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

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

Overview

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

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

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

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

See "Results of Operations - Third Quarter of 2008 Compared to Third Quarter of 2007" for a more detailed discussion of our results of operations.

Outlook

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

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

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

Business segment results

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs and expenses

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

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

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

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

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

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

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

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

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

Restructuring Charges and Asset Impairments

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

                             Balance at                                           Balance at
                              June 30,                    Cash      Non-cash     September 30,
(Dollars in thousands)          2008        Expenses    payments     charges         2008

Severance and benefit
costs                       $     77,314   $   24,709   $ (24,257 ) $       -   $        77,766
Asset impairments                      -       19,522           -     (19,522 )               -
Other exit costs                   9,195        4,998      (3,658 )         -            10,535
Total                       $     86,509   $   49,229   $ (27,915 ) $ (19,522 ) $        88,301

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

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

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

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

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

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

Income taxes

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

Minority interest (preferred stock dividends of subsidiaries)

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

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

Preferred stock dividends of subsidiaries $ 6,540 $ 4,862

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

Discontinued operations

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

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

Net loss from discontinued operations, net of tax   $    2,063    $  1,565

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

Revenue by source

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

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

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

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

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

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

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

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

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

Costs and expenses

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

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

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

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

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

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

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

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

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

Restructuring Charges and Asset Impairments

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

                  Balance at                                            Balance at
                 December 31,                   Cash      Non-cash     September 30,
(Dollars in
thousands)           2007         Expenses    payments     charges         2008

Severance and
benefit costs    $      81,251   $   54,584   $ (58,071 ) $       -   $        77,764
Asset
impairments                  -       20,205           -     (20,205 )               -
Other exit                                              )
costs                    5,795       10,348      (5,606           -            10,537
Total            $      87,046   $   85,137   $ (63,677 ) $ (20,205 ) $        88,301

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

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

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