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, 2008.

Overview

For the first quarter, revenue decreased 12% to $1.38 billion due to challenging global economic conditions and the negative impact of foreign currency translation, which negatively impacted revenue growth by 6%. Acquisitions positively impacted revenue growth by 1%.

Income from continuing operations attributable to Pitney Bowes Inc. common stockholders was $101.8 million or $0.49 per diluted share as compared with $0.58 earnings per diluted share in the first quarter of 2008. Income from continuing operations in the first quarter of 2009 included a 5 cent per diluted share non-cash tax charge associated with out-of-the-money stock options that expired during the quarter. Income from continuing operations in the first quarter of 2008 included restructuring charges and asset impairments of 5 cents per diluted share and a tax adjustment of 3 cents per diluted share related to additional tax accrued associated with lease refunds in the U.K. and Ireland.

Despite volatile and difficult global economic conditions which resulted in a decline in revenue growth for the quarter in the majority of our business segments, we were able to grow our net cash provided by operating activities by 9 percent to $276.5 million for the first quarter of 2009 and further reduce our debt.

We remain focused on cost controls and reduced our SG&A expense by over $50 million, despite significant headwinds from the negative impacts of both foreign currencies and increased pension costs when compared to the prior year.

See "Results of Operations - First Quarter of 2009 Compared to First Quarter of 2008" for a more detailed discussion of our results of operations.

Outlook

The ongoing economic slowdown has continued to delay or change customer buying decisions worldwide. Our business model and the actions we have taken to significantly reduce costs and streamline our operations have and will continue to help mitigate, but do not eliminate, the effects of prolonged global economic weakness and unanticipated currency fluctuations. We expect that our 2009 reported results will continue to be negatively impacted by the strengthening of the U.S. dollar and the Japanese yen and by the significant increase in pension costs related to recent changes in capital markets and assumptions used to calculate pension liabilities.

We continue to expect our mix of revenue to change, with a greater percentage of revenue coming from diversified revenue streams associated with fully featured smaller systems and a smaller percentage from larger system sales. We expect to derive further synergies from our acquisitions. We will continue 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 March 31, 2009 and 2008.

(Dollars in thousands)

                                          Revenue                                      EBIT (1)
                         -----------------------------------------     -----------------------------------------
                               Three Months Ended March 31,                  Three Months Ended March 31,
                         -----------------------------------------     -----------------------------------------
                             2009            2008        % change          2009            2008        % change
                         -------------    -----------    ---------     ------------    ------------    ---------
U.S. Mailing             $     508,523    $   552,585           (8 )%  $    192,834    $    223,955          (14 )%
International Mailing          237,312        308,333          (23 )%        30,939          49,935          (38 )%
Production Mail                109,429        135,404          (19 )%         5,067           8,583          (41 )%
Software                        75,375         99,663          (24 )%         2,604           6,478          (60 )%
                         -- ----------    - ---------    -- ------     -- ---------    -- ---------    -- ------
Mailstream Solutions           930,639      1,095,985          (15 )%       231,444         288,951          (20 )%
                         -- ----------    - ---------    -- ------     -- ---------    -- ---------    -- ------

Management Services            266,502        302,635          (12 )%        13,637          18,637          (27 )%
Mail Services                  141,251        125,422           13 %         18,575          18,389            1 %
Marketing Services              41,192         49,915          (17 )%         2,016           1,752           15 %
                         -- ----------    - ---------    -- ------     -- ---------    -- ---------    -- ------
Mailstream Services            448,945        477,972           (6 ) %       34,228          38,778          (12 )%
                         -- ----------    - ---------    -- ------     -- ---------    -- ---------    -- ------

Total                    $   1,379,584    $ 1,573,957          (12 )%  $    265,672    $    327,729          (19 )%
                         -- ----------    - ---------    -- ------     -- ---------    -- ---------    -- ------

(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 first quarter of 2009, Mailstream Solutions revenue decreased 15% to $931 million and EBIT decreased 20% to $231 million, compared to the prior year. Within Mailstream Solutions:

U.S. Mailing's revenue decreased 8% primarily due to fewer placements of mailing equipment as customers delayed purchases of new equipment and extended leases on existing equipment due to the economic conditions. Revenue continues to be adversely affected by the ongoing changing mix to more fully featured smaller systems. Additionally, revenue was impacted by an increase in lease renewals, which has a positive impact on profit margins but negatively impacts revenue in the current period. U.S. Mailing's EBIT decreased 14% principally due to lower financing revenue, meter rentals, and supplies sales because of lower business activity levels over the last year. International Mailing revenue decreased 23%, with 18% of this decline driven by the unfavorable impact of foreign currency translation. The remaining decrease was due to delayed customer purchase decisions for mailing equipment, particularly in France, Canada and Asia Pacific. EBIT declined 38% to $30.9 million. International Mailing's EBIT margin declined to 13% for the quarter, primarily driven by our UK, Canada and Asia Pacific operations and partly due to changes in currency which increased product costs. Revenue for Production Mail decreased 19%, partly due to the unfavorable impact of foreign currency translation of 7%, and also as a result of lower equipment sales in the U.S., France, and Asia Pacific as economic uncertainty continues to delay large-ticket capital expenditures for many large enterprises worldwide. However, the segment's revenue benefited from increased service revenue as customers are keeping their equipment for longer periods of time. Production Mail's EBIT decreased 41% driven by lower revenues and a shift in product mix to lower margin products. This was partially offset by an improved service margin due to prior year cost reduction initiatives and price increases on longer-service equipment. Software's revenue decreased 24%, principally due to economic uncertainties and the unfavorable impact of foreign currency translation of 11%. The economic uncertainty has resulted in fewer large-ticket licensing deals than in the prior year as customers continue to assess the overall business environment. Software's EBIT decreased 60% principally due to the lower revenues and continued investments in new product development and integration of the global software engineering organization.

During the first quarter of 2009, Mailstream Services revenue decreased 6% to $449 million and EBIT decreased 12% to $34 million, compared to the prior year. Within Mailstream Services:

Management Services revenue decreased 12%, of which 5% was driven by the unfavorable impact of foreign currency translation. The segment's revenue was also adversely affected by lower print and transaction volumes worldwide. Management Services EBIT decreased by 27% primarily due to lower revenue worldwide. Outside the U.S., lower print and transaction volumes, especially in Europe, resulted in an overall decline in the segment's EBIT margin. In the U.S., despite declining transaction volumes, EBIT margin improved 80 basis points to 10% when compared with the prior year. This was a result of actions taken in 2008 to reduce the fixed cost structure of the

Revenue by source

The following table shows revenue by source for the three months ended March 31, 2009 and 2008:

(Dollars in thousands)

                                       Three Months Ended March 31,
                                  ---------------------------------------
                                      2009           2008       % change
                                  -------------   -----------   ---------
              Equipment sales     $     231,825   $   302,713         (23 )%
              Supplies                   88,029       107,600         (18 )%
              Software                   79,726       105,405         (24 )%
              Rentals                   168,130       184,953          (9 )%
              Financing                 182,798       198,939          (8 )%
              Support services          174,347       191,525          (9 )%
              Business services         454,729       482,822          (6 )%
                                  -- ----------   - ---------   -- ------
              Total revenue       $   1,379,584   $ 1,573,957         (12 )%
                                  -- ----------   - ---------   -- ------

Equipment sales revenue decreased 23% compared to the prior year due to lower placements of mailing equipment as more customers extended their leases on existing equipment due to the economic conditions. Revenue also continues to be adversely affected by the ongoing changing mix in equipment placements to more fully featured smaller systems. Foreign currency translation had an unfavorable impact of 8%.

Supplies revenue decreased 18% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations. Foreign currency translation had an unfavorable impact of 7%.

Software revenue decreased 24% compared to the prior year primarily due to challenging comparisons to the 2008 first quarter when there were several large-ticket licensing deals. The impact of the global economic slowdown has caused many businesses to delay their capital spending worldwide, thus impacting our software revenues. Foreign currency translation had an unfavorable impact of 11%.

Rentals revenue decreased 9% compared to the prior year as customers in the U.S. continue to downsize to smaller, fully featured machines. Foreign currency translation had an unfavorable impact of 4%.

Financing revenue decreased 8% compared to the prior year, mostly due to the unfavorable impact of foreign currency translation of 5%. In addition, lower equipment sales have resulted in a corresponding decline in our lease portfolios.

Support services revenue decreased 9% compared to the prior year, principally due to the unfavorable impact of foreign currency translation of 8%.

Business services revenue decreased 6% compared to the prior year. Lower volumes at Management Services and Marketing Services more than offset the increase in mail volumes processed at Mail Services. The positive impact of acquisitions which contributed 3% was offset by the unfavorable impact of foreign currency translation of 4%.

(Dollars in thousands)

                                         Three Months Ended March 31,
                                      ----------------------------------
                                           2009               2008
                                      ---------------    ---------------
Cost of equipment sales               $       123,085    $       161,113
Cost of supplies                      $        23,341    $        27,872
Cost of software                      $        19,497    $        27,737
Cost of rentals                       $        35,851    $        38,304
Cost of support services              $        98,326    $       113,995
Cost of business services             $       359,907    $       379,291
Selling, general and administrative   $       443,528    $       496,495
Research and development              $        46,949    $        50,000

Cost of equipment sales as a percentage of revenue was 53.1% in the first quarter of 2009 compared with 53.2% in the prior year, primarily due to a favorable mix of higher margin equipment sales in International Mailing.

Cost of supplies as a percentage of revenue was 26.5% in the first quarter of 2009 compared with 25.9% in the prior year due to the lower sales volume and product mix.

Cost of software as a percentage of revenue was 24.5% in the first quarter of 2009 compared with 26.3% in the prior year due to a favorable mix.

Cost of rentals as a percentage of revenue was 21.3% in the first quarter of 2009 compared with 20.7% in the prior year primarily due to the fixed costs associated with meter depreciation on lower revenues.

Cost of support services as a percentage of revenue was 56.4% in the first quarter of 2009 compared with 59.5% in the prior year due to margin improvements in U.S. Mailing, International Mailing and Production Mail driven by the positive impacts of prior year cost reduction initiatives and price increases on longer-service equipment in Production Mail.

Cost of business services as a percentage of revenue was 79.1% in the first quarter of 2009 compared with 78.6% in the prior year. This is due to lower volumes of higher margin print and transaction activity which has negatively impacted International Management Services.

Selling, general and administrative ("SG&A") expenses as a percentage of revenue was 32.1% in the first quarter of 2009 compared with 31.5% in the prior year. Excluding the effect of foreign exchange, SG&A expense declined $17.8 million as a result of our cost reduction initiatives. However, the impact of the lower revenues and increased pension costs more than offset the benefits associated with our prior year cost reduction initiatives.

Research and development expenses decreased $3.1 million from the prior year. On a constant currency basis, research and development expenses were equal to the prior year as we continue to invest in developing new technologies, enhancing our products, and expanding our offshore development capabilities. Research and development expenses as a percentage of sales increased to 3.4% in the first quarter of 2009 from 3.2% in the first quarter of 2008.

Restructuring charges and asset impairments

Pre-tax restructuring reserves at March 31, 2009 are composed of the following:

(Dollars in thousands)

                                 Balance at                                                       Balance at
                                December 31,                         Cash         Non-cash        March 31,
                                    2008           Expenses        payments        charges           2009
                               --------------    -------------    ----------    -------------    ------------
Severance and benefit costs    $      108,431    $           -    $  (28,316 )  $           -    $     80,115
Other exit costs                       32,678                -        (4,385 )              -          28,293
                               -- -----------    ---- --------    - --------    ---- --------    -- ---------
Total                          $      141,109    $           -    $  (32,701 )  $           -    $    108,408
                               -- -----------    ---- --------    - --------    ---- --------    -- ---------

As of March 31, 2009, 2,278 terminations have occurred under this program and approximately 300 additional positions have been eliminated. The majority of the liability at March 31, 2009 is expected to be paid by the end of 2009 from cash generated from operations.

Net interest expense

Interest expense for the three months ended March 31, 2009 and 2008:

(Dollars in thousands)

                                         Three Months Ended March 31,
                                   ----------------------------------------
                                       2009            2008       % change
                                   ------------    ------------   ---------
           Interest expense, net   $     50,651    $     58,777         (14 )%

Net interest expense decreased by $8.1 million or 14% in the first quarter of 2009 compared to the prior year due to lower average borrowings of $125 million and a lower average interest rate of approximately 67 basis points.

Income taxes

The effective tax rate for the first quarter of 2009 was 40.4% compared with 37.2% in the prior year. The 2009 tax rate was increased by an $11.1 million write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of stock units previously granted to our employees. The 2008 effective tax rate was negatively impacted by a $6.5 million tax accrual associated with lease refunds in the U.K. and Ireland.

Discontinued operations

The following table shows selected financial information included in discontinued operations for the three months ended March 31, 2009 and 2008, respectively:

(Dollars in thousands)

                                                              Three Months Ended March 31,
                                                            --------------------------------
                                                                2009              2008
                                                            -------------    ---------------
Net gain (loss) from discontinued operations, net of tax    $       2,623    $        (3,832 )

The net gain for the three months ended March 31, 2009 relates to $9.8 million pre-tax income, less tax of $3.8 million, for a bankruptcy settlement, which was partially offset by the accrual of interest on uncertain tax positions. We received a bankruptcy settlement for unsecured claims pertaining to the leasing of certain aircraft. These leasing transactions were originally executed by our former Capital Services business, which was sold in 2006. At the time of the Capital Services sale, we retained the rights to the bankruptcy claims. Since these claims were attributable to our former Capital Services business, we recorded the gain on this settlement in discontinued operations. The net loss for the three months ended 2008 relates to the accrual of interest on uncertain tax positions.

Noncontrolling interests (Preferred stock dividends of subsidiaries)

The following table details dividends paid to preferred stockholders for the three months ended March 31, 2009 and 2008:

(Dollars in thousands)

                                               Three Months Ended March 31,
                                            -----------------------------------
                                                 2009                2008
                                            ---------------     ---------------
Preferred stock dividends of subsidiaries   $         4,521     $         4,798

We believe that cash flow from operations, existing cash and liquid investments, as well as borrowing capacity under our commercial paper program, the existing credit facility and debt capital markets should be sufficient to finance our capital requirements and to cover our customer deposits. Our potential uses of cash include but are not limited to the following: growth and expansion opportunities; internal investments; customer financing; tax payments; interest and dividend payments; pension and other benefit plan funding; acquisitions; and share repurchase program.

In light of recent market events, we have conducted an extensive review of our liquidity provisions. We have carefully monitored for material changes in the creditworthiness of those banks acting as derivative counterparties, depository banks or credit providers to us through credit ratings and the credit default swap market. We have determined that there has not been a material variation in the underlying sources of cash flows currently used to finance the operations of the company. To date, we have had consistent access to the commercial paper market.

Cash Flow Summary

The change in cash and cash equivalents is as follows:

(Dollars in thousands)


                                             Three Months Ended March 31,
                                          ----------------------------------
                                               2009               2008
                                          ---------------    ---------------
Cash provided by operating activities     $       276,471    $       253,135
Cash used in investing activities                 (62,290 )          (71,359 )
Cash used in financing activities                (163,676 )         (164,267 )
Effect of exchange rate changes on cash            (3,959 )            3,101
                                          -- ------------    -- ------------
Increase in cash and cash equivalents     $        46,546    $        20,610
                                          -- ------------    -- ------------

2009 Cash Flows

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. The increase in cash provided by operating activities was due to decreases in finance receivable and accounts receivable balances of $102.2 million and $72.8 million, respectively, resulting from lower billings and strong collections. In addition, the timing of tax payments favorably contributed $58.6 million. Partially offsetting these positive impacts was a reduction in accounts payable and accrued liabilities of $141.5 million, primarily due to the timing of payments such as year-end incentive compensation and commissions as well as $32.7 million in restructuring payments associated with the prior year cost reduction initiatives and a $20.3 million payment for the unwinding of derivatives related to the March 2009 debt issuance. See Notes 14 and 17 to the Condensed Consolidated Financial Statements for additional discussions of the restructuring payments and unwinding of the derivatives, respectively.

Net cash used in investing activities consisted principally of capital expenditures of $47.8 million combined with a decrease in reserve account balances of $21.7 million which is due to the timing of customer deposits as well as increased cash preservation by customers.

Net cash used in financing activities consisted primarily of a decrease in notes payable of $384.7 million due to the repayment of commercial paper, which was partially offset by the proceeds from long term obligations of $297.5 million related to the March 2009 debt issuance. Dividends paid to stockholders were $74.3 million for the first quarter of 2009.

2008 Cash Flows

Net cash provided by operating activities consisted primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. The net increase in our current and non-current income taxes contributed $49.2 million to cash from operations resulting from the timing of tax payments. Lower investments in finance receivables of $30.8 million and an increase in advance billings of $57.6 million also contributed to the increase in operating cash flow. The decrease in accounts payable and accrued liabilities of $85.5 million, primarily due to the payment of year-end incentive compensation and commissions partially offset by additional restructuring reserves, and an increase in inventory of $17.7 million, partly due to the required build of new fully digital, networked, and remotely-downloadable equipment and the U.S. postal rate change in the second quarter of 2008, which reduced our cash flow from operations. The increase in accounts receivable of $5.2 million is driven by contracts that are billed annually in International Mailing partly offset by lower balances in Software due to collections related to the strong fourth quarter 2007 business.

Net cash used in financing activities consisted primarily of dividends paid to stockholders of $74.1 million and stock repurchases of $180.0 million, partially offset by proceeds from issuance of stock of $6.1 million and a net increase in . . .