"The weak economic conditions, credit crisis in the financial markets, and extremely low investment rates of return that we experienced during fiscal 2009 continue to challenge our financial results for fiscal 2010. While we have not seen improvement in any of our key indicators, we have not seen any significant deterioration either. On a positive note, this is the first quarter in the last four sequential quarters that we have not had a noticeable decline in checks per client. The largest sequential decline in fiscal 2009 peaked in the third quarter at 2.2%," commented Jonathan J. Judge, President and Chief Executive Officer of Paychex.

"We have remained steadfast in providing excellent customer service and investing in our business, while continuing to control expenses. Our financial position remains strong with significant cash and total corporate investments and no debt as of August 31, 2009," added Mr. Judge.

Payroll service revenue decreased 6% to $354.4 million for the first quarter from the same period last year. Weak economic conditions negatively impacted our client growth, check volume, and revenue per check. Our checks per client decreased 5.0% for the first quarter compared to the same period last year. Our client base growth has been adversely impacted by weak new business starts and continued client losses from companies going out of business.

Human Resource Services revenue increased 1% to $132.1 million for the first quarter from the same period last year. Contributing to Human Resource Services revenue growth in the quarter, as compared to the same quarter last year are: an increase of 4% for comprehensive human resource outsourcing services client employees served to 463,000; an increase of 10% for comprehensive human resource outsourcing services clients to 18,000; and an increase of 5% for workers' compensation insurance clients to 78,000 as of August 31, 2009. In addition, health and benefits services revenue grew 39% in the first quarter compared to the same period last year.

The asset value of retirement services client employees' funds increased 2% year-over-year to $9.6 billion as of August 31, 2009 (up 34% compared to our lowest fiscal 2009 asset value of $7.2 billion as of February 28, 2009), due to retirement plans converting with existing assets. However, the shift in the mix of assets in the retirement services client employees' funds to investments earning lower fees from external fund managers has generated lower revenue than the same quarter last year. The impact from weak economic conditions on our payroll client base has nearly offset our revenue growth from Human Resource Services, as these ancillary services are most often provided to our payroll clients. The most significant impacts have been to retirement services and comprehensive human resource outsourcing services revenue.

Total expenses decreased 1% to $310.3 million for the first quarter compared to the same period last year. This decline is primarily due to overall cost control measures and stable headcount, offset slightly by costs related to continued investment in key areas of our sales force and our technological infrastructure.

For the first quarter, our operating income was $189.9 million, a decrease of 14% from the same period last year. Operating income excluding interest on funds held for clients (see Note 1 on page 3 for further description) decreased 11% to $176.2 million for the first quarter as compared to $197.4 million for the same period last year.

                                                                                                                  
                                                                 For the three months ended August 31,            
 $ in millions                                                   2009          2008                      % Change 
 Operating income                                                $  189.9      $  221.6                  (14  %)  
 Excluding interest on funds held for clients                       (13.7  )      (24.2  )               (43  %)  
 Operating income excluding interest on funds held for clients   $  176.2      $  197.4                  (11  %)  


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We continue to follow our investment strategy of maximizing liquidity and protecting principal. With the turmoil in the financial markets, this translates to significantly lower yields on high quality instruments, impacting our income earned on funds held for clients and corporate investments. We are seeing gradual improvements in liquidity for high quality money market securities and are beginning to explore opportunities to invest a portion of the short-term portfolio in investments other than United States ("U.S.") agency discount notes.

For the first quarter, interest on funds held for clients decreased 43% to $13.7 million due to lower average interest rates earned and lower average investment balances. Average investment balances for funds held for clients decreased 10% for the first quarter compared to the prior year period. This decline was a result of overall economic factors, which have negatively impacted our client base, and the impact of the American Recovery and Reinvestment Act of 2009 (the "2009 economic stimulus package") generating lower tax withholdings for client employees.