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 third quarter, revenue decreased 12% to $1.36 billion due to continuing challenging global economic conditions and the negative impact of foreign currency translation, which negatively impacted revenue by 2%.

Income from continuing operations attributable to Pitney Bowes Inc. common stockholders was $105.7 million or $0.51 per diluted share as compared with $0.48 earnings per diluted share in the third quarter of 2008. Income from continuing operations in the third quarter of 2009 included a non-cash after-tax restructuring charge of $8.3 million, or 4 cents per diluted share. Income from continuing operations in the third quarter of 2008 included restructuring charges and asset impairments of 19 cents per diluted share.

A continued global economic downturn resulted in a decline in revenue for the quarter in all of our business segments. EBIT margins, however, were up in three of our segments from 2008, and also increased in six of our seven segments when compared to the second quarter of 2009. We reduced our selling, general and administrative expense by over $173.7 million during the nine months ended September 30, 2009, despite increased pension costs when compared to the prior year. We also reduced our debt by $297.9 million during the nine months ended September 30, 2009.

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

Outlook

Economic and business conditions in mail-intensive industries have continued to be weak during the quarter. Sales cycles for most capital purchase decisions by customers remain long. These factors have impacted our financial results, as the sustained economic downturn has had a negative effect on high-margin financing, rental, and supplies revenue streams. While the company has been successful in reducing its cost structure across its entire business and is shifting to a more variable cost structure, these actions have not been enough to date to offset the impact of lower revenue.

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 that our 2009 reported results will continue to be negatively impacted by challenging economic conditions and by the increase in pension costs related to recent changes in capital markets and assumptions used to calculate pension liabilities.

To enhance our responsiveness to changing market conditions, we have undertaken a strategic transformation process designed to create long-term flexibility to invest in future growth. We are currently completing the diagnostic phase of this project and are analyzing a wide range of opportunities for process and operational improvements in areas such as our global customer interactions and product development processes. Currently, we are targeting annualized benefits, net of investments, from our strategic transformation initiatives in the range of at least $150 to $200 million on a pre-tax basis. These benefits and the related costs, which could be significant, will be recognized as different actions are approved and implemented, with the goal of reaching the full benefit run rate by 2012.

Business segment results

The following table shows revenue and earnings before interest and taxes ("EBIT") by segment for the three months ended September 30, 2009 and 2008. 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,
                              -------------------------------------------    --------------------------------------------
                                   2009            2008         % change         2009             2008          % change
                              --------------    -----------    ----------    -------------    -------------    ----------
U.S. Mailing                  $      491,036    $   558,038         (12)%    $     178,066    $     221,179      (19 )%
International Mailing                224,681        271,727         (17)%           29,193           41,123      (29 )%
Production Mail                      126,434        154,554         (18)%           11,494           23,183      (50 )%
Software                              82,361         94,221         (13)%            8,241            3,167      160 %
                              -- -----------    - ---------    -- -------    -- ----------    -- ----------    ----- ----
Mailstream Solutions                 924,512      1,078,540         (14)%          226,994          288,652      (21 )%
                              -- -----------    - ---------    -- -------    -- ----------    -- ----------    ----- ----

Management Services                  259,370        287,989         (10)%           19,517           16,064       21 %
Mail Services                        134,042        139,689          (4)%           23,024           15,467       49 %
Marketing Services                    38,896         41,455          (6)%            7,448            8,088       (8 )%
                              -- -----------    - ---------    -- -------    -- ----------    -- ----------    ----- ----
Mailstream Services                  432,308        469,133          (8)%           49,989           39,619       26 %
                              -- -----------    - ---------    -- -------    -- ----------    -- ----------    ----- ----

Total                         $    1,356,820    $ 1,547,673         (12)%    $     276,983    $     328,271      (16 )%
                              -- -----------    - ---------    -- -------    -- ----------    -- ----------    ----- ----

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

During the third quarter of 2009, Mailstream Solutions revenue decreased 14% to $925 million and EBIT decreased 21% to $227 million, compared to the prior year. Within Mailstream Solutions:

U.S. Mailing's revenue decreased 12% primarily due to fewer placements of mailing equipment as customers continued to delay purchases of new equipment and extend 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. Lease extensions have a positive impact on profit margins longer-term but negatively impact revenue in the current period. U.S. Mailing's EBIT decreased 19% principally due to lower financing revenue, meter rentals, and supplies sales because of lower business activity levels over the prior year.

International Mailing revenue decreased 17%, with 6% of this decline driven by the unfavorable impact of foreign currency translation. The international economic environment continued to create weaker demand for our products and services. As a result, many customers delayed making purchase decisions for new mailing systems and lower mail volume reduced supplies revenue. International Mailing's EBIT declined 29% to $29.2 million, primarily driven by lower levels of equipment, financing and supplies sales.

Revenue for Production Mail decreased 18% primarily 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. Foreign currency translation had an unfavorable impact of 2%. Production Mail's EBIT decreased 50% driven by lower revenues and a shift in product mix to lower margin products.

Software's revenue decreased 13%, with 4% of this decline driven by the unfavorable impact of foreign currency translation. Worldwide consolidation in the financial services industry and slowness in the retail sector continued to adversely impact the sales and renewal of software licenses. Uncertainty surrounding the economy has resulted in many large multi-national organizations changing their approval policies for capital expenditures, which has lengthened the sales cycle. Software's EBIT increased to $8.2 million compare to $3.2 million in the prior year due to business integration and productivity initiatives which resulted in substantial EBIT margin improvements. This helped offset the pressure on margin due to lower revenue and a higher mix of some lower margin software sales.

Management Services revenue decreased 10%, of which 2% was driven by the unfavorable impact of foreign currency translation. The segment's revenue was also adversely affected by lower business activity and decreased print and transaction volumes throughout the U.S. and Europe. Management Services EBIT, however, increased by 21% primarily due to productivity enhancements that have improved the profitability of the operations in both the U.S. and internationally.

Mail Services revenue decreased 4%, of which 1% was driven by the unfavorable impact of foreign currency translation. Declines in mail volumes processed for some customers were partly offset by the significant expansion of the customer base and increases in both standard mail and flats. Mail Services EBIT increased by 49% driven by the integration of Mail Services sites acquired last year and ongoing automation and productivity initiatives taken by the business.

Marketing Services revenue decreased 6%, mostly due to the impact of fewer household moves during the quarter and the resulting decline in the volume of required change of address kits. Marketing Services EBIT decreased 8% due to the lower transaction volumes.

Revenue by source

The following table shows revenue by source for the three months ended September 30, 2009 and 2008:

(Dollars in thousands)        Three Months Ended September 30,
                         ------------------------------------------
                              2009            2008        % change
                         --------------    -----------   ----------
Equipment sales          $      225,759    $   296,520        (24)%
Supplies                         83,464         96,864        (14)%
Software                         87,295        100,092        (13)%
Rentals                         163,711        182,850        (10)%
Financing                       171,228        195,632        (12)%
Support services                177,607        193,516         (8)%
Business services               447,756        482,199         (7)%
                         -- -----------    - ---------   -- -------
Total revenue            $    1,356,820    $ 1,547,673        (12)%
                         -- -----------    - ---------   -- -------

Equipment sales revenue decreased 24% compared to the prior year mostly due to fewer placements of mailing equipment as customers in the U.S. and internationally have delayed purchases of new equipment and extended 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 2%.

Supplies revenue decreased 14% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations in the U.S. and internationally. Foreign currency translation had an unfavorable impact of 3%.

Software revenue decreased 13% compared to the prior year due to the impact of the global economic slowdown which has caused many businesses to delay their capital spending worldwide, thus negatively impacting software revenues. Foreign currency translation had an unfavorable impact of 4%.

Rentals revenue decreased 10% compared to the prior year. In the U.S., customers continue to downsize to smaller, fully featured machines. The weak economic conditions also have had a negative impact on our international rental markets in France and Canada. Foreign currency translation had an unfavorable impact of 1%.

Financing revenue decreased 12% compared to the prior year. Lower equipment sales over the past year have resulted in a decline in our lease portfolios. Foreign currency translation had an unfavorable impact of 2%.

Support services revenue decreased 8% compared to the prior year principally driven by lower new equipment placements. Foreign currency translation had an unfavorable impact of 3%.

Business services revenue decreased 7% compared to the prior year primarily due to lower transaction volumes at Management Services. Foreign currency translation had an unfavorable impact of 1%.

 (Dollars in thousands)                  Three Months Ended September 30,
                                      --------------------------------------
                                            2009                 2008
                                      -----------------    -----------------
Cost of equipment sales               $         124,819    $         157,593
Cost of supplies                      $          23,785    $          26,382
Cost of software                      $          19,413    $          25,917
Cost of rentals                       $          40,508    $          36,252
Financing interest expense            $          23,975    $          27,702
Cost of support services              $         100,541    $         113,581
Cost of business services             $         335,406    $         370,213
Selling, general and administrative   $         435,931    $         484,650
Research and development              $          45,052    $          53,008

Cost of equipment sales as a percentage of revenue was 55.3% in the third quarter of 2009 compared with 53.1% in the prior year, primarily due to the unfavorable mix of lower margin equipment sales in International Mailing and Production Mail.

Cost of supplies as a percentage of revenue was 28.5% in the third quarter of 2009 compared with 27.2% in the prior year primarily due to an unfavorable mix of lower margin product sales in U.S. Mailing.

Cost of software as a percentage of revenue was 22.2% in the third quarter of 2009 compared with 25.9% in the prior year due to the impact of business integration measures and productivity investments, which more than offset lower revenue levels.

Cost of rentals as a percentage of revenue was 24.7% in the third quarter of 2009 compared with 19.8% in the prior year primarily due to the fixed costs associated with meter depreciation on lower revenues in both the U.S. Mailing and International Mailing segments.

Financing interest expense as a percentage of revenue was 14.0% in the third quarter of 2009 compared with 14.2% in the prior year primarily due to lower interest rates. In computing our financing interest expense, which represents our cost of borrowing associated with the generation of financing revenues, we assumed a 10:1 leveraging ratio of debt to equity and applied our overall effective interest rate to the average outstanding finance receivables.

Cost of support services as a percentage of revenue was 56.6% in the third quarter of 2009 compared with 58.7% in the prior year. Improvements in our U.S. Mailing, International Mailing and Production Mail segments are driven by the positive impacts of ongoing productivity investments as well as price increases on longer-service contracts in our Production Mail segment.

Cost of business services as a percentage of revenue was 74.9% in the third quarter of 2009 compared with 76.8% in the prior year. This improvement is due to the positive impacts of cost reduction programs in our Management Services and Mail Services businesses, partly offset by lower transaction volumes in our Management Services business.

Selling, general and administrative ("SG&A") expenses as a percentage of revenue was 32.1% in the third quarter of 2009 compared with 31.3% in the prior year. SG&A expense declined $48.7 million or 10%, primarily as a result of our cost reduction initiatives and the positive impact of foreign currency translation of 2%. Lower revenues and increased pension costs more than offset these benefits on a percentage of revenue basis.

Research and development expenses decreased $8.0 million from the prior year, $1.2 million of which related to foreign currency translation. The decline in overall spending is due to the wind-down of redundant costs related to our transition to offshore development capabilities.

Restructuring charges and asset impairments

During the third quarter of 2009, we have undertaken a strategic transformation process designed to create long-term flexibility to invest in future growth. We are currently completing the diagnostic phase of this project and are analyzing a wide range of opportunities for process and operational improvements in areas such as our global customer interactions and product development processes. The restructuring charge in the current quarter represents costs associated with initial actions identified as part of the diagnostic phase of this project. The future benefits and related costs, which could be significant, will be recognized as actions are approved and implemented.

Pre-tax restructuring reserves at September 30, 2009 for the restructuring actions taken in the third quarter of 2009 are composed of the following:

                                    Balance at                                                Balance at
                                     July 1,                      Cash        Non-cash       September 30,
(Dollars in thousands)                 2009        Expenses     payments       charges           2009
                                   ------------    ---------    ---------    -----------    ---------------
Severance and benefit costs        $          -    $  10,040    $    (801 )  $         -    $         9,239
Other exit costs                              -        2,805       (1,232 )            -              1,573
                                   ----- ------    -- ------    -- ------    ---- ------    -- ------------
Total                              $          -    $  12,845    $  (2,033 )  $         -    $        10,812
                                   ----- ------    -- ------    -- ------    ---- ------    -- ------------

We recorded pre-tax restructuring charges and asset impairments during 2008 and 2007. These charges primarily related to a program we announced in November 2007 to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line.

As of September 30, 2009, 2,904 terminations have occurred under this program and approximately 300 additional positions have been eliminated since the inception of the program. The majority of the liability at September 30, 2009 is expected to be paid during the next twelve months from cash generated from operations.

Pre-tax restructuring reserves at September 30, 2009 for the restructuring program announced in 2007 are composed of the following:

                                    Balance at                                                  Balance at
                                     June 30,                       Cash        Non-cash       September 30,
(Dollars in thousands)                 2009         Expenses      payments       charges           2009
                                   ------------    -----------    ---------    -----------    ---------------
Severance and benefit costs        $     66,167    $         -    $ (13,190 )  $         -    $        52,977
Other exit costs                         25,832              -       (2,424 )            -             23,408
                                   -- ---------    ---- ------    - -------    ---- ------    -- ------------
Total                              $     91,999    $         -    $ (15,614 )  $         -    $        76,385
                                   -- ---------    ---- ------    - -------    ---- ------    -- ------------

Other interest expense

Other interest expense for the three months ended September 30, 2009 and 2008:

(Dollars in thousands)         Three Months Ended September 30,
                          -------------------------------------------
                              2009             2008         % change
                          -------------    -------------   ----------
Other interest expense    $      27,244    $      30,037         (9)%

Other interest expense decreased by $2.8 million or 9% in the third quarter of 2009 compared to the prior year. This is driven primarily by lower interest rates and lower average borrowings.

Income taxes

The effective tax rate for the third quarter of 2009 was 34.3% compared with 39.4% in the prior year. The 2008 effective tax rate was increased principally due to a low tax benefit associated with restructuring expenses recorded in the three months ended September 30, 2008.

The following table shows selected financial information included in discontinued operations for the three months ended September 30, 2009 and 2008, respectively:

                                                        Three Months Ended
(Dollars in thousands)                                     September 30,
                                                    ---------------------------
                                                       2009            2008
                                                    -----------     -----------

The losses for the three months ended September 30, 2009 and September 30, 2008 relate 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 September 30, 2009 and 2008:

(Dollars in thousands)                         Three Months Ended September 30,
                                            ---------------------------------------
                                                  2009                  2008
                                            -----------------     -----------------
Preferred stock dividends of subsidiaries   $           4,622     $           6,540

The three months ended September 30, 2008 included a net expense of $1.8 million associated with the redemption of $10 million of 9.11% Cumulative Preferred Stock in August 2008.

Results of Operations - Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008

Revenue by source

 (Dollars in thousands)        Nine Months Ended September 30,
                          -----------------------------------------
                              2009            2008        % change
                          -------------    -----------   ----------
Equipment sales           $     714,780    $   910,883        (22)%
Supplies                        253,466        305,750        (17)%
Software                        254,401        314,617        (19)%
Rentals                         487,992        553,658        (12)%
Financing                       528,534        591,834        (11)%
Support services                531,200        579,996         (8)%
Business services             1,344,493      1,452,978         (7)%
                          -- ----------    - ---------   -- -------
Total revenue             $   4,114,866    $ 4,709,716        (13)%
                          -- ----------    - ---------   -- -------

Equipment sales revenue decreased 22% compared to the prior year due to lower placements of mailing equipment as more customers have delayed purchases of new equipment and 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 6%.

Supplies revenue decreased 17% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations in the U.S. and internationally. Foreign currency translation had an unfavorable impact of 5%.

Software revenue decreased 19% compared to the prior year primarily due to the impact of the global economic slowdown which has caused many businesses to delay their capital spending worldwide. Worldwide consolidation in the financial services industry and slowness in the retail sector have also adversely impacted sales and renewals of software licenses. Foreign currency translation had an unfavorable impact of 7%.

Rentals revenue decreased 12% compared to the prior year as customers in the U.S. continue to downsize to smaller, fully featured machines. The weak economic conditions have also impacted our international rental markets, specifically in Canada and France. Foreign currency translation had an unfavorable impact of 3%.

. . .