Summary Results

Revenues

Revenues for the three years ended December 31, 2007 were as follows:

(in millions)		Year Ended December 31,												Percent Change
		2007				2006				2005				2007			2006
Equipment sales		$	4,753			$	4,457			$	4,519			7	%		(1	)%
Post sale and other revenue (1)			11,653				10,598				10,307			10	%		3	%
Finance income			822				840				875			(2	)%		(4	)%
Total Revenue		$	17,228			$	15,895			$	15,701			8	%		1	%
Reconciliation to Consolidated Statements of Income
Sales		$	8,192			$	7,464			$	7,400
Less: Supplies, paper and other sales			(3,439	)			(3,007	)			(2,881	)
Equipment sales		$	4,753			$	4,457			$	4,519
Service, outsourcing and rentals		$	8,214			$	7,591			$	7,426
Add: Supplies, paper and other sales			3,439				3,007				2,881
Post sale and other revenue		$	11,653			$	10,598			$	10,307
Memo: Color (2)		$	6,356			$	5,578			$	4,928

Total 2007 revenue increased 8% compared to the prior year and includes the results of GIS since May 9, 2007, the effective date of the acquisition. When including GIS in our 2006 results⁽³⁾, our 2007 total revenue increased 4%. Currency had a 3-percentage point positive impact on total revenues. Total revenues included the following:

• 9% increase in post sale, financing and other revenue, or 6% including GIS in our 2006 results⁽³⁾. This included a 3-percentage point benefit from currency. Growth in GIS, color products, DMO and document management services more than offset the decline in black-and-white digital office revenue and light lens products:
  • 8% increase in service, outsourcing, and rentals revenue to $8,214 million reflected the inclusion of GIS, growth in document management services and technical service revenue. Supplies, paper, and other sales of $3,439 million grew 14% year-over-year due to the inclusion of GIS as well as growth in DMO.
• 7% increase in equipment sales revenue, or a decrease of 1% when including GIS in our 2006 results ⁽³⁾. This included a 3-percentage point benefit from currency. Growth in office multifunction color and production color install activity was offset by overall price declines of between 5% – 10%, declines in production black-and-white products and color printers, as well as an increased proportion of equipment installed under operating lease contracts where revenue is recognized over-time in post sale.
• 14% growth in color revenue ⁽²⁾ Color revenue of $6,356 million comprised 39% of total revenue, compared to 35% in 2006 reflecting:
  • 18% growth in color post sale, financing and other revenue. Color represented 35% and 31% of post sale, financing and other revenue, in 2007 and 2006, respectively ⁽⁴⁾.
  • 7% growth in color equipment sales revenue. Color sales represented 49% and 45% of total equipment sales, in 2007 and 2006, respectively ⁽⁴⁾.
  • 31% growth in color pages. Color pages represented 12% and 9% of total pages, in 2007 and 2006, respectively ⁽⁴⁾.

Total 2006 revenue increased 1% from the prior year. There was a negligible impact from currency. Total revenue included the following:

• 1% decline in equipment sales, including a benefit from currency of 1-percentage point, primarily reflecting revenue declines in Office and high-end production black-and-white products, partially offset by revenue growth from color products and growth in DMO. Strong install activity in color products and office black-and-white products including, entry production color, iGen3 and office multifunction color products, partially offset by overall price declines. Approximately two-thirds of 2006 equipment sales were generated from products launched in the past 24 months.
• 3% growth in post sale and other revenue, including a benefit from currency of 1-percentage point, primarily reflecting growth in digital Office and Production products, DMO, and value-added services offset by declines in light lens and licensing revenue. Analog revenues of $302 million represented 3% of 2006 post sale revenue compared to $494 million or 5% of 2005 post sale revenue.
• 4% decline in Finance income, including a benefit from currency of 1-percentage point, reflecting lower average finance receivables.
• 13% growth in color revenue. Color revenue of $5,578 million comprised 35% of total revenue in 2006 compared to 31% in 2005.
• 16% growth in color post sale and other revenue. Color sales represented 31% of post sale and other revenue in 2006 compared to 28% in 2005. In 2006, approximately 9% of our pages were printed on color devices, which was up from 7% in 2005.
• 9% growth in color equipment sales revenue. The pace of color equipment sales growth was impacted by lower OEM color printer sales. Color sales represented approximately 45% of total equipment sales in 2006 compared to 41% in 2005.

(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 excludes the impact of GIS.

(3) The percentage point impacts from GIS reflect the revenue growth year-over-year after including GIS’ results from 2006 on a proforma basis. Click here for an explanation of this non-GAAP measure.

(4) As of December 31, 2007, total color, color post sale, financing and other, and color equipment sales revenues comprised 37%, 34% and 46%, respectively, if calculated on total, total post sale, financing and other, 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.

2008 Projected Revenues

Excluding currency impacts, we expect 2008 revenue to grow moderately driven by continued increases in annuity revenue. We anticipate that new launches combined with products and applications launched during the prior two years, and the businesses acquired in 2007, will enable us to further strengthen our market position.

Growth in post sale and other revenue will be driven by our success in increasing the volume of equipment installed at customer locations, volume of pages and mix of color pages generated on that equipment, as well as growth in document management services.

Net Income

Net income and diluted earnings per share for the three years ended December 31, 2007 were as follows:

(in millions, except per share amounts)		2007			2006			2005
Net income		$	1,135		$	1,210		$	978
Diluted earnings per share		$	1.19		$	1.22		$	0.94

2007 Net income of $1,135 million, or $1.19 per diluted share, decreased $75 million or $0.03 per diluted share from 2006 primarily reflecting:

• Gross profit increase of $492 million due to increased revenue of $1,333 million, including the addition of GIS.
• Increase in selling, administrative and general expenses of $304 million due primarily to the inclusion of GIS.
• Decrease in restructuring and asset impairment charges of $391 million. 2006 restructuring charges were $385 million ($257 million after-tax).
• Decrease in Other expenses, net of $41 million due to 2006 charges of $68 million (pre and post tax) related to probable losses for Brazilian labor-related contingencies and a $13 million ($9 million after-tax) charge resulting from the termination of a previous credit facility.
• Increase in income tax expense of $688 million due to higher pre-tax income as well as the absence of the following 2006 income tax benefits:
  • $472 million related to the favorable resolution of certain tax matters from the 1999-2003 IRS audit.
  • $46 million tax benefit resulting from the resolution of certain tax matters associated with foreign tax audits.
• Decrease in equity income of $17 million primarily attributable to charges of $30 million for our share of Fuji Xerox restructuring.

2006 Net income of $1,210 million, or $1.22 per diluted share, increased $232 million or $0.28 per diluted share from 2005 primarily reflecting:

• $472 million income tax benefit related to the favorable resolution of certain tax matters from the 1999-2003 IRS audit.
• $68 million (pre-tax and after-tax) for litigation matters related to probable losses on Brazilian labor-related contingencies.
• $46 million tax benefit resulting from the resolution of certain tax matters associated with foreign tax audits.
• $13 million ($9 million after-tax) charge from the write-off of the unamortized deferred debt issuance costs as a result of the termination of a previous credit facility.
• $385 million ($257 million after-tax) restructuring and asset impairment charges.

2005 Net income of $978 million, or $0.94 per diluted share, included the following:

• $343 million after-tax benefit related to the finalization of the 1996-1998 IRS audit.
• $115 million ($84 million after-tax) charge for litigation matters relating to the MPI arbitration panel decision and probable losses for other legal matters.
• $93 million ($58 million after-tax) gain related to the sale of our total equity interest in Integic Corporation (“Integic”).
• $366 million ($247 million after-tax) restructuring and asset impairment charges.