Annual Report 2008

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Overview

We are a $17.6 billion technology and services enterprise and a leader in the global document market. We develop, manufacture, market, service and finance a complete range of document equipment, software, solutions and services.

References in this section to “we,” “us,” “our,” the “Company” and “Xerox” refer to Xerox Corporation and its subsidiaries unless the context specifically states or implies otherwise.

We provide the document industry’s broadest portfolio of document systems and services for businesses of any size. Digital systems include high-end printing and publishing systems; digital presses, advanced and basic multifunctional devices (“MFD’s”) which can print, copy, scan and fax; digital copiers; laser and solid ink printers and fax machines. We provide software and workflow solutions with which businesses can easily and affordably print books, create personalized documents for their customers, and scan and route digital information. Our services expertise is unmatched and includes helping businesses develop online document archives, analyzing how employees can most efficiently share documents and knowledge in the office, operating in-house print shops or mailrooms, and building Web-based processes for personalizing direct mail, invoices, brochures and more. We also offer software, support and supplies, such as toner, paper and ink.

We serve a $132 billion market

(in billions)

$25 Production
We are the leading provider in the market that offers a complete family of monochrome and color production systems, business development tools and workflow solutions. We are creating new market opportunities in targeted application areas with digital printing as a complement to traditional offset printing.

$26 Services
Our value-added services deliver solutions, which not only optimize enterprise output spend and infrastructure, but also streamline, simplify and digitize our customers’ document-intensive business processes.

$81 Office
We are well positioned to capture growth by leading the transition to color and by reaching new customers with our broad offerings and expanded distribution channels.

This estimate, and the market estimates that follow, are
calculated by leveraging third-party forecasts from firms
such as International Data Corporation and InfoSource
in conjunction with our assumptions about our markets.

The document industry is transitioning to digital systems, to color, and to an increased reliance on electronic documents. More and more, businesses are creating and storing documents digitally and using the Internet to exchange electronic documents. We believe these trends play to the strengths of our product and service offerings and represent opportunities for future growth in the $132 billion market we serve.

Our Strategy

We are well-positioned to lead in this large and growing market through:

Executing on Growth Initiatives

•

Accelerating the transition to color – We have the broadest color portfolio in the industry and leading technologies.

–

Color is the fastest growing portion of our market and estimated at $44 billion.

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Economic cost and quality improvements are driving the transition from black-and-white to color.

–

We continue to capture growth opportunities within the black-and-white segment of our core markets, which we estimate is a $62 billion market.

•

Building on services leadership – We lead the industry with end-to-end Document Management Services and we participate in three areas of the outsourcing services market:

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Infrastructure Outsourcing, where we help our customers to reduce their enterprise spend through differentiated technology, skills and automation.

–

Application Outsourcing, where we help our customers to streamline their document intensive business processes through automation and deployment of software applications and tools.

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Business Process Outsourcing, where our customers leverage our global delivery capability and proprietary production imaging software to manage both high volume standardized activities as well as lower volume complex workflows.

•

Driving the New Business of Printing^® – We continue to create new market opportunities with digital printing as a complement to traditional offset printing through a market transition we call the “New Business of Printing”.

–

We are driving the New Business of Printing opportunity by identifying applications which are suitable for digital production.

–

Our leading business development tools, workflow and digital technology, led by our market-making Xerox iGen^® technology, uniquely positions us to meet the increasing demand for short-run, customized and quick-turnaround offset quality printing.

Expanding our Distribution Channels

•

We continue to expand our presence in the small and mid-size business (“SMB”) market through the acquisition of Veenman B.V. in the European market, as well as additional acquisitions made by Global Imaging Systems, Inc. in the U.S. markets.

•

We are maintaining our investments in Developing Markets, a high-growth market opportunity.

•

We are capitalizing on our Graphic Arts coverage investments to capture the opportunity associated with the New Business of Printing.

Securing Future Technology Leadership

•

Through advancing our heritage of innovation, we are yielding a broad technology portfolio.

•

We are capitalizing on breakthrough ink technologies such as Solid Ink and Cured Gel Ink and

•

Expanding our Document Management Technologies that optimize the capabilities of our products and streamline customers’ processes.

Optimizing Productivity and Infrastructure

•

We are improving the efficiency and effectiveness of our infrastructure and

•

Optimizing our resources to support innovation and growth.

Our Business Model Fundamentals

One fundamental of our business model is our annuity model. Post sale revenue growth is driven by increasing equipment installation which increases the number of page-producing machines in the field (“MIF”) and by expanding the document management services we offer our customers. 73% of our 2008 total revenue was post sale revenue that includes equipment maintenance and consumable supplies, among other elements. We sell the majority of our equipment through sales-type leases that we record as equipment sale revenue. Equipment sales represented 27% of our 2008 total revenue.

Revenue stream

73%
Approximately 73% of our revenue, “post sale” includes annuity-based revenue from maintenance, services, supplies and financing, as well as revenue from rentals and operating lease arrangements.

27%
The remaining 27% of our revenue comes from equipment sales, from either lease arrangements that qualify as sales for accounting purposes or outright cash sales.

The number of equipment installations and the growth in document management services are key indicators of post sale revenue trends. The mix of color pages is also a significant indicator of post sale revenue trends because color pages use more consumables per page than black-and-white. In addition, expanding our market, particularly within the New Business of Printing, is key to increasing pages and we have developed tools and resources to be the leader in this large market opportunity.

Our consistent cash flow from operations is driven by recurring revenues; this, along with modest capital investments, enables us to provide a return to shareholders through:

•

Expanding our distribution through acquisitions;

•

Buying back shares under our share repurchase program and

•

Maintaining our quarterly dividend.

We anticipate expanding our future earnings through:

•

Modest revenue growth;

•

Driving cost efficiencies to balance gross profit and expense;

•

Leveraging our share repurchase and

•

Making accretive acquisitions.

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