Pitney Bowes (PBI)

12. Stock Plans

Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R). SFAS 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. We elected to adopt the modified retrospective application method as provided by SFAS 123(R), and, accordingly, financial statement amounts for the prior periods have been adjusted to reflect the fair value method of expensing prescribed by SFAS 123(R).

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Income:

At December 31, 2006, $35 million of unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted average period of 2.6 years. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004, was approximately $23.2 million, $21.9 million and $26.3 million, respectively. There were no capitalized stock-based compensation costs at December 31, 2006 and 2005. Proceeds from issuance of stock in our Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 include $3.4 million, $3.9 million and $4.8 million of windfall tax benefits from stock option exercises, respectively.

We settle employee stock options and restricted stock with treasury shares. Restricted stock units are settled primarily in shares except for the related minimum tax withholding which will be settled in cash.

In 2006, we modified our new stock-based compensation awards, requiring a minimum requisite service period of one year for retirement eligible employees.

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