Xerox Reports Second-Quarter 2008 Earnings of 24 Cents Per Share



    
    -   Total revenue up 8 percent, post-sale revenue up 10 percent
    -   Total color revenue up 11 percent
    -   $442 million in operating cash flow
    -   $377 million in share repurchase; $1 billion more authorized for
        stock buyback
    -   Maintains full-year earnings expectations of $1.26 to $1.30 per share
    

    NORWALK, CT, July 24 /CNW/ - Xerox Corporation (NYSE:   XRX) announced
today second-quarter earnings of 24 cents per share, including a previously
announced restructuring charge of 5 cents per share.
    Total revenue of $4.5 billion grew 8 percent in the quarter, including a
4 point benefit from currency. Post-sale revenue, which represents more than
70 percent of the company's total revenue, increased 10 percent. Equipment
sale revenue was up 2 percent. The company's revenue includes the benefit of
its acquisition of Global Imaging Systems in May 2007.
    "Our annuity-based global business led to steady revenue growth this
quarter along with earnings and cash in line with our expectations," said Anne
M. Mulcahy, Xerox chairman and chief executive officer. "While the U.S.
economy creates challenges for our business with large enterprises, we're
seeing consistent positive performance in the small and mid-size business
market, with strong results from our developing markets and Global Imaging
operations. In addition, demand for our document services, which help
customers reduce costs and improve productivity, is up this quarter. Strong
revenue growth in these key areas does have an impact on gross margin, which
we're offsetting with cost reductions and operational improvements that help
deliver solid bottom-line results."
    During the quarter, Xerox generated $442 million in operating cash flow.
The company also repurchased $377 million in Xerox shares, and announced today
that its board of directors authorized an additional $1 billion in share
repurchase, bringing the total available authorization for share repurchase to
$1.7 billion.
    Xerox technology is accelerating the adoption of digital color printing
in businesses and commercial print enterprises. Revenue from color grew
11 percent in the second quarter and represents 40 percent of Xerox's total
revenue, up 2 points from the second quarter of 2007. Xerox color devices
print the highest volume of pages in the industry - producing more than 25
billion pages in the first half of this year and more than 40 billion pages
last year. In the second quarter, the number of color pages grew 28 percent,
and now represent 16 percent of total pages, up 4 points from the prior year.
Color performance excludes results from Global Imaging Systems.
    Xerox document management services help businesses simplify work
processes, manage office technology and in-house print shops, digitize paper
files, create digital archives and much more. For the first half of 2008,
Xerox Global Services generated nearly $1.8 billion in annuity revenue, up 8
percent from the prior year.
    Xerox's production business provides commercial printers and
document-intensive industries with high-speed digital printing and services
that enable on-demand, personalized printing. Total production revenue
increased 4 percent in the second quarter, including a 5 point currency
benefit. Production color installs declined 12 percent in the second quarter
largely due to the timing of new product introductions. In late May, Xerox
launched six production color systems, with installs primarily beginning in
the second half of this year. Production black-and-white systems declined 8
percent. Demand for the Xerox Nuvera(R) EA and Xerox Nuvera 288 digital
presses only partially offset declines from other high volume and light
production systems.
    Through expanded channels of distribution and competitive offerings for
businesses of any size, Xerox continues to drive the demand for color in the
office with installs of color multifunction systems up 34 percent from the
prior year. Total office revenue was up 9 percent in the second quarter,
including a 4 point benefit from currency. Installs of the company's
black-and-white multifunction devices increased 10 percent. During the second
quarter, Xerox launched 12 multifunction systems and printers, competitively
priced to meet the needs of workplaces small to large.
    Accelerated growth in Xerox's developing markets continued in the second
quarter with revenue up 19 percent, reflecting positive performance in all
regions.
    The effect of more revenue from developing markets and services as well
as continued pricing investments resulted in a second quarter gross margin of
39.2 percent, down 1.1 points from the prior year. Selling, administrative and
general expenses as a percent of revenue at 25.8 percent was about flat
compared to the second quarter of 2007, while the company continued to make
investments in marketing and sales coverage.
    During the second quarter, Xerox made more progress in expanding
distribution with the acquisition of Veenman B.V., the leading independent
office technology distributor in the Netherlands, as well as Global Imaging's
purchase of Saxon Business Systems, which gives Global Imaging even more scale
in the U.S.
    "We have the flexibility to be aggressive in the marketplace while
delivering on our earnings expectations," added Mulcahy. "We're launching more
competitively priced products than anyone else in our industry, growing our
sales channels to reach more businesses of any size anywhere, and making
marketing investments that drive installs of Xerox technology and fuel our
healthy annuity stream."
    Xerox expects third-quarter 2008 earnings in the range of 28 to 30 cents
per share and maintains its full-year earnings expectations of $1.26 to
$1.30 per share.

    This release contains "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. The words "anticipate,"
"believe," "estimate," "expect," "intend," "will," "should" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. These statements reflect management's current beliefs, assumptions
and expectations and are subject to a number of factors that may cause actual
results to differ materially. These factors include but are not limited to the
risk that we will not realize all of the anticipated benefits from our 2007
acquisition of Global Imaging Systems; the risk that unexpected costs will be
incurred; the outcome of litigation and regulatory proceedings to which we may
be a party; actions of competitors; changes and developments affecting our
industry; quarterly or cyclical variations in financial results; development
of new products and services; interest rates and cost of borrowing; our
ability to protect our intellectual property rights; our ability to maintain
and improve cost efficiency of operations; changes in foreign currency
exchange rates; changes in economic conditions, political conditions, trade
protection measures, licensing requirements and tax matters in the foreign
countries in which we do business; reliance on third parties for manufacturing
of products and provision of services; and other factors that are set forth in
the "Risk Factors" section, the "Legal Proceedings" section, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section and other sections of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008 as well as our 2007 Form 10-K filed with the
Securities and Exchange Commission. The company assumes no obligation to
update any forward-looking statements as a result of new information or future
events or developments, except as required by law.
    For more information on Xerox, visit http://www.xerox.com or
http://www.xerox.com/news. For open commentary and industry perspectives,
visit http://www.xerox.com/blogs or http://www.xerox.com/podcasts. Xerox(R),
Xerox Nuvera(R), the Xerox wordmark and the spherical connection symbol are
trademarks of Xerox Corporation in the United States and/or other countries.

    
                              Xerox Corporation
           Condensed Consolidated Statements of Income (Unaudited)


                        Three Months Ended         Six Months Ended
    (in millions,            June 30,                   June 30,
     except per         ----------------           ----------------
     share data)          2008     2007  % Change    2008     2007  % Change
    ------------------- -------------------------  --------------------------
    Revenues
      Sales             $ 2,119  $ 1,976       7%  $ 4,132  $ 3,683      12%
      Service,
       outsourcing
       and rentals        2,207    2,027       9%    4,320    3,951       9%
      Finance income        207      205       1%      416      410       1%
                        -------- --------          -------- --------
    Total Revenues        4,533    4,208       8%    8,868    8,044      10%
                        -------- --------          -------- --------

    Costs and Expenses
      Cost of sales       1,400    1,286       9%    2,719    2,370      15%
      Cost of service,
       outsourcing and
       rentals            1,275    1,148      11%    2,506    2,266      11%
      Equipment
       financing
       interest              79       79       -       159      157       1%
      Research,
       development and
       engineering
       expenses             223      223       -       444      441       1%
      Selling,
       administrative
       and general
       expenses           1,170    1,081       8%    2,294    2,035      13%
      Restructuring
       and asset
       impairment
       charges               63       (2)     (*)       66       (4)     (*)
      Provision for
       litigation, net        -        -      (*)      795        -      (*)
      Other expenses,
       net                   78       78       -       158      135      17%
                        -------- --------          -------- --------
    Total Costs and
     Expenses             4,288    3,893      10%    9,141    7,400      24%
                        -------- --------          -------- --------

    Income (Loss) before
     Income Taxes and
     Equity Income(*)(*)    245      315     (22%)    (273)     644      (*)
      Income tax expense
       (benefit)             59       76     (22%)    (187)     178      (*)
      Equity in net
       income of
       unconsolidated
       affiliates            29       27       7%       57       33      73%
                        -------- --------          -------- --------
    Net Income (Loss)   $   215  $   266     (19%) $   (29) $   499      (*)
                        -------- --------          -------- --------
                        -------- --------          -------- --------
    Basic Earnings
     (Loss) per Share   $  0.24  $  0.28     (14%) $ (0.03) $  0.53      (*)
    Diluted Earnings
     (Loss) per Share   $  0.24  $  0.28     (14%) $ (0.03) $  0.52      (*)


    (*)    Percent change not meaningful.

    (*)(*) Referred to as "Pre-Tax Income" throughout the remainder of this
           document.


                              Xerox Corporation
              Condensed Consolidated Balance Sheets (Unaudited)


                                                      June 30,   December 31,
    (in millions, except share data in thousands)        2008         2007
    ------------------------------------------------  ----------   ----------
    Assets
    Cash and cash equivalents                         $     843    $   1,099
    Accounts receivable, net                              2,598        2,457
    Billed portion of finance receivables, net              287          304
    Finance receivables, net                              2,657        2,693
    Inventories                                           1,436        1,305
    Other current assets                                    967          682
                                                      ----------   ----------
      Total current assets                                8,788        8,540
    Finance receivables due after one year, net           4,961        5,051
    Equipment on operating leases, net                      629          587
    Land, buildings and equipment, net                    1,597        1,587
    Investments in affiliates, at equity                    994          932
    Intangible assets, net                                  624          621
    Goodwill                                              3,591        3,448
    Deferred tax assets, long-term                        1,599        1,349
    Other long-term assets                                1,529        1,428
                                                      ----------   ----------
      Total Assets                                    $  24,312    $  23,543
                                                      ----------   ----------
                                                      ----------   ----------
    Liabilities and Shareholders' Equity
    Short-term debt and current portion of long-term
     debt                                             $   1,218    $     525
    Accounts payable                                      1,326        1,367
    Accrued compensation and benefits costs                 573          673
    Other current liabilities                             2,449        1,512
                                                      ----------   ----------
    Total current liabilities                             5,566        4,077
    Long-term debt                                        6,730        6,939
    Liability to subsidiary trust issuing preferred
     securities                                             636          632
    Pension and other benefit liabilities                 1,190        1,115
    Post-retirement medical benefits                      1,390        1,396
    Other long-term liabilities                             846          796
                                                      ----------   ----------
      Total Liabilities                                  16,358       14,955
    Common stock, including additional
     paid-in-capital                                      3,678        4,096
    Treasury stock, at cost                                (313)         (31)
    Retained earnings                                     5,157        5,288
    Accumulated other comprehensive loss                   (568)        (765)
                                                      ----------   ----------
      Total Shareholders' Equity                          7,954        8,588
                                                      ----------   ----------
      Total Liabilities and Shareholders' Equity      $  24,312    $  23,543
                                                      ----------   ----------
                                                      ----------   ----------

    Shares of common stock issued                       894,792      919,013
    Treasury stock                                      (22,558)      (1,836)
                                                      ----------   ----------
    Shares of common stock outstanding                  872,234      917,177
                                                      ----------   ----------
                                                      ----------   ----------


                              Xerox Corporation
         Condensed Consolidated Statements of Cash Flows (Unaudited)


                                         Three Months Ended  Six Months Ended
                                               June 30,           June 30,
                                           ----------------  ----------------
    (in millions)                            2008     2007     2008     2007
    -------------------------------------  -------  -------  -------  -------
    Cash Flows from Operating Activities:
    Net income (loss)                      $  215   $  266   $  (29)  $  499
    Adjustments required to reconcile net
     income (loss) to cash flows from
     operating activities:
      Depreciation and amortization           178      162      323      314
      Provisions for receivables and
       inventory                               59       58      108       94
      Net gain on sales of businesses and
       assets                                 (15)       -      (22)      (4)
      Undistributed equity in net income
       of unconsolidated affiliates            (2)     (13)     (29)     (18)
      Stock-based compensation                 20       18       40       35
      Provision for litigation, net             -        -      795        -
      Restructuring and asset impairment
       charges                                 63       (2)      66       (4)
      Cash payments for restructurings        (22)     (60)     (59)    (134)
      Contributions to pension benefit
       plans                                  (31)     (27)     (66)     (55)
      Increase in inventories                 (36)     (22)    (165)    (160)
      Increase in equipment on operating
       leases                                 (84)     (76)    (161)    (145)
      Decrease in finance receivables          96       82      220      220
      Increase in accounts receivable and
       billed portion of finance
       receivables                            (40)     (89)     (68)    (116)
      Decrease (increase) in other current
       and long-term assets                    28       58       (6)      54
      Increase (decrease) in accounts
       payable and accrued compensation        40       11     (143)     (73)
      Net change in income tax assets and
       liabilities                             13       49     (287)     143
      Net change in derivative assets and
       liabilities                            (13)     (26)      10      (24)
      (Decrease) increase in other current
       and long-term liabilities              (24)       5      (47)     (27)
      Other, net                               (3)      (6)      14      (24)
                                           -------  -------  -------  -------
        Net cash provided by operating
         activities                           442      388      494      575
                                           -------  -------  -------  -------

    Cash Flows from Investing Activities:
      Cost of additions to land, buildings
       and equipment                          (55)     (56)     (99)    (108)
      Proceeds from sales of land,
       buildings and equipment                 27        2       36        6
      Cost of additions to internal use
       software                               (33)     (25)     (60)     (54)
      Acquisitions, net of cash acquired     (138)  (1,530)    (142)  (1,530)
      Net change in escrow and other
       restricted investments                (138)      19     (137)      40
      Other, net                               52       46       52      118
                                           -------  -------  -------  -------
        Net cash used in investing
         activities                          (285)  (1,544)    (350)  (1,528)
                                           -------  -------  -------  -------

    Cash Flows from Financing Activities:
      Net debt payments on secured
       financings                             (59)    (178)    (147)    (374)
      Net cash proceeds on other debt         325    1,009      571      996
      Common stock dividends                  (39)       -      (79)       -
      Proceeds from issuances of common
       stock                                    1       19        4       51
      Excess tax benefits from stock-based
       compensation                             -        6        1       18
      Payments to acquire treasury stock,
       including fees                        (377)     (64)    (712)    (289)
      Repurchases related to stock-based
       compensation                            (1)       -      (33)       -
      Other                                    (4)     (15)      (9)     (15)
                                           -------  -------  -------  -------
        Net cash (used in) provided by
         financing activities                (154)     777     (404)     387
                                           -------  -------  -------  -------
    Effect of exchange rate changes on
     cash and cash equivalents                 (2)      11        4       17
                                           -------  -------  -------  -------

    Increase (decrease) in cash and cash
     equivalents                                1     (368)    (256)    (549)
    Cash and cash equivalents at beginning
     of period                                842    1,218    1,099    1,399
                                           -------  -------  -------  -------
    Cash and cash equivalents at end of
     period                                $  843   $  850   $  843   $  850
                                           -------  -------  -------  -------
                                           -------  -------  -------  -------


    Financial Review

    Summary

    Revenues

                                               Three Months Ended
                                                    June 30,
    (in millions)                                 2008       2007     Change
    ----------------------------------------  -------------------------------
    Equipment sales                           $  1,160   $  1,141         2%
    Post sale revenue(1)                         3,373      3,067        10%
                                              --------------------
    Total Revenue                             $  4,533   $  4,208         8%
                                              --------------------
                                              --------------------

    Reconciliation to Condensed Consolidated Statements of Income

    Sales                                     $  2,119   $  1,976
    Less: Supplies, paper and other sales         (959)      (835)
                                              --------------------
    Equipment sales                           $  1,160   $  1,141
                                              --------------------
                                              --------------------

    Service, outsourcing and rentals          $  2,207     $2,027
    Add: Finance income                            207        205
    Add: Supplies, paper and other sales           959        835
                                              --------------------
    Post sale revenue                         $  3,373   $  3,067
                                              --------------------
                                              --------------------

    Memo: Color(2)                            $  1,700   $  1,531        11%
                                              --------------------
                                              --------------------


    (1) Post sale revenue is largely a function of the equipment placed at
    customer locations, the volume of prints and copies that our customers
    make on that equipment, the mix of color pages, as well as associated
    services.

    (2) Color revenues represent a subset of total revenues and exclude GIS
    revenues.

    Second quarter 2008 total revenues grew 8% compared to the second quarter
2007. Our consolidated 2008 results include the results of Global Imaging
Systems (GIS), which was acquired effective May 9, 2007. When including a full
quarter of GIS in our 2007 results, second quarter 2008 total revenue grew 
5%(3). Currency had a 4-percentage point positive impact on total revenues in
the quarter. Total revenues included the following:
    -   10% increase in post sale revenue, or 8%(3) including a full quarter
        of GIS in our 2007 results. Growth in GIS, color products and
        document management services more than offset a decline in light lens
        products revenue. The components of post sale revenue increased as
        follows:
        -  9% increase in service, outsourcing and rentals revenue to
           $2,207 million, reflecting the inclusion of GIS, growth in
           document management services and technical service revenue.
        -  Supplies, paper and other sales of $959 million grew 15% year-
           over-year due to the inclusion of GIS as well as growth in
           supplies and paper sales.
    -   2% increase in equipment sales revenue, with a 4-percentage point
        benefit from currency. When including a full quarter of GIS in our
        2007 results, second quarter 2008 equipment sales revenue declined
        2%(3), with a 3-percentage point benefit from currency. Growth in
        install activity was offset by overall price declines of between 5%
        and 10% as well as product mix. More than two-thirds of the second
        quarter 2008 equipment sales were generated from products launched in
        the past 24 months.
    -   11% growth in color revenue(2).  Color revenue of $1,700 million
        comprised 40% of total revenue in the second quarter 2008, excluding
        GIS, compared to 38% in the second quarter 20074, reflecting:
        -  17% growth in color post sale revenue. Color represented 37% of
           post sale revenue in the second quarter 2008, excluding GIS,
           versus 34% in the second quarter 2007(4).
        -  Color equipment sales revenue was flat. Color sales represented
           50% of total equipment sales in the second quarter 2008, excluding
           GIS, versus 48% of total equipment sales in the second quarter
           2007(4).

    (3) The impact from GIS reflects the revenue growth year-over-year after
    including GIS's results for the full second quarter 2007 on a pro forma
    basis. See page 17 for an explanation of this non-GAAP measure.

    (4) Total color, color post sale and color equipment sales revenues
    comprised 38%, 35% and 44% in 2008, respectively, if calculated on total,
    total post sale and total equipment sales revenues, including GIS. GIS is
    excluded from the color information presented, as the breakout of the
    information required to make this computation for all periods is not
    available.

    Notes:

    -   Approximately 75% of GIS revenue is included in the Office segment
        representing those sales and services that align to our Office
        segment, and 25% is in the Other segment.
    -   Install activity percentages include the Xerox-branded shipments to
        GIS.

    Net Income

    Second quarter 2008 net income of $215 million, or $0.24 per diluted share
included charges for after-tax restructuring of $43 million, or $0.05 per
diluted share.
    Second quarter 2007 net income was $266 million, or $0.28 per diluted
share.
    The calculations of basic and diluted earnings per share are included as
Appendix I.


    Operations Review

                                              Three Months Ended June 30,

    (in millions)                      Production    Office    Other    Total
    ------------------------------     --------------------------------------
    2008
      Equipment sales                      $  317   $  775   $   68   $1,160
      Post sale revenue                     1,020    1,751      602    3,373
                                           ----------------------------------
      Total Revenues                       $1,337   $2,526   $  670   $4,533
                                           ----------------------------------
                                           ----------------------------------

      Segment Profit (Loss)                $   87   $  279   $  (16)  $  350
                                           ----------------------------------
                                           ----------------------------------

      Operating Margin                        6.5%    11.0%   (2.4%)     7.7%
                                           ----------------------------------
                                           ----------------------------------

    2007
      Equipment sales                      $  342   $  738   $   61   $1,141
      Post sale revenue                       939    1,589      539    3,067
                                           ----------------------------------
      Total Revenues                       $1,281   $2,327   $  600   $4,208
                                           ----------------------------------
                                           ----------------------------------

      Segment Profit (Loss)                $  111   $  267   $  (31)  $  347
                                           ----------------------------------
                                           ----------------------------------

      Operating Margin                        8.7%    11.5%   (5.2%)     8.2%
                                           ----------------------------------
                                           ----------------------------------


    Refer to Appendix II for the reconciliation of Segment Operating Profit to
Pre-tax Income.
    In 2008 we revised our segment reporting to integrate the Developing
Markets Operations (DMO) into the Production, Office and Other segments. DMO
is a geographic region that has matured to a level where we now manage it
based on the basis of products sold, consistent with our North American and
European geographic regions. Refer to Appendix III for DMO's results.

    Production

    Revenue
    -------

    Second quarter 2008 Production revenue of $1,337 million increased 4%,
including a 5-percentage point benefit from currency, reflecting:
    -   9% increase in post sale revenue as growth from digital products more
        than offset declines in revenue from light lens technology.
    -   7% decline in equipment sales revenue, including a 6-percentage point
        benefit from currency, reflecting declines in light production and
        color printing systems.
    -   12% decline in installs of production color products driven in part
        by timing of new product introductions.
    -   8% decline in installs of production black-and-white systems driven
        by declines in installs of light production printing systems.

    Operating Profit
    ----------------

    Second quarter 2008 Production profit of $87 million decreased  $24
million from second quarter 2007 due to increased SAG expenses associated with
sales coverage investments and spending associated with the drupa trade show.

    Office

    Revenue
    -------

    Second quarter 2008 Office revenue of $2,526 million increased 9%,
including a 4-percentage point benefit from currency, reflecting:
    -   10% increase in post sale revenue, reflecting a full quarter of GIS
        results as well as growth from color multifunction devices and color
        printers.
    -   5% increase in equipment sales revenue, reflecting a full quarter of
        GIS results as well as growth from color digital products partially
        offset by declines from black-and-white devices primarily due to
        price declines and product mix.
    -   34% color multifunction device install growth led by strong demand
        for Xerox WorkCentre(R) and Phaser(R) products.
    -   10% increase in installs of black-and-white copiers and multifunction
        devices, including 11% growth in Segment 1&2 products (11-30 ppm) and
        8% growth in Segment 3-5 products (31-90 ppm). Segment 3-5 installs
        include the Xerox 4595, a 95 ppm device with an embedded controller.

    Operating Profit
    ----------------

    Second quarter 2008 Office profit of $279 million increased $12 million
from second quarter 2007 as a result of the inclusion of GIS for a full
quarter in 2008 and higher gross profit, which was partially offset by
increased SAG expenses.

    Other

    Revenue
    -------

    Second quarter 2008 Other revenue of $670 million increased 12%, including
a 3-percentage point benefit from currency, primarily reflecting a full
quarter of GIS results in 2008 as well as increased paper revenue. Paper
comprised approximately half of second quarter 2008 Other segment revenue.

    Operating Profit
    ----------------

    Second quarter 2008 Other loss of $16 million improved $15 million from
second quarter 2007, reflecting higher income from licensing arrangements,
value-added services and paper sales.

    Costs, Expenses and Other Income

    Gross Margin
    ------------

                                               Three Months Ended
                                                    June 30,
                                              ---------  ---------  ---------
                                                 2008       2007      Change
                                              ---------  ---------  ---------
    Total Gross Margin                           39.2%      40.3%   (1.1) pts
      Sales                                      33.9%      34.9%   (1.0) pts
      Service, outsourcing and rentals           42.2%      43.4%   (1.2) pts
      Financing income                           61.8%      61.5%     0.3 pts

    Second quarter 2008 total gross margin decreased 1.1-percentage points
compared to the second quarter 2007, primarily due to price declines and a
higher proportion of revenue from lower margin channels and products.
    Sales gross margin decreased 1.0-percentage points compared to the second
quarter 2007, primarily due to the 2.8-percentage point impact of price
declines as well as channel and product mix, which were partially offset by
cost improvements and other variances.
    Service, outsourcing and rentals margin decreased 1.2-percentage points
compared to the second quarter 2007 driven in part by a higher mix of document
management services at a lower gross margin. Cost improvements offset price
declines of 1.2-percentage points.

    Research, Development and Engineering Expenses ("R,D&E")
    --------------------------------------------------------


                                               Three Months Ended
                                                     June 30,
                                              ---------  ---------  ---------
                                                 2008       2007      Change
                                              ---------  ---------  ---------

    R,D&E % Revenue                               4.9%       5.3%  (0.4) pts

    R,D&E of $223 million in the second quarter 2008 was unchanged from the
second quarter 2007. R&D of $190 million increased $2 million and sustaining
engineering costs of $33 million decreased $2 million from second quarter
2007. R,D&E as a percentage of revenue declined 0.4-percentage points, as we
leveraged our current R,D&E investments to support GIS operations.
    We invest in technological development, particularly in color, and believe
our R&D spending is sufficient to remain technologically competitive. Xerox
R&D is strategically coordinated with Fuji Xerox.

    Selling, Administrative and General Expenses ("SAG")
    ----------------------------------------------------

                                               Three Months Ended
                                                    June 30,
                                              ---------  ---------  ---------
                                                 2008       2007     Change
                                              ---------  ---------  ---------

    SAG % Revenue                                25.8%      25.7%    0.1 pts


    SAG expenses of $1,170 million in the second quarter 2008 were  $89
million higher than the second quarter 2007, reflecting a full quarter of GIS
results in 2008, as well as a $33 million negative impact from currency. The
SAG expense increase reflected the following:
    -   $46 million increase in selling expenses reflecting a full quarter of
        GIS results, unfavorable currency, investments in selling resources
        and spending associated with the drupa trade show.
    -   $48 million increase in general and administrative expenses
        reflecting a full quarter of GIS results and unfavorable currency.
    -   $5 million decrease in bad debt expenses to $34 million due to higher
        prior year reserves.

    Restructuring Charges
    ---------------------

    During the second quarter 2008, we recorded restructuring charges of  $63
million primarily related to headcount reductions of approximately 1,000
employees primarily in North America. About two-thirds of these charges are
associated with initiatives focused on improving gross margin and the
remainder are primarily focused on reducing selling, administrative and
general expense. The restructuring reserve balance as of June 30, 2008, for
all programs was $119 million, of which approximately $95 million is expected
to be spent over the next twelve months. Worldwide Employment

    Worldwide Employment
    --------------------

    Worldwide employment of 58,000 at June 30, 2008, increased approximately
600 from year-end 2007 primarily reflecting additional headcount associated
with acquisitions and additional sales professionals.

    Other Expenses, Net

                                                        Three Months Ended
                                                              June 30,
    (in millions)                                          2008         2007
    ------------------------------------------------- -----------------------
    Non-financing interest expense                    $      65    $      70
    Interest income                                          (9)         (14)
    Gains on sales of businesses and assets                 (15)           -
    Currency losses (gains), net                              2           (1)
    Amortization of intangible assets                        13           10
    Legal matters                                             6            1
    All other expenses, net                                  16           12
                                                      -----------------------
      Total Other expenses, net                       $      78    $      78
                                                      -----------------------
                                                      -----------------------
    


    Non-Financing Interest Expense
    ------------------------------

    Second quarter 2008 non-financing interest expense of $65 million was
$5 million lower than second quarter 2007, reflecting the benefit of lower
interest rates partially offset by higher average debt balances.

    Interest Income
    ---------------

    Second quarter 2008 interest income of $9 million decreased $5 million
reflecting lower average cash balances and lower rates of return.

    Gains on Sales of Businesses and Assets
    ---------------------------------------

    The $15 million in gains on sales of businesses and assets in the second
quarter 2008 is primarily related to the sale of certain surplus facilities in
Latin America.

    Amortization of Intangible Assets
    ---------------------------------

    Second quarter 2008 amortization of intangible assets increased $3
million primarily due to the amortization of intangibles associated with our
GIS acquisition.

    Legal Matters
    -------------

    Second quarter 2008 litigation expenses of $6 million were related to
probable losses on various legal matters.

    
    Income Taxes

                                             Three Months Ended
                                                  June 30,
                                           ----------  ----------  ----------
    (in millions)                               2008        2007      Change
    ------------                           ----------  ----------  ----------
    Income tax expense                     $      59   $      76   $     (17)
    Effective tax rate                         24.1%       24.1%      -  pts
    


    The second quarter 2008 effective tax rate was 24.1% and included a 1.5%
benefit from the tax effect of the second quarter restructuring charges.
Excluding the impact of the restructuring charges, the adjusted effective tax
rate was 25.6%(5) as compared to 24.1% in the second quarter 2007. These rates
were lower than the U.S. statutory tax rate primarily reflecting tax benefits
from the utilization of foreign tax credits and the geographical mix of income
before taxes and the related tax rates in those jurisdictions.
    Our effective tax rate is based on nonrecurring events as well as
recurring factors, including the geographical mix of income and the related
tax rates in those jurisdictions, and available foreign tax credits. In
addition, our effective tax rate will change based on discrete or other
nonrecurring events that may not be predictable. We anticipate that our
effective tax rate for the remaining quarters of 2008 will approximate 26%,
excluding the effects of any future discrete events.
    (5) See page 17 for an explanation of this non-GAAP measure.

    Equity in Net Income of Unconsolidated Affiliates

    Equity in net income of unconsolidated affiliates of $29 million
increased $2 million compared to second quarter 2007, reflecting our 25% share
of Fuji Xerox's higher net income as well as favorable currency.

    Capital Resources and Liquidity

    The following table summarizes our cash, cash equivalents and short-term
investments for the three months ended June 30, 2008 and 2007:

    
                                                    Three Months Ended
                                                         June 30,
                                           ----------------------------------
                                                                      Amount
    (in millions)                               2008        2007      Change
    -------------------------------------- ----------  ----------  ----------
    Net cash provided by operating
     activities                            $     442   $     388   $      54
    Net cash used in investing activities       (285)     (1,544)      1,259
    Net cash (used in) provided by
     financing activities                       (154)        777        (931)
    Effect of exchange rate changes on cash
     and cash equivalents                         (2)         11         (13)
                                           ----------  ----------  ----------
    Increase (decrease) in cash and cash
     equivalents                                   1        (368)        369
    Cash and cash equivalents at beginning
     of period                                   842       1,218        (376)
                                           ----------  ----------  ----------
    Cash and cash equivalents at end of
     period                                      843         850          (7)
    Short-term investments                         -          20         (20)
                                           ----------  ----------  ----------
    Total cash, cash equivalents and
     short-term investments                $     843   $     870   $     (27)
                                           ----------  ----------  ----------
                                           ----------  ----------  ----------


    Cash Flows from Operating Activities
    ------------------------------------

    Net cash provided by operating activities was $442 million in the second
quarter 2008. The $54 million increase in cash from second quarter 2007 was
primarily due to the following:

    -   $49 million increase due to improved collection performance of trade
        receivables.
    -   $38 million increase due to lower restructuring payments resulting
        from a lower level of restructuring activities over the past twelve
        months.
    -   $14 million increase due to higher net run-off of finance
        receivables.
    -   $16 million decrease due to higher income tax payments.
    -   $14 million decrease as a result of higher inventory, primarily due
        to lower Production equipment sales as well as build-up for product
        launches.
    -   $8 million decrease due to higher installs of Xerox products that are
        recorded as equipment on operating leases.

    Cash Flows from Investing Activities
    ------------------------------------

    Net cash used in investing activities was $285 million in the second
quarter 2008. The $1,259 million increase in cash from second quarter 2007 was
primarily due to the following:

    -   $1,392 million increase due to less cash used for acquisitions in
        2008. Second quarter 2008 acquisitions included $138 million for
        Veenman B.V. and Saxon Business Systems as compared to $1,530 million
        for the acquisition of GIS in the second quarter 2007.
    -   $157 million decrease due to higher escrow and other restricted
        investments, primarily resulting from the funding of the escrow
        account for the previously disclosed Carlson litigation settlement.

    Cash Flows from Financing Activities
    ------------------------------------

    Net cash used in financing activities was $154 million in the second
quarter 2008. The $931 million decrease in cash from second quarter 2007 was
primarily due to the following:

    -   $684 million decrease due to lower net cash proceeds on other debt.
        Second quarter 2008 reflects the issuance of $1.4 billion in Senior
        Notes, as well as net payments of $875 million on the 2007 Credit
        Facility and $200 million on other debt. Second quarter 2007
        primarily reflects the issuance of $1.1 billion in Senior Notes.
    -   $313 million decrease due to higher purchases under our share
        repurchase program.
    -   $39 million decrease due to common stock dividend payments.
    -   $24 million decrease due to lower proceeds from the issuance of
        common stock, reflecting a decrease in stock option exercises as well
        as lower tax benefits from stock-based compensation.
    -   $119 million increase from lower net repayments on secured debt
        reflecting continued run-off of our U.S. secured borrowing program.

    Customer Financing Activities
    -----------------------------

    The following represents our total finance assets associated with our
lease and finance operations:

                                                        June 30, December 31,
    (in millions)                                          2008         2007
    ------------------------------------------------- ----------  -----------
    Total Finance receivables, net(1)                 $   7,905    $   8,048
    Equipment on operating leases, net                      629          587
                                                      ----------  -----------
    Total Finance Assets, net                         $   8,534    $   8,635
                                                      ----------  -----------
                                                      ----------  -----------

    (1) Includes (i) billed portion of finance receivables, net, (ii) finance
        receivables, net and (iii) finance receivables due after one year,
        net as included in our Condensed Consolidated Balance Sheets.
    

    Accounts Receivable Sales Arrangement
    -------------------------------------

    During the second quarter 2008 we sold $168 million of accounts
receivables, as compared to $200 million in the first quarter 2008, under an
existing accounts receivables sales arrangement in Europe. Substantially all
of the receivables sold under this arrangement during the second quarter 2008
remained uncollected by the third party as of June 30, 2008.

    Forward-Looking Statements

    This release contains "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. The words "anticipate,"
"believe," "estimate," "expect," "intend," "will," "should" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. These statements reflect management's current beliefs, assumptions
and expectations and are subject to a number of factors that may cause actual
results to differ materially. These factors include but are not limited to the
risk that we will not realize all of the anticipated benefits from our 2007
acquisition of Global Imaging Systems, Inc; the risk that unexpected costs
will be incurred; the outcome of litigation and regulatory proceedings to
which we may be a party; actions of competitors; changes and developments
affecting our industry; quarterly or cyclical variations in financial results;
development of new products and services; interest rates and cost of
borrowing; our ability to protect our intellectual property rights; our
ability to maintain and improve cost efficiency of operations; changes in
foreign currency exchange rates; changes in economic conditions, political
conditions, trade protection measures, licensing requirements and tax matters
in the foreign countries in which we do business; reliance on third parties
for manufacturing of products and provision of services; and other factors
that are set forth in the "Risk Factors" section, the "Legal Proceedings"
section, the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section and other sections of our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008 and in our 2007 Form 10-K filed
with the Securities and Exchange Commission. The Company assumes no obligation
to update any forward-looking statements as a result of new information or
future events or developments, except as required by law.

    Non-GAAP Financial Measures

    We have reported our financial results in accordance with generally
accepted accounting principles (GAAP). In addition, we have discussed the
following non-GAAP measures:
    1. Adjusted Revenue: We discussed the revenue growth for the second
quarter 2008 using non-GAAP financial measures. To understand trends in the
business, we believe that it is helpful to adjust the revenue growth rates to
illustrate the impact of the acquisition of GIS by including their estimated
revenue for the comparable 2007 period. We refer to this adjusted revenue as
"As Adjusted" in the following reconciliation table. Management believes these
measures give investors an additional perspective on revenue trends, as well
as the impact to the Company of the acquisition of GIS that was completed in
May 2007.
    2. Adjusted Effective Tax Rate: The effective tax rate for the second
quarter 2008 is discussed in this presentation using a non-GAAP financial
measure that excludes the effect of charges associated with restructuring.
Management believes that it is helpful to exclude this effect to better
understand and analyze the current period's effective tax rate given the
discrete nature of the charge in the period.
    Management believes that these non-GAAP financial measures provide an
additional means of analyzing the current period results against the
corresponding prior period results. However, all of these non-GAAP financial
measures should be viewed in addition to, and not as a substitute for, the
Company's reported results prepared in accordance with GAAP. A reconciliation
of these non-GAAP financial measures to the most directly comparable financial
measures calculated and presented in accordance with GAAP are set forth below
as well as in the 2008 second quarter presentation slides available at
www.xerox.com/investor.

    
                                            Three Months Ended
    (in millions)                                 June 30,
    -------------------------------------- ----------------------
                                                2008        2007    % Change
                                           ----------  ----------  ----------
    Equipment Sales Revenue:
      As Reported                          $   1,160   $   1,141          2%
      As Adjusted                          $   1,160   $   1,179         (2%)

    Post Sale Revenue:
      As Reported                          $   3,373   $   3,067         10%
      As Adjusted                          $   3,373   $   3,126          8%

    Total Revenues:
      As Reported                          $   4,533   $   4,208          8%
      As Adjusted                          $   4,533   $   4,305          5%


    Revenue "As Adjusted" adds GIS's revenues for the period April 1st through
May 8th 2007 to our second quarter 2007 reported revenue.


                                                  Three Months Ended
                                                     June 30, 2008
                                           ----------------------------------
                                                  As    Restruc-          As
    (in millions)                           Reported      turing    Adjusted
    -------------                          ----------  ----------  ----------
    Income (Loss) before Income Taxes and
     Equity Income                         $     245   $      63   $     308
                                           ----------------------------------
                                           ----------------------------------

    Income Taxes                           $      59   $      20    $     79
                                           ----------------------------------
                                           ----------------------------------
    Effective Tax Rate                         24.1%                   25.6%



                                 APPENDIX I

                              Xerox Corporation
                          Earnings per Common Share

      (Dollars in millions, except per share data. Shares in thousands)

                                                         Three Months Ended
                                                              June 30,
                                                       ----------------------
                                                           2008         2007
                                                      ----------   ----------
    Basic Earnings per Share:

    Net Income                                        $     215    $     266
                                                      ----------   ----------
                                                      ----------   ----------

    Weighted Average Common Shares Outstanding          889,791      938,916
                                                      ----------   ----------
                                                      ----------   ----------

    Basic Earnings per Share                          $    0.24    $    0.28
                                                      ----------   ----------
                                                      ----------   ----------

    Diluted Earnings per Share:

    Net Income                                        $     215    $     266
    Interest on Convertible Securities, net                   -            1
                                                      ----------   ----------
    Adjusted net income available to common
     shareholders                                     $     215    $     267
                                                      ----------   ----------
                                                      ----------   ----------

    Weighted Average Common Shares Outstanding          889,791      938,916
    Common shares issuable with respect to:
      Stock options                                       5,229        9,130
      Restricted stock and performance shares             5,662        6,824
      Convertible securities                              1,992        1,992
                                                      ----------   ----------
    Adjusted Weighted Average Common Shares
     Outstanding                                        902,674      956,862
                                                      ----------   ----------
                                                      ----------   ----------

    Diluted Earnings per Share                        $    0.24    $    0.28
                                                      ----------   ----------
                                                      ----------   ----------
    -------------------------------------------------------------------------
    Dividends per Common Share                        $    0.04    $       -
                                                      ----------   ----------



                                 APPENDIX II

                              Xerox Corporation
         Reconciliation of Segment Operating Profit to Pre-Tax Income

                                (in millions)

                                                         Three Months Ended
                                                               June 30,
                                                           2008         2007
                                                      ----------   ----------
    Total Segment Operating Profit                    $     350    $     347
      Reconciling items:
        Restructuring and asset impairment charges          (63)           2
        Restructuring charges of Fuji Xerox                  (3)           -
        Equity in net income of unconsolidated
         affiliates                                         (29)         (27)
        Other                                               (10)          (7)
                                                      -----------------------
    Pre-tax income                                    $     245    $     315
                                                      -----------------------
                                                      -----------------------

    Our reportable segments are consistent with how we manage the business and
view the markets we serve. Our reportable segments are Production, Office and
Other. The Production and Office segments are centered around strategic
product groups, which share common technology, manufacturing and product
platforms, as well as classes of customers.

    Production:     Monochrome 91+ pages per minute (ppm) excluding 95 ppm
                    with embedded controller; Color 41+ ppm excluding 50 ppm,
                    60 ppm and 70 ppm with embedded controller.
    Office:         Monochrome up to 90 ppm as well as 95 ppm with embedded
                    controller; Color up to 40 ppm as well as 50 ppm, 60 ppm
                    and 70 ppm with embedded controller.
    Other:          Xerox Supplies Business Group (predominantly paper),
                    value-added services, Wide Format Systems, Xerox
                    Technology Enterprises (XTE), royalty and licensing, GIS
                    network integration solutions and electronic presentation
                    systems, equity income and non-allocated corporate items.



                                 APPENDIX III

                              Xerox Corporation
          DMO Revenue and Operating Margin within Segment Reporting

    Effective January 1, 2008, we revised our segment reporting to integrate
DMO into the Production, Office and Other segments. We will continue to
provide DMO's revenue and profit on a supplemental basis as follows through
2008.

                            Three Months Ended June 30,

                     (in millions)                   Total DMO
                     ------------------------------------------
                     2008

                          Equipment sales           $      194
                          Post sale revenue                437
                                                    -----------
                          Total Revenues            $      631
                                                    -----------
                                                    -----------
                          Segment Profit            $       69
                                                    -----------
                                                    -----------
                          Operating Margin               10.9%
                                                    -----------
                                                    -----------

                     2007

                          Equipment sales           $      165
                          Post sale revenue                366
                                                    -----------
                          Total Revenues            $      531
                                                    -----------
                                                    -----------
                          Segment Profit            $       37
                                                    -----------
                                                    -----------
                          Operating Margin                7.0%
                                                    -----------
                                                    -----------
    





For further information:

For further information: Media Contacts: Michael Moeller, Xerox
Corporation, (203) 849-2469, michael.moeller@xerox.com; Christa Carone, Xerox
Corporation, (203) 849-2417, christa.carone@xerox.com

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