Pitney Bowes (PBI)

Costs and expenses

(Dollars in thousands)

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

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

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

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

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

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

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

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

Costs and expenses

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

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Costs and expenses

Cost of equipment sales as a percentage of revenue was 53.3% in the first six months of 2008 compared with 48.5% in the prior year, primarily due to the decrease in mix of higher margin equipment sales in the U.S.

Cost of supplies as a percentage of revenue increased slightly to 26.0% in the first six months of 2008 compared with 25.9% in the prior year.

Cost of software as a percentage of revenue increased to 25.3% in the first six months of 2008 compared with 24.8% in the prior year primarily due to a change in the mix of business.

Cost of rentals as a percentage of revenue decreased to 21.0% in the first six months of 2008 compared with 23.2% in the prior year primarily due to lower depreciation costs related to the transition of our product line.

Cost of support services as a percentage of revenue increased to 59.5% compared with 56.1% in the prior year primarily due to higher fuel costs worldwide for direct sales and service teams.

Cost of business services as a percentage of revenue was 78.5% for the six months of 2008 compared to 78.8% for the prior year. The successful integration of new sites and productivity improvements at our Mail Services operations was partially offset by higher costs associated with the acquisition in our Management Services operations.

Selling, general and administrative (“SG&A”) expenses as a percentage of revenue increased to 31.4% in the first six months of 2008 compared with 30.9% in the prior year. This was largely due to lower organic revenue growth, a shift in the mix of

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Costs and Expenses

We have a centralized treasury system and do not allocate interest costs to our business segments. Accordingly, all interest costs are included in interest expense on the Consolidated Statements of Income and are not allocated to cost of financing.

Cost of equipment sales as a percentage of revenue decreased to 50.1% in the first nine months of 2007 compared with 50.6% in the prior year, primarily due to the increase in sales of higher margin equipment in the U.S.

Cost of supplies as a percentage of revenue was 26.7% in the first nine months of 2007 compared with 26.5% in the prior year.

Cost of software as a percentage of revenue increased to 24.3% of revenue in the first nine months of 2007 compared to 23.2% in the prior year, due primarily to the acquisition of MapInfo.

Cost of rentals as a percentage of revenue increased to 23.2% in the first nine months of 2007 compared with 21.7% in the prior year, primarily due to higher depreciation costs from placements of new meters.

Cost of support services as a percentage of revenue was 56.8% for the nine months of 2007 compared to 56.4% for the prior year.

Cost of business services increased to 78.5% of revenue in the first nine months of 2007 compared with 78.0% in the prior year, due to continued integration costs in our legal solutions businesses at Management Services and higher margin print contracts in the prior year that did not repeat this year.

Selling, general and administrative expenses as a percentage of total revenue was 31.2% for the first nine months of 2007 compared to 30.9% for last year. The acquisition of MapInfo and continued investments in sales and marketing channels offset benefits from our productivity initiatives.

Research and development expenses as a percentage of total revenue were 3.1% in the first nine month of 2007 compared with 3.0% in the prior year. Research and development expenses increased due primarily to the acquisition of MapInfo.

Costs and expenses

Cost of equipment sales as a percentage of revenue decreased to 48.5% in the first six months of 2007 compared with 50.3% in the prior year, primarily due to the increase in sales of higher margin equipment in the U.S.

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Costs and expenses

Cost of equipment sales as a percentage of revenue was 50.5% in the first quarter of 2007 and 2006.

Cost of supplies as a percentage of revenue increased to 26.0% in the first quarter of 2007 compared with 24.9% in the prior year primarily due to the increase in sales of toner, ink, and other supplies which have lower margins than our meter-related supplies.

Cost of software increased to 26.8% of revenue in the first quarter of 2007 compared with 24.2% in the prior year due to the increase in mix of service versus licensing revenue.

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Costs and expenses

          Cost of equipment sales as a percentage of revenue increased to 50.6% in the first nine months of 2006 compared with 50.2% in the prior year, primarily due to the increase in mix of Production Mail and International Mailing sales.

          Cost of supplies as a percentage of revenue increased to 26.5% in the first nine months of 2006 compared with 24.4% in the prior year, primarily due to sales of toner, ink and other supplies which have lower margins from our traditional meter supplies.

          Cost of software increased to 23.2% of revenue in the first nine months of 2006 compared to 21.7% in the prior year, due primarily to the Emtex acquisition and investments to grow revenue.

          Cost of rentals as a percentage of revenue increased to 21.7% in the first nine months of 2006 compared with 20.7% in the prior year, primarily due to higher depreciation costs from the placements of new meters.

          Cost of support services increased to 56.4% of revenue in the first nine months of 2006 compared with 56.1% in the prior year, primarily due to an increase in the mix of lower margin production mail and international support services.

          Cost of business services decreased to 78.0% of business services revenue in the first nine months of 2006 compared with 81.0% in the prior year, primarily due to our ongoing focus on cost containment and efficiency in our management services operations, and the improved integration of new sites in our mail services operations.

          Selling, general and administrative expenses decreased slightly to 30.9% of total revenue in the first nine months ended 2006 compared to 31.0% in the prior year as benefits from our transformation and productivity programs more than offset transition expenses related to the consolidation and outsourceing of administrative functions in Europe.

          Research and development increased by $1.9 million from the prior year reflecting our continued investment in developing new technologies and enhancing our products.