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

Thank you for joining us today for our second quarter earnings release. Also here with us today is John Judge, our President and CEO. The call will be comprised of three sections; a review of our second quarter 2009 financial results, including comments and revised guidance for the full year fiscal 2009; an overview from John Judge; and lastly a Q&A session. Yesterday afternoon after the market closed, we released our financial results for the second quarter ended November 30, 2008, and we have filed our Form 10-Q with the SEC which provides additional discussion and analysis of the results for the quarter. These are available by accessing our Investor Relations page at www.paychex.com. In addition, this teleconference is being broadcast over the Internet and will be archived and available on our website for approximately one month. To say the least, these are difficult times. Virtually every business entity is encountering an environment that is both challenging and one that very few have experienced before. Before moving on to the normal sequence of the teleconference, I would like to make a few comments about the wellbeing of Paychex. Our first half of fiscal 2009 reflected total service revenue growth of 7% or $62 million. Operating income net of certain items, primarily interest on funds held for clients, grew 9% or $32 million. Through the efforts of our employees, we were able to pass over 50% of our increased revenues to the operating line. We project full year fiscal 2009 total service revenue growth to be between 5 and 7%. While fiscal 2009 may not be up to the usual Paychex standards, we are still growing and leveraging our operating margins. Our liquidity position continues to remain strong with $479 million in cash and total investments as of November 30, 2008…

Thanks John. Good morning all. Thanks for taking the time to join us on this call. When I think about the quarter we just closed and the macroeconomic environment that we find ourselves in, the thought that keeps crossing my mind is, “I’m glad I’m at Paychex.” I’m glad I work with the quality of people here. I’m glad we have the product offerings that are needed in good economic times and bad. I’m glad we have the financial strength to weather the storm; lots of cash on our balance sheet; excellent cash generation ability; no debt; and no need for debt, but should that change, excellent access to credit. And most importantly, a business model that’s produced excellent financial results for 35 years and will continue to do so in the future. By all measures and especially Paychex measures, this was a tough financial quarter for us and for the U.S. at large. The turbulence in the financial markets is the worst anyone’s seen since the Great Depression and it took its toll on our float revenues, our management fees from 401-K assets, and on our customers and prospective customers. [Doc] took you through the details of our second quarter and first half business performance. I’d like to just emphasize a few points and then we’d be happy to take your questions. First and foremost, we generated $524 million of revenue and $140 million of profit in this tough macroeconomic environment. We expanded our margins slightly during the quarter from 37.5% last year to 38.1% this year. And at the same time as we managed to expense to protect our margins, we continued to invest in important areas for our business. We added sales headcount again this year. We continue to invest in important strategic growth areas such as health insurance. We paid out $224 million in dividends in the first six months and will continue to distribute our profits to our shareholders in the future in future dividends. We have a very large and loyal client base and our customer sat is at an all-time high. Customer satisfaction is critical to our business model and is another area we continue to invest in. We’ve added important new product functionality that has helped our performance, especially in our major markets accounts, products like our time and labor management online product and our HR online product. And our health insurance investment led us to a doubling of that business in the last 12 months with much more to come. So when I think about the headwinds we’re facing and all the macroeconomic challenges in the marketplace, and I talk with my colleagues running other companies in Rochester and throughout the United States, there’s no question we’re all in for a tough and challenging time. But if we have to be in an environment like this, I wouldn’t trade my position with anyone. We’d be happy to take your questions and comments.

(Operator Instructions) Your first question comes from Rod Bourgeois - Sanford C. Bernstein & Co., Inc. Rod Bourgeois - Sanford C. Bernstein & Co., Inc.: I wanted to ask you a question about the guidance. In the volatile economic environment here, I’m wondering if you can give some more specificity on what specific economic assumptions you’re making about the next several quarters of the fiscal year. And the mechanics of that would be really helpful to understand. Are you assuming year-over-year rates of decline in your key economic metrics that are similar to the year-over-year decline that you experienced in the quarter you just reported, or are you incorporating economic events differently in your forward guidance?

No, basically the steepness of what the direction would be on checks per client, new sales, losses, we pretty much maintain the curve at where it is and we projected that into the third and fourth quarter. So basically we didn’t sit there and say okay, checks have declined some percentage in the first six months; we’ll say 1.5%; and then we said okay, we’ll just make it 1.5 for the next six months. No, we projected that to decrease. Now you also have to understand though, we don’t put significant differences in because to estimate there’s going to be another significant downturn, I’ve got no way of knowing that. And the same thing on interest rates. We do the forecast there, if the prime rate changes subsequent to when we give guidance, you know how to quantify that. Now in this instance, though, the float funds have reached a point where there is no rate risk anymore because the rates can’t go down anymore. We basically have three components in the funds held for clients; long term, very predictable; a short term better rate which we have some money in that, we know it’s going to peel off over the next three or four months. That’s where we get about 150 basis points. But we know exactly when it’s going to peel off. And then we have the day-to-day stuff, which is currently getting about 10 basis points. Rod Bourgeois - Sanford C. Bernstein & Co., Inc.: So just to kind of handicap things a little bit for us, I mean when you gave your last guidance, it was probably pretty quick after giving that guidance that it was clear the world had changed and that the guidance would probably need to be tweaked some. Is it less likely that that will happen again, based on the current guidance because of the way you structured it? Or is it in some respects equally likely given the volatility that we have in the economy? Is there any reason why lowering guidance again is less likely here, given the progress you’ve made in the year and the way you’re structuring your guidance?

Hey, Rod, this is John Judge. One of the things that you have to remember is what happened in this quarter. Right? Shortly after we did that guidance, the AIG fell apart, Fannie and Freddie fell apart, and there was a tremendous amount of turmoil that happened in this past quarter. If you think something like that could happen again in the next quarter that would drive as significant a change in the macroeconomic environment then you’d take one pat. We’re not assuming it’s going to be another quarter like this last one, which was pretty dramatic. But as John said when we do our modeling, which is a fairly sophisticated set of modeling, very similar to yours I’m sure, we run two analyses. We run one that takes the trends of the existing environment and if those trends are down, we keep them running down. And then we take another one which is for better or worse we’ll call it worse case, and we talk through both of those and try and figure out where we think the world is going to come out. But I think as John said just before unless you think you’re going to see another set of events that were as dramatic as what happened in this past quarter, and we don’t think that’s going to happen, then you’d kind of go with the trend versus a step function which is really what happened in this quarter. Rod Bourgeois - Sanford C. Bernstein & Co., Inc.: And one final question on that, I mean, you’re entering the critical period for client retention and so is there anything about the current environment that might cause your experience with client retention to be, you know, different than normal? And I understand bankruptcies are a factor here. But outside of bankruptcies are there any factors that would cause you to have a heightened concern about your upcoming retention experience?

No, and I would say the way I would phrase it is there’s not – I mean, the bankruptcies are there and we’ve quantified those for you. The relatively weak new business origination environment that we’re facing is there. So you know there are those things that are in the environment. You know about those. We’ve talked about those. And the accounts themselves, our clients on a retention basis, our client sat is running at its all-time high. We have a very high touch model as you know. We touch our clients, depending on the frequency of their payroll, weekly or you know every two weeks or twice a month in almost all cases. And we have some clients that are monthlies, but for the most part we touch our clients on a regular basis. Our payroll specialists are essentially the payroll department of our clients. So we feel pretty comfortable about where we are relative to knowing our clients, about knowing the validity of the customer sat survey data that we have about where we are in the marketplace. So we feel pretty good about that. So the retention piece, you know, I think, you know, take into account what’s happening in the economy, but I don’t think we’ve got anything out there – there’s nothing I know of that would cause it to run any different than it normally would run, you know, outside the things that you mentioned. And on the sales side, I’d say the same thing is true. I mean, it’s a tough sales environment; no question about it. I mean clients are taking longer to make their decisions. But there’s nothing going on relative to competition, competitive offerings, any issues with our offerings that we’re aware of that would change the landscape for us.

Your next question comes from Kartik Mehta - Ftn Midwest Securities Corp.

John I wanted to ask you about the float portfolio. Obviously the short term rates are near zero. Will you change your duration at all or increase the amount of long term to offset that or were you just going to keep it where it is and let the market just correct itself eventually?

We’ll let the market correct but we have another thing to watch. You know, our primary goal is – it’s a great deal to get this float money. There’s a tremendous amount of responsibility that goes along with it, and we’ve got to make sure that the deal we told our clients we would do when we did it, we’ve got to do. So right now where you’ve got to be a little bit careful in the long term portfolio because while we don’t project it getting significantly worse than it is right now, we have to make sure we’re managing our money that if it gets significantly worse, we’re okay. And the reason is if you had a significant drop in the float balances, then I’ve got to liquidate some of the long term portfolios. So I think it’s a matter of our first objective is to take care of the money for our clients. The next one is principal and liquidity, and you know yield is down the curve a little bit and I think that’s simply being responsible in the industry to what we have to do.

John, I think you said in the last six months that client growth has been flat. If you look at the environment today, do you think net client growth could remain flat based on what the environment is today, going forward?

That’s a reasonable assumption I will not rule out. I mean, ADP had negative client growth in fiscal 2001 or 2, negative client growth to some degree is possible. Do I think it will be significant? I don’t. But you know we’re going into the crucial selling season and the crucial retention season and you know we’ve got some optimism. It’s funny, when we’ve talked to our sales people they don’t feel too good, but the key is that they’re not projecting anything to be significantly worse than what we’ve experienced. And that to me was good news. We did that the other day. Now you don’t know till the pudding shows up, but we’ll see what happens. But we’re optimistic yet cautious and we just keep executing, and we mentioned we kept all the sales positions full. We’re not looking to decrease that sales force. Now obviously in operations and other jobs, people that leave the company are our opportunities to reduce costs, but we’re not doing that in sales.

And the last question, is there any opportunity to move pricing more than 4% to offset any of these negative fundamentals? Or do you keep it at 4 because that’s the way it’s been and that’s what the model says?

Hi Kartik, it’s John. We you know we’ll get into those discussions about pricing in about another two to three months. It’s something that we do in the spring time. The way I’d answer your question is, if you look at the history that we’ve had as a company the answer that you would probably come up with is that yes that you know we could probably push it a little harder than that if we chose to. But when you look at the environment we’re in right now, I’m not so sure that that would be a smart thing to do. I think it’s going to be – you know, it’s always a healthy debate that we have every year around the price increase time. And I think it’s going to be a very healthy one this year. I think that, quite frankly, there’ll be more pressure on the downside on that than on the upside, you know, from our sales and marketing teams just because of the environment. But it is true that at least so far, it appears that we have a relatively price insensitive market and I want to be careful about that. It’s and I think it’s relatively price insensitive because the prices are so low. When we make changes, as you know, when we change something 3 or 4%, you know the net impact on a client is normally less than $100.

Your next question comes from Glenn Greene - Oppenheimer & Co. Glenn Greene - Oppenheimer & Co.: I wanted to go back to sort of the retention attrition issue and to just get some more a little bit more granular if we could, and I know I appreciate sort of the double-digit trends you’ve seen in the business failures, but in a normal environment you sort of have – correct me if I’m wrong, but about a 20% attrition of customers. In that context, what have you seen to date and do you expect – you know, how meaningfully above that 20% do you expect attrition to run this year? Just some clarity around that context.

Well, the number that you’re talking about with the 12 or 13%, I mean that’s a number that refers to the increase in clients going out of business over a normal environment. So you’re right. In a normal – but if you set that aside for a second and you talk about all attrition, you know we’ve been running in a 19 to about a 20, probably a 22 or a 23 range if you look at our long term history. And in the time that I’ve been here watching it pretty closely which is a little over 4 years now, you know we’ve been somewhere between 19 and 20.5 maybe 21. So the only – when we look at attrition right now, the only thing that is different is the macroeconomic environment. The piece that’s different is companies going out of business have increased, there’s a little bit more of companies that have stopped processing. They’re still in business but they’ve stopped processing. It could be a, you know, a five person firm that went down to two people and they stopped running the checks on our system and they’re either doing it manually or not paying themselves at all as they hang on. But the overwhelming majority of our clients, what’s happening inside of them is actually different than what I would have guessed given the environment. You know, I would have guessed that there would be a larger decline of employees in existing clients than there is. It’s down, but it’s down ever so slightly. So that part of it has been a surprise to me. And the overwhelming majority of the clients that are still there, you know because of the high client satisfaction, because of the high touch model that we have with those clients, we don’t think that we’re going to see any changes in that. So the majority of what we’re facing basically is the environment and quite frankly, it would be hard for me to imagine with what we’ve been through over the past six months that it’s going to get a lot worse and cause a much greater business failure scenario for our clients. But again who knows? These are pretty un – Glenn Greene - Oppenheimer & Co.: And business failures are typically 70% or so of the attrition trend if I recall right?

Yes. Oh you mean of our total attrition how much is that? Glenn Greene - Oppenheimer & Co.: Yes.

You know in a normal year, if we lose 20% of our clients we’ll lose somewhere in the neighborhood of 12% of them to business failures; we’ll lose another 1 or 2% of them to clients who have either stopped processing or have lost the ability to pay and we take them off the system; and then in a normal year somewhere in the neighborhood of 4 to 6% will be other things. You know, they’re unhappy with service, they want a different type of product offering than we have, you know there’s a variety of other things. We call those the controllable events and we spend a lot of time working on that to try and get that number as small as we can. But you’re in the right neighborhood in the numbers that you’ve talked about. Glenn Greene - Oppenheimer & Co.: And then just one more question. On the pricing front and I’m not that concerned about the rate card, the 4% that you normally get, but and it relates to a comment that came out on sort of the ADP call their last quarter about regional local providers being more aggressive in discounting and trying to get whatever market share they could in the context of the challenging environment, and that seems to be square sort of in the small, mid-size business environment, your market, have you seen any of that on sort of new business or ancillary service sales or retention or anything like that?

We have and it’s normal by the way at this time of year. And it’s a normal thing to think about when you’re in this type of an economy that people will get more aggressive on price. I mean, one of the ways to think about it is when you have a market like ours that is dominated by two players, ourselves and ADP, if you think about the amount of weapons you have in your arsenal if you will when you try and convince a client not to go with the market leader, you come to price pretty quickly. They’re not going to out-service us, they’re not going to put more product feature functionality into the marketplace, so the only real weapon that they have available to them is price. And they sell in a normal market, they will typically – and we’ll just use a core client as an example as opposed to an [inaudible] client but they’ll typically bring their products into the marketplace at a discount to ours of somewhere in the 20 to 25% rate. And we usually have very little problem winning in that environment. So you know will they tend to get a little more aggressive on price? They will. But you know our business well enough to know that we have very healthy margins and we have a very significant amount of price delegation authority down to the field so to the extent that our people have to do a discount, they have the ability to discount and you know it would be somewhat of a losing battle to them. We’ve been pretty happy with where we are. We’ve got a little bit more discounting in our environment right now than would be normal, but nowhere near what I would have expected given the environment. So the discipline that’s in place on the discounting piece is pretty good. We’ve spent a lot of time working with our teams to make sure that they understand the value that they’re delivering so they don’t get caught in a you know any type of a price war. And on the other side of the coin to keep in mind when you think about these regionals is that in an economic time like this, their financial stability is nowhere near the financial stability of ourselves or a company like an ADP. So you know this is a much more stressful time for them than it is for us.

Your next question comes from [Unidentified Analyst] - Goldman Sachs.

The first question I have is at what percentage of your revenues this year actually get an impact from the sales you did last year? And based on that question like how do you see that impacting next year in that your sales quality is down this year?

Well, obviously the sales we don’t make this year will have an impact next year and generally it’s a little bit bigger than what it is in the current year. In payroll, the revenue in the year only about 10% of it comes from basically what’s sold in the year. Obviously the following year it’s a little bit more. HRS is a little more in the current year because they have sign-up fees but not again it’s the same phenomena.

And the other question is the distance between, and I think you explained this last quarter but it would be great to explain it again, the distance between the percentage of checks per client decline and the business failures like how do you calculate the – like because there’s a disconnect I think there’s 1.5% in the checks per client but more than 10% in business failures. Could you explain that again?

When we’re talking about how many clients fail, I mean, you talk about 12% of clients fail but and it’s up 10%, but we’ve baked in 12. So it’s only up you know the 12 is up 1.5%. So it’s not that big a factor because we’re going to lose 19 anyway. As John talked the range in the time I’ve been here I think has been 19 to 23. We are not at 23 right now. I mean, we’re above 19. We’re probably somewhere between 20 and 21. So it’s not changed that dramatically yet. But you know clients, you don’t have them it’s not as good a situation. Now you talked about the checks per client. That’s simply a calculation. It’s kind of detailed. We take the client base and we don’t do it exactly like ADP does it, because our numbers should be a little bit worse because they I think do it based on existing employees or clients. In other words, the client had to be there a year ago and today. We take the client base what it looked like a year ago, the whole base, and it looks like now, and we measure what the check deterioration has been on a client-by-client basis. That was what was down 1.5%. Now in the last cycle that got the 4%. But it went like a rocket. That hasn’t happened yet this time.

Your next question comes from [Charlie Murphy] – Morgan Stanley. Charlie Murphy – Morgan Stanley: I wanted to ask about compensation related expenses, Paychex’s biggest costs. If you include options expense that number rose 6% year-over-year. Is it fair to say that that rate of growth should continue over the next several quarters given your comments on maintaining service or should it perhaps decrease given your comments [inaudible] little and operations and related areas?

I would guess it would decrease some. I saw at one time, you know on the analysts’ report that talked about how much of a benefit did we get from for example sales not being exactly where they wanted to be. The amount of money that came out of expenses as a result of performance being less than planned, was less than like maybe $3 or $4 million. It was not a very big number. So we’re managing this quite well. Obviously we’ll put whatever measures in place we think we need, but again I want to reemphasize we know we’ve got to service the client base and decreased interest rates don’t change the levels of work. So we’ve got to make sure we’re doing what we need to do for the clients because that’s the best long term philosophy. Charlie Murphy – Morgan Stanley: As a quick follow-up, do you have any first impressions on how the new U.S. presidential administration may impact the small business environment?

I would say only positively. I mean, I haven’t seen anybody in recent years do anything that favors big business over small. I would not expect that to change.

If you look at what has been talked about throughout the primaries and of course you know he’s got to take office and he’s got to do things, but whenever there’s discussion about increasing health benefits, increasing offerings in retirement services area, increasing job growth, all of those things are positive for our business. I mean, we have existing products in every one of those three and those are three pretty big planks of the platform. So anything that is done that will, you know, that moves the needle in those three areas or others, you know, are good for our business.

Your next question comes from James Kissane - Banc of America.

John, what portion of your HRS revenue is actually sensitive to 401-K assets? Maybe kind of touch on the 401-K revenue model, what portion is asset based and what’s account based?

I’d say on the 401-K model, 25% of the revenue is floating on that stuff. About 25%. Now over time that’s going to diminish because our new product what it basically does it offers you more investment choices, we lose basis points but we charge more for the product. And some people ask, why did you go in a direction and lose basis points? Because we’re the leader in the 401-K product and we’ve got to make sure we’re evolving so we meet the needs of those investors. And more and more people want more opportunity to decide what they invest in. And a real good thing on 401-K I feel the best about, you know we’ve got a lot of great sales vice presidents and they’re always very quick to complain to the product people when they don’t have what they need. And our vice president of sales here on the HR side is for about six months been telling us you’ve got all the product that you need; you almost can’t even think of what new product would be in the 401-K line. So we’ll continue to go that way. But it’s about 25%.

And what portion of your sales force compensation is commission based? I guess kind of going back to one of the answers you gave earlier.

Well, the commission base is – the normal sales person’s probably going to make about $40,000 base and about $25,000 variable. Now what you have to recognize is when you get the better sales people, the variable goes up significantly. And you know that’s kind of where it’s – but also don’t assume that we’re selling nothing. Sometimes you can look at this and you say oh, it’s horrible! And it’s not like we like it, but it’s not like nothing’s happening. I mean, when I looked at the source of business and saw that new business starts were only down 12%, that number didn’t quite jive with how I felt but all the time I don’t feel good, I could be better. But it’s not like nothing’s happening.

Okay, just one last question, kind of big picture. John, what’s the tone of the credit market? Last call I think you had said it kept getting worse, you know.

I would say the tone right now is sucks. There’s no place to go. I mean, there’s no return. So when we went out of the variable rate demand notes because we began to believe they might not trade every day, which did happen, they didn’t not trade for very long but I can’t call up you know 100,000 clients and say, “Well, I can’t move $1 billion today.” That you know that’s a bad day. I mean there’s bad days but that’s a real bad one. So right now I think it’s kind of stuck. We came out of those and went right to the U.S. dealer securities so we’re at basically about 10 or 15 basis points. The variable rate demand notes over the quarter eventually came down, so you could take that risk, you’re only going to pick up about 20 basis points. So I think right now it’s trying to work its way through the system. The shock of all those things that happened in late September, I would say things are slightly better but you know is there another way? I don’t know, but my people are doing a good job in this. I mean, I think for us to not have any principal losses and meet all the client demands means that when you come to this responsibility, I’d have a tough time saying how we could have done it better.

Your next question comes from Jason Kupferberg – UBS. Jason Kupferberg – UBS: I wanted to try and cross reference a bunch of these data points. We were talking about flat client growth. We know about the slowdown in core payroll and ancillary sales and some would argue that macro conditions, at least as it relates to unemployment, may very well get worse before they get better. And now it sounds like there might be some incrementally more cautious comments on pricing as we look forward. So when we start to project out, since we’re halfway through fiscal ’09 and start thinking about fiscal ’10, I mean just logically speaking I know you’re not going to give any specific guidance, but services revenue growth logically would it slow versus fiscal ’09, just given everything that I just mentioned?

It could. I think the people that know our story know how the revenue model works. And it’s possible that revenue growth in payroll next year could be a little bit less than it is this year. Now we won’t know all that. There’s a lot of factors that affect that. The timing of a lot of things affects that. And we won’t know that until we get into the budget cycle in the May period. Jason Kupferberg – UBS: And then more of a historical housekeeping item, have you guys ever had a down net income year or a year where adjusted operating income grew as slow as it’s projected to grow in fiscal ’09?

The only year we ever had a down net income growth year was 1990, and actually that year was worse than what we’re having now because there was no interest rate then, so the down number actually was operating income without any float. And this year we’re still projecting 5 to 8% growth in operating income without float. There’s other factors that are in here. You go back and you want to say go back that long, I mean this business now is at $2 billion, back in 1990 it was about $150 million. The market was a little bit different. We weren’t into all these electronic products. HRS was somebody’s dream. The revenue there was zero. We’re a totally different company. So I think when we look at what we’ve been doing and you know we maintained this streak for about 18 or 19 years, I think all streaks are really kind of made to be eventually broken. We feel real good about what we’re doing. We feel real good about our prospects. And based on size, some of them aren’t at the same growth levels they used to be, but we don’t think much has changed. When the cycle ends, we’ll come back and we’ll be very good. Jason Kupferberg – UBS: Just a follow-up on the pricing comments, how do you handle a situation where a customer maybe comes to you and says, “Hey, look, you put in 4% earlier this year but I’ve got ADP knocking on my door saying they’ll do it for, I don’t know, 5% less than you’re doing it now and now’s a good time to cut over before the beginning of the calendar year.” I mean, how do you handle that situation in this environment?

It’s always the same. There’s nothing that’s different this year versus the others. I mean, we put customers on all through the year. We put a lot of customers on at this time of the year because of the natural affinity of get your books lined up with January. But that’s a business as usual business value. I mean, we either are providing a value or not. The same thing is true with ADP. They’re either providing a value or not. So that’s a normal scenario in our world. There’s nothing different that’s going on this year versus others that where that happens. The only guidance I’d give you is we watch pretty closely, you know, the amount of clients we lose to ADP each year and the ones that we gain from them. I’m sure they do the same. And in general terms they tend to be flat. You know for the last several years, we’ve been running a little bit ahead. We’ve taken more of theirs than we’ve lost them, but the numbers are relatively small.

You know, a point I want to make when you look at ’10 because too often you always pick up the slightly negative and miss some of the positive. The float diminishment that took place in fiscal 2009 can’t be anywheres near that in ’10 because there’s no place left to go.

Your next question comes from Tien-Tsin Huang - J. P. Morgan.

John Morphy, I was wondering to the extent possible can you give us the sensitivities for Paychex revenue and earnings to the changes in some of the key metrics like attrition and checks per client and your sales? Similar to what you do on the Fed funds side.

Basically, I mean, let’s take interest rates out. We already went to the depths and we are where we are. If you take clients moving, it doesn’t really affect margins too much unless I really had a significant reduction in clients, because almost all of our costs related to supporting a client are metric based and as the metrics changed, the things got to change. And we balance it. Obviously that’s a little bit easier to deal with in an environment that’s positive than one that’s highly negative. But I would not anticipate any highly negative in that area. The one that affects margins the most is checks per client. And if net declines slightly, we’ve been able to fight that off. And we’ve done that so far in this cycle. There does come a point, though, if checks per client fall enough or precipitously, where for a short period of time or until it recovers, we could have some margin degradation. Now one thing and I saw another point and I meant to put it in my comments and I forgot to, is somebody was commenting does the guidance imply margin degradation across the rest of the year? Well, historically our margins are not the same all year. The highest margins are in the first quarter, and then they basically drift off a little bit because of the timing of when the price increase goes in, our budget process and the Paychex kind of year end which really isn’t a May 31 year-end, the business year-end is basically December, January, February. So basically we’ll watch margins, we watch our costs aggressively. I don’t remember any time in our history where margins have changed dramatically and I wouldn’t anticipate that would happen here. But you could get some events that would put them under a little bit of pressure, but again, and we look at this guidance that we’re changing today, and wow, by Paychex standards it seems like it’s real big. Most companies would love to have our guidance problem.

I guess just thinking about further than checks per client, if it were to shift down 100 [bips] what would the earnings impact be?

A hundred bips?

Yes, 100 bips.

A hundred bips, that’s one person per client?

Yes. If I were moving from with that 1% to down 2%.

Oh, 1%, 2%?

Yes, sorry.

Probably less than $5 million.

Less than $5 million. Then attrition if we were to go to say 20 to 21%, is it the similar sort of thinking?

No, that revenue could be a little bit higher. But the costs would [inaudible] it. So that’s the one I don’t worry about as much.

So it ranks really checks per client and then attrition.

Checks per client is hard because I don’t get a cost offset. That last check is the lowest revenue per check but it’s probably the most profitable check. Now another thing that’s kind of interesting when you look at the data is, when checks per client goes down my revenue per check actually goes up.

I’m just trying to think about it sensitivities. I know ADP gives some of the detail around checks per client changes and how that influences earnings. That’s why I was asking. So the $5 million is a pretty good proxy for now.

Yes, reasonable. Now you have to remember that when you’re talking with them, I mean they’ve got that whole upper end. A lot of their revenues and I’m not in, so I’m not sure their metrics and mine would be exactly the same.

The last question for me is just the I guess the ancillary services. Is there any risk of existing clients dropping some of the ancillary services, particularly 401-K? Have you seen some of that and how has that pattern looked in the past cycles?

First off, we didn’t have that much HRS in the past cycles. So it’s a little bit new territory. Highly unlikely many people drop taxpayer direct deposit, because those are almost a basic part of the product. The 401-K plans though when I think they do start to drop you’ll find that that client has already reached a point where I’m not getting much economics from them anyway. When you get down to three or four employees, the guy’s stopped the match, he stopped all these other things, so I lose that client. It’s not that big – I mean, I don’t like it but the financial impact is the same as others because in the 401-K model, and the pricing model is not quite as good as our payroll model, on the low end. On the low end on pricing of the payroll product, we give great leveraging on pricing and for the work we have to do. Obviously the client doesn’t pay as much, but we have good profit levels. The 401-K gets to be a little more uniform based per employee. So the charges don’t quite have as big effect. So the small client basically goes down is not as big a deal.

Your next question comes from David Grossman - Thomas Weisel Partners.

Just to get back to something that was asked a little bit earlier and this may be overly simplistic, but it appears the payroll guidance you know assumes flat client growth plus your annual price increase. So if in fact that’s a fair way to look at it, you know with bankruptcies up, etc., can you help us understand you know how strong of a selling push relative to prior years that you’d need in the February quarter to keep that you know client base flat year-over-year?

We – this guidance is not based upon the selling season being better than the last one. It’s based on the level of percentage of plan that they’ve done the first six months will continue. And you know sometimes people are you selling 50% of what you expect? No, we’re way above 50%. Now we’re not where we’d like to be. I mean, the normal range for a Paychex sales force is probably somewhere between 95 and 102, 103. So we’re below the 95 but it’s not like the world has ended.

When you say 95, you mean 95% of the prior year?

Plan. We work off plan. I don’t work off prior year.

And just one other question, John, in the 10-Q there was a comment and I may have misunderstood this about that your baseline clients [slot] income would be $60 million which looks like that would be down, I don’t know, about $15 million from the mid-point of your guidance for this year. Did I understand that right and ?

Basically what we were trying to do was to quantify a rock bottom number with the long term float. Though we’re not projecting that it’s going to do that. Basically that would say the bottom is around $60 million, assuming short term you get zero. That would mean you’d have $2 or $3 billion invested in nothing. You know, interest rates can’t stay at 10 basis points.

So that so the $60 million would be essentially all the income off the long term float?

Yes, and what I’m trying to identify is everybody worries about, “Well, I’ll drop $52 to $60 million this year.” They can’t drop $52 to $60 million next year because there’s not enough left to drop. The drop is probably less than half of that.

Your next question comes from Mark Marcon - Robert W. Baird.

I was wondering on the float, can you talk a little bit about what you were assuming with regards to the average float balance for the balance of the year?

What it’s been. Could that could it be subject to some there, but the only place that that’s going to have an impact is going to be in the bonus season. I don’t believe wages that variance can change dramatically, the bonus season could change, but that’s money or extra money we’re only holding for like three days. The bonus season really is amazing. I wish I could give you some information on it because you think well it must have started well, but 95% of the bonuses that happen between December 29 and January 3. There’s probably some risk on that, but that’s not going to be a big number.

So when you say what we’re seeing you mean essentially if we take a look at the last quarter –

I’ve got float balance that’s probably flat. I mean, 2% isn’t enough to worry – you know, 2%’s nothing.

And so if we’re looking at the guidance in terms of the ENS revenue then essentially if we’re running the average float balance at roughly flat, then that’ll tell us exactly what your guidance is assuming with regards to the yield.

Yes, I think you can figure it out. And one thing I would tell you is that it’ll be better in the third quarter than the fourth. And it’s only because we have some short term instruments that are still above the 10% - 10 point basis points. Now the average duration – they’ve got defined duration. They’re not at risk, but they’re going to mature and in this environment we are not predicting you can get the same rate back again. You know, at some point there’s got to be a little more sanity to some of these rates. But we’re not trying to predict when it will happen.

Just along those lines, what point – what would the trigger point be for you to move into slightly riskier assets?

It’s once the banking – I’ll be back in variable rate demand notes once the banks start working well together. Right now I just I can’t trust the system, and the Fed and the people, they’ve got to get the system back under control. I mean, variable rate demand notes really aren’t a problem. My problem relates to the fact that I can’t miss even for a day. But I believe order will be restored to that and rates will be restored. I can’t tell you when. I mean, if you have any confidence that this is going to get better or recover then it all has to go back to normal at some point.

What’s your sense with regards to as we look out over the you know, say, 18 months and let’s assume the environment stays challenging through the end of this fiscal year and certainly when you’re planning for fiscal 2010 things don’t just turn around on a dime, how should we think about, you know, your expense growth for next year in terms of the controllable expenses?

Well, Mark, it’s very hard to answer that question now because you know, again, you’re going to have to look at each one of your elements. If I don’t have any client growth, when it comes to operations and G&A, there isn’t going to be any expense growth, okay, or very little. Because we have a long term culture here, expenses grow less than revenue. Now the real question you come back to then is what are you going to do in the area of selling? You know, selling one of the toughest decisions to make is if you decide to reduce the size of your sales force. It’s almost like admitting defeat. And I don’t see us doing that.

Could you increase it at a lower rate than what you have in the past?

Absolutely. If you ask me, it’s going to go up less than it did this year.

Right. And so from that perspective and it could potentially go up at a rate that would be similar to what you would expect with regards to your growth, could it not?

Yes.

And then your other elements would actually come down, relative to the growth.

No, we’re going to be cautious and prudent and again we’ve got to service clients at the level we need to but I guarantee you money we don’t need to spend, we’re not spending. But we will invest in what we think the future needs.

Mark, it would be safe for you to assume that our [ELR] is going to stay constant or get better.

And then with regards to just the healthcare initiative you made some comments about that’s going to get better, the new administration is basically planning on sticking with an employer based healthcare system and it sounds like there’s going to be penalties for those who don’t put in place healthcare. How are you – how material or how big could that become over the next couple of years do you think?

Well, it’s hard to say. One thing we do know on our client base, when you go above I’ll use 25 employees, a very high percentage of our client base above 25 employees offers healthcare. That doesn’t mean all the employees take it. They might not like the cost of it. But it is offered to them. So that number’s above 80%.

But two things, Mark, when you think about healthcare for us that I think are material, one, I think that healthcare will stay as a high priority agenda item through this administration and the next. And two, it’s a very high priority item for us and we’re relatively new into it. So I mean it’s hard for me to see anything happening other than a continuation of pretty significant growth in the health insurance business for us. And by the way, we’re spending more time on the individual health now as well, so it’s not just small group. It’s also small individual.

Your next question comes from [Gary Krishnan] – Credit Suisse. Gary Krishnan – Credit Suisse: I just had a question on net new client growth. Is there a way for us to think about how far new business charts or companies going out of business, the metrics would have to deteriorate for net new clients to maybe be negative for the year?

Well, we just said a few minutes ago it’s possible for client growth to grow negative. So some of those metrics could exist now. Now, do the metrics exist to take it significantly negative? At the moment, no. But you know we’re heading into the season that will tell us a little bit more than we know now. But you know we have no reason to believe that.

There just isn’t all of that if you think about it at least the way I think about it is those are things that when they reverse, we reverse with it. So you know if we were having problems with our existing clients, that would paint one picture. But when the only issue that you’re having is either a lack of new business starts or an increase in companies going out of business, the minute that those trends reverse themselves, we reverse right with it. So if you have to have problems, those are the good problems to have.

Your next question comes from Franco Turrinelli - William Blair & Company, LLC. Franco Turrinelli - William Blair & Company, LLC: John Morphy, did I hear you correctly? Did you say that in the previous cycle pace per control got as low as minus 4%?

Yes. Franco Turrinelli - William Blair & Company, LLC: And what was the kind of client growth at the time? What’s kind of the correlation between those two?

Well, we can go back. It was 2002. I think client growth was I’m going to guess about 5%. It might have been a little lower. Franco Turrinelli - William Blair & Company, LLC: So we’re clearly in a different environment both –

Yes, I think client growth back then was hard to determine because I just remembered that’s when we bought [Advantage] and [Inter-Pay]. I think if you go back – I’d have to go back and look at our releases and our [SEC] annual report, my belief is we quantified organic growth to the best we could. Franco Turrinelli - William Blair & Company, LLC: Yes. I showed – I think you did, by my recollections.

I’ll make a guess, I think it was between 3 and 5. Franco Turrinelli - William Blair & Company, LLC: Which is a perfect segue into my other question, maybe more for John Judge. You know, you commented on the advantages of being at Paychex and the financial stresses and strains that your smaller competitors may be experiencing. Can you just comment a little bit on your view of the opportunity and maybe your appetite for consolidating the industry maybe a little bit more?

Well, we buy small payroll companies every year and have been for a very long time. And this year is no different than that. So we continue to buy smaller companies. I completely subscribe to the theory that when you get into times like this, particularly if you have financial strength as we do, that while you’re going to have challenges you’re going to have hopefully great opportunities that present themselves to you. We have a fairly significant amount of cash on our balance sheet. We generate a lot of cash. We have sort of an envied position relative to our credit worthiness, and a credit line secured and unsecured that we actually have in place right now. So we have pretty good currency even in this market in our stock. So something show itself that would either help our product offerings or help our financials, we have an appetite for acquisition which I assume is what your question is. So it’s sort of a combination. We have the means and we have the appetite. We, as you know because we spend a lot of time with you, we’re a very disciplined company. And so we’re not going to go on a buying spree just because we can. But if something shows itself and it’s the right play for us, you know, a straight up payroll company’s a very easy thing for us to evaluate because we do it on a regular basis. Some of the other companies that might be interesting to us that have product offerings, they’re a little more difficult but the bottom line is that we have an appetite and we have the means and the only question is, you know, does something show up that makes sense for us and our clients? Franco Turrinelli - William Blair & Company, LLC: Which actually is a great segue into my last question, if I may, you know we’re collectively aware I think of the investments that you’ve made and are now making in the healthcare and the 401-K offerings, are there other investments that are important that are kind of underway right now that, all alternatively that you may choose to defer in this current environment?

Not so much on the defer side, if I understood your question, but if you think about MMS as an example, in the course of the last couple of years and you know without a lot of fanfare and without a lot of headlines, we have made some pretty significant improvements to our time and labor management offerings, to our HR online offerings, to our series of things that are again in the HR world that have to do with things like applicant tracking, background checks for new employees. We’ve dramatically increased the number of HR consultants that we have available to small to medium-sized businesses to help them with essentially everything that is done in a normal, HR department whether that’s onboard, determination, you know benefits administration and so on. So we’ve made a lot of investments there. We’re going to continue again as we find things that make sense to sort of fill out that wheel of offerings if you will. We’ll continue to do that. And you know when we look at this year as an example, one of the strongest sales teams that we have going right now is our MMS team. They’re having a terrific year and a big part of why we think they’re having a terrific year is that they’ve got some offerings that either you know are in and of themselves creating revenue opportunities or they’re enabling our MMS clients to talk to us because otherwise we didn’t have a time and labor management module, as an example. So you know those things things are continuing. Now in terms of are we going to disinvest the foreign investments, you know, we have to make those decisions every quarter and every year. And to the extent that we’re, you know, we’re investing in…

There’s nothing that we’re currently investing in or? Franco Turrinelli - William Blair & Company, LLC: Well, nothing that you – I mean as I said it feels like your portfolio of products and services is in pretty good shape right now, which allows you to maybe make some of these decisions factoring in the current environment.

Yes. I’d say that that’s mostly right, but you also know us well enough to know that when we’re either investing in something that’s not cooked yet or we’re pursuing something that we’re not prepared to talk publicly about yet, that we just don’t talk about it. There’s rarely a time, at least that I’ve seen around here, where we’re just sort of you know standing pat and working as hard as we can on our existing environment. We always spend some percentage of our management time and our funds, quite frankly, on things that are you know three to five or five to ten years out. And there’s no difference with that right now. It’s that balance that we’ve talked about where we’re pretty intense on the current fiscal year, but we always carve off some amount of our resources for both management think time and funds to invest in things that will impact us in the future. And to the extent that you get stressed in your current environment, you might look a little harder on the monies that you’re spending in the future. But I can’t imagine that we’d ever get to a time where we’re not working on things that are three, four, five, six years down the line.

Your next question comes from Michael Costanza – Penfield Post. Michael Costanza – Penfield Post: Thank you gentlemen for taking my call. A couple of things. Let me start with what would be local and what concerns people of Monroe County. I did hear the word attrition. When speaking of different elements of your plans for the future, I know it’s not going to be in your sales force but do you plan to not be filling positions in other areas?

When you heard the word attrition in our dialogue, Michael, that was relating to our clients not our employees. Michael Costanza – Penfield Post: Oh, I see. So you are going to continue to retain your employees at the level that you have them now?

Well, who knows, but I mean if you look at what’s happened with our company in the last four years, our employment in Rochester has gone from 2,000 to 3,300. Our square footage has gone from something in the neighborhood of 400,000 square feet to over 800,000 square feet. You know, we’ve grown our employee base in Rochester at about 55% over that period of time where in the rest of the country we’ve grown at about 35 or 36. So you know where we’ve been both a growth engine in this town for some period of time and I don’t see that changing. Michael Costanza – Penfield Post: Good. Very good to hear. Also I’ve been wondering – hello? Are you still there?

Yes, we’re still here. Michael Costanza – Penfield Post: Oh, I’m sorry. I’ve been wondering whether the downturn might actually have provided a boon in your human resources business in the sense that companies that are downsizing would need to make more use of human resource services to deal with the employees who would be leaving, for example, and I’m only using that as an example. Am I mistaken about that?

It varies. Remember we’re on the low side, 17 employees the average side of the client. So we don’t – outsourcing for us is more to get away from worry free and something you don’t want to do. Very little of our outsourcing actually means they lay off employees, so outsourcing is a little bit of a misnomer on our end. If you’re on the large end, outsourcing means you reduce jobs. Michael Costanza – Penfield Post: Those were my only questions. Thank you.

Thank you.

Your last question comes from Michael Baker - Raymond James.

John Morphy, just wanted to get some color on the workers comp side in terms of given the change in the economy during the quarter, did you see any meaningful change in claims activity?

I haven’t seen any at all. It’s going to be interesting to see what happens because I always believed that claims went up in these times and the insurance companies tell us claims go down, because people don’t want to report stuff, don’t want to go on disability, etc. So I haven’t seen anything dramatic and we’ll just keep watching it. The effect on the PEO went back to [pace] the accidents, and when you’ve got workers comp, you’ve got a portfolio that’s got about five or six years open in it, it was back – most of those claims are two or three years ago, and whoever quantified the adversity of the claim missed it. Now I use this as an example. It isn’t a good one and we didn’t have this, but we’ll say you thought somebody had a broken arm and now you find out amputate the arm, so the cost goes up. Okay, I think if we don’t have any other questions, I think we’ve enjoyed the call. We always appreciate your interest and we’re glad to be here and I hope you all have a great holiday season with you and your families.

Thank you for participating in today’s conference. You may disconnect at this time.