Good afternoon and welcome to the Pitney Bowes Fourth Quarter 2007 Earnings Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question and answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce your speakers for today's conference call, Mr. Murray Martin, President and Chief Executive Officer; Mr. Bruce Nolop, Executive Vice President and Chief Financial Officer; and Mr. Charles McBride, Vice President, Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overview.

Thank you and good afternoon. Let me remind you that you can find today's earnings press release and the attached schedules on our website at www.pb.com/investorrelations. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change based on various important factors, including changes in international or national political or economic conditions, timely development and acceptance of new products, timing of potential acquisitions, mergers or restructurings, gaining product approval, successful entry into new markets, changes in interest rates and changes in postal regulations as more fully outlined in the company's Form 10-K Annual Report filed with the Securities and Exchange Commission. Additionally, if there are any non-GAAP measures discussed during the call such as adjusted earnings per share, earnings before interest and taxes or EBIT, free cash flow and organic revenue, there will be a reconciliation of those measures to GAAP measures located on our website. Now, our President and Chief Executive Officer, Murray Martin, will start with an overview of the quarter. Murray?

Good afternoon and thank you for joining us for today's quarterly results announcement. I will share a few thoughts on the quarter and the year, and Bruce will follow with a financial overview of the fourth quarter and the year as well as an update on our transition initiatives. I will conclude with our outlook for 2008 and then we will open the line for questions. Overall, 2007 was a year of continued progress and transformation. We have taken steps to anticipate the changing environment and to enhance our long-term success. We enriched our offerings and delivered more value through our strategic expansion into faster growing segments of the mailstream. We continued our focus on operational efficiency, free cash flow, and expense management while accelerating some planned actions to deliver long-term value. While we faced some challenges in the second half of 2007, we remain confident that our progress in expanding and transforming our business positions us for bottom line growth and increased shareholders value. Our results highlighted the outstanding success of our growth strategies and the timeliness of the transition initiatives that we began implementing in the fourth quarter. Both our annual revenue of $6.1 billion and our fourth quarter revenue of $1.7 billion were in line with our expectations. Adjusted earnings per share was better than expected for both the quarter and the year at $0.72 and $2.72 respectively. The free cash flow for the year of $924 million was substantially better than we had originally projected. As we saw throughout 2007, the quarter's results were led by strong performances from our mail services and our software segments. Growth in mail services continues to be driven by presort and cross-border mail services, as well as enhanced operating leverage. Our software segment's fourth quarter performance was paced by strong…

Our revenue was $1.7 billion for the quarter, which was an 8% increase from the prior year and within our guidance range of 6% to 9%. Foreign currency contributed about 4% and acquisitions about 5% to our revenue growth. For the quarter, our revenue in the U.S. grew by 1% while our revenue outside the U.S. grew by 25%. For the year, our revenue was $6.1 billion, which represents 7% increase from the prior year. This also was within our guidance range of 6% to 8%. Our earnings before interest and taxes or EBIT for the quarter was $310 million. Our EBIT margin was 18.7%, which was lower than the prior year, but up from the third quarter. The decline in our EBIT margins from the prior year was primarily due to a lower gross margin, which reflects a shift in mix. Also, our SG&A expense ratio was up slightly this quarter when compared with the prior year. But this was solely related to currency and acquisitions. If you exclude these factors, SG&A was actually down for the quarter and our ratio of SG&A to revenue declined by two-tenths of a percent. If we add back depreciation and amortization, our EBITDA for the quarter was $408 million, which was close to the $414 million of EBITDA in last year's fourth quarter. Our adjusted earning per share for the quarter was $0.72, which compares with our guidance of $0.67 to $0.71 and $0.77 in the same period last year. For the year, our adjusted earnings per share was $2.72, which compares with our guidance of $2.67 to $2.71 and was $0.03 above the $2.69 for the prior year. Our adjusted earnings per share was affected by higher interest expense due to increased levels of debt outstanding and the fact that last…

We view 2008 as a year of opportunity. We are excited about the opportunities for growth and value creation ahead and believe that we are taking the right actions to successfully manage the lingering conditions that we identified at the end of 2007. That is why we are reaffirming the 2008 guidance that we provided in November. We expect revenue growth in the range of 6% to 9% and adjusted diluted earnings per share from continuing operations in the range of $2.80 to $2.90. As we discussed in November, the significant activity levels generated from the rate change, which occurred in the first half of 2007, will impact our comparisons for the first half of 2008. We expect that the ongoing focus on our strategic priorities will result in a stronger second half of the year. In 2007 our earnings per share were evenly split at 50% in each half of the year. In 2008, we expect that split will be more like the pattern of 2006, which was 46% and 54%. In closing, this year we will continue strengthening our growth platforms. We will execute our transition initiatives. We will focus on operation efficiency; enhance customer experience and innovation, while leveraging our more diverse portfolio of products, software, and services in new ways. We'll now take your questions. Question And Answer

Thank you. [Operator Instructions]. And our first question comes from Matt Troy with Citi. Please go ahead.

Good evening. A couple of questions. I wanted to get my hands around how to think about the domestic mail piece going forward, 3-5 years. When the dust settles on the events of the last couple of quarters, I was just wondering, you have historically given us an organic growth rate in that business. I thought it was something 3% to 4%ish or may be it was 1% to 3%, a lot of numbers in my head today. But when the dust settles and you kind of figure out more what the run rate business looks like, is that going to be a lower number than you have given in the past, higher, or about equal?

Hi, Matt. It's Murray. In the past, we have said 1% to 3%, and we anticipate that will slide a point and be in the 0% to 2% range.

Okay.

As we look forward. As I had mentioned earlier, we do have that lower number of leases outstanding through the third and fourth and first and second quarter of FY08. That comes back to about neutral in the third and then goes positive in Q4 forward.

Okay. And then why structurally the lower growth rate? Is it just the maturity of the business, is it a few placements fall out a result of migration? Are the one-two things you can point to as to why that you lose a point on that?

I think, Matt, there you have hit on a number of the items; one, there has been more functionality put into lower speed equipment, which makes it much more cost-effective for the customer. And so, as a result, instead of having to buy up, they can now buy mid-range and accomplish their tasks with all the feature and functionality. So, technology has enabled the customer to see better performance in the band that they would require rather than having to go up. So, I think that would be the major event, the number of placements are staying in the same ballpark. It is really the reshaping of the customers' installed base.

All right. And you can offset that with the higher growth in software and services through and around that installed base.

Correct, that's exactly right.

On the second question, Neopost, they have shadowed you fairly well over the last couple of quarters in terms of starting similar market conditions. I was just wondering if in a while I think has anyone asked, do you see Neopost as a more relevant competitor now relative to, let's say, when they put Neopost and Ascom Hassler together? Are they becoming more of a competitor or is it pretty stable in terms of how you guys line up and how do you measure that? Is it point share, is it incremental placement games, help me how we get a better sense that the share is pretty stable?

As we look at it, the share remains very stable. There has not been any significant shares. So we don't see anything specifically different there. We will continue to innovate with new products and technology, and continue to lead in the marketplace as we have throughout our history. So, we don't see anything where we would slow down our investment into new and better products and innovation that would allow for any change in the North American mix. As we looked on a global basis, we continue to see opportunity where we are expanding our shares. So we look at that as a continuing opportunity in the international marketplace.

And last question.

And Matt, just one other thing I would add, this is Bruce, that as Murray said, we generally measure our placements and market share by number of meters outstanding. But in some cases, Neopost is adding revenue per meter that we already have. For example, they are doing more financing. So it's possible that they will look differently than us, but not gaining market share.

Okay. Last one from me. Managed services, evaluating strategic alternatives, I know it's early days, but what have you learned? What kind of interest is out there? And I know again it's early, but is the interest kind of below, at or above what you would have expected? That would be part one, and then two, are you just looking at managed services? Murray, you're a savvy operational guy. Are you looking at the whole book of business? Are you really just focused on the alternatives for managed services?

First of all, let me answer the two questions. One on managed services, I would say that what is clear is we have a good, solid business that performs very well in its sector and is a desirable asset. So, that's how I'd characterize management services. It then becomes in this market what is the best option for that asset and we would look to be able to give more specific responses on that in the second quarter.

Okay.

So that's where we would we be there. Secondly, to other pieces of the business, I believe in continuously evaluating all of your assets and we will... we are and will continue to do that on a regular basis so that we will always be looking at what will enable us to maximize the value of the business.

Okay thanks Bruce, thanks Murray.

Thank you. And our next question comes from the line of Jay Vleeschhouwer from Merrill Lynch. Please go ahead.

Thanks, good afternoon. My first question is, Murray, can you comment on conditions in vertical markets other than financial services, if there is any update there. Second on the equipment side, first, a short-term question, to what extent did business that did not close in the third quarter get closed in the fourth quarter? And your comment about the mixing down the downshifting of equipment, an answer to Matt's question is interesting, but it's not necessarily a new trend, does it, or are you suggesting that perhaps the down mixing is becoming more exacerbated?

I got to try and remember all of your questions, Jay. So if we... do you want to give me one at a time?

Sure. Sorry, first, the verticals other than financial services.

Yes, in the verticals outside of financial services, certainly financial services has had the most damage in this period of time. But it does have rollover effects in other areas. And so we don't see the same magnitude of effect as we did in the others, but places like retail certainly follows right along that pattern. So, I'd say some not as much basically where we had anticipated it to be in those areas.

Okay. On the equipment side --

Downsizing.

Right and then whether any of the Q3 business that missed got closed in Q4?

So, on the equipment, that has been a historical; however, we have been introducing new products with new technology at an accelerating rate, which offers the functionality. So, the technology that has become available and allowed us to do that has accelerated a little more than... a little more quickly than what we would have anticipated. So that is really the one item and the other of course is the ending of migration, which would also have a slight adjusting effect when you compare on a year-over-year basis.

Okay.

As to Q3 to Q4, we have seen... I would say, when I talked in Q3, there was some suspension particularly in the financial services sector and certainly we said then and believe that those can't stay indefinitely and we have seen some activity, but not to the level that we would yet expect. So, it's not staying out there permanently. It is coming in, but still not at the rate that we are looking for on the longer term.

All right. Just a couple of last ones. With respect to PBMS, can you comment at all on how your signings looked in the quarter and since you announced your exploration of strategic options, have there been any changes or difficulties in terms of employee retention, the effectiveness of executing contracts in place, anything of that kind where people might be reevaluating their future with that part of the company?

PBMS is a leadership company in its industry and as such it continues to lead. It has a solid management team which is committed to the business and committed to its future direction, whatever the best strategic option there is and they look at it as whatever is the best strategic option will also be the best for the business and for their customers. Therefore, they are in very good position to talk to their customers about being the leading provider in that space and that being a continuing case regardless of who the shareholders are if there was to be a transition. So, we are not seeing any issues there as far as retention and expansion and our business continues to be riding well. As you can see, our results are still positive in that space and we expect it to go along with the forecast that we had put in place that it will continue to grow.

And lastly for me on the software business, you pointed out the strength in that quarter. How would rank the effects of any role of just seasonality, cross-selling pursuant to the integration of the organization, or just overall better new product introductions, selling effectiveness and so forth?

Well, as you are aware, the software business, I don't know whether you call it seasonal, but it does sort of come in waves and that's certainly there. I don't think there is any particular seasonality around it. I do believe that the consolidation that we have put in place of Group 1 and MapInfo to create a much larger and more dynamic software business is giving us strength in the marketplace. It's giving us linkages between the products. It's giving us more depth in the customers and exposing more products to other customers. So, your point about cross-sell et cetera, yes, that leverage is starting to occur and I think we are only starting to see the value of what will come in that business as it aggregates into a very powerful software company.

Okay. Thanks Murray.

Thank you. Our next question is from Carol Sabbagha with Lehman brothers. Please go ahead.

Thanks. Can I dig a little bit deeper please into on the U.S. mailing numbers? It seems like the trends worsened from the third quarter. I know you didn't have... in the third quarter you mentioned that it was in the full quarter of a weak economy et cetera, but it seems like going from negative, call it, 3% almost to a negative 9% is the worsening of trends. I was trying to figure out what happened within that and within U.S. mailing, how much were equipment sales down?

I don't know that we've got the equipment sale handy, Carol, but let me just deal with the first part of your question and we will see we can get you the other answer. If you look at it from Q3 to Q4, first of all, there was some residual shape base in the beginning of Q3 and you didn't have the financial effect for the entire quarter. Secondly, if you recall last year Q4 was a very substantial quarter. So, you had also a slight anomaly of a very large Q4 from a comparison last year, which would have been higher than our trend and that's really where you would see the shift.

Yes, tell... just the number of equipment sales was down about 25% and just to say why would it be that much is first is, as Murray mentioned, you had the end of meter migration and last year that was a fairly significant component and that is going to go through. Secondly is the lease explorations. As we mentioned, just as you look at what comes due, and as we talked in the call last quarter, the way it works is if a customer enters into a new lease, even if it's the same equipment; that produces what would be an equipment sale for accounting purposes. So you get kind of a magnifying effect and that's why the revenue that's reported for accounting tends to be more... have more fluctuations than the actual cash flow that we are getting from customers and that's why you get sometimes like this quarter, you'll get a disconnect between what looks like from the accounting perspective, what it is looking like from an economic or cash flow perspective.

Okay. And then can you

So one other thing I mentioned too, just before I lose it, is --

Sorry.

Also with meter migration, shifting from electronic to digital, you had a significant increase in supplies revenue and that tapered off because, again, that was really at the end of 2006. So, every quarter is not growing as fast as it did in the past.

And then if you look at what the U.S. mailing did for the year sort of to try the even-out the second quarter anomaly, what did it do overall organically for the year and what was equipment sales like for the year? I don't know if it is easy to get those two numbers.

The first one on the organic, it was a decline of a little bit over 1%.

Okay

About 1.5% and equipment, let's call, a 10% decline.

Okay. And then it seems like the economic, the weakening economy had a little bit more of an impact on U.S. mailing. Your other businesses seemed to have improving trends versus what they saw in the third quarter. Why would you think it's mostly impacting mailing? Is that the one that's most exposed to financial markets, I thought may be management services may have been?

Carol, I don't think that I would say that's the economic. That has to do with the shifting in the lease space and what is available for renewal and for trade-up more than the economics. So, certainly there is some economic effect in there, but it is more on what we would see and as we discussed last quarter that we have a lower set of opportunities in Q4, Q1, and Q2. And so, what we were telling you in Q3 is that that trend will be there and we won't pull those leases forward by trying to finance the customer early. They need to fall in their regular chain. So, you had the time shift in Q2 and also you had the meter migration completion, which creates that about12-month spot in our 5-year cycle of lease renewals. And that is much bigger effect than the economic effect.

Economic. Okay, and then my last quick question is you kind of talked about what the quarterly seasonality is going to be next year, but you didn't give quarterly guidance for 1Q. Are you stopping doing that and why unless I missed it?

Yes, we are giving annual guidance and we will be as open as we can be in providing you with transparency of information, and what our trends look like going forward. As we and our Board have looked at what the trends are in this regard, we believe that the best practice is to move to an annual guidance. So we are moving to annual guidance, but we will continue to have a high level of transparency and work with you in working on your models as you go forward.

Thank you very much.

Thank you. Our next question is from Shannon Cross with Cross Research. Please go ahead.

Hi, good evening. First question I had just with regard to your production mailing segment, you talked about strength in the U.S. and I am sorry, I lost it here, there was one other region, was that Asia and weakness in Europe I think? If you could just provide any more color on what's driving the strength there and how we should think about it as we go in to 2008? Again, if you compare, that's obviously some of the weakness you saw in the U.S. mailing segment?

As you look at Asia, Asia is continuing to perform very, very well and... in all sections and we are seeing as the economy evolves in Asia, it's now moving to the point where a high volume mail is becoming practical from high-end hardware point of view. They are now looking for more and more efficiencies, but more than that the integrity that we deliver with our systems to ensure that the right pieces of paper are in the right envelope, and then tying that together with our software. So, you will continue to see growth in that area as their economy continues to progress very well and as the infrastructures build in those areas. So, we see that as a long-term. In the U.S. we continue to see positive effects from the new products and services that we introduced in the DMT marketplace. We also see the value of the integrity that we bring with the linkage of the software and hardware that we can deliver that is really not available to the same extent as elsewhere. And it's placed us in a significantly different competitive position. As we switch to Europe, in Europe, the market has not moved as quickly to adopt the higher integrity solutions and we expect that that will continue to move forward, particularly as you see the market now looking at how to affect TransPromo, and that is putting promotional information right in the print stream and inserting it in the envelope. So, we see this as a trend. I just got back from Europe and the trend is also starting there. I talked with a variety of people and they are now starting to look at something totally different than they had before, which is TransPromo. The other item in the U.S. is we have had increasing enthusiasm about our Relia-Vote systems and that is vote by mail. We have a high security system that ties in end-to-end linkage together and we are getting more and more traction with that product in different states and in local governments to facilitate all of their interim voting requirements. So, although it works within the federal system, a lot of the application there is on different state-wide voting areas. So, that is another area that is continuing to be very positive in this segment for us.

Is there any... I mean, is that something that should ramp? I mean, it's probably relatively small, but will it ramp as we get closer to the election or is it just sort of a continual shift that people are making?

I think it's more of a continual shift. It will continue to ramp, but it won't necessarily accelerate around the election. This is more of a long-term trend, which enables the populous to be involved in government in a much easier form. So, rather than having to be on a certain date in a certain location, this ensures that everybody has access. It is a controlled system. So, we are seeing a greater and greater level of adoption throughout the U.S. and we would expect that trend to continue and accelerate going forward.

Okay. And then can you remind us, I think you started to see this earlier than a lot in terms of the economic slowdown, but there has been more and more talk about fewer credit card mailings and obviously a tightening there. How should we think about the impact to your business? Obviously, it's hurting U.S. mailing, but... and sort of how far along do you think we are in terms of the tightening in situations like that? Just to sort of gauge how much further, I guess, pressure from may be the credit card side or the financial side do you think can go?

Well, first, let me respond by saying most of the mail that we are involved in includes a transaction. So, it isn't quite as sensitive as if we were in the mass mailing business. We have not that higher percentile. Certainly we sell software for list cleansing and document preparation et cetera, but the bulk of our revenues tend to be around transactional mail. So, if there are four pages instead of five, that could have some effect, but normally you will still get a bill regardless of the economy and that's what has always made Pitney Bowes a much softer float in negative environments, is it doesn't get hit quite the same, similarly it doesn't get quite the benefit on an up market because that number, that volume stays relatively constant. We have seen some in the other spaces, but again, we are more fringe in that area than directly involved.

Okay, great. And then I don't know maybe Bruce, could you talk a little bit about... obviously you listed a number of factors that improved cash flow during 2007. Can you talk a little bit about the puts and takes there, the lower finance receivables et cetera and what we should think about carrying forward in 2008, and if there is... do you think opportunity for upside to the number that you provided, especially given the out-performance this year?

Yes, I would say just comment, first of all, in 2008 our main presumption is that working capital, finance receivables, and taxes will return to more normal levels and so that drives the forecast. In other words, we don't think that this level of free cash flow is sustainable just from a systemic point of view. And in addition, there were a couple of areas that will change in '08. One is, as I mentioned, in '07 we have the sale of the training facility, which is in Atlanta and that was $30 million. So that will not repeat and also because we are taking the transition initiatives on our product line, we will have to spend more on rental assets than we did this year. So we estimate roughly $50 million swing in '08 compared to '07. So, that's why it may look like we are going down in free cash flow, but it's coming from a base. That doesn't mean there is not potential upside, particularly in the three areas that I mentioned, working capital which we are going to continue to focus on, finance receivables to the degree that if sales don't come in as much as expected. The kind of the good thing about the Pitney Bowes' business model is cash flow goes up because you are not producing any finance receivables. And also taxes is another area where we are always looking for ways to defer expenses. So that's kind of a philosophical overview of it.

Okay, great. Thank you very much.

Thank you. Our next question is from Julio Quinteros with Goldman Sachs. Please go ahead.

Hi, this is Kim sitting in for Julio. I was just wondering on your revenue guidance and your visibility, how comfortable are you in terms of visibility in your guidance given the takedown last quarter?

As we said last quarter, we spend a fair amount of time looking forward and wanted to be sure that we had solid ranges and I think you can see from our fourth quarter that we are pretty accurate in projecting where our ranges are. Of course you are never going to say you are going to be perfect, but we think that we've done a very good job of forecasting what is realistic in the current environment. There was a positive of significance or a negative of significance, we would talk to that. But we think that we are in a pretty good understanding of what will happen through 2008 given continuation of current conditions.

Okay, great. Thank you.

Our next question is from Ananda Baruah with Banc of America. Please go ahead.

Okay. Thanks a lot guys. This is actually Ananda Baruah from B of A. Just quick question again on U.S. mailing on equipment. Is it fair to say or I guess I wanted to get your opinion on whether you feel that it was a little bit weaker this quarter than you originally anticipated?

No, we don't want to leave you with that impression. When we gave the revised guidance and that was as of the end of last quarter, we fully expected U.S. mailing to be that low and we did not give specific guidance with respect to U.S. mailing for the quarter. But if we had, it would have been consistent with what we came out. And that was, if you recall, we took our time before we gave new guidance for the fourth quarter as we wanted to be sure we had it. So we went through and actually looked at all the leases coming due and had a very good handle on what was coming. And so just want to reinforce, there were no surprises this quarter. If anything, the only surprise was upside on software from what we expected and expense controls have been a little bit better, which is why we came in slightly above our guidance range.

Thanks, that's helpful. And if I recall, did you provide sort of an '08 kind of guidance range previously for U.S. mailing?

We did not.

You did not, okay. And then just sort of regarding your recurring revenues, I was just wondering sort of what are recurring revenue aspects of maybe the financial services vertical versus some of your other verticals, and then maybe the recurring revenue aspects of your enterprise business versus your mid-market business, the difference there?

Yes, the one thing I would say is that the difference in recurring revenue versus not would not be a function necessarily of the vertical, it would relate more to the type of products being sold. And in general, in U.S. mailing, it's a recurring sales approach in the sense that a customer signs up and they have a monthly payment and for accounting purposes, we record much of that as a sale. So even what we call non-recurring, which is for accounting of sale, in the context of U.S. mail is really much more of a long-term relationship with the customer. Where you have one-off sale that would tend to be more in the high volume mailers such as in production mail and those would be... have a high percentage of financial services. Financial services is also fairly high in management, in our management services business, which is very much long-term contracts. So, all that is a long way of saying that I don't think that looking at vertical markets is a good way to really distinguish between recurring and non-recurring revenue.

Okay, got it. So, it's more along, but there's along the product lines, but then there are certain product lines that might sell more predominantly into different verticals.

That's correct. That's right.

Okay, thanks. And how much of your 6% to 9% revenue forecast for FY08 is organic?

We think it's probably going to be in a range of 2% to 5%.

Okay, great. And then just one last one from me, I guess going back to Carol's original question about... it's actually Matt's originally question about the secular long-term kind of growth opportunity for U.S. mailing equipments, I guess you are saying now it might look more like 0% to 2% versus 1% to 3%, a lot of that's because of the increased functionality. So, should we take away from that that nothing sort of the current dynamic notwithstanding, your sense is that nothing about the inherent secular demand opportunities is really changing?

That's correct. We are seeing that things are staying fairly stable as to where they have been other than the areas we've touched on.

Okay, thanks a lot.

Thank you. There are no further questions at this time. I'm sorry, we do have one last question from Chris Whitmore with Deutsche Bank. Please go ahead.

Thanks very much. Just in response to an earlier question, you seemed to suggest that the weakness in U.S. mailing would be about a four quarter phenomenon. First, did I hear it correctly, did I understand that commentary correctly? And if so, why would it recover after this 12 month-period? Thanks.

Yeah, Chris. We run five-year leases and they renew at the end of the five years or slightly before. So, we can actually see the flow of business that is coming in and what causes the cycle to change is when you have meter migration and you get changes that pulls things around in the standard flow. So, I would say on the current trend, five years from now, we will have a similar valley because of the way it flows. So, as we trend out the five-year bookings, we can tell what is coming up and the opportunity there is therefore it. And so, that's what's caused the shift in the current period. It actually goes back 4.5 years from when that occurs and that's why we can see when it comes positive. So, we can see that on an ongoing basis.

So, maybe you can help me understand why we were surprised a quarter ago. If you have such kind of visibility on the timing of these lease renewals and the U.S. mailing business is a primary area of disappointment, why didn't we see this coming and how can we have confidence again that it reaccelerates going forward? Is there a technology driver, is there a regulatory driver et cetera? Thanks.

I think there is really two things and as I said back at the end of Q3, the first was we did not really account for what happened with leases when they had partial lease upgrades, which is what occurred in Q1 and Q2 of last year. And what I mean by that to try and simplify it is if you have a piece of equipment three years into a five-year lease and we upgrade that equipment for you with technology, which is what we did in Q1 and Q2 of last year, instead of trading that earlier, you actually extend the time before the trade up. You say I just got the upgrade to the equipment and therefore I won't trade it on the regular schedule, I'll let it go a little longer. And that actually is where we had not anticipated that there would be a change in the timing of when people upgrade their leases as a result of what happened in Q1 and Q2. And that was the major change that we saw and it was something we have now got in our models, but we had not put anything like that into prior modeling. And then of course the second part was the economic effect. So, it was really the two, one on top of the other, but we didn't have that in the model. We now have it in the model and so, as there are any future similar changes it will occur, we'll see when it will occur and then of course the economic effect, which causes people to extend their leases rather than putting a new piece of equipment, which gives us the same revenue flow on a stream basis, but it doesn't give us the sale recognition that you would have when you change the piece of equipment. From a profitability point of view, it's of course very good when you extend the same unit in place. So those are really the three items that occurred that we now have a better way of looking at and projecting.

And in terms of any technology or regulatory drivers that are coming in the future, in the next 12 to 18 months to drive upgrades?

What we actually see there is nothing real specific. But, as I also spoke in November, we are moving to persistent connected devices, and we see a lot of value that will occur in the coming years in that area, and we are working very closely with the postal service in creating new values by having devices connected that can be changed, and modified on a much more frequent basis. And so it will be instead of having a hardwired device, we will have softer devices that can migrate much more quickly, and the customers will see benefits in that as far as their costing and capabilities as the postal service continues to roll out full phase scanning, particularly here in the U.S. And that will be there in Q2 of '08, and as a result, the ability to scan the barcodes and take action on those will be greatly enhanced. So we see that as more of the natural program rather than a forced one, and we believe that it is better to have a natural value curve creation rather than a forced mandate, which causes irregularities in the market.

Okay. Final question was on equipment margins, equipment margins actually were a bit below, about 4 points below what I had modeled. What's your outlook for equipment margins going forward? Thanks and that's it.

What... when you say equipment margin, I think you are looking at mix, and so I think it really would be more a function of the mix between U.S. mail, which is the meter business, and production mail, and we don't see any changes in the margin on the equipment for each business. So the only exposure is to what degree the mix changes.

Thank you. We do have a follow-up question from Ananda with Banc of America. Please go ahead.

Thanks guys. Just one more high level one. I guess how would you characterize the state of, or your feel for the state of the economy is today versus sort of what you had baked into your forecast back in November? Thanks.

I think we are seeing basically what we have forecasted at the time. I believe we saw it a little earlier than many people saw it because when you look at our business, it is very involved right early in where the transactions are originated and so we probably saw it earlier and we haven't seen any major trend or anything that has changed from where we had seen it in the end of the third quarter. So we are seeing a fairly constant state at this point.

Okay, thank you.

And we do have a question from Jake Hemmeni [ph] with Morgan Stanley. Please go ahead.

Hi. Looks like you have got about $550 million of notes maturing in 2008 and looks like you are going to do another close to $400 million of share repurchase plus the dividend. So, the three of those combine about $1.2 billion of cash needs and you are going to generate at the midpoint, $650 million of free cash flow. So can you kind of just bridge me to how are you going to finance the gap there?

Yes, I would say a couple of things. First is you may want to look at cash flow over a two-year period. In other words, we've had in 2007 extraordinary free cash flow. So, if you add the free cash flow that we achieved in 2007 plus what we expect in 2008, you can see that we can accommodate all of the dividends, the share repurchase that we have announced today and the cash portion of the restructuring, all that is accommodated by the free cash flow either that we have already generated or that we are projecting for 2008. So, the first premise is that you don't have that same issue. Second is we will use commercial paper as part of it. We think that part of our offset to an economy is the floating rate and as I mentioned, we have 80% fixed rate and 20% floating, which is a much higher ratio than we typically would have. So, we can use that. And then the other thing that creates uncertainty is just to what extent we do anything with management services and until that gets resolved, we don't want to lock into any particular financing strategy.

How much commercial paper do you have outstanding currently?

We have about $500 million outstanding

Okay, thanks.

Thank you. And we do have a question from Edward Donohue with oneINVEST [ph]. Please go ahead.

Good afternoon gentlemen. A question with regard to one of the previous callers, was talking that... asked a question whether there was any regulatory element as a driver going forward. And I was just wondering how phases III and IV, which is on the U.S. postal site, which is supposed to be the digitalization ending in December '08, whether you see that as a driver or not?

We have done a pretty good job of moving our devices and I think we can tell you what we've got left, something of... we've got 40,000 units left, which out of our base is not that big a number. So, we would expect to see a good portion of those change, but as I had previously mentioned, since this was a long migration, it did not have quite the same anomaly as we had in some of the others. The only real anomaly was when they introduced shape base, which was not part of meter migration and stuck that in the middle that had an effect on the business. But the migration is really flowing through our normal lease upgrades and we might see a little bit at the end of the year, but in general it would just flow through our normal business.

And if I may ask a question about competitors then, do you see those similar trends with some of your competitors, especially Neopost?

I think that as... if you look at competitive basis, there is a higher percentile of the base that would be open for opportunity.

Very nicely put. Thank you. Okay, I'm going to bed now, thanks a lot.

Thank you and there are no further questions.

Well, thank you very much. As I mentioned, as we look forward in 2008, we see opportunity. Certainly we've come through some challenges back in Q3, but I think as we have exhibited in Q4, we had very strong handle on exactly what was happening within our business, where the opportunities were and set appropriate forecast going forward. As a result, we were able to overachieve on the forecast that we delivered on... on our earnings and significantly on our free cash flow. As we look forward in 2008, we look forward to continuing to be able to not only meet our objectives, but to deliver enhanced value and that will be our continuing focus. We are over 90% identified on our transition initiatives program. So we see that within our sights to get to the numbers that we have talked about and to deliver the value to continue at the same time, to enhance our strength as a company, to enhance our capabilities, and to deliver more value to our shareholders because that inevitably between our shareholders and our customers is what is going to create the strength in the future of this company. So thank you very much for taking the time out this evening to speak with us and we look forward to sharing more good news with you in the future.

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