Welcome and thank you all for standing by. (Operator Instructions) I would now like to turn the call over to Mr. John Morphy, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you for joining us today on our third quarter earnings release. Also with us is Jon Judge, our President and CEO. The teleconference call will be comprised of three sections: a review of third quarter 2007 financial results, including comments and guidance for full year 2007; an overview from Jon; and lastly, a Q&A session. Yesterday afternoon after the market closed, we released our financial results for the third quarter ended February 28, 2007. This press release can be obtained by accessing our website at the Investor Relations page. We have also filed our Form 10-Q with the SEC, which provides additional discussion and analysis of the results of the quarter. This filing is also available on our website. In addition, this teleconference is being broadcast over the Internet and it will be archived and available on our website until April 30, 2007. Please refer to our website for access to all recent news releases, current financial information, SEC filings, and our Investor Relations presentation that will be updated next week or so. Third quarter was another excellent record setting quarter for Paychex. Total revenue was up 13%. Payroll service revenue grew 8%. Payroll revenue growth was slightly lower than normal, primarily due to year-over-year growth on year end type revenue, such as year end reports and W-2's not being quite as strong as last year when payroll revenue growth was very strong at 10%. We anticipate the fourth quarter will be in the slightly over 9% range. As mentioned before, quarter-over-quarter revenue growth can bounce around. It is not always indicative of full year results. Human resource services revenue increased 25% to $102.2 million as we crossed the $100 million in a quarter threshold for the first time ever. We continued to leverage our revenue growth with operating…

Thanks, John. I'll just add a few comments and then open up for Q&A. As John pointed out, we were pleased with how the quarter played out. It was another record quarter for the key financial drivers. Revenue performance was solid, with payroll services revenue at 8% growth against a pretty tough compare. HRS revenue at 25% growth. Operating income growth at 18%, excluding the normal items of interest in client funds and stock compensation litigation reserve, was very strong there. Diluted earnings per share of 35%, less the 2% that John mentioned for the unusual charge for the litigation reserve, was right on target. Our expense management was excellent as was margin protection. So, we were pleased with our financial performance. But there were other reasons for our positive feelings about how our nearly 12,000 people performed. The third quarter is a very important quarter for us and one where it's imperative that we perform well if we're to have a good year. It's our clients' year end, so there's lots of important processing and service delivery work to be performed. It's the most important quarter from a sales volume standpoint, especially December and January. It's the quarter where we put on the most number of new clients because of January and the new calendar year. From a P&L standpoint, it'll usually determine whether or not we can deliver the full year performance at our stated guidance. So in short, while it might seem like just another quarter, it's not. We actually have a lot riding on how we perform in the third quarter. With all that said, let me comment on why we feel so positive about the results our team put forward. We had one of the most successful and least eventful client year end closings that…

(Operator Instructions) Your first question comes from Craig Peckham – Jeffries. Craig Peckham – Jeffries: Hi, John Morphy, thanks for some of the explanation on the rate of growth in the payroll services line. I wondered if you could elaborate a bit, is there any correlation between the rate of growth in payroll service revenue in this quarter and your comments on what's happening with balances? John Morphy: No, because the float income basically is not in payroll service revenue and the balances in filing frequencies don't really affect our revenue or profitability other than the floating coming back. Craig Peckham - Jefferies: Could you give us an update in terms of what's happening on the health care front? John Morphy: The health care front is going pretty much exactly as we planned it to be. We're in the process of building out our sales teams and building out the back office support systems for it. It's going extremely well. I would say that our early experiences would absolutely reconfirm that this is one of the brightest opportunities that we have in front of us and one that we are going to pursue extremely vigorously. Craig Peckham - Jefferies: I suppose it's too early to give us any revenue statistics there though? John Morphy: That would be correct.

Your next question comes from Brandt Sakakeeny - Deutsche Bank. Brandt Sakakeeny - Deutsche Bank: Just in terms of the 8% payroll growth, maybe John or Jon, if you could just highlight again a couple issues that maybe resulted in that this quarter? Also, your confidence that you'll achieve the 9% to 11% target in the payroll growth for the full year? Thanks. Jon Judge: First, you've got the guidance 9% to 11%, that says something. I just mentioned we believe the fourth quarter is going to be slightly over 9%. Basically, the third quarter is an unusual quarter for us because it's kind of our year end. Not the accounting year end but the client year end and year-over-year reporting can vary different. And we have to make accruals going into the quarter based on W-2's and other things. It doesn't take much year-over-year on some of that unusual to be different to drive the number down. So, a year ago we got strong 10% growth because those year-end things more went our way and this year a couple didn't go quite as strong as they did in the prior year so, it's affected the growth number a little bit in the quarter. But we've looked at our forecast and we believe it's going to be right back to a little above nine in the fourth quarter. I think it's just a one quarter thing. Brandt Sakakeeny - Deutsche Bank: Right. And I guess number two is, clearly Ceridian is having some issues, more on the stock front. Have you seen in your major market segment any fallout from the noise around that or is it sort of business as usual there? Jon Judge: Ceridian is an interesting company, one we rarely see in the marketplace. They tend to…

Your next question comes from Adam Frisch - UBS. Adam Frisch - UBS: John Morphy, just a quick clarity on the payroll growth. The 9% that you're calling for the fourth quarter, is that the total line item or does that exclude major market and other payroll? John Morphy: Payroll service revenue. That's the only revenue number we give you. Adam Frisch - UBS: On the three main components of revenue growth -- pricing, ancillary and clients -- have there been any changes there that you've seen? Jon Judge spoke to a strong market and you're really pleased with the quarter but were there any kind of changes in those three main drivers of the top line? Jon Judge: We stay within our parameters. And you have to recognize, when we look at that growth formula, the client growth really can range from 3.5% to a beautiful 5%, though it wouldn't be in the imminent future, although we'd like to keep pushing for it. Pricing is generally around 4% and probably the more consistent and ancillaries are the same thing. They really can range from 3.5% to as many as much as 6%. Lately, the client growth has been the one that's been not quite as strong in that formula, but the ancillary has been more than making up for it. So far, I think we're still pretty close on the revenue model. Adam Frisch - UBS: John, you answered a question about the healthcare initiative from Craig's question. But anything substantial on the 401-K side, any new initiative you have going on over there? John Morphy: 401-K is playing out very well. We talk to you about the investments that we made to create what we were calling multifund at the time, which is a capability in-house to essentially…

Our next question comes from Brian Keane - Prudential. Brian Keane - Prudential: You said December and January are the big key sales months. It sounds like new client growth for the year will probably fall out 3% to 4%. I was just hoping, Jon Judge, you could give us a little bit of color on the sales this year? Did there tend to be more bankruptcies, more start-ups, less start-ups, just kind of on the environment there? Jon Judge: I don't really have anything to report you on those particular metrics. On the bankruptcies, there's no dramatic change in that that would cause us to even go in to do a detailed analysis on it. On the new business starts, there's nothing dramatically different there. I will remind you, though that one of the interesting things about our business is that even when we have a bankruptcy, if we've done the right job in terms of client satisfaction, when these companies go bankrupt, the people end up either starting a new company or going into an existing company next door. So, they actually continue to be referrals for us and help generate new business for us even in the case of a bankruptcy. But on the points that you brought out, there's really nothing that I'm aware of; John can comment if he sees something differently. There's nothing I'm aware of that would suggest that there's anything different going on, on bankruptcies, if there's anything different going on in terms of the rate of client growth inside of our clients. That seems to be pretty stable at somewhere between 1% and 2%. We don't see a lot going on new in terms of new business starts. Either slowing down or speeding up. So, I really don't see anything in…

Your next question comes from Tim Morly - A.G. Edwards. Tim Morly - A.G. Edwards : Just on the 401-K business in terms of additional utilization by employees at existing customers, have you seen any changes on that that you might attribute to the auto enrollment kinds of features from legislation several months ago? John Morphy: We're not seeing that and the reason is that if you go back and you ask the clients that you have do you want to flip in auto enrollment?, which is probably more to our benefit than theirs, they probably don't do too much of it. But if you can try to get it squeezed into new plans, then you're going to see more of it. Auto enrollment is going to be a little more controlled by the company because while you want people in the 401-K plans, auto enrollment may cost you more in matches etc., but then there's Safe Harbor rules. So, I think all the stuff in the end is going to help but it's going to take a while. Tim Morly - A.G. Edwards : And then my follow-up question goes back to the issue of the cash on the balance sheet. But just thinking about the M&A environment, I am just curious any thoughts you have about the realistic amount of money you think you may commit to M&A? I'm sure you look at stuff all the time, like you said. But thinking about the things you look at and would consider, do you think you really only need to earmark $500 million for M&A or $600 million over the foreseeable future or is it too hard to even put a tag on that amount? Jon Judge: We don't think of it as specifically in those terms as you…

Our next question comes from Charlie Murphy - Morgan Stanley. Charlie Murphy - Morgan Stanley: John Morphy, could you talk a little about CapEx? I think you provided the guidance down two times this year, if I'm not mistaken? What's driving that? John Morphy: The down happens because our people don't spend the money. Charlie Murphy - Morgan Stanley: So if you look out to next year, how much is maintenance CapEx versus growth, what should we expect there? John Morphy: I don't think CapEx next year will be any different from this year. If anything, it'll be lower. We had some big stuff in there but again, I'm not the whole way through the budget. But our people, generally we get aggressive sometimes in what we approve and our limiting factor on CapEx is not cash, it's what can we implement and get the returns on.

David Grossman with Thomas Weisel Partners, you may ask your question.

We talked a lot about the payroll business. Maybe I missed it, but could you give maybe at least some qualitative views on how the checks per client have tracked in the quarter versus let's say the first half of the year? John Morphy: Checks per client are relatively flat right now. There's been times in the year where we've seen some improvement, but I wouldn't say anything consistent, which is why your hear us continually use the kind of discussion of stuck in a good place. The last time we saw check acceleration that was meaningful was in the first quarter of fiscal 2006.

Is that consistent with prior business cycles that you've experienced in terms of the trend in checks per client? John Morphy: Checks per client actually doesn't usually change very much except when the cycles really change. It's amazing how it just stays kind of right where it is. But it can move fast both ways when you get either real good expansion or the other one. That's what we saw the first quarter last year. Something moved it and that's when we changed the guidance up a little bit for the operating year. But since then, we've really seen pretty good check activity, maybe slightly up but not a lot.

John, your comments about the float balances. I think you talked about 8% is a good number to use going forward. So, are we at a point now, I think you said your anniversary of the rate increases is in the first quarter of fiscal '08. Is that to imply then that we should look for just maybe a little modest uptick, but somewhere just above 8% in terms of float income growth? John Morphy: Float income growth from my perspective will be somewhere between 7% and 10% in the following year. We haven't modeled the whole thing but if I'm sitting here knowing what I know, the same thing you can get from reading our 10-Q and as we discussed this, I think that's what a reasonable person would assume.

Your next question comes from T.C. Robillard - Bank of America. T.C. Robillard - Bank of America: Jon, forgive my ignorance here, but can you give just some examples as to what can be unusual, some specific examples around what varies in the third quarter? You said last year it caused you guys 10% growth, this year it was 8%. Can you just give me some examples of what happens with your clients at year end that can cause some fluctuation? Jon Judge: There's a bunch of things. The third quarter, in a way we don't have a seasonal business but in a way we do. It seems like it's so predictable but to give you an example, float is seasonal. The best quarter for us on float is the third. The next best is the fourth, and the next best is the first, and the worst is the second. That's because the money pile-ups at the front end and the bonuses where they are and the federal deposit withholdings and the FICA. Now you take the business, though, you've got year end, which is the big thing that causes change. So, what's involved in a year end is you've got obviously W-2s. Now, in W-2's, our philosophy and policy is that we basically earn that revenue all year, there's very little W-2 that we prepare that we don't get paid for. It's minuscule. So, we basically accrue W-2 revenue across the whole year based upon a year end basis. So, basically it's a March accrual until the end of February. We accrue it and we basically break the accrual into 13 periods booking two periods in January because a little more work gets done in January than the rest of the year. So, you've got some swings on that year-over-year. The other thing that happens in this quarter is you've got all the year end reports. You got the year end bonus checks. So, you've got a lot of transactions that tie to activity that's not normal to the whole year. So at the end of the day, that's why the revenue generally goes up and it's why we also sometimes don't get sequentially higher revenue from the third quarter to the fourth. So, you've just got all those unusual items. You don't get as much of it on the human resource side, but you do get some of it there because you have 401-K filings and other things, but it doesn't seem to be as built up. But you get transactional things and you get the W-2's, you get the float moving and then you've got the year end report. So, it does move around. And there's really no way to estimate that stuff as closely as we can estimate some other things.

Our next question comes from Gary Bisbee - Lehman Brothers. Gary Bisbee - Lehman Brothers: You mentioned a minute ago that what you're seeing in terms of penetration on the ancillary products with new clients is very high. Can you give us a sense what that's trended like in the last few quarters for the sale of the HR products into the new payroll customers because penetration is substantially higher than overall? Jon Judge: Penetration levels don't bounce around too much. The payroll ones have been high for quite a while on tax pay and direct deposit. HRS, obviously we've got pieces that grow, the ones we're pushing like Paychex Premiere, if you call that an ancillary, that growth obviously is continuing to be excellent. Now, the year-over-year growth on that might be less only because we're getting to more critical mass. When something is at 0%, getting it to increase a big percent is easier than when finally it gets up to tens of millions of dollars. So, we looked at each one of these and we pushed the sales forces. But while in terms of being ancillaries, I don't think the penetration of the take rate changes dramatically as much as maybe our emphasis on where the product is on a maturity cycle. Like workers' comp, I think about 10% of the base has workers' comp. Hopefully, that's going to get up to about as 30%. So these growth rates just kind of move along as time goes on but it isn't like all of a sudden we see more people taking something. John Morphy: Well, in reference your specific question I think if I heard right, the difference would be in a new client, tax pay penetration might be at 98% or 99% whereas in our installed…

Your next question comes from Mark Marcon - R.W. Baird. Mark Marcon - Robert W. Baird: Good morning. Could you -- did you mention specifically how the retention for clients payroll shaped up for this quarter? Was it at a new record level? Jon Judge: Yes. I did, although, I maybe went over it quickly. The new client retention or the inverse would be client loss, those numbers are running at record levels. We broke the record last year and we've been running this year at levels beyond last year's performance and we're at a point now through the third quarter with one quarter to play, I don't like to go and make too many projections or point to the center field wall too many times, but I feel very strongly that our ops team is going to probably bring us in this year at a new record, which would be hopefully below 20% on losses. Mark Marcon - Robert W. Baird: John Morphy, your comment with regards to the average check per clients not changing. When you're saying that, are you saying that in terms of the overall pool, which you have the normal dynamic where you're bringing in new clients that are smaller than the average client and so that balances out? Or are you saying that in terms of if you looked at the same client a year ago, they have an increased hiring? John Morphy: We don't look at the same client a year ago because it's almost impossible to do with our level of detail and payouts in the client base. Not that there's a bad cast, it's just a lot of coming and going. No, that's the average for the whole base. Mark Marcon - Robert W. Baird: That's what I thought. And so,…

Our next question comes from Greg Smith - Merrill Lynch. Greg Smith - Merrill Lynch: Intuit's payroll business looked like it might have been a good fit. Any reason you guys didn't do that deal? Jon Judge: Well, I'm thinking about how to answer this question. We were very much aware of that deal. We have very good insight into that client base, and we have a reasonably good understanding of how that business was performing inside Intuit and we did not have any interest in buying that client base. John Morphy: I am sure ADP was very happy when we bought Advantage and InterPay and we weren't too disturbed when they bought Intuit. Greg Smith - Merrill Lynch: Got it. Okay very helpful. There was a lot of talk about the balance sheet and the cash. Just curious if the idea of taking on debt and paying out a big one-time dividend, is that something that's ever been considered or are you just philosophically against something like that? John Morphy: We've looked at it but that gives the person sitting there a nice Christmas present but it doesn't do much for the ongoing situation. Jon Judge: I would say that we're philosophically against both of those ideas but we're more philosophically against one-time distributions than we are about taking on debt.

Your next question comes from Jeremy Davis - Credit Suisse. Jeremy Davis - Credit Suisse: Good morning, guys. I know it's a small component of overall profitability, but wondering if you've seen any trends on workers' comp or health care costs within the PEO business or claims activity that may have changed? Jon Judge: No, we haven't seen anything, but we're probably not the best ones to ask on that and that's because we are just brutal at making sure we're minimizing risk on our PEO. We have a great group of people down that run the PEO organization. We have clearly told them that while we want growth, we don't want increased risk. We continue to do very well in our worker's comp claims in that business and our healthcare is under control. So, we're in a little bit different spot than the rest of them. ADP is probably a little more closer to us but I think Adminstaff, they look at this differently. They're trying to make money in areas where we aren't. It doesn't mean it's good, bad or indifferent, it's just different posturing and different ways of looking at the base. We also have the Paychex Premier product push in kind of the PEO type of environment and actually we're seeing more Premier in Florida. We're still seeing PEO but we are seeing some Premier business that's very good down there too, which keeps us out of those situations. Jeremy Davis - Credit Suisse: Good. Well keep being brutal. Jon Judge: We will. Jeremy Davis - Credit Suisse: Any commentary on time and labor? I don't think anybody's commented on that one yet and whether or not you're getting up to the high teens or maybe a $20 million run rate in that business yet? Jon Judge: Well, we're definitely, if I take all of it, the Stromberg piece plus Paychex piece, we're definitely over $20 million. I don't know that we're over $30 million but we're clearly over $20 million. It's a good business for us and it helps us sell other stuff, it really helped us sell other stuff. This isn't a business we went into so much to just get margins off it. In enables us in the MMS marketplace to get clients and significant MMS revenue where we wouldn't get them without these products. So, we're pretty happy with them.

Our next question comes from Sanil Daptardar - Sentinel Asset Management. Sanil Daptardar - Sentinel Asset Management: On the operating expenses, if you look at the operating margins, they were down sequentially, you did mention about litigation reserves of $13 million. If you exclude those reserves, there was a sequential drop of more than 100 basis points, was it solely due to the hiring of additional employees or something else has gone into that? John Morphy: First off, you should not look at our operating margin sequentially quarter by quarter ever because it doesn't work. I talked about the seasonality earlier in the call, we don't look at it that way and they can bounce all over the place. Actually, the better one to look at -- and I also don't look at too much of the gross margin without the selling and G&A expenses because we have a tough time categorizing clearly there. The best statistic, and we disclosed it, is operating income without float. Now, here you've got to take out stock-based comp because there wasn't any of that a year ago. Next year you'll leave that in. Obviously, we take out the $13 million in the lawsuit, what you'll see is that the quarter generated almost 18% increase in operating income year over year in that quarter. That is 3 points above our stated objective and the quarter also got us to the fact that we're at 15% our stated objective year-to-date. So basically, when I look at margins and things going on, we felt very favorable about them in the quarter. But when you do sequential and some other things, it doesn't always work. Now, one of the reasons it doesn't, is our margins generally jump the most in the first quarter. The price increase goes…

Your next question comes from Liz Grausam - Goldman Sachs. Liz Grausam - Goldman Sachs: Thank you. I'm actually going to ask the margin question from the opposite side. You guys outperformed my margin expectations by quite a bit in the quarter. So what contributed, in your mind, to some of that outperformance? Was it just better expense control, was there some spending that you ratcheted back, related really to sales productivity that delivered that margin? John Morphy: Well, basically, we are tough on expenses. The second thing is a very clean year-end helps expenses because you don't have overtime on your payroll specialists. And I don't know how much we had but I know we had less than we had in the past. We've had year-ends where the burden on a branch is just overwhelming. So, we're running it better and better and we also knew that we did some investing a little bit earlier in the year than we normally do, which is why we were below our 15% goal. But we've been after our managers and they've done a great of responding; ideally we want to be back to the 15% threshold through the nine months and we were able to do that. Liz Grausam - Goldman Sachs: On the multifund product, I know last quarter you said that it was taking a little bit longer to ramp customers onto that just due to the newness of the products. How is that initiative going in terms of getting clients up and running on the product? Jon Judge: It's going well, as I mentioned earlier. I'm not going to give you the specific numbers but I will tell you that I've had some concern expressed to me from our operations team because we're putting on somewhere in the neighborhood of almost three times the number of people that we've put into the plan. So, we're kind of working the back room over time right now and they're running as fast as they can to keep up. We're pretty pleased with where it is.

Your next question comes from Franco Turrinelli - William Blair. Franco Turrinelli - William Blair: A question for you on the 401-K front. I noticed the growth in retirement services client up 15% and the employee fund up 24%. Can you give us a little bit more insight into these numbers? Clearly, you're getting more penetration of the base, is that really penetrating the existing base or is it really what you've been talking about in terms of new customers taking this on a lot? I'm assuming the funds are up because the average plan size, so to speak, is bigger. Is that because different types of customers are coming on board? What's been going on that explains these numbers? John Morphy: The funds are up because the stock market is up. Franco Turrinelli - William Blair: It's as simple as that? John Morphy: Our client base hasn't changed materially. When the multifund thing gets a little more down the road, hopefully we'll get more conversions. We've had good acceptance of that product. But that's why that's up. So, I don't look at those two to ever move in sync. In the 401-K, 15% is doing well. Franco Turrinelli - William Blair: Jon Judge, can you give us an update on international? Jon Judge: Not a significant change from the last time that we talked. The international continues, Germany continues to go well. The expansion there is as we've discussed in the past, it's one where we're running that as fast as the expense world will allow us to run it; and really not a whole lot more to report. It's going well. It continues to rise at levels faster than opening up a new operation in the U.S. would run. All in all, it seems to be going quite…

Our final question comes from Rod Bourgeois - Sanford Bernstein. Rod Bourgeois - Sanford Bernstein: The 18% operating income growth, that float at 18% is very nice to see. Congrats on the margin expansion there. The question that I have relates to the float and earnings growth outlook, which is what we've kind of been focused on here lately. John, you made it pretty clear that the balance growth is probably going to be in the 8% range. I also take it that you're expecting the yield to potentially peak here in the not too distant future. Can you talk about that dynamic? John Morphy: I think it's going to get stuck, hopefully, in the safe peak. I think it's going to be stuck until they do something. You're not going to see much rate change. Rod Bourgeois - Sanford Bernstein: Right. So, but does that happen about mid calendar year? John Morphy: I think you're going to see that dynamic happen right in the first quarter. Rod Bourgeois - Sanford Bernstein: Okay. And therefore, you get 7% to 8% float earnings growth because the yield maxes out and gets stuck and then the balance just grows at 8%? John Morphy: Correct. It's going to go equal to the balance curve. We've done some planning on it. I don't know the exact number, but that's why I said somewhere between 7% and 10% and probably somewhere right in the middle of that. Until I really run all the cash flows, I don't know exactly. But we know that float income growth does diminish quickly and you've seen it diminish lately. But the last increased anniversary is the one that was on June 29, which was the day after our guidance in the beginning of the year. Rod Bourgeois - Sanford Bernstein: John, at this point with the structure of the interest rate world, do you have pretty good visibility into how the yield will play out over the next year? Are there any wild cards with respect to the shape of the yield curve or anything? John Morphy: I don't think so because the long-term portfolio; well it's not a super long-term, those rates do not change very much. In the short-term they almost go with rate with the federal funds rate. Rod Bourgeois - Sanford Bernstein: Thanks very much, guys. John Morphy: Again, we thank you for your great interest in Paychex. Jon and I are looking out at one of those unbelievable March days. It's actually sunny and warm here and hopefully the rest of the year will be like that. So anyway, thanks a lot and you all have a great start to spring.