FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2009
Commission file number 0-11330

PAYCHEX, INC.

911 Panorama Trail South
Rochester, New York 14625-2396
(585) 385-6666
A Delaware Corporation

IRS Employer Identification Number: 16-1124166

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock, $0.01 Par Value		360,823,987 Shares
CLASS		OUTSTANDING AS OF FEBRUARY 28, 2009

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure of Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item 6. Exhibits
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
In thousands, except per share amounts

For the three months ended

For the nine months ended

February 28,

February 29,

February 28,

February 29,

2009

2008

2009

2008

Revenue:

Service revenue

512,196

494,845

1,526,446

1,446,699

Interest on funds held for clients

16,385

37,327

60,380

100,396

Total revenue

528,581

532,172

1,586,826

1,547,095

Expenses:

Operating expenses

174,503

170,995

513,646

492,762

Selling, general and administrative expenses

156,677

150,778

442,294

423,870

Total expenses

331,180

321,773

955,940

916,632

Operating income

197,401

210,399

630,886

630,463

Investment income, net

1,067

3,597

6,050

23,337

Income before income taxes

198,468

213,996

636,936

653,800

Income taxes

67,678

71,522

217,195

213,139

Net income

130,790

142,474

419,741

440,661

Basic earnings per share

0.36

0.39

1.16

1.19

Diluted earnings per share

0.36

0.39

1.16

1.18

Weighted-average common shares outstanding

360,821

361,178

360,743

370,814

Weighted-average common shares outstanding,
assuming dilution

360,913

361,770

360,966

372,080

Cash dividends per common share

0.31

0.30

0.93

0.90

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In thousands, except per share amount


	February 28,		May 31,
	2009		2008

ASSETS
Cash and cash equivalents	$	428,407	$	164,237
Corporate investments		61,163		228,727
Interest receivable		21,955		34,435
Accounts receivable, net of allowance for doubtful accounts		165,154		184,686
Deferred income taxes		15,011		7,274
Prepaid income taxes		—		11,236
Prepaid expenses and other current assets		27,719		27,231

Current assets before funds held for clients		719,409		657,826
Funds held for clients		4,153,478		3,808,085

Total current assets		4,872,887		4,465,911
Long-term corporate investments		82,221		41,798
Property and equipment, net of accumulated depreciation		280,956		275,297
Intangible assets, net of accumulated amortization		85,272		74,500
Goodwill		434,073		433,316
Deferred income taxes		15,578		13,818
Other long-term assets		4,481		5,151

Total assets	$	5,775,468	$	5,309,791


LIABILITIES
Accounts payable	$	37,484	$	40,251
Accrued compensation and related items		123,305		132,589
Deferred revenue		10,812		10,326
Accrued income taxes		18,996		—
Deferred income taxes		16,103		—
Litigation reserve		20,404		22,968
Other current liabilities		48,973		47,457

Current liabilities before client fund obligations		276,077		253,591
Client fund obligations		4,089,570		3,783,681

Total current liabilities		4,365,647		4,037,272
Accrued income taxes		22,633		17,728
Deferred income taxes		10,812		9,600
Other long-term liabilities		45,227		48,549

Total liabilities		4,444,319		4,113,149

COMMITMENTS AND CONTINGENCIES — NOTE J

STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value; Authorized: 600,000 shares; Issued and outstanding: 360,824 shares as of February 28, 2009 and 360,500 shares as of May 31, 2008, respectively		3,608		3,605
Additional paid-in capital		456,690		431,639
Retained earnings		827,726		745,351
Accumulated other comprehensive income		43,125		16,047

Total stockholders’ equity		1,331,149		1,196,642

Total liabilities and stockholders’ equity	$	5,775,468	$	5,309,791

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands


	For the nine months ended
	February 28,			February 29,
	2009			2008

OPERATING ACTIVITIES
Net income	$	419,741		$	440,661
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment and intangible assets		63,164			59,362
Amortization of premiums and discounts on available-for-sale securities		16,808			12,560
Stock-based compensation costs		19,310			18,989
Benefit for deferred income taxes		(7,389	)		(4,046	)
Provision for allowance for doubtful accounts		1,819			2,005
Net realized gains on sales of available-for-sale securities		(878	)		(3,842	)
Changes in operating assets and liabilities:
Interest receivable		12,480			22,405
Accounts receivable		17,713			26,883
Prepaid expenses and other current assets		10,748			6,609
Accounts payable and other current liabilities		2,592			3,388
Net change in other assets and liabilities		7,215			5,401

Net cash provided by operating activities		563,323			590,375

INVESTING ACTIVITIES
Purchases of available-for-sale securities		(16,334,122	)		(73,545,729	)
Proceeds from sales and maturities of available-for-sale securities		17,616,942			74,815,834
Net change in funds held for clients’ money market securities and other cash equivalents		(1,480,049	)		(806,544	)
Purchases of property and equipment		(53,288	)		(64,621	)
Proceeds from sales of property and equipment		7			709
Acquisition of businesses, net of cash acquired		(6,466	)		(32,940	)
Purchases of other assets		(18,097	)		(18,038	)

Net cash (used in)/provided by investing activities		(275,073	)		348,671

FINANCING ACTIVITIES
Net change in client fund obligations		305,889			411,417
Repurchases of common stock		—			(999,999	)
Dividends paid		(335,779	)		(333,960	)
Proceeds from and excess tax benefit related to exercise of stock options		5,810			63,933

Net cash used in financing activities		(24,080	)		(858,609	)


Increase in cash and cash equivalents		264,170			80,437
Cash and cash equivalents, beginning of period		164,237			79,353

Cash and cash equivalents, end of period	$	428,407		$	159,790

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
February 28, 2009

Note A: Description of Business and Significant Accounting Policies

Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Paychex”) is a leading provider of comprehensive payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States (“U.S.”). The Company also has a subsidiary in Germany.

Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the Company’s revenue is generated within the U.S. The Company also generates revenue within Germany, which was less than one percent of its total revenue for the nine months ended February 28, 2009. Long-lived assets in Germany are insignificant in relation to total long-lived assets of the Company as of February 28, 2009.

Basis of presentation: The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statement presentation. The Consolidated Financial Statements include the consolidated accounts of the Company with all significant intercompany transactions eliminated. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature), which are necessary for a fair presentation of the results for the interim period. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes to Consolidated Financial Statements presented in the Company’s Annual Report on Form 10-K as of and for the year ended May 31, 2008 (“fiscal 2008”). Operating results and cash flows for the nine months ended February 28, 2009 are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year ending May 31, 2009 (“fiscal 2009”).

PEO revenue recognition: Professional Employer Organization (“PEO”) revenue is included in service revenue and is reported net of direct costs billed and incurred which include wages, taxes, benefit premiums, and claims of PEO worksite employees. Direct costs billed and incurred were $677.0 million and $661.6 million for the three months ended February 28, 2009 and February 29, 2008, respectively, and $1.9 billion for both the nine months ended February 28, 2009 and February 29, 2008.

PEO workers’ compensation insurance: Workers’ compensation insurance for PEO worksite employees is provided under a deductible workers’ compensation policy with a national insurance company. Claims are paid as incurred and the Company’s maximum individual claims liability is $1.0 million under both its fiscal 2009 and fiscal 2008 policies.

Note A: Description of Business and Significant Accounting Policies - continued

The Company has recorded the following amounts on its Consolidated Balance Sheets for workers’ compensation claims as of:


	February 28,		May 31,
In thousands	2009		2008

Prepaid expense		$ 2,477		$ 2,612
Current liability		$ 7,335		$ 8,395
Long-term liability		$18,456		$18,294

The amounts included in prepaid expense on the Consolidated Balance Sheets relate to the policy for the fiscal year ended May 31, 2004, which was a pre-funded policy.

Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss experience and actuarial loss projections, and is subject to change due to multiple factors, including economic trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as reported. Adjustments to previously established reserves are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.

Stock-based compensation costs: The Company has stock-based awards to employees consisting of stock options, restricted stock awards, and restricted stock units. The Company typically makes grants to its officers, directors, and management in July. The grants approved by the Board of Directors (the “Board”) were as follows:

For the nine months ended

February 28, 2009

February 29, 2008

Weighted-

average

Shares

fair value

Shares

fair value

In thousands, except per share amounts

granted

per share

granted

per share

Stock options

783

$ 6.90

714

$10.83

Restricted stock

137

$31.86

134

$43.91

Restricted stock units

607

$28.30

499

$40.60

The Company accounts for all stock-based awards to employees, including grants of employee stock options, as compensation costs in the Consolidated Financial Statements based on the fair value measured as of the date of grant. These costs are recognized as an expense in the Consolidated Statements of Income over the requisite service period and increase additional paid-in capital. Stock-based compensation costs recognized were $5.4 million and $19.3 million for the three and nine months ended February 28, 2009, as compared with $6.1 million and $19.0 million for the respective prior year periods. As of February 28, 2009, the total unrecognized compensation cost related to all unvested stock-based awards was $66.9 million and is expected to be recognized over a weighted-average period of 2.5 years.

Note A: Description of Business and Significant Accounting Policies - continued

The fair value of restricted stock awards is equal to the closing market price of the underlying common stock as of the date of grant. The fair value of restricted stock units is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the vesting period, as these awards do not earn dividend equivalents.

The fair value of stock option grants is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted-average assumptions used for valuation under the Black-Scholes model were as follows:


	For the nine months ended
	February 28,			February 29,
	2009			2008

Risk-free interest rate		3.3	%		4.7	%
Dividend yield		3.4	%		2.8	%
Volatility factor		.28			.26
Expected option life in years		6.4			6.2

Risk-free interest rates are yields for zero-coupon U.S. Treasury notes maturing approximately at the end of the expected option life. The estimated volatility factor is based on a combination of historical volatility using weekly stock prices and implied market volatility, both over a period equal to the expected option life. The expected option life is based on historical exercise behavior.

The Company has determined that the Black-Scholes option pricing model, as well as the underlying assumptions used in its application, is appropriate in estimating the fair value of its stock option grants. The Company periodically assesses its assumptions as well as its choice of valuation model, and will reconsider use of this model if additional information becomes available in the future indicating that another model would provide a more accurate estimate of fair value, or if characteristics of future grants would warrant such a change.

Fair value of financial instruments: Effective June 1, 2008, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements.” This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements; however, this standard does not require any new fair value measurements. The adoption of this standard has not had a material effect on the Company’s results of operations or financial position.

In determining the fair value of its assets and liabilities, the Company uses various valuation approaches, predominately the market and income approaches. In determining the fair value of its available-for-sale securities, the Company utilizes the Interactive Data Pricing service, a market approach. SFAS No. 157 establishes a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability. Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 valuations are based on inputs, other than quoted prices included within Level 1, that are observable, either directly or indirectly. Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.

Note A: Description of Business and Significant Accounting Policies - continued

The following table presents information on the Company’s financial assets and liabilities measured at fair value on a recurring basis under SFAS No. 157 as of February 28, 2009:


			Quoted		Significant
			prices in		other		Significant
	Carrying		active		observable		unobservable
	value		markets		inputs		inputs
In thousands	(Fair value)		(Level 1)		(Level 2)		(Level 3)

Assets:
Available-for-sale securities	$	2,096,772	$	53	$	2,096,719	$	—
Other securities	$	5,133	$	5,133	$	—	$	—

Liabilities:
Other long-term liabilities	$	5,153	$	5,153	$	—	$	—

As of February 28, 2009, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

Note B: Reclassification Within Consolidated Statements of Cash Flows

Client fund obligations represent the Company’s contractual obligation to remit funds to satisfy clients’ payroll and tax payment obligations. To better reflect the nature of these activities, the Company has reclassified the net change in client fund obligations in the Consolidated Statements of Cash Flows from investing activities to financing activities for all periods presented. The impact of the reclassification to the prior year period is as follows:


	For the nine months ended
In thousands	February 29, 2008

Net cash provided by investing activities — as previously reported		$	760,088
Impact of reclassification — net change in client fund obligations			(411,417	)

Net cash provided by investing activities — as reclassified		$	348,671


Net cash used in financing activities — as previously reported		$	(1,270,026	)
Impact of reclassification — net change in client fund obligations			411,417

Net cash used in financing activities — as reclassified		$	(858,609	)

This reclassification had no impact on the net change in cash and cash equivalents or cash flows from operating activities for the period presented.

Note C: Basic and Diluted Earnings Per Share

Basic and diluted earnings per share were calculated as follows:


	For the three months ended				For the nine months ended
	February 28,		February 29,		February 28,		February 29,
In thousands, except per share amounts	2009		2008		2009		2008

Basic earnings per share:
Net income	$	130,790	$	142,474	$	419,741	$	440,661

Weighted-average common shares outstanding		360,821		361,178		360,743		370,814

Basic earnings per share	$	0.36	$	0.39	$	1.16	$	1.19


Diluted earnings per share:
Net income	$	130,790	$	142,474	$	419,741	$	440,661

Weighted-average common shares outstanding		360,821		361,178		360,743		370,814
Dilutive effect of common share equivalents at average market price		92		592		223		1,266

Weighted-average common shares outstanding, assuming dilution		360,913		361,770		360,966		372,080

Diluted earnings per share	$	0.36	$	0.39	$	1.16	$	1.18

Weighted-average anti-dilutive common share equivalents		14,379		7,757		13,267		6,061

Weighted-average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share.

Shares of the Company’s common stock issued for stock option exercises and vesting of restricted stock and restricted stock units for the three months ended February 28, 2009 were minimal, while 0.3 million shares were issued for the nine months ended February 28, 2009. Total shares issued during the three and nine months ended February 29, 2008 were 0.1 million shares and 1.9 million shares, respectively.

Note D: Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments consisted of the following:


	February 28, 2009
			Gross		Gross
			unrealized		unrealized			Fair
In thousands	Cost		gains		losses			value

Type of issue:
Money market securities and other cash equivalents	$	2,194,957	$	—	$	—		$	2,194,957
Available-for-sale securities:
General obligation municipal bonds		845,908		32,144		(203	)		877,849
Pre-refunded municipal bonds		532,690		21,181		(69	)		553,802
Revenue municipal bonds		367,249		12,873		(52	)		380,070
Variable rate demand notes		—		—		—			—
U.S. agency securities		284,154		844		—			284,998
Other equity securities		20		33		—			53

Total available-for-sale securities		2,030,021		67,075		(324	)		2,096,772
Other		7,574		—		(2,441	)		5,133

Total funds held for clients and corporate investments	$	4,232,552	$	67,075	$	(2,765	)	$	4,296,862


	May 31, 2008
			Gross		Gross
			unrealized		unrealized			Fair
In thousands	Cost		gains		losses			value

Type of issue:
Money market securities and other cash equivalents	$	714,907	$	—	$	—		$	714,907
Available-for-sale securities:
General obligation municipal bonds		812,611		12,732		(287	)		825,056
Pre-refunded municipal bonds		504,377		7,724		(489	)		511,612
Revenue municipal bonds		444,852		5,298		(295	)		449,855
Variable rate demand notes		1,536,911		67		—			1,536,978
U.S. agency securities		30,000		—		(36	)		29,964
Other equity securities		20		59		—			79

Total available-for-sale securities		3,328,771		25,880		(1,107	)		3,353,544
Other		10,143		426		(410	)		10,159

Total funds held for clients and corporate investments	$	4,053,821	$	26,306	$	(1,517	)	$	4,078,610

Note D: Funds Held for Clients and Corporate Investments - continued

Included in money market securities and other cash equivalents as of February 28, 2009 are U.S. agency discount notes, government money market funds, and bank demand deposit accounts. As of May 31, 2008, money market securities and other cash equivalents included government money market funds, commercial paper, time deposits, repurchase agreements, and bank demand deposit accounts.

Classification of investments on the Consolidated Balance Sheets is as follows:


	February 28,		May 31,
In thousands	2009		2008

Funds held for clients	$	4,153,478	$	3,808,085
Corporate investments		61,163		228,727
Long-term corporate investments		82,221		41,798

Total funds held for clients and corporate investments	$	4,296,862	$	4,078,610

The Company is exposed to credit risk in connection with these investments through the possible inability of borrowers to meet the terms of their bonds. In addition, the Company is exposed to interest rate risk, as rate volatility will cause fluctuations in the fair value of held investments and in the earnings potential of future investments. The Company maintains a conservative investment strategy within its investment portfolios to maximize liquidity and protect principal. The Company attempts to mitigate the risks associated with its investment activities by investing primarily in high credit quality securities with AAA and AA ratings and short-term securities with A-1/P-1 ratings, limiting amounts that can be invested in any single issuer, and by investing in short- to intermediate-term instruments whose fair value is less sensitive to interest rate changes. All the investments held as of February 28, 2009 are traded in active markets.

As of February 28, 2009, the Company had no exposure to variable rate demand notes or prime money market funds. The Company’s primary short-term investment option is currently U.S. agency discount notes. The Company has no exposure to auction rate securities, sub-prime mortgage securities, asset-backed securities or asset-backed commercial paper, collateralized debt obligations, enhanced cash or cash plus mutual funds, or structured investment vehicles (SIVs). The Company has not and does not utilize derivative financial instruments to manage interest rate risk.

The Company’s available-for-sale securities reflected a net unrealized gain of $66.8 million as of February 28, 2009 compared with a net unrealized gain of $24.8 million as of May 31, 2008. The gross unrealized losses of $0.3 million, included in the net unrealized gain, as of February 28, 2009 were comprised of 11 available-for-sale securities, which had a total fair value of $28.9 million. The gross unrealized losses of $1.1 million, included in the net unrealized gain, as of May 31, 2008 were comprised of 76 available-for-sale securities, which had a total fair value of $243.6 million.

Note D: Funds Held for Clients and Corporate Investments - continued

The Company regularly reviews its investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. The Company believes that the investments it held as of February 28, 2009 were not other-than-temporarily impaired. While certain available-for-sale securities had fair values that were below cost, the Company believes that it is probable that the principal and interest will be collected in accordance with contractual terms, and that the decline in the fair value was due to changes in interest rates and was not due to increased credit risk. As of February 28, 2009 and May 31, 2008, the majority of the securities with an unrealized loss held an AA rating or better. The Company currently believes that it has the ability and intent to hold these investments until the earlier of market price recovery or maturity. The Company’s assessment that an investment is not other-than-temporarily impaired could change in the future due to new developments or changes in the Company’s strategies or assumptions related to any particular investment.

The cost and fair value of available-for-sale securities that had stated maturities as of February 28, 2009 are shown below by contractual maturity. Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.


	February 28, 2009
			Fair
In thousands	Cost		value

Maturity date:
Due in one year or less	$	598,844	$	602,786
Due after one year through three years		638,333		660,656
Due after three years through five years		526,828		553,636
Due after five years		265,996		279,641

Total	$	2,030,001	$	2,096,719

Note E: Property and Equipment, Net of Accumulated Depreciation

The components of property and equipment, at cost, consisted of the following:


	February 28,		May 31,
In thousands	2009		2008

Land and improvements	$	4,144	$	3,617
Buildings and improvements		84,636		84,723
Data processing equipment		178,654		166,893
Software		106,381		98,513
Furniture, fixtures, and equipment		142,831		136,330
Leasehold improvements		86,660		76,244
Construction in progress		61,500		52,078

Total property and equipment, gross		664,806		618,398
Less: Accumulated depreciation and amortization		383,850		343,101

Property and equipment, net of accumulated depreciation	$	280,956	$	275,297

Note E: Property and Equipment, Net of Accumulated Depreciation - continued

Depreciation expense was $15.8 million and $47.3 million for the three and nine months ended February 28, 2009, respectively, as compared with $15.4 million and $45.5 million for the three and nine months ended February 29, 2008, respectively.

Within construction in progress, there were costs for software being developed for internal use of $60.4 million and $51.6 million as of February 28, 2009 and May 31, 2008, respectively. Capitalization of costs ceases when the software is ready for its intended use, at which time the Company begins amortization of the costs. The Company has approximately $57.6 million in costs for internal use software that will begin to amortize during the last three months of fiscal 2009. The estimated annual amortization related to these costs will be approximately $3.8 million.

Note F: Goodwill and Intangible Assets, Net of Accumulated Amortization

The Company had goodwill balances on its Consolidated Balance Sheets of $434.1 million as of February 28, 2009, and $433.3 million as of May 31, 2008. During the nine months ended February 28, 2009, the Company recorded $0.8 million of goodwill related to acquisitions of businesses.

The Company has certain intangible assets with finite lives. The components of intangible assets, at cost, consisted of the following:


	February 28,		May 31,
In thousands	2009		2008

Client lists and associate office license agreements		$197,675		$170,984
Other intangible assets		5,675		5,675

Total intangible assets, gross		203,350		176,659
Less: Accumulated amortization		118,078		102,159

Intangible assets, net of accumulated amortization		$ 85,272		$ 74,500

Amortization expense relating to intangible assets was $5.7 million and $15.9 million for the three and nine months ended February 28, 2009, respectively, as compared with $5.1 million and $13.8 million for the three and nine months ended February 29, 2008, respectively.

The estimated amortization expense relating to intangible asset balances for the full fiscal year 2009 and the following four fiscal years, as of February 28, 2009, is as follows:


	Estimated
In thousands	amortization
Fiscal year ending May 31,	expense

2009		$21,967
2010		$21,703
2011		$18,625
2012		$15,799
2013		$ 9,852

Note G: Business Acquisition Reserves

The Company has recorded reserves related to acquisitions in the amounts of $10.2 million for severance and $6.4 million for redundant lease costs. Activity for the nine months ended February 28, 2009 for these reserves is summarized as follows:


	Balance as of							Balance as of
	May 31,		Utilization			Additions		February 28,
In thousands	2008		of reserve			to reserve		2009

Severance costs		$149		$ —			$207		$ 356
Redundant lease costs		$742		$(200	)		$517		$1,059

The remaining severance payments are expected to be completed during the fiscal year ending May 31, 2010. Redundant lease payments are expected to be completed during the fiscal year ending May 31, 2016. Payments of $0.7 million extend beyond one year and are included in other long-term liabilities on the Consolidated Balance Sheets as of February 28, 2009.

Note H: Income Taxes

The Company is currently under a state income tax audit for the years ended May 31, 2004 through 2007. The examination phase of the audit may conclude within the next twelve months; however, based on the current status of the examination, it is not reasonably possible to estimate the impact, if any, to previously recorded uncertain tax positions. As of February 28, 2009 and May 31, 2008, the total reserve for uncertain tax positions was $23.0 million and $17.7 million, respectively.

Note I: Comprehensive Income

Comprehensive income is comprised of two components: net income and other comprehensive income. Comprehensive income includes all changes in equity during a period except those resulting from transactions with owners of the Company. The change in unrealized gains and losses, net of applicable taxes, related to available-for-sale securities is the primary component reported in accumulated other comprehensive income in the Consolidated Balance Sheets.

Comprehensive income, net of related tax effects, is as follows:


	For the three months ended					For the nine months ended
	February 28,		February 29,			February 28,		February 29,
In thousands	2009		2008			2009		2008

Net income		$130,790		$142,474			$419,741		$440,661
Change in unrealized gains and losses of available-for-sale securities, net of taxes		22,130		(234	)		27,078		18,432

Total comprehensive income		$152,920		$142,240			$446,819		$459,093

As of February 28, 2009, accumulated other comprehensive income was $43.1 million, which was net of taxes of $23.7 million. As of May 31, 2008, accumulated other comprehensive income was $16.0 million, which was net of taxes of $8.8 million.

Note J: Commitments and Contingencies

Lines of credit: As of February 28, 2009, the Company had unused borrowing capacity available under four uncommitted, secured, short-term lines of credit at market rates of interest with financial institutions as follows:


Financial institution	Amount available	Expiration date

JP Morgan Chase Bank, N.A.	$350 million	February 2010
Bank of America, N.A.	$250 million	February 2010
PNC Bank, National Association	$150 million	February 2010
Wells Fargo Bank, National Association	$150 million	February 2010

The primary uses of the lines of credit would be to meet short-term funding requirements related to deposit account overdrafts and client fund obligations arising from electronic payment transactions on behalf of clients in the ordinary course of business, if necessary. No amounts were outstanding against these lines of credit as of, or during, the nine months ended February 28, 2009.

Credit facility: The Company has a committed, secured, one-year revolving credit facility, expiring on September 20, 2009. Paychex of New York LLC (the “Borrower”), a subsidiary of the Company, entered into the credit facility with JPMorgan Chase Bank, N.A. and Bank of America, N.A. (the “Lenders”). The credit facility is collateralized by the long-term securities of the Borrower, to the extent of any borrowing. Under the credit facility the Borrower may, subject to certain restrictions, borrow up to $400 million to meet short-term funding requirements on client fund obligations. The obligations under this credit facility have been guaranteed by the Company and certain of its subsidiaries. Upon expiration of the commitment in September 2009, any borrowings outstanding will mature and be payable on such date. No amounts were outstanding against this credit facility as of, or during, the nine months ended February 28, 2009.

The credit facility includes various financial and other customary covenants, with which the Borrower must comply in order to maintain borrowing availability and avoid penalties, including a limitation on the Borrower’s ability to incur additional indebtedness, create liens, enter into consolidations or mergers, dispose of assets, make investments, pay dividends, enter into transactions with affiliates, or prepay certain indebtedness. The credit facility (and collateral security agreements executed in connection therewith) also contains customary events of default including, but not limited to, payment defaults, covenant defaults, cross-defaults to other indebtedness, material judgment defaults, inaccuracy of representations and warranties, bankruptcy and insolvency events, defects in the Lenders’ security interest, change in control events, and material adverse changes.

Certain Lenders under the credit facility, and their respective affiliates, have performed, and may in the future perform for the Company and its subsidiaries, various commercial banking, investment banking, underwriting, and other financial advisory services, for which they have received, and will receive, customary fees and expenses.

Note J: Commitments and Contingencies - continued

Letters of credit: As of February 28, 2009, and May 31, 2008, the Company also had irrevocable standby letters of credit available totaling $65.8 million and $71.5 million, respectively, required to secure commitments for certain insurance policies and bonding requirements. These letters of credit expire at various dates between May 2009 and December 2012 and are collateralized by securities held in the Company’s investment portfolio. No amounts were outstanding on these letters of credit as of, or during, the nine months ended February 28, 2009.

Other commitments: The Company enters into various purchase commitments with vendors in the ordinary course of business. As of February 28, 2009, the Company had outstanding commitments to purchase approximately $4.2 million of capital assets.

The Company guarantees performance of service on annual maintenance contracts for clients who financed their service contracts through a third party. In the normal course of business, the Company makes representations and warranties that guarantee the performance of its services under service arrangements with clients. In addition, the Company has entered into indemnification agreements with its officers and directors, which require it to defend and, if necessary, indemnify these individuals for certain pending or future claims as they relate to their services provided to the Company. Historically, there have been no material losses related to such guarantees and indemnifications.

The Company currently self-insures the deductible portion of various insured exposures under certain employee benefit plans. The Company’s estimated loss exposure under these insurance arrangements is recorded in other current liabilities on the Consolidated Balance Sheets. Historically, the amounts accrued have not been material. The Company also maintains insurance coverage in addition to its purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions, warranty liability, and acts of terrorism; and capacity for deductibles and self-insured retentions through its captive insurance company.

Contingencies: The Company is subject to various claims and legal matters that arise in the normal course of its business. These include disputes or potential disputes related to breach of contract, breach of fiduciary duty, employment-related claims, tax claims, and other matters.

In August 2001, the Company’s wholly owned subsidiary, Rapid Payroll, Inc. (“Rapid Payroll”) informed 76 licensees that it intended to stop supporting their payroll processing software in August of 2002. Thereafter, lawsuits were commenced by licensees asserting various claims, including breach of contract and related tort and fraud causes of action. As previously reported in the Company’s prior periodic reports, these lawsuits sought compensatory damages, punitive damages, and injunctive relief against Rapid Payroll, the Company, the Company’s former Chief Executive Officer, and its Senior Vice President of Sales and Marketing. In accordance with the Company’s indemnification agreements with its senior executives, the Company has agreed to defend and, if necessary, indemnify them in connection with these pending matters.

As of February 28, 2009, the Company has fully resolved its licensing responsibility and settled all litigation with 75 of the 76 licensees who were provided services by Rapid Payroll. In 2007, a verdict was issued in the Brunskill Associates, Inc. v. Rapid Payroll, Inc. et al. case, which was pending in California Superior Court, Los Angeles County, in which a jury awarded to the plaintiff $15.0 million in compensatory damages and subsequently awarded an additional $11.0 million in punitive damages. The Company is pursuing an appeal of that verdict. Any final judgment would be subject to an award of statutory interest.

Note J: Commitments and Contingencies - continued

The Company has a reserve for pending litigation matters. The litigation reserve has been adjusted in fiscal 2009 for settlements and incurred litigation expenditures. The Company’s reserve for all pending litigation totaled $20.4 million as of February 28, 2009, and is included in current liabilities on the Consolidated Balance Sheets.

In light of the reserve for all pending litigation matters, the Company’s management currently believes that resolution of outstanding legal matters will not have a material adverse effect on the Company’s financial position or results of operations. However, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse impact on the Company’s financial position and the results of operations in the period in which any such effect is recorded.

Note K: Supplemental Cash Flow Information

Income taxes paid were $188.7 million and $169.0 million for the nine months ended February 28, 2009 and February 29, 2008, respectively.

Note L: Related Party Transactions

During the three and nine months ended February 28, 2009, the Company purchased approximately $1.4 million and $4.0 million of data processing equipment and software from EMC Corporation, as compared with $1.5 million and $4.1 million in the respective prior year periods. The Chairman, President, and Chief Executive Officer of EMC Corporation is a member of the Company’s Board.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the operating results of Paychex, Inc. and its wholly owned subsidiaries (“we,” “our,” or “us”) for the three months ended February 28, 2009 (the “third quarter”), the nine months ended February 28, 2009 (the “first nine months” or the “ nine-month period”), and the respective prior year periods ended February 29, 2008, and our financial condition as of February 28, 2009. The focus of this review is on the underlying business reasons for significant changes and trends affecting our revenue, expenses, net income, and financial condition. This review should be read in conjunction with the February 28, 2009 Consolidated Financial Statements and the related Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”). This review should also be read in conjunction with our Annual Report on Form 10-K (“Form 10-K”) for the year ended May 31, 2008 (“fiscal 2008”). Forward-looking statements in this review are qualified by the cautionary statement included in this review under the next sub-heading, “Safe-Harbor Statement under the Private Securities Litigation Reform Act of 1995.”

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain written and oral statements made by management may constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Forward-looking statements are identified by such words and phrases as “we expect,” “expected to,” “estimates,” “estimated,” “current outlook,” “we look forward to,” “would equate to,” “projects,” “projections,” “projected to be,” “anticipates,” “anticipated,” “we believe,” “could be,” and other similar phrases. All statements addressing operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to revenue growth, earnings, earnings-per-share growth, or similar projections, are forward-

looking statements within the meaning of the Reform Act. Because they are forward-looking, they should be evaluated in light of important risk factors. These risk factors include, but are not limited to, the following risks, as well as those that are described in our periodic filings with the Securities and Exchange Commission (“SEC”):

	•		general market and economic conditions including, among others, changes in United States (“U.S.”) employment and wage levels, changes in new hiring trends, changes in short- and long-term interest rates, changes in the fair value and the credit rating of securities held by us, and accessibility of financing;

	•		changes in demand for our services and products, ability to develop and market new services and products effectively, pricing changes and the impact of competition, and the availability of skilled workers;

	•		changes in the laws regulating collection and payment of payroll taxes, professional employer organizations, and employee benefits, including retirement plans, workers’ compensation, health insurance, state unemployment, and section 125 plans;

	•		changes in workers’ compensation rates and underlying claims trends;

	•		the possibility of failure to keep pace with technological changes and provide timely enhancements to services and products;

	•		the possibility of failure of our operating facilities, computer systems, and communication systems during a catastrophic event;

	•		the possibility of third-party service providers failing to perform their functions;

	•		the possibility of penalties and losses resulting from errors and omissions in performing services;

	•		the possible inability of our clients to meet their payroll obligations;

	•		the possible failure of internal controls or our inability to implement business processing improvements; and

	•		potentially unfavorable outcomes related to pending legal matters.

Any of these factors could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-Q is based upon the facts and circumstances known at this time. We undertake no obligation to update these forward-looking statements after the date of filing of this Form 10-Q with the SEC to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.

Overview

We are a leading provider of comprehensive payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses. Our Payroll and Human Resource Services offer a portfolio of services and products that allow our clients to meet their diverse payroll and human resource needs.

Our Payroll services are provided through either our Core Payroll or Major Market Services, which is utilized by clients that have more sophisticated payroll and benefit needs, and include:

	•		payroll processing;

	•		payroll tax administration services;

	•		employee payment services; and

	•		regulatory compliance services (new-hire reporting and garnishment processing).

Our Human Resource Services primarily include:

	•		comprehensive human resource outsourcing services, which include Paychex Premier^® Human Resources and our Professional Employer Organization (“PEO”);

	•		retirement services administration;

	•		workers’ compensation insurance services;

	•		health and benefits services;

	•		time and attendance solutions; and

	•		other human resource services and products.

We primarily earn revenue through recurring fees for services performed. Service revenue is primarily driven by the number of clients, checks or transactions per client per pay period, and utilization of ancillary services. We also earn interest on funds held for clients between the time of collection from our clients and remittance to the applicable tax or regulatory agencies or client employees. Our strategy is focused on achieving strong long-term financial performance by providing high quality, timely, accurate, and affordable services; growing our client base; increasing utilization of our ancillary services; leveraging our technological and operating infrastructure; and expanding our service offerings.

Our financial results continue to be challenged by weakening economic conditions as many of our key indicators were weaker during our third quarter than on a year-to-date basis as compared to the respective prior year periods. Checks per client decreased 4.3% for the third quarter compared to a decrease of 2.4% for the nine-month period. Our new client sales from new business starts declined 23% for the third quarter compared to a 16% decline for the nine-month period. Clients lost due to companies going out of business or no longer having any employees increased 21% for the third quarter compared to a 16% increase for the nine-month period. On a positive note, while deterioration in the above trends was noticeable through January 2009, the trends appear to have stabilized as we review our results for February and early March 2009. Considering the weak economy, our calendar year end selling season was good as the annualized revenue sold in the third quarter was down only 4% for the third quarter and was flat for the nine-month period when compared to the respective prior year periods.

In summary, the weak economy affects our ability to sell and retain clients and reduces our transaction volumes related to fewer employees in our client base. The volatility in the financial markets has resulted in lower investment rates of return and lower average invested balances in our funds held for clients, and has adversely impacted the asset value of our retirement services client employees’ funds.

The financial results for the third quarter as compared to the same period last year are as follows:

	•		Payroll service revenue increased 2% to $381.2 million.

	•		Human Resource Services revenue increased 9% to $131.0 million.

	•		Total revenue decreased 1% to $528.6 million.

	•		Operating income decreased 6% to $197.4 million, as combined interest on funds held for clients and investment income decreased 57%.

	•		Operating income, net of certain items, increased 5% to $181.0 million. Refer to the discussion on page 20 of this review for further information on this non-GAAP measure.


	•		Net income and diluted earnings per share decreased 8% to $130.8 million and $0.36 per share, respectively.

Despite the economic pressures, we have achieved growth in our service revenue as a result of price increases and growth in utilization of ancillary Payroll and Human Resource Services by new and existing clients. We also have continued to leverage our expenses as operating income, net of certain items, increased 5% for the third quarter compared to the same period last year, and improved as a percentage of service revenue to 35.3% from 35.0% for the respective periods.

In addition to reporting operating income, a U.S. generally accepted accounting principle (“GAAP”) measure, we present operating income, net of certain items, which is a non-GAAP measure. We believe operating income, net of certain items, is an appropriate additional measure, as it is an indicator of our core business operations performance period over period. It is also the measure used internally for establishing the following year’s targets and measuring management’s performance in connection with certain performance-based compensation payments and awards. Operating income, net of certain items, excludes interest on funds held for clients. Interest on funds held for clients is an adjustment to operating income due to the volatility of interest rates, which are not within the control of management. Operating income, net of certain items, is not calculated through the application of GAAP and is not the required form of disclosure by the SEC. As such, it should not be considered as a substitute for the GAAP measure of operating income and, therefore, should not be used in isolation, but in conjunction with the GAAP measure. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies. Operating income, net of certain items, increased 5% to $181.0 million for the third quarter, as compared to $173.0 million for the same period last year. Refer to the reconciliation of operating income to operating income, net of certain items, on page 26 of this review.

Our results have been impacted by not only the weak economic conditions, but also the credit crisis. That credit crisis caused a flight to quality investments in the financial markets, resulting in lower available yields on high quality instruments. The average rate of return earned on our combined investment portfolios for the third quarter was 1.7% compared to 3.6% for the same period last year. Our short-term portfolio has been heavily invested in taxable securities, and our short-term taxable interest rates earned have averaged 0.5% for the third quarter compared to 3.8% for the same period last year.

Financial Position and Liquidity

We also believe that our investments as of February 28, 2009 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date to indicate any other-than-temporary impairment. We maintain a conservative investment strategy within our investment portfolios to maximize liquidity and protect principal. In the current financial markets, this translates to significantly lower yields on high quality instruments, impacting our income earned on funds held for clients and corporate investments. Our exposure from our investing activities has been limited in the current investment environment as the result of our policies of investing primarily in high credit quality securities with AAA and AA ratings and short-term securities with

A-1/P-1 ratings, and by limiting the amounts that can be invested in any single issuer. All investments held as of February 28, 2009 are traded in active markets.

As of February 28, 2009, we had no exposure to variable rate demand notes (“VRDNs”) or prime money market funds. Our primary short-term investment option is currently U.S. agency discount notes. We have no exposure to auction rate securities, sub-prime mortgage securities, asset-backed securities or asset-backed commercial paper, collateralized debt obligations, enhanced cash or cash plus mutual funds, or structured investment vehicles (SIVs). We have not and do not utilize derivative financial instruments to manage our interest rate risk.

Our primary source of cash is from our ongoing operations. Cash flow from operations was $563.3 million for the first nine months, as compared with $590.4 million for the same period last year. The decrease in cash flow from operations was related to lower net income and changes in operating assets and liabilities. Historically, we have funded operations, capital purchases, and dividend payments from our operating activities. It is anticipated that cash and total corporate investments as of February 28, 2009, along with projected operating cash flows, will support our normal business operations, capital purchases, and dividend payments for the foreseeable future. During the first nine months, dividends paid to stockholders were 80% of net income.

For further analysis of our results of operations for the three and nine months ended February 28, 2009, and our financial position as of February 28, 2009, refer to the analysis and discussion in the “Results of Operations,” “Liquidity and Capital Resources,” and “Critical Accounting Policies” sections of this review.

Outlook

Our outlook for the full fiscal year ending May 31, 2009 (“fiscal 2009”) has been revised to reflect the impacts of current economic and financial conditions, and assumes the economic weakness we have experienced will continue through the remainder of the fiscal year. Refer to page 19 for information on some of our key indicators, which provides statistical evidence of the economic weakness in the third quarter and first nine months of fiscal 2009.

Projected revenue and net income growth for fiscal 2009 are as follows:


Payroll service revenue	1	%	—	3	%
Human Resource Services revenue	10	%	—	13	%
Total service revenue	3	%	—	5	%
Interest on funds held for clients	(45	%)	—	(40	%)
Total revenue	0	%	—	2	%
Investment income, net	(75	%)	—	(70	%)
Net income	(7	%)	—	(5	%)

Growth in operating income, net of certain items, is expected to approximate 5% to 8% for fiscal 2009. The effective income tax rate is expected to approximate 34% throughout fiscal 2009. Under normal financial market conditions, the impact to our earnings from a 25-basis-point increase or decrease in the short-term interest rates would be approximately $4.0 million, after taxes, for a twelve-month period. Such a basis point change may or may not be tied to changes in the Federal Funds rate. We estimate the lowest level of combined interest on funds held for clients and investment income over the next twelve-month period would be approximately $60 million.

Purchases of property and equipment for fiscal 2009 are expected to be in the range of $75 million to $80 million, in line with our growth rates. Fiscal 2009 depreciation expense is projected to be approximately $65 million, and we project amortization of intangible assets to be approximately $20 million.

RESULTS OF OPERATIONS

Summary of Results of Operations:


	For the three months ended									For the nine months ended
$ in millions	February 28, 2009			February 29, 2008			% Change			February 28, 2009			February 29, 2008			% Change

Revenue:
Payroll service revenue	$	381.2		$	374.2			2	%	$	1,135.7		$	1,097.3			4	%
Human Resource Services revenue		131.0			120.6			9	%		390.7			349.4			12	%

Total service revenue		512.2			494.8			4	%		1,526.4			1,446.7			6	%
Interest on funds held for clients		16.4			37.4			(56	%)		60.4			100.4			(40	%)

Total revenue		528.6			532.2			(1	%)		1,586.8			1,547.1			3	%

Combined operating and SG&A expenses		331.2			321.8			3	%		955.9			916.6			4	%

Operating income		197.4			210.4			(6	%)		630.9			630.5			—

As a % of total revenue		37	%		40	%					40	%		41	%

Investment income, net		1.1			3.6			(70	%)		6.0			23.3			(74	%)


Income before income taxes		198.5			214.0			(7	%)		636.9			653.8			(3	%)

As a % of total revenue		38	%		40	%					40	%		42	%

Income taxes		67.7			71.5			(5	%)		217.2			213.1			2	%

Net income	$	130.8		$	142.5			(8	%)	$	419.7		$	440.7			(5	%)


As a % of total revenue		25	%		27	%					26	%		28	%

Diluted earnings per share	$	0.36		$	0.39			(8	%)	$	1.16		$	1.18			(2	%)

Details regarding our combined funds held for clients and corporate investment portfolios are as follows:


	For the three months ended						For the nine months ended
	February 28,			February 29,			February 28,			February 29,
$ in millions	2009			2008			2009			2008

Average investment balances:
Funds held for clients	$	3,589.0		$	3,746.0		$	3,299.1		$	3,302.0
Corporate investments		550.8			413.7			515.1			798.4

Total	$	4,139.8		$	4,159.7		$	3,814.2		$	4,100.4


Average interest rates earned (exclusive of net realized gains):
Funds held for clients		1.8	%		3.6	%		2.4	%		3.9	%
Corporate investments		1.0	%		3.6	%		1.7	%		3.9	%
Combined funds held for clients and corporate investments		1.7	%		3.6	%		2.3	%		3.9	%

Net realized gains:
Funds held for clients	$	0.2		$	3.3		$	0.9		$	3.8
Corporate investments		—			—			—			—

Total	$	0.2		$	3.3		$	0.9		$	3.8


As of:	February 28,			May 31,
$ in millions	2009			2008

Net unrealized gain on available-for-sale securities ⁽¹⁾		$ 66.8			$ 24.8

Federal Funds rate ⁽²⁾		0.25	%		2.00	%

Three-year “AAA” municipal securities yield		1.48	%		2.65	%

Total fair value of available-for-sale securities		$2,096.8			$3,353.5

Average duration of available-for-sale securities in years ⁽³⁾		2.3			2.7

Weighted-average yield-to-maturity of available-for-sale securities ⁽³⁾		3.3	%		3.4	%


⁽¹⁾		The net unrealized gain of our investment portfolio was approximately $65.5 million as of March 20, 2009.

⁽²⁾		The Federal Funds rate was a range of 0% to 0.25% as of February 28, 2009.

⁽³⁾		These items exclude the impact of VRDNs held as of May 31, 2008, as they are tied to short-term interest rates.

Payroll service revenue: The increases in Payroll service revenue of 2% and 4%, respectively, for the third quarter and first nine months of fiscal 2009 from the same periods last year were primarily attributable to price increases and growth in the utilization of our ancillary payroll services. The rate of growth has been adversely impacted by the effects of the weakening economic conditions. During the third quarter and nine-month period of fiscal 2009, checks per client declined 4.3% and 2.4%, respectively.

Our payroll tax administration services were utilized by 93% of our clients as of February 28, 2009 and February 29, 2008. Our employee payment services were utilized by 74% of all clients as of February 28, 2009, compared with 72% as of February 29, 2008. Nearly all new clients purchase our payroll tax administration services and more than 80% of new clients select a form of employee payment services.

Human Resource Services revenue: Human Resource Services revenue increased 9% to $131.0 million and 12% to $390.7 million for the third quarter and first nine months of fiscal 2009, respectively. The following factors contributed to Human Resource Services revenue growth:


								% Change
								from
As of:	February 28,					February 29,		February 28,
$ in millions	2009		% Change			2008		2007

Comprehensive human resource outsourcing services client employees served		432,000		6	%		409,000		17	%
Workers’ compensation insurance clients		75,000		8	%		70,000		19	%
Retirement services clients		50,000		6	%		47,000		10	%
Health and benefits services revenue	$	14.6		79	%	$	8.2		97	%

While the above factors positively contributed to the revenue growth as compared to the same period last year, the rate of growth has been adversely impacted by economic factors. The volatility in the financial markets has caused the asset value of retirement services client employees’ funds to decline 23% to $7.2 billion as of February 28, 2009 as compared to February 29, 2008. The S&P 500 declined 45% during the same period. The decline in asset value and clients’ employees moving their retirement portfolios to safer investments reduced retirement services revenue growth by $3.0 million and $5.9 million, respectively, during the third quarter and nine-month period. Within our comprehensive human resource outsourcing services we are experiencing lower levels of employees per client, which has reduced revenue growth by $2.9 million and $4.5 million, respectively, for the third quarter and nine-month period. The estimated growth in Human Resource Services revenue for the third quarter and nine-month period would have been 14% and 15%, respectively, exclusive of these two items. We also continue to experience volatility in PEO net service revenue due to fluctuations in workers’ compensation claims and adjustments to workers’ compensation rates in Florida.

Total service revenue: Total service revenue growth for the third quarter and first nine months of fiscal 2009 was 4% and 6%, respectively. The weak economy continues to have a negative impact on service revenue growth as, for the nine-month period, we have experienced a 16% increase in clients lost due to companies going out of business or no longer having any employees, a 16% decline in new sales from new business starts, and a 2.4% decrease in checks per client.

Interest on funds held for clients: For the third quarter and first nine months of fiscal 2009, interest on funds held for clients decreased 56% and 40%, respectively. The decreases in interest on funds held for clients were primarily the result of lower average interest rates earned. In addition, the overall economic trends of companies going out of business and lower checks per client have adversely impacted the growth in average investment balances for the third quarter and nine-month period.

Combined operating and SG&A expenses: The following table summarizes total combined operating and selling, general and administrative (“SG&A”) expenses:


	For the three months ended							For the nine months ended
	February 28,		February 29,					February 28,		February 29,
$ in millions	2009		2008		% Change			2009		2008		% Change

Compensation-related expenses	$	220.5	$	213.6		3	%	$	625.3	$	595.7		5	%
Stock-based compensation costs		5.4		6.1		(12	%)		19.3		19.0		2	%
Facilities expense		15.0		14.4		4	%		44.5		41.9		6	%
Depreciation of property and equipment		15.8		15.4		2	%		47.3		45.5		4	%
Amortization of intangible assets		5.7		5.1		13	%		15.9		13.8		15	%
Other expenses		68.8		67.2		3	%		203.6		200.7		2	%

Total operating and SG&A expenses	$	331.2	$	321.8		3	%	$	955.9	$	916.6		4	%

Combined operating and SG&A expenses increased 3% and 4% for the third quarter and first nine months of fiscal 2009 as compared with the same periods last year, primarily as a result of increases in personnel and other costs related to selling and retaining clients, and promoting new services. As of February 28, 2009, we had approximately 12,600 employees compared with approximately 12,300 employees as of February 29, 2008. The lower growth rates in compensation-related expenses are a result of lower bonus and commission expenses attributed to the more challenging selling environment given the current economic conditions. The decrease in stock-based compensation costs during the third quarter is a result of timing of vesting for certain stock-based awards.

Depreciation expense is primarily related to buildings, furniture and fixtures, data processing equipment, and software. Amortization of intangible assets is primarily related to client list acquisitions, which are amortized using either straight-line or accelerated methods. The increase in amortization was mainly due to intangibles from acquisitions and client list acquisitions. Other expenses include such items as delivery, forms and supplies, communications, travel and entertainment, professional services, and other costs incurred to support our business.

Operating income: Operating income declined 6% for the third quarter, and was flat for the first nine months of fiscal 2009, as compared with the same periods last year. The changes in operating income were attributable to the factors previously discussed.

Operating income, net of certain items, excludes interest on funds held for clients. Refer to the discussion of operating income, net of certain items, in the “Overview” section on page 20 of this review. Operating income, net of certain items, is summarized as follows:


	For the three months ended									For the nine months ended
	February 28,			February 29,						February 28,			February 29,
$ in millions	2009			2008			% Change			2009			2008			% Change

Operating income	$	197.4		$	210.4			(6	%)	$	630.9		$	630.5			—
Excluding: Interest on funds held for clients		(16.4	)		(37.4	)		(56	%)		(60.4	)		(100.4	)		(40	%)

Operating income, net of certain items	$	181.0		$	173.0			5	%	$	570.5		$	530.1			8	%

Investment income, net: Investment income, net primarily represents earnings from our cash and cash equivalents and investments in available-for-sale securities. Investment income does not include interest on funds held for clients, which is included in total revenue. The decrease in investment income for the third quarter as compared to the same period last year was primarily due to lower average interest rates earned, offset by higher average investment balances. The decrease for the nine-month period was a result of lower average interest rates earned and lower average investment balances, which resulted from the funding of the stock repurchase program completed in December 2007.

Income taxes: Our effective income tax rate was 34.1% for both the third quarter and first nine months of fiscal 2009, compared with 33.4% and 32.6% for the respective prior year periods. The increase in the effective income tax rate is a result of lower levels of tax-exempt income derived from municipal debt securities held in our investment portfolios.

Net income and earnings per share: The decreases in net income were 8% and 5% for the third quarter and first nine months of fiscal 2009, respectively, as compared with the same periods last year. The decreases in net income were attributable to the factors previously discussed. In particular, combined interest on funds held for clients and investment income declined 57%, or $23.5 million, and 46%, or $57.3 million, for the third quarter and first nine months of fiscal 2009, respectively.

Diluted earnings per share for the third quarter of $0.36 per share decreased 8% from $0.39 per share for the same period last year. Diluted earnings per share for the nine-month period of $1.16 per share decreased 2% from $1.18 per share for the same period last year. Diluted earnings per share for the nine-month period decreased at a rate lower than the decline in net income due to a lower number of weighted-average shares outstanding as a result of the stock repurchase program completed in December 2007. Additionally, the decline in combined interest on funds held for clients and investment income noted above impacted diluted earnings per share for the third quarter and first nine months of fiscal 2009 by $0.04 per share and $0.10 per share, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The current credit crisis has resulted in unprecedented volatility in the global financial markets, with diminished liquidity and increased exposure to investment losses occurring in these markets. Despite this macroeconomic environment, we believe that our financial position as of February 28, 2009 remained strong with cash and total corporate investments of $571.8 million and no debt. We also believe that our investments as of February 28, 2009 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date to indicate an other-than-temporary impairment. Cash and total corporate investments as of February 28, 2009, along with projected operating cash flows, are expected to support our normal business operations, capital purchases, and dividend payments for the foreseeable future.

Lines of credit: As of February 28, 2009 we had unused borrowing capacity available under four uncommitted, secured, short-term lines of credit at market rates of interest with financial institutions as follows:


Financial institution	Amount available	Expiration date

JP Morgan Chase Bank, N.A.	$350 million	February 2010
Bank of America, N.A.	$250 million	February 2010
PNC Bank, National Association	$150 million	February 2010
Wells Fargo Bank, National Association	$150 million	February 2010

Credit facility: We have a committed, secured, one-year revolving credit facility, expiring on September 20, 2009. The credit facility is collateralized by the long-term securities of Paychex of New York LLC (the “Borrower”), to the extent of any borrowing. Under the credit facility the Borrower may, subject to certain restrictions, borrow up to $400 million to meet short-term funding requirements on client fund obligations. Upon expiration of the commitment in September 2009, any borrowings outstanding will mature and be payable on such date. No amounts were outstanding against this credit facility as of, or during, the first nine months of fiscal 2009.

The revolving loans under the credit facility will bear interest at competitive rates to be elected by the Borrower. The Borrower will also pay a facility fee at a rate of .05% per annum on the average daily unused amount of the commitment. Refer to Note J of the Notes to Consolidated Financial Statements for further discussion of the credit facility.

Letters of credit: As of February 28, 2009, we had irrevocable standby letters of credit available totaling $65.8 million, required to secure commitments for certain insurance policies and bonding requirements. These letters of credit expire at various dates between May 2009 and December 2012 and are collateralized by securities held in our investment portfolios. No amounts were outstanding on these letters of credit as of, or during, the first nine months of fiscal 2009.

Other commitments: We enter into various purchase commitments with vendors in the ordinary course of business. As of February 28, 2009, we had outstanding commitments to purchase approximately $4.2 million of capital assets.

We guarantee performance of service on annual maintenance contracts for clients who financed their service contracts through a third party. In the normal course of business, we make representations and warranties that guarantee the performance of our services under service arrangements with clients. In addition, we have entered into indemnification agreements with our officers and directors, which require us to defend and, if necessary, indemnify these individuals for certain pending or future claims as they relate to their services provided to us. Historically, there have been no material losses related to such guarantees and indemnifications.

We currently self-insure the deductible portion of various insured exposures under certain employee benefit plans. Our estimated loss exposure under these insurance arrangements is recorded in other current liabilities on our Consolidated Balance Sheets. Historically, the amounts accrued have not been material. We also maintain insurance coverage in addition to our purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions, warranty liability, and acts of terrorism; and capacity for deductibles and self-insured retentions through our captive insurance company.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions with unconsolidated entities such as special purpose entities or structured finance entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. We do maintain investments as a limited partner in low-income housing projects that are not considered part of our ongoing operations. These investments are accounted for under the equity method of accounting and are less than 1% of our total assets as of February 28, 2009.

Reclassification Within Consolidated Statements of Cash Flows

Client fund obligations represent our contractual obligation to remit funds to satisfy clients’ payroll and tax payment obligations. To better reflect the nature of these activities, we have reclassified the net change in client fund obligations in the Consolidated Statements of Cash Flows from investing activities to financing activities for all periods presented. This reclassification had no impact on the net change in cash and cash equivalents or cash flows from operating activities for any periods presented. Refer to Note B in the Notes to Consolidated Financial Statements for more information on this reclassification.

Operating Cash Flow Activities


	For the nine months ended
	February 28,		February 29,
In millions	2009		2008

Net income	$	419.7	$	440.7
Non-cash adjustments to net income		92.9		85.0
Cash provided by changes in operating assets and liabilities		50.7		64.7

Net cash provided by operating activities	$	563.3	$	590.4

The decrease in our operating cash flows for the first nine months of fiscal 2009 related primarily to lower net income and changes in operating assets and liabilities. The fluctuation in operating assets and liabilities between periods was primarily the result of lower interest receivable, timing of billing cycles within accounts receivable, and timing of payments for compensation, PEO payroll, income tax, and other liabilities.

Investing Cash Flow Activities


	For the nine months ended
	February 28,			February 29,
In millions	2009			2008

Net change in funds held for clients and corporate investment activities	$	(197.2	)	$	463.5
Purchases of property and equipment, net of proceeds from the sale of property and equipment		(53.3	)		(63.9	)
Acquisition of businesses, net of cash acquired		(6.5	)		(32.9	)
Purchases of other assets		(18.1	)		(18.0	)

Net cash (used in)/provided by investing activities	$	(275.1	)	$	348.7

Funds held for clients and corporate investments: Funds held for clients and corporate investments consist of short-term funds and available-for-sale securities. The portfolio of funds held for clients and corporate investments is detailed in Note D of the Notes to Consolidated Financial Statements.

Fluctuations in net funds held for clients and corporate investment activities primarily relate to timing of purchases, sales, or maturities of investments. The amount of funds held for clients will vary based upon the timing of collecting client funds, and the related remittance of funds to applicable tax or regulatory agencies for payroll tax administration services and to employees of clients utilizing employee payment services. During the nine months ended February 29, 2008, proceeds from sales and maturities of available-for-sale securities were not reinvested as a result of the $1.0 billion stock repurchase program completed in December 2007. Additional discussion of interest rates and related risks is included in the “Market Risk Factors” section of this review.

Purchases of long-lived assets: To support our continued client and ancillary product growth, purchases of property and equipment were made for data processing equipment and software, and for the expansion and upgrade of various operating facilities. We purchased approximately $1.4 million and $4.0 million of data processing equipment and software from EMC Corporation during the third quarter and first nine months of fiscal 2009 as compared with $1.5 million and $4.1 million in the respective prior year periods. The Chairman, President, and Chief Executive Officer of EMC Corporation is a member of our Board of Directors (the “Board”).

Construction in progress totaled $61.5 million as of February 28, 2009 and $52.1 million as of May 31, 2008. Of these costs, $60.4 million and $51.6 million represent software being developed for internal use as of February 28, 2009 and May 31, 2008, respectively. Capitalization of costs ceases when software is ready for its intended use, at which time we will begin amortization of the costs. We expect amortization of a significant portion of the internal use software costs in construction in progress to begin during the last three months of fiscal 2009, and to be amortized over fifteen years.

During the nine months ended February 28, 2009 and February 29, 2008, we paid $6.5 million and $32.9 million, respectively, related to immaterial acquisitions. The purchase of other assets relates to purchases of customer lists.

Financing Cash Flow Activities


	For the nine months ended
	February 28,			February 29,
In millions, except per share amounts	2009			2008

Net change in client fund obligations	$	305.9		$	411.4
Repurchases of common stock		—			(1,000.0	)
Dividends paid		(335.8	)		(334.0	)
Proceeds from and excess tax benefit related to exercise of stock options		5.8			64.0

Net cash used in financing activities	$	(24.1	)	$	(858.6	)

Cash dividends per common share	$	0.93		$	0.90

Net change in client fund obligations: The client fund obligations liability will vary based on the timing of collecting client funds and the related required remittance of funds to applicable tax or regulatory agencies for payroll tax administration services and to employees of clients utilizing employee payment services. Collections from clients are typically remitted from one to 30 days after receipt, with some items extending to 90 days.

Repurchases of common stock: We repurchased 23.7 million shares of common stock for a total of $1.0 billion under our stock repurchase program completed in December 2007.

Dividends paid: In July 2008, our Board declared an increase of 3% in the quarterly dividend payment to $0.31 per share from $0.30 per share. The quarterly dividend of $0.31 per share was paid February 16, 2009 to stockholders of record as of February 1, 2009. The payment of future dividends is dependent on our future earnings and cash flow and is subject to the discretion of our Board.

Exercise of stock options: The decrease in proceeds from and excess tax benefit related to exercise of stock options is due to a decrease in the number of shares issued for stock option exercises to 0.2 million shares during the first nine months of fiscal 2009 from 1.8 million shares during the same period last year, and a decrease in the average exercise price per share.

MARKET RISK FACTORS

Changes in interest rates and interest rate risk: Funds held for clients are primarily comprised of short-term funds and available-for-sale securities. Corporate investments are primarily comprised of available-for-sale securities. As a result of our operating and investing activities, we are exposed to changes in interest rates that may materially affect our results of operations and financial position. Changes in interest rates will impact the earnings potential of future investments and will cause fluctuations in the fair value of our longer-term available-for-sale securities. We maintain a conservative investment strategy within our investment portfolios to maximize liquidity and protect principal. We attempt to mitigate the risks associated with our investing activities by investing primarily in high credit quality securities with AAA and AA ratings and short-term securities with A-1/P-1 ratings, limiting amounts that can be invested in any single issuer, and by investing in short- to intermediate-term instruments whose fair value is less sensitive to interest rate changes. We manage the available-for-sale securities to a benchmark duration of two and one-half to three years. All investments held as of February 28, 2009 are traded in active markets.

As of February 28, 2009, we had no exposure to VRDNs or prime money market funds. Our primary short-term investment option is currently U.S. agency discount notes. We have no exposure to auction rate securities, sub-prime mortgage securities, asset-backed securities or asset-backed commercial paper, collateralized debt obligations, enhanced cash or cash plus mutual funds, or structured investment vehicles (SIVs). We have not and do not utilize derivative financial instruments to manage our interest rate risk.

During the first nine months of fiscal 2009, the average interest rate earned on our combined funds held for clients and corporate investment portfolios was 2.3% compared with 3.9% for the same period last year. With the turmoil currently in the financial markets, our conservative investment strategy translates to significantly lower yields on high quality instruments. When interest rates are falling, the full impact of lower interest rates will not immediately be reflected in net income due to the interaction of short- and long-term interest rate changes. During a falling interest rate environment, the decreases in interest rates decrease earnings from our short-term investments, and over time decrease earnings from our longer-term available-for-sale securities. Earnings from the available-for-sale-securities, which as of February 28, 2009 had an average duration of 2.3 years, would not reflect decreases in interest rates until the investments are sold or mature and the proceeds are reinvested at lower rates.


	February 28, 2009
In millions	Cost		Fair value

Maturity date:
Due in one year or less	$	598.9	$	602.8
Due after one year through three years		638.3		660.7
Due after three years through five years		526.8		553.6
Due after five years		266.0		279.6

Total	$	2,030.0	$	2,096.7

The following table summarizes recent changes in the Federal Funds rate:


	Fiscal year			Fiscal year			Fiscal year
	through			ended			ended
	February 28,			May 31,			May 31,
	2009			2008			2007

Federal Funds rate — beginning of period		2.00	%		5.25	%		5.00	%
Rate (decrease)/increase:
First quarter		—			—			0.25
Second quarter		(1.00	)		(0.75	)		—
Third quarter		(0.75	)		(1.50	)		—
Fourth quarter		NA			(1.00	)		—

Federal Funds rate — end of period ⁽¹⁾		0.25	%		2.00	%		5.25	%

Three-year “AAA” municipal securities yield — end of period		1.48	%		2.65	%		3.71	%


⁽¹⁾		The Federal Funds rate was a range of 0% to 0.25% as of February 28, 2009.

Calculating the future effects of changing interest rates involves many factors. These factors include, but are not limited to:

	•		daily interest rate changes;

	•		seasonal variations in investment balances;

	•		actual duration of short-term and available-for-sale securities;

	•		the proportional mix of taxable and tax-exempt investments;

	•		changes in tax-exempt municipal rates as compared to taxable investment rates, which are not synchronized or simultaneous; and

	•		financial market volatility and the resulting effect on benchmark and other indexing interest rates.

Subject to these factors, a 25-basis-point change generally affects our tax-exempt interest rates by approximately 17 basis points.

Our total investment portfolio (funds held for clients and corporate investments) is expected to average approximately $3.9 billion for fiscal 2009. Our normal and anticipated allocation is approximately 55% invested in short-term and available-for-sale securities with an average duration of 35 days and 45% invested in available-for-sale securities with an average duration of two and one-half to three years.

The combined funds held for clients and corporate available-for-sale securities reflected a net unrealized gain of $66.8 million as of February 28, 2009, compared with a net unrealized gain of $24.8 million as of May 31, 2008. During the first nine months of fiscal 2009, the net unrealized gain/(loss) on our investment portfolios ranged from a net unrealized loss of $15.2 million to a net unrealized gain of $86.6 million. Our investment portfolios reflected a net unrealized gain of approximately $65.5 million as of March 20, 2009.

As of February 28, 2009 and May 31, 2008, we had $2.1 billion and $3.4 billion, respectively, invested in available-for-sale securities at fair value. The weighted-average yield-to-maturity was 3.3% and 3.4% as of February 28, 2009 and May 31, 2008, respectively. The weighted-average yield-to-maturity excludes available-for-sale securities tied to short-term interest rates, such as VRDNs. Assuming a hypothetical decrease in both short-term and longer-term interest rates of 25 basis points, the resulting potential increase in fair value for our portfolio of available-for-sale securities held as of February 28, 2009 would be in the range of $11.5 million to $12.0 million. Conversely, a corresponding increase in interest rates would result in a comparable decrease in fair value. This hypothetical increase or decrease in the fair value of the portfolio would be recorded as an adjustment to the portfolio’s recorded value, with an offsetting amount recorded in stockholders’ equity. These fluctuations in fair value would have no related or immediate impact on the results of operations, unless any declines in fair value were considered to be other-than-temporary.

Credit Risk: We are exposed to credit risk in connection with these investments through the possible inability of the borrowers to meet the terms of their bonds. We attempt to mitigate this risk by investing primarily in high credit quality securities with AAA and AA ratings and short-term securities with A-1/P-1 ratings, and by limiting amounts that can be invested in any single issuer.

We regularly review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held as of February 28, 2009 were not other-than-temporarily impaired. While certain available-for-sale securities had fair values that were below cost, we believe that it is probable that the principal and interest will be collected in accordance with contractual terms, and that the decline in the fair value was due to changes in interest rates and was not due to increased credit risk. As of February 28, 2009 and May 31, 2008, the majority of the securities with an unrealized loss held an AA rating or better. We currently believe that we have the ability and intent to hold these investments until the earlier of market price recovery or maturity. Our assessment that an investment is not other-than-temporarily impaired could change in the future due to new developments or changes in our strategies or assumptions related to any particular investment.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are described in Item 7 of our Form 10-K for fiscal 2008, filed with the SEC on July 18, 2008. On an ongoing basis, we evaluate the critical accounting policies used to prepare our Consolidated Financial Statements, including, but not limited to, those related to:

	•		revenue recognition;

	•		PEO workers’ compensation insurance;

	•		valuation of investments;

	•		goodwill and other intangible assets;

	•		accrual for client fund losses;

	•		contingent liabilities;

	•		stock-based compensation costs; and

	•		income taxes.

There have been no material changes in these aforementioned critical accounting policies, other than as required by adoption of new accounting pronouncements as described below.

Effective June 1, 2008, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements.” This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements; however, this standard does not require any new fair value measurements. The adoption of this standard has not had a material effect on our results of operations or financial position.

In determining the fair value of our assets and liabilities, we use various valuation approaches, predominately the market and income approaches. In determining the fair value of our available-for-sale securities, we utilize the Interactive Data Pricing service, a market approach. SFAS No. 157 establishes a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on its reliability. Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level 2 valuations are based on inputs, other than quoted prices included within Level 1, that are observable, either directly or indirectly. Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.

Item 3. Quantitative and Qualitative Disclosure of Market Risk

The information called for by this item is provided under the caption “Market Risk Factors” under Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.

Item 4. Controls and Procedures

Disclosure Controls and Procedures and Internal Control Over Financial Reporting: Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures: As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting: We also carried out an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this report. Based on such evaluation, there has been no change in our internal control over financial reporting that occurred during the most recently completed fiscal quarter ended February 28, 2009, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note J of the Notes to Consolidated Financial Statements, which is incorporated herein by reference thereto, for information regarding legal proceedings.

Item 1A. Risk Factors

With the exception of the following, there have been no other material changes in our risk factors from those disclosed in Part I, Item 1A, of our fiscal 2008 Form 10-K.

We may be adversely impacted by volatility in the financial and economic environment: During periods of weakening economic conditions, employment levels may decrease and interest rates may become more volatile. These conditions may impact our business due to lower transaction volumes or an increase in the number of clients going out of business. Current or potential clients may decide to reduce their spending on payroll and other outsourcing services. The interest we earn on funds held for clients may decrease as a result of a decline in funds available to invest and lower interest rates. In addition, during periods of volatility in the credit markets, certain types of investments may not be available to us or may become too risky for us to invest in, further reducing the interest we may earn on client funds. Constriction in the credit markets may impact the availability of financing, even to borrowers with the highest credit ratings. We historically have not borrowed against available credit arrangements to meet liquidity needs. However, should we require additional short-term liquidity during days of large outflows of client funds, a credit constriction may limit our ability to access those funds or the flexibility to obtain them at interest rates that would be acceptable to us. If all of these financial and economic circumstances were to remain in effect for an extended period of time, there could be a material adverse effect on our financial results.

Item 6. Exhibits

Exhibit 31.1: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	PAYCHEX, INC.
Date: March 25, 2009	/s/ Jonathan J. Judge
	Jonathan J. Judge
	President and Chief Executive Officer


Date: March 25, 2009	/s/ John M. Morphy
	John M. Morphy
	Senior Vice President, Chief Financial Officer, and Secretary

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