Welcome to the Paychex first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. John Morphy, Senior Vice President and Chief Financial Officer.

Thank you for joining us today for our first quarter earnings release. Also joining us is Jon Judge, our President and CEO. The teleconference call will be comprised of three sections; a review of our first quarter 2010 financial results including comments and guidance for full year fiscal year 2010, an overview from Jon, and lastly, a Q&A session. Yesterday afternoon after the market closed, we released our financial results for the first quarter ended August 31, 2009 and we have filed our Form 10-Q with the SEC which provides additional discussion and analysis of results for the quarter. These are available by accessing our investor relations page at www.paychex.com. In addition, this teleconference is being broadcast over the internet and will be archived and available on our web site for approximately one month. The weak economic conditions, credit crisis in the financial markets and extremely well invested rates of return on our funds held for clients that we experienced during 2009 continue to challenge our financial results for fiscal 2010. Throughout this challenging economic period, we have continued to focus on providing excellent customer service, investing for our future and maintaining a strong financial position. We continue to invest in key sales areas and our infrastructure while at the same time being prudent regarding expenses. We continue to generate positive cash flow from operations and maintain a balance sheet without debt. Our return on equity in the first quarter was an exceptional 38%. We are well positioned to act on opportunities that will arise when the economy begins to recover. As we have done in recent quarters, we will now share some of our key indicators that should provide insight into how this small to medium sized economy has been behaving. We believe this information will be beneficial to…

You know as you look at our first quarter, in some ways one might assess the quarter as being pretty drab. Even though it came in about where we thought it was going to come in, we didn't get a lot better, but we didn't get a lot worse. But in other ways, particularly given the last three quarters of economic tornadoes that drabness in and of itself could be seen as pretty positive. Clearly we saw some signs that were encouraging both in the general economic indicators and some of our internal key indicators. First and foremost, the numbers John just took you through were against the toughest quarter compare we'll have all year. The first quarter last year was a pretty good quarter, the calm before the storm if you will. It wasn't until September, our second quarter that the severe economic problems started. You remember Lehman Brothers filed for bankruptcy on September 15. The U.S. Government took over AIG the next day and then Bank of America took over Merrill and so on for three very difficult quarters for the U.S., so the year to year compare was the worst we'll see all year. And then some of the underlying key indicators showed signs of some relief. In the area of new hire reporting, we came in about the same as we did in the fourth quarter. It was the second quarter in a row of flat or better. The big problems here started second quarter of last year and it's somewhat clear to us now that the worst appears to be behind us. The big question remaining of course is how long with the climb out will be. Checks per client, John just talked about that, just slightly sequentially better. There was a similar story to…

(Operator Instructions) Your first question comes from Rod Bouget – Sanford C. Bernstein Rod Bouget – Sanford C. Bernstein: Jon Judge outlined a long list of encouraging signs. Those things are good to hear about, but at the same time, the guidance is being nudged down for payroll revenues. So can you explain what the main things were that got worse to offset the encouraging signs that you outlined?

Basically the guidance didn't get changed very much when you start talking in terms of total dollars. We forecasted a pretty narrow range. We started the year, we were hopeful the checks per clients would be stuck right where it was and that the client base basically stayed dead even. Client base went down a very small amount in the first quarter, but it was a little bit more than we thought it would be, but not much. Right now we're looking at client growth for the year to be much better than it was a year ago as most of the decline took place basically in the last six months. Checks per client was off a tad. The good news was that it didn't move very much. When you look at those things, and we also have a lot of other factors and some of our clients are also being a little more prudent on which special reports they're running and things like that. So when we looked at guidance and revenue for the rest of the year, we decided that we would take it down slightly. When we looked at our expense controls and the rest of it, we felt that the rest of the guidance could stay where it was. Rod Bouget – Sanford C. Bernstein: You mentioned that the main thing is the client base declined. Can you quantify the amount of the client base decline and whether that decline was more because of a surprise on the booking front or the bankruptcy front?

There was no surprise. I think the number is very small. It's less than 1,000 so it's not a big difference. The client base went down about 18,000. Rod Bouget – Sanford C. Bernstein: But it was consistent with what you were expecting?

No, we were expecting it to stay exactly flat. Rod Bouget – Sanford C. Bernstein: So it was a surprise, but a very slight one.

I don't know that I'd call 1,000 clients a surprise. You're running a business inside a range, well inside an acceptable range, it's not a surprise.

Backlog scored two more points than they expect, I don't think that's a surprise. Rod Bouget – Sanford C. Bernstein: Can you talk about the pricing and discounting? It's encouraging that I guess things got a lot less bad on that front. Have competitors shown a continuation in their price counting and discounting aggression compared to three months ago and at the same time, what level of pricing increase do you expect will stick for fiscal '10.

The quarter, if you looked at this quarter versus the fourth quarter, the discounting did improve. What we see in the marketplace relative to our competitors clearly improved in the quarter, but it always improved in the first quarter, so I'll say that. What I would tell you is pretty much what I've been saying for the last two or three quarters relative to the discounting front. We are not the aggressors in this world, and we will not be the aggressors in this world. With that said, we will match competitor pricing if we have to to maintain our position in the marketplace. So we're not in the camp of a company that might be trying to use price as a mechanism to drive share, so we will not be the aggressor in that, but we will also not idly sit by and watch it happen. As it relates to price increase sticking, we did the price increase as you know in May. The experience this year is exactly what the experience has been over the last 10 or 15 years. It was not a blip on the screen relative to the pricing increase. So you can assume that almost all if not all of it will stick through the course of the year. Rod Bouget – Sanford C. Bernstein: Is that a 3.5% price increase? Is that about the right amount?

It was a little bit lower than. I think it was more like 2.5%.

We put in 3.5% but then we discount a little bit, so it's going to be threeish.

Your next question comes from Jason Kupferberg – UBS. Jason Kupferberg – UBS: I wanted to follow up on the guidance. I know you mentioned the reasons why the payroll services revenues is getting kicked down, yet none of the other guidance components I think are changing. Are you implying that you're taking out some additional costs here and so you're just going to keep your margins about where you thought and your income decline with still be down 10% to 12% or is it just kind of nudged toward the lower end and it wasn't enough to justify changing the whole range?

We were able to watch our people and take advantage of some people who chose to do other things. One thing to remember when you have a work force like ours, a lot of these people are in the age group of 25 to 35 and by nature, economy good or bad, these people do tend to sometimes move around. You've got mothers that have children, all those types of things. So we actually got a little more favorability to reduce those expenses. We're taking advantage of their choices, us not really forcing any choices, and we were able to get expenses down more than we thought. So all in all, maybe we're a little too optimistic on the revenue side, and maybe a little too pessimistic on the how fast we can reduce expenses, and I think netted out.

In general, we've talked about this before, the culture in this company is that expenses are earned by the ability to generate revenue and so if the revenue picture starts to get a little bit softer than we had planned for, it's in our culture to go pull the expense out as well. Jason Kupferberg – UBS: On other clarification on the guidance, do you still expect for the full year fiscal '10 that checks per client will be down about 3%?

Basically, you get down about 3% if they stay where they are because of the year over year comparisons. I know what I budgeted, but I was pretty happy they wound up where they were in the first quarter, because we had other quarters we had hoped they were going to stay and they didn't. Jason Kupferberg – UBS: I think you recently hired to a new head of sales and marketing from outside the company. Can you talk a little bit about why you went external versus internal to fill that position and maybe a little bit about what you expect this gentleman will bring to the table that might have been missing in the past?

I don't know that I'd frame it in that way, but to answer your question, we had a fellow that was running sales and marketing for 26 years. He was with the company obviously a very long time. He was the architect that built the sales and marketing processes we had. He retired. And so when he retired, and we went to replace him, we looked both inside and outside and the decision that I made in terms of going outside was to get somebody who had some experiences that were in many respects different than some of the experiences that our internal candidates had. And he looked like somebody who could make a significant add to our company. He spent a lot of time in the business world. He's been in a senior level position for some significant period of time. He's got both sales and marketing background, an outstanding track record of success and he's been here now for a couple of weeks and it's been a good couple of weeks. We expect that he's going to be a great add to our company and quite frankly, whenever you have a chance to add experiences to the existing group that you have, my personal opinion is that's a positive thing. So I'm very much looking forward to the contributions he's going to make over time and feel very good about the hire.

Your next question comes from Glenn Greene – Oppenheimer. Glenn Greene – Oppenheimer: Just wanted to talk about, clearly the sequential improvement in bankruptcy trends, are you sort of the mode that you think we've hit bottom? What do you expect going forward in terms of those trends?

It's really hard to tell, but we watch those trends and some of the other indicators that I talked about and we've got a fairly long history on them so we have the ability to maybe see trends before others might. But in that world, when we look at all of the different indicators, that being one of the important ones, it does look to us like it's definitely getting less bad, and it does definitely look like it's starting to climb its way out. You couple that with Bernacke's comments about what he's seeing and others and you start to get the feel that it's possible that we may have bottomed out. Our issue is not that quite frankly. When we sit around here and try to figure out what's happening in the economy, the questions more typically go to how long is it going to take to climb out. How long with the recovery take as opposed to whether or not it's started. Glenn Greene – Oppenheimer: Just back to the pricing for a second, just want to get a sense of it it's actually improved at all in the last three to six months and secondarily is it the same order of magnitude of competition, same from the national vendor or you're seeing, just sort of contrast the national competition versus the local, regional competition, what you're seeing and how has it changed in the last three months?

As I said, in the last three months it's gotten a little bit better, but in the first quarter, our experience has been it's always better in the first quarter. So you take that with a grain of salt. My expectation is as we go into the second quarter, my expectation is that it's not going to continue at the rate it was at last year. If you sit back and forget about our industry and just think about pricing theory in general, one of the reasons when you're in a stable market that somebody would start an aggressive price campaign is to try to grab share. If you do that for some period of time, and you find that you're not only grabbing share but you're also impacting the pricing in your existing clients and so on, my guess is that you come to the conclusion that maybe that's not a great idea and you will fight on a different front. But we'll see what happens. We've been very clear about it that we are not the aggressor in this and we won't be the aggressor in it, but we won't sit by and watch it happen either. Glenn Greene – Oppenheimer: And the contract between what you're seeing at the local and regional level.

The majority of the issue is national not local and regional. If you look at the actual differential in price that we live in a normal world between us and the regional, it's a significant disparity and it's significant because the quality of the product that's delivered and the stability and the financial integrity of the provider is usually so different that we can sustain very dramatic difference in price between us and the regional competitors and still win. So they don't tend to be the issue in this particular discussion. It's more the national.

Your next question comes from Ashwin Shirvaikar – Citi. Ashwin Shirvaikar – Citi: As comps improve for the business through the year should we expect a reversal of some of the cost actions that you took earlier?

Should we expect it to lessen? Is that what you said? Ashwin Shirvaikar – Citi: No should we expect a gradual reversal? You had the hiring freeze and you had taken away some of the benefit increases. Should we expect a reversal?

The only two things we have that I would say are floating is wage increases and the 401-K match. Everything else we've done is basically what we would have done anyway, prudent decisions. Things that we've needed to do, we've done. We haven't gone to what I would call dire cost reductions. So that's the only two that are there and they'll come back when we decide it's the right time to bring them back, the wage freeze on pay and the 401-K match. Ashwin Shirvaikar – Citi: Could you comment on the incremental profitability of some of the faster growing services such as HRS?

Basically, the same thing as always. In other words, if we're in a growth environment which unfortunately we haven't been for the last few quarters, the incremental margin is very high. It isn't any different on one product versus another except on payroll when you've got a load of clients completely. So the incremental margins on all the HRS products are pretty much the same. Health care I wouldn't say is any better or any worse than anything else.

Your next question comes from Gary Bisbee – Barclays Capital. Gary Bisbee – Barclays Capital: You've given us a trend on sales into new business start ups as sort of understanding that economic indicator, but can you give us a sense of new sales into existing established small business? Is that a similar number or is that performing much better?

When you talk about sales to clients, the distinguishing note there is clients that are either a new company, they were formed in that year or they're existing clients that were either not doing it at all or doing it with another vendor or doing it in-house with a software product. And then the second thing is the ancillary sales which is the sales into existing vendors of additional products. So they're two different animals. Gary Bisbee – Barclays Capital: And how have those been doing respectively?

The sales, if you take the new clients coming in, the biggest significant notice that we saw in the last 12 months of a change was the number of sales or the percentage of sales that we brought in that were from companies that were formed in that year. That was a number that was off very significantly. It's improved in this last quarter. One data point does not a trend make, but it's a good start. The other categories were all performing about normal. So the customers switching from existing methods whether that be a competitor or whether doing it themselves, last year was not really an issue of any significance to us. The issue was the lack of formation of new businesses. On the ancillary sales, the ancillary sales are performing well as I mentioned in my comments. But you've got to remember the ancillary sales depend on us bringing in new clients to sell the ancillaries into. Gary Bisbee – Barclays Capital: Has the percentage of the ancillaries going into existing payroll customers versus what you just said bringing in new customers overall, has that changed a lot? Is it easier to do one or the other?

No. If I'm understanding your question, we think of that in terms of attach rates. So when we bring a client in, how many of those clients have tax pay? How many of those clients have employee pay? How many of those clients take Worker's Comp. How many of those clients take national health benefits, and so on. Those attach rates have not change dramatically at all. There's no issue there. The issue is the number of clients brought in. Gary Bisbee – Barclays Capital: In the last quarter or two, I think you gave us a sense of total overall annualized new business sold. I assume it's safe to think that that number is still down modestly year over year, but do you have any sense as we move through the year things go onto your plan. Does that turn positive just because the comps get a lot easier?

First of all, you're talking about what we call par which is the annualized revenue. When you're talking about how we did last year versus for example our competitors when we were down just slightly, like a point or two, two at most I think, and our competitors were down, I don't know what the numbers were but 15% or 12% or something like that. That story looks like it's going to play out the same this year if not maybe even a little better. Gary Bisbee – Barclays Capital: So just comps on its own could make that a positive number by year end or is that not necessarily true?

No, we hope it will be positive. Gary Bisbee – Barclays Capital: Can you break out for us by quarter what the benefits, the 401-K, HRS revenue was last year from the planned documents business, the $12 million. What did that look like?

By quarter it was almost even. It probably went 2.5, it was a little more in the fourth quarter, the other three were about the same. Three in the fourth quarter, and the rest of the three quarters were about the same. Gary Bisbee – Barclays Capital: Was there any of that in fiscal '08 or was that just last year.

Pretty much just all year.

Your next question comes from Jim MacDonald – First Analysis. Jim MacDonald – First Analysis: I'm trying to figure out the difference between the government jobs data which is still going down on a year over year basis in the August quarter and your checks per client which improved sequentially. What's going on there? Is your client base different or is there a mix shift upward to more larger clients that could be impacting the minus 5% or better than 5.2%?

I think we're in apples and watermelon here probably to some extent because our client base has run at the low end basically, we say about 10 million people. We think we have about a third market share so the market that we're in paying people is about 30 million. I don't know how many people are working in the U.S., 200 million, 300 million. I'm not sure the government data survey is very much of our 30 million, they're so small. I'm not sure they can even find them. Jim MacDonald – First Analysis: I'm looking at the one to 49 jobs data.

I'm not sure where they get it all, but we've never had our data be that close to theirs hardly ever, which is one of the reasons we shied away based on our client base of giving out data and checks per client and new hire reporting. Jim MacDonald – First Analysis: On health care, it's only up slightly sequentially from last quarter. Do you think there's any impact? Are people dropping health plans waiting for the new health policy or any other just lack of new client sales?

I don't believe so. What happened unfortunately, we did not get all the sales edging in one part of our sales force as early as we wanted to. The other side we did, so we think that's going to correct as the year goes on so we see that as just a first quarter blip. We're still getting pretty good take rates. We still expect to be in the $30 million plus for the year and we'll just keep tracking it. But right now, not too much gets stopped because people have got to keep going.

Your next question comes from James Kissane – Bank of America, Merrill Lynch. James Kissane – Bank of America, Merrill Lynch: Just trying to confirm, I think you said the net pricing was up 3%, so if you net the increases with the discounting you're still getting 3% net? Is that right?

It might not be exactly. I can't tell you the answer to that question. We put in a price increase into the install base. And there isn't much discounting that goes into that base. The discounting moves by what the sales force is selling and what that discount is at and that discount is still higher than my average discount is in my base, and we've seen it get a little bit better. But there's two pieces here that you've got to watch. So really pricing is on the base which remains good and I believe that national competitor also raised prices on the base, so it's really what you're doing in the street fighting for the new business. James Kissane – Bank of America, Merrill Lynch: Comparing to national players, relative to the low end, how is the pricing environment in the major market segment? More intense? Less intense?

What do you mean by that? James Kissane – Bank of America, Merrill Lynch: If you compare customers with the 14 employees versus your customers, prospective customers with 250 employees. What does the discounting look like in major markets versus core?

It's pretty similar.

The one thing in major markets, they tend to be competitive bids so pricing tends to be more consistent and the other advantage we have in major markets is we are not always the price leader on those products. For some of those we're less. It's a little bit different.

We have a different list price in that market segment versus the core segment. James Kissane – Bank of America, Merrill Lynch: On the cost structure, you obviously run a tight ship, but will you let employee attrition cause head count to be down in fiscal 2010?

It depends on the part of the business that you're looking at. The way that we staff our sales organization is different than the way that we staff the other parts of the company. So in general terms it will depend, but we clearly will do whatever we have to do to maintain full employment, but at the same time make sure that we allow the attrition levels take us to where we need to get to if we need a smaller amount of people involved. So we're in pretty good shape right now. One of the things, this type of business, and it's true I'm told for most high transaction businesses, but this type of business tends to run with relatively high attrition levels and so it gives you a lot of opportunities that way. It's the only good news I can think of about relatively high attrition levels. We also as a company, because of the things that we've done and the way that we've structured ourselves to be able to move work for example from one office to another. And the example I'll use for you is the year we have four hurricanes in Florida we didn't miss a single payroll because we're able to switch a whole branch office worth of work in about an hour's time from that branch office to another branch office. When you have that kind of capability, if you get imbalances in your work load or significantly if you get attrition in one city, but you really needed it in another, there are things that we can do to move our work around to get us through those temporary periods. So we are very aggressive about how we manage our costs. We will continue to be very aggressive about how we manage our costs, but we're also very aggressive about the respect that we show to our employees and the planning that we do to try to make sure that we keep this a sound environment for them. James Kissane – Bank of America, Merrill Lynch: I guess the key question; do you think your margins are higher over the next cycle than they were over the last cycle?

Our margins will eventually keep improving.

Your next question comes from Timothy Willi – Wells Fargo. Timothy Willi – Wells Fargo: The first question was around your comments all the debate within health care and your belief there is probably some way it would benefit Paychex other than what we've seen. But what do you think about health care and what you know about the proposals and the debate around the small business world? Do you see it as just an opportunity to sell the heath care services which I guess is pretty obvious or is there also something also around the need for health care that would prompt small businesses that may be doing this on their own or regional competitors that don't have the capabilities to bundle it all together that would actually potentially be a benefit to the core payroll business, or do you just view this as probably positive for the health care business?

I think first and foremost it's the latter. Whether or not it will end up being able to propel our ability to compete in the core business, I don't know. I think there's probably some possibility for that, but the most obvious one is the latter. And it's not just a small group. There's a possibility that this could affect small individuals. There's a possibility that it could affect some other things that we're not prepared to talk about, but if it goes that way there will be good things for us. But in general, I would say that it's most about helping the basic business of the national health care agency that we have and I do believe, from everything that I've seen I do believe that it's going to be pretty positive for us. Timothy Willi – Wells Fargo: Around the M&A environment, any thoughts around the incremental opportunities or pipeline since the last call?

The thing that is always true when you get into an economic situation like this is that more M&A potential presents itself than robust periods, and that's proven to be true for us. The things that we have available for us to look at, there's certainly more of them, and I would say in general the quality is better. We have a small M&A department that we established a couple of years ago that is staffed with professionals in this discipline and we have an appetite to get involved when we find something that we feel will have a significantly positive impact on our company. And I'm not prepared to talk to you about any of those yet, but I think we've been pretty clear that we have interest there and as soon as we find something that makes sense and we can get it done, we'll tell you as soon as that comes.

Your next question comes from Christopher Mammone – Deutsche Bank. Christopher Mammone – Deutsche Bank: On the second derivative improvements on the new sales and the bankruptcy metrics, could we just dissect those a little bit further? Are there any sectors that are performing much better than others that are sort of leading the charge here?

Not really. Our business is a little bit different than businesses that have large clients in the industry sectors. They tend to be less important to us than they do to other types of businesses in part because our product set tends to be a utility product set and in part because when you get into industry applications they don't tend to be the utility types. What does show itself is on geographic areas. Florida as you know has been terribly hard hit area in the economy. When you look at the numbers of employment, Florida doesn't jump out. There are some smaller states that jump out with bigger numbers, but that could just be the laws of small numbers. But from a geography standpoint, places like Florida and Nevada, Arizona, specifically around Phoenix and Southern California are the areas that were hardest hit by things like housing and the construction industries associated with housing, and then it trickles down obviously into things like how often you go out to dinner or how often you get your hair cut and so on. So those areas are ones that we're hopeful will continue to show improvement.

Your next question comes from Tien-Tsin Huang – J.P. Morgan. Tien-Tsin Huang – J.P. Morgan: I know I've asked this before, but can you remind us what's the decision making process in shifting your investment strategy and I'm obviously curious to see what it's going to take for you to move off of the agency discount?

Basically we have an Investment Committee of the Board that meets usually twice a year and as needed. We're not going to change the risk model for return, but our treasury people have been pretty encouraging to me for the first time in a long time. Their belief is the liquidity in some of these instruments is getting to the point where they really want to go to the investment committee and ask for them to allow them to invest in them. So I think that's something that's going happen over the next six to eight weeks, and we'll take a look at it. I don't think you'll see a monstrous change in the return rate because you won't just push the whole portfolio over there, but I think we're seeing liquidity get better and hopefully down the road we'll be back to normal times and you get back the interest rates that are more indicative of what's going to happen. Tien-Tsin Huang – J.P. Morgan: But for the next six to eight weeks it could start to see you shifting some away and over time we could see a bigger mix but we shouldn't expect a 100% transition.

No. My belief is, the world gets back to normalcy, we'll be pretty active. I don't think you'll see us back in auction securities. The only reason is I think the lesson people have learned is you shouldn't be trading an investment daily that actually has a maturity cycle that means it doesn't have to trade daily. Some people may go back to doing that, but you're not going to see us doing that. So I think you're going to be back in instruments that trade where they should and we'll be back in them. I'm confident that will happen. Do you have a view on the subject? You know our investment philosophy. Tien-Tsin Huang – J.P. Morgan: Yes. It's been consistent and I think it's been very prudent but I think you obviously could get a [inaudible] and I appreciate the conservatism. What happened in the past with some of the investments but I think some of the investors have been looking for a little bit of additional yield just to juice up the earnings a little bit given what's been happening with the economic backdrop. I am not in a position to really appreciate capital preservation versus yield at this stage in the cycle, but it does seem like given we're seeing some improvement it would make sense to shift some of the investments towards higher yielding securities.

We're pretty close to agreement, just maybe the speed.

Your next question comes from Mark Marcon – Robert W. Baird. Mark Marcon – Robert W. Baird: I'd like to focus in on HRS. Can you talk a little bit about what made the comparison period in HRS more difficult because it sounds like it probably didn't have more of a contribution in the first quarter of last year than it would have had in the second quarter or the third quarter. When I take a look at the overall HRS guidance, you decelerated from 8% to basically flat in this first quarter, but we're looking at 3% to 6% growth which at the low end would imply that we're going to re-accelerate the 5% growth by the back half of the year. So I'm just wondering what gives you the confidence that we're going to have that re-acceleration.

We have a horrible comparison in the first quarter because the world didn't end really for HRS until going into the second quarter. Payroll started getting hit 12 to 18 months ago. We got off to a very good start on the sales cycle on HRS and the world kind of came to an abrupt stop. I also say way more volatility. I had some favorable Worker's comp in the first quarter last year, but I had to compare against, I don't have to compare against anymore because Worker's comp in these markets tend to get positive surprises. We used to get a fair number, but now it's gotten better and better and it's breaking even, so we've just got normal volatility. I'm confident you're going to see improvement and I think the fourth quarter, and I won't say the number because the number is higher than what you just said, but we believe it's going to come back and health care will get going a little bit better than it did in the first quarter. Again, it's the timing on some of the sales force people, but we look at the compares. You look at the pieces. Basis points on 401-K went right into the tank. So when you go look a year ago, the basis point change isn't very much. You go look at it back to February, the basis point change is 35% to 40%. So I think you're going to see the factors come back, and we looked at the forecast, and I can assure you, one thing I like about this process we do, and one of the things we gain out of having the 10-Q there is John and I read all the questions this morning and I can assure than we looked at that question HRS, and we went back, and I pulled in my controller and my divisional control there and I said, "Okay, let's look at this thing again to make sure what we believe is correct." And everything they showed me made me actually be more optimistic that the growth is going to be there and it's going to happen throughout the year. So I'm pretty confident that's going to happen unless some shoe drops, which I don't think it's going to. We also know that in this particular group, the sales for the first quarter were good in that area. We were actually slightly above plans. So we think there's some good stuff here, but again with some caution. Mark Marcon – Robert W. Baird: Can you talk a little bit about the 401-K? It looked like sequentially you had about 1,000 employer drops which sounds like it's equal to the drop that you ended up seeing with regards to the total client base.

That would be more a coincidence. 401-K is a tough sell right now. You've got the stock market. It's getting better. You've got all those issues with, remember we're in small business where people are not trusting large so it's just a tough game and you've got the government a little bit talking about the future of these, which I think the future would be bright, but you've just got a lot of uncertainty. So we'll see that come back. Mark Marcon – Robert W. Baird: If we take a look at the asset base, that clearly improved significantly sequentially.

It didn't improve until recently. I didn't see that in the first quarter. Mark Marcon – Robert W. Baird: So when you're looking at first quarter average relative to fourth quarter average, you didn't see much of an improvement?

Not until the end. Mark Marcon – Robert W. Baird: So that's going to spill over and that's going to help us. Can you remind us what the fees used to be relative to what they're averaging now?

No. I never disclose that. Mark Marcon – Robert W. Baird: On MMS, can you tell us how that's going, just the sales trends that you're looking at there relative to the small business market.

MMS had a year last year that it appeared that MMS didn't get the memo that the economy was falling apart. They had a pretty normal year and we booked them for something similar to that this year and they're looking fine. So MMS again, it does not appear to us that we're going to struggle with MMS this year at all, so we're expecting to have another good year with them. They have definitely benefited from the investments that we've made in things like labor on line and HR on line not just from the revenue streams that those products bring in themselves, but for the fact that it allows them to bid on things that they weren't able to bid in before when we didn't have it. So as I mentioned in the call earlier, we're in the process of doing some things that will make those offerings even more attractive and have a broader market to look at than what we see today. So again, we think MMS is going to continue to be a pretty good player for us and as I also mentioned our pricing on MMS is a little bit different than our pricing is in core. So that also gives it a natural attraction, and it's a great alternative to what these clients have, where they are today. It's an alternative for them. So it still remains to be a pretty good business. It's a pretty large business right now. It's only about 10 years old, but it's half a billion class kind of a business. Mark Marcon – Robert W. Baird: As you're looking at things and as you're planning future investments typically as we get into particularly into the third fiscal quarter, you typically end up seeing a pick up with regards to head counts and sales forces and you start planning for the next year and there's commissions that pick up. How are you thinking about expense growth sequentially this year relative to the past years?

Cautious and conservative is the only thing that we're hopeful on. A good problem to have is the selling expenses will grow throughout the year so that's going to be there. Hopefully we're going to sell more in the second half which I'll be thrilled to pay those commissions. When you take the operating jobs outside of sales, and kind of manage the business in two pieces, you've got the sales piece to try to drive that to keep from running more par revenue. The rest of the business is just really, it moves with the revenue. So if the revenue is there, the cost can go up. If the revenue is not there, the cost has to go down. I don't see any change in that. But actually, you look at this and you see what we've done, some people say well you put new efforts in. We actually in this part, aren't running the company much differently today as we do at any time. We're always prudent about it. We always watch it. You've got a lot of key indicators and statistics that say you can add this number of people if you've got this number of clients and this number of services. So we have to hold the line on those and we're always trying to improve those ratios. At the same time we never want to sacrifice the service level we provide to clients. Mark Marcon – Robert W. Baird: Can you tell us a little bit about what operational efficiencies you're seeing above and beyond just some of the things that may be more obvious for folks just by looking at your head count or sales force growth? What are you seeing in terms of operational efficiencies in terms of technology initiatives, things like that on your part because if we take a look at the fee operating margin sequentially, that was a pretty nice improvement. Obviously you had the price increase that went through, but are there things that are going on below the surface that may not be quite as visible to us?

We're always working on those things. You know that we obviously capitalized a lot of money and now we're amortizing the platform which we'll talk more about that next call. The reason we don't talk more about that is for obvious reasons. But basically we have this continuous improvement philosophy but when you've got a company like ours where so much is the same, and it's pretty much distributed and kind of centralized, you don't get quantum leaps. It really is going out there and fighting for it each and every day and once reason cost, I don't know that we're the best in the world at taking cost out. I know one thing. We're one of the best in the world at ever letting the cost get in. So basically these inefficiencies don't get in because we've had this philosophy now for 25 or 30 years that your expense growth can't equal revenue growth. So it almost forces you to not get efficient because you're just not going to tolerate it.

Your next question comes from Gary for Kelly Flynn – Credit Suisse. Gary for Kelly Flynn – Credit Suisse: On the health and benefits products, do you typically see a spike? Is that in Q3 as a result of open enrollment into health plans?

No, we don't normally see any spikes. We're too new to this. It could happen eventually, but a lot of our growth really isn't by more people signing up inside a plan. It's getting more clients. Gary for Kelly Flynn – Credit Suisse: On the retirement services product, I realize generally that they're also 401-K in some cases have been suspended etc., but are there any trends that you're seeing in terms of the reduction and risk appetites of those signing up for 401-K plans and do you expect that to be an ongoing impact on your fees earned?

Absolutely we saw a switch to less risky funds. And that's one of the reasons the market came back. You don't always see all of it because they were never in that point, but we see that and I think John's got a comment here.

It's not that as much as it is the impact of individual cash flows. It's not unusual when you have unemployment running at the level it's running and companies doing salary freezes and 401-K match freezes and so on for people to change their savings patterns. Gary for Kelly Flynn – Credit Suisse: On the payroll services revenue growth targets, is it unrealistic to expect that at least by Q4, as comps get better that you may not at least see growth being flat year over year?

I don't know. Too much moving around. We think we feel pretty good about what we're forecasting. We'll watch how the world moves the next three months and we'll really watch how it moves when we get to the big selling season in January. Gary for Kelly Flynn – Credit Suisse: I was also thinking about the impact on HRS because you usually typically drop from your payroll clients and if they started to spill through. I was wondering about the impact on the next year going forward, is payroll services having a growth or it's not even flat by the end of the year.

We'd love to see it but it's too early to say and as we talked before on the HRS, we just got some unusual items which we feel pretty optimistic about what's going to happen. If you got payroll growth it would be even better. That would actually help HR even more.

We're doing everything we know to get to what you said to be the reality. We hired sales people this year as opposed to taking people out of the equation and we continue to make investments in our product portfolio and so on. So we're doing everything that we know how and hopefully you're right and our guidance is wrong.

Your next question comes from Michael Baker – Raymond James. Michael Baker – Raymond James: I had a question about health reform, and I was wondering if given your presence in the market that the legislators are trying to affect as well as your payroll data you see and the health benefit up take, do you think you'll have an advantage in sourcing leads or identifying those that are uninsured and draw them into the agency?

I don't know if that will be the case. Clearly the position that we have in the market has given us the ability to participate in some of the conversations that are going on in Washington and that's been helpful because in many respects, we know a lot about this business and we know a lot about the efficiencies of how the business could be run, so that part is good. I think that I'm not so sure that the lead thing is right. Where we get a huge advantage in the lead generation is more in the structure, our distribution of go to market structure that we have. When you're in a business like ours where you have almost 600,000 install clients and you talk to somewhere in the neighborhood of 300,000 prospects, just with your general payroll coverage, it's very simple to explore whether or not the clients would also have a need for health care, and if they do, to do a warm transfer for them into the licensed agents that we have to sell the health care products. So we think it's more our position in the marketplace, the number of feet of the street that we have, the number of clients we have internally, the number of clients that we touch each year that give us a significant advantage. Michael Baker – Raymond James: It sounds like they're looking for someone to actually set up and run the state health insurance exchanges and what I was wondering is given your processing knowledge and capabilities whether you would look to actually morph your health agency into one of those exchanges or do you think that would just be a waste of investment?

I don't think it would be a waste of an investment. It is something that we're studying. It is possible that it will become a reality. That's one of the alternatives that are being kicked around. I don't want to get into too much discussion on this, because it is something that we're talking about. But we're very familiar with it and I'd say that there is a possibility that there could be a play there.

Your next question comes from Franco Turrinelli – William Blair & Co. Franco Turrinelli – William Blair & Co.: The thinking on the higher yield instrument, I'm assuming that that is not factored into the guidance that you provided on the interest income.

No, and I wouldn't factor anything in yet.

At this time we have no further questions. I'd like to now turn the call over to your speakers for closing comments.

I would like to thank you all for your interest in Paychex and spending some time with us and hope you all are enjoying life and good weather where you are. We've had a great September after not such a great summer, so hope all is well and we'll talk to you in December. Take care.