Research and Development

Investment in R&D is critical for competitiveness in Xerox’s fast-paced markets where more than two-thirds of our equipment sales are from products launched during the past two years.

Xerox’s R&D drives innovation and customer value by:

	–	Creating new differentiated products and services.
	–	Enabling cost competitiveness through disruptive products and services.
	–	Enabling new ways to serve customers.
	–	Creating new business opportunities to drive future growth by reaching out to new customers.

To ensure our success, we have aligned our R&D investment portfolio with our strategic planks: leading the color transition, enabling the “New Business of Printing,” and enhancing customer value through services. 2006 R&D spending focused primarily on the development of high-end business applications to drive the “New Business of Printing,” on extending our color capabilities, and on lower-cost platforms and customer productivity enablers that drive the digitization of the office.

The Xerox iGen3, an advanced next-generation digital printing press that produces photographic-quality prints indistinguishable from offset, and Xerox’s proprietary Solid Ink technology for the office are examples of the type of breakthrough technology we developed and that we expect will drive future growth. We include in our R, D&E expenses our sustaining engineering expenses, which are the hardware engineering and software development costs we incur after we launch a product.

Patents, Trademarks and Licenses

We are a technology company. With our Xerox Palo Alto Research Center (“PARC”) subsidiary, we were awarded nearly 560 U.S. utility patents in 2006. We were ranked 39^th on the list of companies that were awarded the most U.S. patents during the year and would have been ranked 36^th with the inclusion of PARC patents. With our research partner, Fuji Xerox, we were awarded over 800 U.S. utility patents in 2006. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. As of December 31, 2006, we held approximately 8,300 design and utility U.S. patents. These patents expire at various dates up to 20 years or more from their original filing dates. While we believe that our portfolio of patents and applications has value, in general no single patent is essential to our business or any individual segment. In addition, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages.

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