to lower depreciation costs associated with the transition of our product line.

Cost of support services as a percentage of revenue increased to 58.7% compared with 58.2% in the prior year primarily due to higher fuel costs worldwide for our direct service organization.

Cost of business services as a percentage of revenue was 78.0% for the third quarter of 2008 and 2007. The favorable impact due to increased volumes at Marketing Services and productivity improvements for U.S. Management Services were offset by acquisition costs at Mail Services and Management Services.

Selling, general and administrative (“SG&A”) expenses as a percentage of revenue decreased to 30.9% in the third quarter of 2008 compared with 31.8% in the prior year reflecting the positive impacts of our transition initiatives.

Research and development (“R&D”) expenses increased $5.3 million from the prior year as we continue to invest in developing new technologies and enhancing our products. R&D expenses as a percentage of revenue increased to 3.4% in the third quarter of 2008 from 3.2% in the third quarter of 2007.

Restructuring Charges and Asset Impairments

Pre-tax restructuring reserves at September 30, 2008 are composed of the following:

Balance at

June 30,

Cash

Non-cash

September 30,

(Dollars in thousands)

2008

Expenses

payments

charges

2008

Severance and benefit costs

77,314

24,709

(24,257

)

77,766

Asset impairments

19,522

(19,522

)

Other exit costs

9,195

4,998

(3,658

)

10,535

Total

86,509

49,229

(27,915

)

(19,522

)

88,301

We recorded pre-tax restructuring charges and asset impairments of $49.2 million in the three months ended September 30, 2008. These charges primarily relate to a program we announced in November 2007 to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line. For the three months ended September 30, 2008, the asset impairment charges included in restructuring activities related to older technology equipment of $10.7 million in France and other assets of $0.2 million. Additional asset impairments, unrelated to restructuring, were also recorded. These other impairment charges are related to intangible assets of $8.6 million due to a loss of a customer in our Marketing Services business and the ongoing shift in market conditions for the litigation support vertical in our Management Services business.

As a result of this program, we originally targeted a net reduction of about 1,500 positions. About half of these reductions were to be outside the U.S. For the three and nine months ended September 30, 2008, 308 and 1,272 terminations have occurred under this program, respectively. During 2008, approximately 300 additional positions have been eliminated. We expect to incur approximately $15 million of restructuring charges in the fourth quarter 2008 associated with actions identified to date; however, we continue to evaluate additional actions in conjunction with this program. We expect to complete the majority of this program by the end of 2008. The majority of the liability at September 30, 2008 is expected to be paid by mid-2009 from cash generated from operations.

Net interest expense

Interest expense for the three months ended September 30, 2008 and 2007:


(Dollars in thousands)		Three Months Ended September 30,
		2008		2007	% change

Interest expense, net	$	54,560	$	60,386	(10	)%

Net interest expense decreased by $5.8 million or 10% in the third quarter of 2008 compared with the prior year. A 57 basis point change in our average interest rate, as a result of lower interest rates on our floating rate debt, was partially offset by an increase in average borrowings of $39 million.

Income taxes

The effective tax rate for the third quarter of 2008 was 39.4% compared with 35.3% in the prior year. The increase is principally due to a low tax benefit associated with restructuring expenses recorded in the three months ended September 30, 2008.

Minority interest (preferred stock dividends of subsidiaries)

The following table details dividends paid to preferred stockholders for the three months ended September 30, 2008 and 2007:

In August 2008, we redeemed 100% of the outstanding Cumulative Preferred Stock issued previously by a subsidiary company for $10 million. This redemption resulted in a net expense of $1.8 million.

Discontinued operations

The following table details the components of discontinued operations for the three months ended September 30, 2008 and 2007:

Net loss for the three months ended September 30, 2008 and 2007 relates to the accrual of interest on uncertain tax positions.

Results of Operations – Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Revenue by source


(Dollars in thousands)	Nine Months Ended September 30,
		2008		2007	% change

Equipment sales	$	910,883	$	961,868	(5	)%
Supplies		305,750		292,197	5	%
Software		314,617		223,580	41	%
Rentals		553,658		552,433	-	%
Financing		591,834		586,658	1	%
Support services		579,996		564,597	3	%
Business services		1,452,978		1,284,215	13	%
Total revenue	$	4,709,716	$	4,465,548	5	%

Equipment sales revenue decreased 5% compared to the prior year. Lower sales of equipment in U.S. Mailing were primarily due to the postal rate case in 2007, which stimulated incremental sales during that period, weak economic conditions, and product shift toward smaller, fully featured postage machines which resulted in an overall unfavorable impact on equipment sales. International revenue increased principally due to a postal rate change in the first quarter of 2008 in France, combined with higher equipment placements throughout Europe and Asia. Foreign currency translation contributed a favorable impact of 4%.

Supplies revenue increased by 5% from the prior year. This increase was primarily driven by revenue growth in Europe as our customers continue to migrate to digital technology. Foreign currency translation contributed 3%.

Software revenue increased by 41% from the prior year primarily driven by acquisitions which contributed 27%, strong international demand for our location intelligence and customer communication software solutions, and foreign currency translation which contributed 3%.

Rentals revenue was flat compared to the prior year. Favorable foreign currency translation of 2% and higher demand in France were offset by lower revenue in the U.S., as our customers continue to downsize to smaller, fully featured machines.

Financing revenue increased 1% primarily due to foreign currency translation.

Support services revenue increased 3% from the prior year, primarily due to the favorable impact of foreign currency translation of 3%. Renewals and pricing increases offset the impact of customers down-sizing their equipment.

Business services revenue increased 13% from the prior year. The growth was driven by higher revenue in Mail Services and Marketing Services, which was partly offset by lower transaction volumes in Management Services. Acquisitions and foreign currency translation contributed 8% and 1%, respectively, to this growth.

Costs and expenses


(Dollars in thousands)	Nine Months Ended September 30,
		2008		2007

Cost of equipment sales	$	484,988	$	481,873
Cost of supplies	$	80,673	$	77,909
Cost of software	$	80,107	$	54,373
Cost of rentals	$	114,227	$	128,312
Cost of support services	$	343,507	$	320,832
Cost of business services	$	1,138,249	$	1,008,647
Selling, general and administrative	$	1,473,098	$	1,393,289
Research and development	$	156,176	$	138,364

Cost of equipment sales as a percentage of revenue increased to 53.2% in the first nine months of 2008 compared with 50.1% in the prior year, primarily due to the increase in mix of lower margin equipment sales outside the U.S.

Cost of supplies as a percentage of revenue decreased slightly to 26.4% in the first nine months of 2008 compared with 26.7% in the prior year. This variance is driven by changes in product mix.

Cost of software as a percentage of revenue increased to 25.5% in the first nine months of 2008 compared with 24.3% in the prior year primarily due to a change in the mix of business.

Cost of rentals as a percentage of revenue decreased to 20.6% in the first nine months of 2008 compared with 23.2% in the prior year primarily due to lower depreciation costs related to the transition of our product line.

Cost of support services as a percentage of revenue increased to 59.2% for the first nine months compared with 56.8% in the prior year primarily due to higher fuel costs worldwide for our direct service organization.

Cost of business services as a percentage of revenue was 78.3% for the nine months of 2008 compared to 78.5% for the prior year. The successful integration of new sites and productivity improvements at our Mail Services operations was partially offset by higher acquisition costs in both our Management Services and Mail Services operations.

SG&A expenses as a percentage of revenue increased slightly to 31.3% in the first nine months of 2008 compared with 31.2% in the prior year. The increase was due to lower revenue growth and a shift in the mix of our businesses as well as higher credit loss expenses in the U.S. Software, which is becoming a larger portion of our overall business, has a relatively higher SG&A expense ratio. These increases were largely offset by the positive impacts of our transition initiatives.

R&D expenses increased $17.8 million from the prior year as we continue to invest in developing new technologies, enhancing our products, and the acquisition of MapInfo. R&D expenses as a percentage of sales increased to 3.3% in the first nine months of 2008 from 3.1% in 2007.

Restructuring Charges and Asset Impairments

Pre-tax restructuring reserves at September 30, 2008 are composed of the following:

Balance at

December 31,

Cash

Non-cash

September 30,

(Dollars in thousands)

2007

Expenses

payments

charges

2008

Severance and benefit costs

81,251

54,584

(58,071

)

77,764

Asset impairments

20,205

(20,205

)

Other exit costs

5,795

10,348

(5,606

)

10,537

Total

87,046

85,137

(63,677

)

(20,205

)

88,301

Net interest expense

Interest expense for the nine months ended September 30, 2008 and 2007:


(Dollars in thousands)	Nine Months Ended September 30,
		2008		2007	% change

Interest expense, net	$	167,464	$	179,654	(7	)%

Net interest expense decreased by $12.2 million or 7% in the nine months ended September 30, 2008 compared with the prior year. A 57 basis point change in our average interest rate, as a result of lower interest rates on our floating rate debt, was partially offset by an increase in average borrowings of $273 million.

Income taxes

The effective tax rate for the first nine months of 2008 was 36.8% compared with 34.6% in the prior year. The increase is principally due to the low tax benefit associated with restructuring expenses recorded in 2008, and an additional tax accrual of $6.5 million in the first quarter of 2008 associated with lease refunds in the U.K. and Ireland.

Minority interest (preferred stock dividends of subsidiaries)

The following table details dividends paid to preferred stockholders for the nine months ended September 30, 2008 and 2007:

In August 2008, we redeemed 100% of the outstanding Cumulative Preferred Stock issued previously by a subsidiary company for $10 million. This redemption resulted in a net expense of $1.8 million.

Discontinued operations

The following table details the components of discontinued operations for the nine months ended September 30, 2008 and 2007:

Net loss for the nine months ended September 30, 2008 and 2007 relates to the accrual of interest on uncertain tax positions.

Liquidity and Capital Resources

In light of recent market events, we have conducted an extensive review of our liquidity provisions. We have not determined a material variation in the underlying sources of cash flows currently used to finance the operations of the company. To date, we have had consistent access to the commercial paper market. In addition, we have carefully monitored the creditworthiness of those banks acting as derivative counterparties, depository banks or credit providers to Pitney Bowes through credit ratings and the credit default swap market for material changes. Lease and loan customer payments are running slightly slower in the third quarter of 2008, but overall delinquency has not increased significantly, or beyond historical levels. We recognize that there are risks in the economy and are closely monitoring the portfolio condition. We will record loss provisions, as necessary, to ensure the business is adequately reserved.

We believe that cash flow from operations, existing cash and liquid investments, as well as borrowing capacity under our commercial paper program, the existing credit facility and debt capital markets should be sufficient to finance our capital requirements and to cover our customer deposits. Our potential uses of cash include but are not limited to the following: growth and expansion opportunities; internal investments; customer financing; tax payments; interest and dividend payments; share repurchase program; pension and other benefit plan funding; and acquisitions.

Cash Flow Summary

The change in cash and cash equivalents is as follows:


(Dollars in thousands)	Nine Months Ended September 30,
	2008			2007

Cash provided by operating activities	$	741,702		$	696,768
Cash used in investing activities		(201,486	)		(739,698	)
Cash (used in) provided by financing activities		(452,998	)		137,442
Effect of exchange rate changes on cash		(5,608	)		5,149
Increase in cash and cash equivalents	$	81,610		$	99,661

2008 Cash Flows

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. A lower investment in finance receivables of $74.3 million and an increase in advanced billings of $16.3 million contributed to this increase in cash. In addition, the timing of tax payments favorably contributed $93.5 million. Partially offsetting these positive impacts was a reduction in accounts payable and accrued liabilities of $94.9 million, primarily due to timing of payments.

Net cash used in investing activities consisted principally of capital expenditures of $170.0 million combined with acquisitions of $69.0 million partially offset by increased reserve account balances for customer deposits of $16.6 million and a reduction in investments of $21.7 million.

Net cash used in financing activities consisted primarily of dividends paid to stockholders of $219.4 million and stock repurchases of $333.2 million, partially offset by proceeds from issuance of stock of $16.6 million and a net increase in notes payable and long-term obligations of $94.9 million. We also paid $11.8 million associated with the redemption of 100% of the outstanding Cumulative Preferred Stock issued previously by a subsidiary company.

2007 Cash Flows

Net cash provided by operating activities consisted primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. The increase in cash flow provided by operating activities for the nine months ended September 30, 2007 compared with the prior year is primarily due to lower additions to finance receivables and the tax payment related to the IRS settlement in 2006. For the nine months ended September 30, 2007, the net increase in our deferred taxes on income and income taxes payable contributed $86.0 million to cash from operations resulting primarily from the timing of tax payments. The decrease in accounts payable and accrued liabilities reduced our cash from operations by $56.5 million, primarily due to the payment of year-end compensation and commissions, and the timing of accounts payable following the strong fourth quarter of 2006. The increase in our internal finance receivable balances decreased cash from operations by $76.4 million, reflecting growth in equipment placements and our payment solutions business during the first nine months.

The net cash used in investing activities consisted primarily of acquisitions, net of cash acquired, of $559.9 million and capital expenditures of $202.0 million.

Net cash provided by financing activities consisted primarily of a net increase in debt of $535.6 million and $99.0 million received from stock issuances partially offset by stock repurchases of $280.0 million and dividends paid to stockholders of $217.2 million.

Capital Expenditures

During the first nine months of 2008, capital expenditures included $86.3 million in net additions to property, plant and equipment and $83.7 million in net additions to rental equipment and related inventories compared with $107.9 million and $94.1 million, respectively, in the same period in 2007.

Financings and Capitalization

We have a commercial paper program that is a significant source of liquidity. During the credit crisis, we have continued to have consistent access to the commercial paper market and have issued commercial paper with longer maturities. As of September 30, 2008, we had $829 million of outstanding commercial paper issuances. We also have a committed line of credit of $1.5 billion which supports commercial papers issuances and is guaranteed by a syndicate of 15 banks until 2011. As of September 30, 2008, this line of credit has not been drawn down.

On March 4, 2008, we issued $250 million of 10 year fixed rate notes with a coupon rate of 5.60% . The interest is paid semi-annually beginning September 2008. The notes mature on March 15, 2018. We simultaneously entered into two interest rate swaps for a total notional amount of $250 million to convert the fixed rate debt to a floating rate obligation bearing interest at 6 month LIBOR plus 111.5 basis points. The proceeds from these notes were used for general corporate purposes, including the repayment of commercial paper and repurchase of our stock.

We believe our financing needs in the short and long term can be met with cash generated internally, borrowing capacity from existing credit agreements, available debt issuances under existing shelf registration statements and our existing commercial paper program.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how a company (a) recognizes and measures in their financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest (previously referred to as minority interest); (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. SFAS 141(R) requires fair value measurements at the date of acquisition, with limited exceptions specified in the Statement. Some of the major impacts of this new standard include expense recognition for transaction costs and restructuring costs. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The most significant impacts of adopting SFAS 141 (R) will be the requirement for us to expense transaction and restructuring costs. We do not expect the adoption of this Statement to have a material impact on our financial position, results of operations, or cash flows.

that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This gain or loss is measured using the fair value of the noncontrolling equity investment. This Statement is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 are applied prospectively. We do not expect the adoption of this Statement to have a material impact on our financial position, results of operations, or cash flows.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 removed the requirement of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modification to the existing terms and conditions associated with the intangible asset. FSP FAS 142-3 replaces the previous useful-life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. This should lead to greater consistency between the useful life of recognized intangibles under SFAS 142 and the period of expected cash flows used to measure fair value of such assets under SFAS No. 141, “Business Combinations”. FSP FAS 142-3 will be applied prospectively beginning January 1, 2009. We do not expect the adoption of this Statement to have a material impact on our financial position, results of operations, or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board (“PCAOB”) amendments to auditing standards (AU Section 411). We do not expect the adoption of this Statement to result in a change in current practice.

Regulatory Matters

There have been no significant changes to the regulatory matters disclosed in our 2007 Annual Report on Form 10-K.

Forward-Looking Statements

We want to caution readers that any forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 in this Form 10-Q, other reports or press releases or made by our management involve risks and uncertainties which may change based on various important factors. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are those which talk about our or management’s current expectations as to the future and include, but are not limited to, statements about the amounts, timing and results of possible restructuring charges and future earnings. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify such forward-looking statements. Some of the factors which could cause future financial performance to differ materially from the expectations as expressed in any forward-looking statement made by or on our behalf include:

changes in international or national political conditions, including any terrorist attacks
negative developments in economic conditions, including adverse impacts on customer demand
changes in postal regulations
timely development and acceptance of new products
success in gaining product approval in new markets where regulatory approval is required
successful entry into new markets
mailers’ utilization of alternative means of communication or competitors’ products
our success at managing customer credit risk
our success at managing costs associated with our strategy of outsourcing functions and operations not central to our business
changes in interest rates
foreign currency fluctuations
cost, timing and execution of the restructuring plan including any potential asset impairments
regulatory approvals and satisfaction of other conditions to consummation of any acquisitions and integration of recent acquisitions
interrupted use of key information systems
changes in privacy laws
intellectual property infringement claims
impact on mail volume resulting from current concerns over the use of the mail for transmitting harmful biological agents
third-party suppliers’ ability to provide product components
negative income tax adjustments for prior audit years and changes in tax laws or regulations
changes in pension and retiree medical costs
acts of nature

Item 3: Quantitative and Qualitative Disclosures about Market Risk

There were no material changes to the disclosures made in the Annual Report on Form 10-K for the year ended December 31, 2007 regarding this matter.

Item 4: Controls and Procedures

Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure.

Under the direction of our CEO and CFO, we evaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting. The CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2008. In addition, no change in internal control over financial reporting occurred during the quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. Notwithstanding this caution, the disclosure controls and procedures are

designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at that reasonable assurance level.

PART II. OTHER INFORMATION

Item 1: Legal Proceedings

Imagitas, Inc., Drivers’ Privacy Protection Act Litigation, MDL Docket No. 1828 (United States Court of Appeals, Eleventh Judicial Circuit, on appeal from the United States District Court, Middle District of Florida). On April 9, 2008, the District Court granted Imagitas’ motion for summary judgment in one of the coordinated cases, Rine, et al. v. Imagitas, Inc. (United States District Court, Middle District of Florida, filed August 1, 2006). On July 30, 2008, the court issued a final judgment on the Rine litigation and stayed all of the other cases filed against Imagitas pending an appellate decision on the Rine litigation. On August 27, 2008, the plaintiffs in the Rine litigation, filed an appeal of the District Court’s decision. The appellate process in this case is proceeding.

Item 1A: Risk Factors

There were no material changes to the risk factors identified in the Annual Report on Form 10-K for the year ended December 31, 2007.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Equity Securities

We repurchase shares of our common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and for other purposes. This program authorizes repurchases in the open market. We have not repurchased or acquired any other shares of our common stock during 2008 in any other manner.

The following table summarizes our share repurchase activity under active programs during the first nine months of 2008:


				Total number of		Approximate dollar value
	Total number		Average price	shares purchased as		of shares that may yet be
	of shares		paid per	part of a publicly		purchased under the plan
	purchased		share	announced plan		(in thousands)
December 2007 Balance					$	406,607
January 2008	2,162,600	$	35.91	2,162,600	$	328,942
February 2008	1,918,500	$	37.17	1,918,500	$	257,636
March 2008	875,600	$	35.43	875,600	$	226,610
April 2008	2,222,500	$	35.78	2,222,500	$	147,085
May 2008	356,000	$	36.21	356,000	$	134,194
June 2008	-		-	-	$	134,194
July 2008	-		-	-	$	134,194
August 2008	-		-	-	$	134,194
September 2008	1,711,335	$	35.54	1,711,335	$	73,376
	9,246,535			9,246,535

Item 3: Defaults Upon Senior Securities

None

Item 4: Submission of Matters to a Vote of Security Holders

None

Item 5: Other Information

None

Item 6: Exhibits

See Index of Exhibits.

Signatures

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


	PITNEY BOWES INC.


November 7, 2008

	/s/ Michael Monahan
	Michael Monahan
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)



	/s/ S. J. Green
	S. J. Green
	Vice President – Finance and
	Chief Accounting Officer
	(Principal Accounting Officer)

Index of Exhibits


Reg. S-K
Exhibits	Description

(12)	Computation of Ratio of Earnings to Fixed Charges.

(31.1)	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31.2)	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32.1)	Section 1350 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(32.2)	Section 1350 Certification of Chief Financial Officer Pursuant Section 906 of the Sarbanes-Oxley Act of 2002.