Xerox Reports Third-Quarter 2008 Earnings of 29 Cents per Share

-- Total revenue up 2 percent

-- Post-sale revenue up 3 percent

-- $260 million in operating cash flow
NORWALK, Conn.--(Business Wire)--
Xerox Corporation (NYSE: XRX) announced today third-quarter
earnings of 29 cents per share.

Total revenue of $4.4 billion grew 2 percent in the quarter,
including a 2 point benefit from currency. Post-sale revenue, which
represents more than 70 percent of the company's total revenue,
increased 3 percent. Equipment sale revenue was down 3 percent. Both
post-sale and equipment sale revenue included a 1 point currency
benefit.

"Our results this quarter reflect the value of a business model
that delivers solid operating cash flow through a profitable annuity
stream," said Anne Mulcahy, Xerox chairman and chief executive
officer.

"In this tough business environment, revenue remained stable this
quarter - the benefit of investments in expanding our reach to small
and mid-size businesses. This focus led to strong performance from our
developing markets and Global Imaging operations and helped to offset
the economic challenges affecting U.S. large enterprises, especially
for our high-volume production systems," she added. "The resulting
shift in revenue mix does put pressure on our gross margin. To better
align our operations with these changes, we're accelerating actions to
reduce our cost base and drive operational improvements across the
board, giving us more flexibility in our business and in this
unpredictable economy."

Xerox generated operating cash flow of $260 million in the third
quarter bringing year-to-date cash flow to $754 million. Xerox closed
the quarter with $873 million in cash and cash equivalents.

"We're confident in the strength of our financial position and the
flexibility we have to manage our business successfully through
today's challenges and for the long-term value of our shareholders,"
Mulcahy said.

Xerox's developing markets continued to deliver strong growth in
the third quarter with revenue up 15 percent, reflecting positive
performance in all regions.

Revenue from color grew 5 percent in the third quarter and
represents more than 40 percent of Xerox's total revenue. Color pages
were up 27 percent and now represent 17 percent of total pages printed
on Xerox technology. Color results exclude the benefit from Global
Imaging Systems.

Xerox document management services help businesses reduce costs by
simplifying work processes, managing office technology and in-house
print shops, converting paper files to digital and much more. Through
the third quarter of this year, Xerox Global Services generated $2.6
billion in annuity revenue, up 6 percent from the prior year.

Xerox's production business provides commercial printers and large
enterprises with high-speed digital printing and services that enable
on-demand, personalized printing. Total production revenue decreased 1
percent in the third quarter, including a 2 point benefit from
currency, largely due to a slowdown in U.S. activity. Installs of
production black-and-white systems declined 11 percent and installs of
production color devices were up 4 percent in the quarter driven by
early demand for the company's new production systems, the Xerox
iGen4(TM) Press and the Xerox 700 Digital Color Press, both of which
were available worldwide beginning in September.

Through expanded channels of distribution and competitive
offerings for businesses of any size, Xerox continues to drive demand
for color in the office with installs of color multifunction systems
up 23 percent from the prior year. Installs of the company's
black-and-white multifunction devices increased 15 percent. Total
office revenue was up 3 percent in the third quarter, including a 2
point benefit from currency.

The effect of accelerated growth from developing markets and for
products that serve the SMB market along with slower U.S. demand for
high-volume production systems resulted in a third-quarter gross
margin of 39.2 percent, down about one point from the prior year.
Selling, administrative and general expenses as a percent of revenue
at 26 percent increased about a half point year over year as the
company maintained its investments in marketing and sales coverage.
The combined impact of margin pressure and selling investments was
offset in the third quarter by a benefit from tax settlements.

The company said it will take a pre-tax restructuring charge of
approximately $400 million or 31 cents per share in the fourth quarter
to accelerate its cost-reduction activities on a global basis.
Excluding the charge, Xerox expects fourth quarter 2008 earnings in
the range of 34 to 36 cents per share.

Commenting on next year's earnings expectations, Mulcahy said, "We
believe the operational efficiencies we'll gain from our restructuring
actions in the fourth quarter position us well to deliver double-digit
earnings growth in 2009."

Note: Expected earnings per share for the fourth quarter 2008 is
discussed in this release using a non-GAAP financial measure that
excludes the effect of the expected fourth quarter restructuring
charges. Refer to the "Non-GAAP Financial Measures" section of this
release for a discussion of this non-GAAP measure and its
reconciliation to the reported GAAP measure.

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, including actions with respect to the
approximately $400 million pre-tax restructuring charge or 31 cents
per share anticipated in the fourth quarter 2008; 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 Conditions and Results of Operations" section
and other sections of our Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2008 and June 30, 2008 and our 2007 Annual
Report 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. Xerox(R), the Xerox wordmark and the
spherical connection symbol are trademarks of Xerox Corporation in the
United States and/or other countries.

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Xerox Corporation
Condensed Consolidated Statements of Income (Unaudited)

Three Months Nine Months Ended
Ended
September 30, September 30,
-------------- -----------------
(in millions,
except per share
data) 2008 2007 % Change 2008 2007 % Change
------------------- ----------------------- --------------------------

Revenues
Sales $2,047 $2,030 1% $ 6,179 $ 5,713 8%
Service,
outsourcing
and rentals 2,126 2,068 3% 6,446 6,019 7%
Finance income 197 204 (3%) 613 614 -
------ ------ ------- -------
Total Revenues 4,370 4,302 2% 13,238 12,346 7%
------ ------ ------- -------

Costs and Expenses
Cost of sales 1,340 1,316 2% 4,059 3,686 10%
Cost of
service,
outsourcing
and rentals 1,241 1,183 5% 3,747 3,449 9%
Equipment
financing
interest 75 79 (5%) 234 236 (1%)
Research,
development
and
engineering
expenses 228 233 (2%) 672 674 -
Selling,
administrative
and general
expenses 1,138 1,091 4% 3,432 3,126 10%
Restructuring
and asset
impairment
charges 14 (3) * 80 (7) *
Provision for
litigation,
net - - - 795 - *
Other expenses,
net 96 79 22% 254 214 19%
------ ------ ------- -------
Total Costs and
Expenses 4,132 3,978 4% 13,273 11,378 17%
------ ------ ------- -------

Income (Loss)
before Income
Taxes and Equity
Income** 238 324 (27%) (35) 968 *
Income tax
expense
(benefit) 15 97 (85%) (172) 275 *
Equity in net
income of
unconsolidated
affiliates 35 27 30% 92 60 53%
------ ------ ------- -------

Net Income $ 258 $ 254 2% $ 229 $ 753 (70%)
====== ====== ======= =======

Basic Earnings per
Share $ 0.30 $ 0.27 11% $ 0.26 $ 0.80 (68%)
Diluted Earnings
per Share $ 0.29 $ 0.27 7% $ 0.25 $ 0.79 (68%)

* Percent change not meaningful.

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

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Xerox Corporation
Condensed Consolidated Balance Sheets (Unaudited)

September December
30, 31,
(in millions, except share data in thousands) 2008 2007
-------------------------------------------------- --------- ---------
Assets
Cash and cash equivalents $ 873 $ 1,099
Accounts receivable, net 2,504 2,457
Billed portion of finance receivables, net 282 304
Finance receivables, net 2,544 2,693
Inventories 1,376 1,305
Other current assets 1,170 682
--------- ---------
Total current assets 8,749 8,540
Finance receivables due after one year, net 4,658 5,051
Equipment on operating leases, net 604 587
Land, buildings and equipment, net 1,515 1,587
Investments in affiliates, at equity 1,017 932
Intangible assets, net 625 621
Goodwill 3,446 3,448
Deferred tax assets, long-term 1,522 1,349
Other long-term assets 1,489 1,428
--------- ---------
Total Assets $ 23,625 $ 23,543
========= =========

Liabilities and Shareholders' Equity
Short-term debt and current portion of long-term
debt $ 1,457 $ 525
Accounts payable 1,303 1,367
Accrued compensation and benefits costs 608 673
Other current liabilities 2,229 1,512
--------- ---------
Total current liabilities 5,597 4,077
Long-term debt 6,783 6,939
Liability to subsidiary trust issuing preferred
securities 637 632
Pension and other benefit liabilities 973 1,115
Post-retirement medical benefits 1,381 1,396
Other long-term liabilities 752 796
--------- ---------
Total Liabilities 16,123 14,955
Common stock, including additional paid-in-capital 3,393 4,096
Treasury stock, at cost (91) (31)
Retained earnings 5,378 5,288
Accumulated other comprehensive loss (1,178) (765)
--------- ---------
Total Shareholders' Equity 7,502 8,588
--------- ---------
Total Liabilities and Shareholders' Equity $ 23,625 $ 23,543
========= =========

Shares of common stock issued 872,442 919,013
Treasury stock (6,842) (1,836)
--------- ---------
Shares of common stock outstanding 865,600 917,177
========= =========
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Xerox Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)

Three Months Nine Months
Ended Ended
September 30, September 30,
------------- ----------------
(in millions) 2008 2007 2008 2007
--------------------------------------- ------ ------ ------- --------

Cash Flows from Operating Activities:
Net income $ 258 $ 254 $ 229 $ 753
Adjustments required to reconcile net
income to cash flows from operating
activities:
Depreciation and amortization 175 171 498 485
Provisions for receivables
and inventory 65 48 173 142
Net gain on sales of
businesses and assets - (1) (22) (5)
Undistributed equity in net
income of unconsolidated
affiliates (31) (25) (60) (43)
Stock-based compensation 26 27 66 62
Provision for litigation, net - - 795 -
Restructuring and asset
impairment charges 14 (3) 80 (7)
Payments for restructurings (33) (61) (92) (195)
Contributions to pension
benefit plans (205) (197) (271) (252)
Increase in accounts
receivable and billed
portion of finance
receivables (60) (111) (128) (227)
Increase in inventories (10) (29) (175) (189)
Increase in equipment on
operating leases (81) (84) (242) (229)
Decrease in finance
receivables 99 50 319 270
Decrease in other current and
long-term assets 24 22 18 76
Increase (decrease) in
accounts payable and accrued
compensation 94 150 (49) 77
(Decrease) increase in other
current and long-term
liabilities (85) 19 (132) (8)
Net change in income tax
assets and liabilities (15) 57 (302) 200
Net change in derivative
assets and liabilities (1) (20) 9 (44)
Other, net 26 19 40 (5)
------ ------ ------- --------
Net cash provided by
operating activities 260 286 754 861
------ ------ ------- --------

Cash Flows from Investing Activities:
Cost of additions to land,
buildings and equipment (43) (56) (142) (164)
Proceeds from sales of land,
buildings and equipment 1 7 37 13
Cost of additions to internal
use software (42) (29) (102) (83)
Acquisitions, net of cash
acquired (11) (44) (153) (1,574)
Net change in escrow and
other restricted investments (266) 12 (403) 52
Other, net 5 19 57 137
------ ------ ------- --------
Net cash used in
investing activities (356) (91) (706) (1,619)
------ ------ ------- --------

Cash Flows from Financing Activities:
Net debt payments on secured
financings (45) (881) (192) (1,255)
Net cash proceeds on other
debt 329 859 900 1,855
Common stock dividends (37) - (116) -
Proceeds from issuances of
common stock 2 8 6 59
Excess tax benefits from
stock-based compensation 1 3 2 21
Payments to acquire treasury
stock, including fees (92) (212) (804) (501)
Repurchases related to stock-
based compensation - - (33) -
Other (5) (3) (14) (18)
------ ------ ------- --------
Net cash provided by
(used in) financing
activities 153 (226) (251) 161
------ ------ ------- --------
Effect of exchange rate changes on cash
and cash equivalents (27) 29 (23) 46
------ ------ ------- --------

Increase (decrease) in cash and cash
equivalents 30 (2) (226) (551)
Cash and cash equivalents at beginning
of period 843 850 1,099 1,399
------ ------ ------- --------
Cash and cash equivalents at end of
period $ 873 $ 848 $ 873 $ 848
====== ====== ======= ========
*T

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Financial Review

Summary

Revenues

Three Months
Ended
September 30,
(in millions) 2008 2007 Change
--------------------------------------------- ----------------------

Equipment sales $1,125 $1,156 (3%)
Post sale revenue(1) 3,245 3,146 3%
---------------
Total Revenue $4,370 $4,302 2%
===============

Reconciliation to Condensed Consolidated Statements of Income
Sales $2,047 $2,030
Less: Supplies, paper and other sales (922) (874)
---------------
Equipment sales $1,125 $1,156
===============

Service, outsourcing and rentals $2,126 $2,068
Add: Finance income 197 204
Add: Supplies, paper and other sales 922 874
---------------
Post sale revenue $3,245 $3,146
===============

Memo: Color(2) $1,636 $1,564 5%
===============
*T

(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.

Third quarter 2008 total revenues grew 2% compared to the third
quarter 2007. Currency had a 2-percentage point positive impact on
total revenues in the quarter. Total revenues included the following:

-- 3% increase in post sale revenue, with a 1-percentage point
benefit from currency. Growth in GIS, color products and
document management services offset declines in high-volume
black-and-white printing systems, black-and-white
multifunction devices and weakness in U.S. enterprise
accounts. The components of post sale revenue increased as
follows:

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-- 3% increase in service, outsourcing and rentals revenue to
$2,126 million, reflecting growth in document management
services and rental revenue.

-- Supplies, paper and other sales of $922 million grew 5%
year-over-year, primarily due to growth in supplies and
paper sales.
*T

-- 3% decrease in equipment sales revenue, with a 1-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 third quarter 2008
equipment sales were generated from products launched in the
past 24 months.

-- 5% growth in color revenue(2). Color revenue of $1,636 million
comprised 40% of total revenue in the third quarter 2008,
excluding GIS, compared to 39% in the third quarter 2007(3),
reflecting:

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-- 10% growth in color post sale revenue. Color represented
37% of post sale revenue in the third quarter 2008,
excluding GIS, versus 35% in the third quarter 2007(3).

-- Color equipment sales revenue declined 6%. Color sales
represented 50% of total equipment sales in the third
quarter 2008, excluding GIS, versus 51% of total equipment
sales in the third quarter 2007(3).
*T

(3) Total color, color post sale and color equipment sales
revenues comprised 37%, 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.

Net Income

Third quarter 2008 net income of $258 million, or $0.29 per
diluted share, included a benefit of $41 million, or $0.04 per diluted
share, from the settlement of certain previously unrecognized tax
benefits and an after-tax net restructuring charge of $9 million ($14
million pre-tax), or $0.01 per diluted share.

Third quarter 2007 net income was $254 million, or $0.27 per
diluted share.

The calculations of basic and diluted earnings per share are
included as Appendix I.

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Operations Review

Three Months Ended September 30,

(in millions) Production Office Other Total
------------------------------------- --------------------------------

2008
Equipment sales $ 298 $ 766 $ 61 $1,125
Post sale revenue 974 1,680 591 3,245
--------------------------------
Total Revenues $ 1,272 $2,446 $ 652 $4,370
================================

Segment Profit (Loss) $ 83 $ 260 $ (46) $ 297
================================

Operating Margin 6.5% 10.6% (7.1%) 6.8%
================================

2007
Equipment sales $ 329 $ 759 $ 68 $1,156
Post sale revenue 957 1,625 564 3,146
--------------------------------
Total Revenues $ 1,286 $2,384 $ 632 $4,302
================================

Segment Profit (Loss) $ 126 $ 259 $ (25) $ 360
================================

Operating Margin 9.8% 10.9% (4.0%) 8.4%
================================
*T

Refer to Appendix II for the reconciliation of Segment Operating
Profit to Pre-tax Income.

In 2008 we revised our segment reporting to integrate 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.

Note:

-- Install activity percentages include the Xerox-branded product
shipments to GIS.

Production

Revenue

Third quarter 2008 Production revenue of $1,272 million decreased
1%, including a 2-percentage point benefit from currency, reflecting:

-- 2% increase in post sale revenue as growth from color,
continuous feed and light production products offset declines
in revenue from black-and-white high-volume printing systems.

-- 9% decline in equipment sales revenue, reflecting declines in
black-and-white production and color production systems,
largely driven by weakness in the U.S.

-- 4% increase in installs of production color products driven by
Xerox 700 and iGen4(TM) activity.

-- 11% decline in installs of production black-and-white systems
driven by declines in installs of light production and
high-volume production printing systems partially offset by
continuous feed systems install growth.

Operating Profit

Third quarter 2008 Production profit of $83 million decreased $43
million from third quarter 2007 due to lower gross profit flow-through
from the decline of equipment sales revenue and increased SAG
expenses.

Office

Revenue

Third quarter 2008 Office revenue of $2,446 million increased 3%,
including a 2-percentage point benefit from currency and our expansion
in the SMB market. Revenue for the third quarter reflects:

-- 3% increase in post sale revenue, with a 1-percentage point
benefit from currency. This reflects growth in GIS, color
multifunction devices and color printers offsetting declines
in black-and-white devices.

-- 1% increase in equipment sales revenue, with a 1-percentage
point benefit from currency. This reflects growth from GIS and
developing markets, partially offset by price declines,
product mix and weakness in enterprise accounts in the U.S.

-- 23% color multifunction device install growth led by strong
demand for Xerox WorkCentre(R) and Phaser(R) products.

-- 15% increase in installs of black-and-white copiers and
multifunction devices, including 16% growth in Segment 1&2
products (11-30 ppm) and 9% 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

Third quarter 2008 Office profit of $260 million increased $1
million from third quarter 2007 as higher gross profit was offset by
increased SAG expenses.

Other

Revenue

Third quarter 2008 Other revenue of $652 million increased 3%,
including a 1-percentage point benefit from currency, reflecting
growth in value-added service, GIS, as well as increased paper
revenue. Paper comprised approximately half of the third quarter 2008
Other segment revenue.

Operating Profit

Third quarter 2008 Other loss of $46 million increased $21 million
from third quarter 2007, due to higher foreign exchange losses and
lower gross profit from paper sales, partially offset by higher equity
income and value-added services.

Costs, Expenses and Other Income

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

Three Months
Ended
September 30,
----------------- -----------
2008 2007 Change
-------- -------- -----------
Sales 34.5% 35.2% (0.7) pts
Service, outsourcing and rentals 41.6% 42.8% (1.2) pts
Financing income 61.9% 61.3% 0.6 pts
Total Gross Margin 39.2% 40.1% (0.9) pts
*T

Third quarter 2008 total gross margin decreased 0.9-percentage
points compared to the third quarter 2007, primarily due to price
declines and a higher proportion of revenue from lower margin channels
including document management services, partially offset by a
0.3-percentage point benefit resulting from a favorable adjustment
related to European product disposal costs.

Sales gross margin decreased 0.7-percentage points compared to the
third quarter 2007, primarily due to the 2.7-percentage point impact
of price declines as well as channel mix, partially offset by cost
improvements and other variances including the favorable adjustment
related to European product disposal costs.

Service, outsourcing and rentals margin decreased 1.2-percentage
points compared to the third quarter 2007 driven by price declines and
mix of approximately 2-percentage points, partially offset by cost
improvements. Mix primarily reflects margin pressure from document
management services.

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

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

R,D&E % Revenue 5.2% 5.4% (0.2) pts
*T

R,D&E of $228 million in the third quarter 2008 was $5 million
lower than the third quarter 2007. R&D of $196 million increased $1
million, and sustaining engineering costs of $32 million decreased $6
million from third quarter 2007. R,D&E as a percentage of revenue
decreased 0.2-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.

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

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

SAG % Revenue 26.0% 25.4% 0.6 pts
*T

SAG expenses of $1,138 million in the third quarter 2008 were $47
million higher than the third quarter 2007, including a $10 million
negative impact from currency. The SAG expense increase reflected the
following:

-- $24 million increase in selling expenses, reflecting
unfavorable currency and investments in selling resources.

-- $6 million increase in general and administrative expenses,
reflecting unfavorable currency.

-- $17 million increase in bad debt expenses to $45 million,
reflecting recent write-off level increases, however as a
percentage of revenue this has remained comparable with the
prior year-end at approximately 1-percent.

Restructuring Charges

During the third quarter 2008 we recorded $14 million of net
restructuring charges, predominantly in the U.S. related to headcount
reductions of approximately 300. The restructuring reserve balance as
of September 30, 2008 for all programs was $93 million, of which
approximately $74 million is expected to be spent over the next twelve
months. We expect to recognize a pre-tax restructuring charge of
approximately $400 million or $0.31 per share in the fourth quarter of
2008 for initiatives that are still in the process of being finalized
by management in order to accelerate our cost-reduction activities on
a global basis.

Worldwide Employment

Worldwide employment of 57,400 at September 30, 2008 is at the
same level as year-end 2007 and has decreased 600 from second quarter
2008, primarily due to restructuring.

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Other Expenses, Net

Three Months Ended
September 30,
(in millions) 2008 2007
------------------------------------------- --------------------------

Non-financing interest expense $ 71 $ 75
Interest income (8) (12)
Gains on sales of businesses and assets - (1)
Currency losses (gains), net 9 (8)
Amortization of intangible assets 14 13
Legal matters - (1)
All other expenses, net 10 13
--------------------------
Total Other expenses, net $ 96 $ 79
==========================
*T

Non-Financing Interest Expense

Third quarter 2008 non-financing interest expense of $71 million
was $4 million lower than third quarter 2007, reflecting the benefit
of lower interest rates partially offset by higher average debt
balances.

Interest Income

Third quarter 2008 interest income of $8 million decreased $4
million, reflecting lower average cash balances.

Currency Losses, Net

Third quarter 2008 net currency losses of $9 million, compared to
net currency gains of $8 million in third quarter 2007, resulted in a
$17 million year over year unfavorable variance. The third quarter
2008 reflects net remeasurement losses associated with our foreign
currency denominated assets and liabilities in our developing market
units as well as the cost of hedging. Third quarter 2007 currency
gains of $8 million primarily reflected the mark-to-market of Yen/Euro
and Yen/USD forward contracts, which were economically hedging
anticipated foreign currency transactions.

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Income Taxes

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

Income tax expense $ 15 $ 97 $ (82)
Effective tax rate 6.3% 29.9% (23.6) pts
*T

The third quarter 2008 effective tax rate was 6.3% and included a
17.9% benefit from the settlement of certain previously unrecognized
tax benefits and the tax effect of the third quarter restructuring
charges. Excluding these items, the adjusted effective tax rate was
24.2%(4) as compared to 29.9% in the third quarter 2007. These rates
were lower than the U.S. statutory tax rate primarily reflecting the
benefit to taxes from the geographical mix of income before taxes and
the related tax rates in those jurisdictions and the utilization of
foreign tax credits.

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 fourth quarter of 2008
will approximate 25%, excluding the effects of any future discrete
events.

(4) 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 $35 million
increased $8 million compared to third 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 and cash equivalents for
the three months ended September 30, 2008 and 2007:

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Three Months Ended
September 30,
--------------------
Amount
(in millions) 2008 2007 Change
------------------------------------------------- ------ ------ ------

Net cash provided by operating activities $ 260 $ 286 $ (26)
Net cash used in investing activities (356) (91) (265)
Net cash provided by (used in) financing
activities 153 (226) 379
Effect of exchange rate changes on cash and cash
equivalents (27) 29 (56)
------ ------ ------
Increase (decrease) in cash and cash equivalents 30 (2) 32
Cash and cash equivalents at beginning of period 843 850 (7)
------ ------ ------
Cash and cash equivalents at end of period $ 873 $ 848 $ 25
====== ====== ======
*T

Cash Flows from Operating Activities

Net cash provided by operating activities was $260 million in the
third quarter 2008. The $26 million decrease in cash from third
quarter 2007 was primarily due to the following:

-- $69 million decrease in pretax income before restructuring.

-- $56 million decrease primarily due to lower accounts payable
related to the timing of payments and purchases.

-- $55 million decrease reflecting changes in benefits and other
accruals.

-- $8 million decrease due to higher contributions to pension
benefit plans.

-- $51 million increase due to improved collection performance of
trade receivables.

-- $49 million increase due to higher net run-off of finance
receivables from lower originations reflecting changes in
channel mix.

-- $28 million increase due to lower restructuring payments
resulting from a lower level of restructuring activities.

-- $19 million increase due to lower inventory growth reflecting
improved inventory supply chain management.

Cash Flows from Investing Activities

Net cash used in investing activities was $356 million in the
third quarter 2008. The $265 million decrease in cash from third
quarter 2007 was primarily due to the following:

-- $278 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.

-- $33 million increase due to lower cash used for acquisitions
in 2008.

Cash Flows from Financing Activities

Net cash provided by financing activities was $153 million in the
third quarter 2008. The $379 million increase in cash from third
quarter 2007 was primarily due to the following:

-- $836 million increase from lower net repayments on secured
debt. Third quarter 2007 includes termination of our secured
financing program with GE in the United Kingdom for $593
million and the repayment of secured borrowings to DLL for
$153 million. The remainder includes lower payments of $71
million associated with the continued run-off of our U.S.
secured borrowing program.

-- $120 million increase due to lower purchases under our share
repurchase program.

-- $530 million decrease due to lower net cash proceeds on other
debt. Third quarter 2008 reflects proceeds of $250 million
from a private placement borrowing, net proceeds of $198
million on the Credit Facility, as well as net payments of
$119 million on other debt. Third quarter 2007 reflects net
proceeds of $400 million in Senior Notes, net proceeds of $290
million on the Credit Facility, as well as net proceeds of
$169 million on other debt.

-- $37 million decrease due to common stock dividend payments.

Customer Financing Activities

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

-0-
*T
September 30, December 31,
(in millions) 2008 2007
----------------------------------- -------------- --------------
Total Finance receivables, net (1) $ 7,484 $ 8,048
Equipment on operating leases, net 604 587
-------------- --------------
Total Finance Assets, net $ 8,088 $ 8,635
============== ==============
*T

(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 third quarter 2008 we sold $146 million of accounts
receivables, as compared to $168 million in the second quarter 2008,
under an existing accounts receivables sales arrangement in Europe.
$136 million of receivables sold to date under this arrangement remain
uncollected by the third party as of September 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; including actions with respect to the
approximately $400 million pre-tax restructuring charge or $0.31 per
share anticipated in the fourth quarter 2008; 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 Reports on Form 10-Q for the quarters
ended March 31, 2008 and June 30, 2008 and our 2007 Annual Report
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 Diluted EPS: Diluted earnings per share for the fourth
quarter 2008 expectations are discussed in this release using a
non-GAAP financial measure that excludes the effect of the expected
fourth quarter restructuring charges. Management believes that it is
helpful to exclude the effects of this charge to better understand and
analyze the expected fourth quarter results given the discrete nature
of the charge.

2. Adjusted Effective Tax Rate: The effective tax rate for the
third quarter 2008 is discussed in this release using a non-GAAP
financial measure that excludes the benefit to taxes relating to the
settlement of certain previously unrecognized tax benefits and the
effect of charges associated with restructuring. Management believes
that it is helpful to exclude these effects to better understand and
analyze the current period's effective tax rate given the discrete
nature of these items 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, 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 third quarter presentation slides available at
http://www.xerox.com/investor.

-0-
*T
Guidance
(amounts per share) Q4 2008
---------------------------- -------------

Adjusted Diluted EPS $0.34 - $0.36

Restructuring $0.31
-------------

GAAP Diluted EPS $0.03 - $0.05
=============
*T

-0-
*T
Three Months Ended
September 30, 2008
---------------------------------------
Pre-Tax Income Effective Tax
(in millions) Income Taxes Rate
-------------------- ------------ ------------ -------------

As Reported $ 238 $ 15 6.3%

Restructuring 14 5
Tax Settlements - 41
---------------------------------------

As Adjusted $ 252 $ 61 24.2%
=======================================
*T

-0-
*T
APPENDIX I

Xerox Corporation
Earnings per Common Share

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

Three Months Ended
September 30,
------------------
2008 2007
--------- --------

Basic Earnings per Share:

Net Income $ 258 $ 254
========= ========

Weighted Average Common Shares Outstanding 870,849 932,217
========= ========

Basic Earnings per Share $ 0.30 $ 0.27
========= ========

Diluted Earnings per Share:

Net Income $ 258 $ 254
Interest on Convertible Securities, net - -
--------- --------
Adjusted net income available to common
shareholders $ 258 $ 254
========= ========

Weighted Average Common Shares Outstanding 870,849 932,217
Common shares issuable with respect to:
Stock options 4,631 8,265
Restricted stock and performance shares 9,410 9,071
Convertible securities 1,992 1,992
--------- --------
Adjusted Weighted Average Common Shares
Outstanding 886,882 951,545
========= ========

Diluted Earnings per Share $ 0.29 $ 0.27
========= ========

----------------------------------------------------------------------

Dividends per Common Share $ 0.0425 $ -
========= ========
*T

-0-
*T
APPENDIX II

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

Three Months Ended
September 30,
2008 2007
------------------
Total Segment Operating Profit $ 297 $ 360
Reconciling items:
Restructuring and asset impairment charges (14) 3
Restructuring charges of Fuji Xerox (2) (5)
Equity in net income of unconsolidated
affiliates (35) (27)
Other (8) (7)
------------------
Pre-tax income $ 238 $ 324
==================
*T

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.

-0-
*T
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.
*T

-0-
*T
Appendix III

Xerox Corporation
DMO Revenue and Operating Margin within Segment Reporting
*T

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.

-0-
*T
Three Months Ended September 30,

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

2008
Equipment sales $ 184
Post sale revenue 432
------------------------
Total Revenues $ 616
========================

Segment Profit $ 50
========================

Operating Margin 8.1%
========================

2007
Equipment sales $ 156
Post sale revenue 379
------------------------
Total Revenues $ 535
========================

Segment Profit $ 32
========================

Operating Margin 6.0%
========================
*T

Media:
Xerox Corporation
Carl Langsenkamp, +1-585-423-5782
carl.langsenkamp@xerox.com
or
Christa Carone, +1-203-849-2417
christa.carone@xerox.com

Copyright Business Wire 2008