Dear Stakeholders:

We write this letter at a time when economies around the world are still struggling under the weight of a global recession that reminds us once again of how interconnected we all are. What happens on Wall Street truly does ripple and ricochet around the world. Despite the toll the recession has taken, we are pleased to report that it has not caused us to waiver from our belief in the need to behave responsibly as a good corporate citizen in the communities and countries in which we operate. There are two broad reasons for that – a belief that good citizenship is the right way to behave and an equally important belief that behaving the right way is a good thing for our business.

Nowhere is this more clearly demonstrated than in our focus on sustainability. That’s a term that gets thrown around a lot these days. We define it as the place where the world’s economies, societies and the environment can thrive in a harmonic state indefinitely. Some people call it the triple bottom line – operating businesses in a way in which economies grow, societies benefit and the environment is protected. Our history shows that it’s not as difficult as you might think.

Our commitment to sustainability began in the 1960s as the right thing to do. That early commitment has led us on a fascinating journey. We pioneered two-sided copying, print-on-demand, the use of recycled paper in the office, recycling toner cartridges and the promulgation of tough sustainability standards for our paper suppliers.

The more we have integrated sustainability into our business operations, the more it has become a part of our DNA. We like to think of ourselves as a leader, still pushing the boundaries of what is possible.

That thinking has taken us to some interesting places and produced some significant results. Our whole product development process is a good case in point. During the early 1990s we began to hone in on remanufacturing. We took back copiers and printers that would have wound up in landfills and either recycled or reused parts or remanufactured entire machines. We had no idea whether we had a market for remanufactured copiers, but soon found out that there was a segment of the market that preferred them.

That led to the realization that we could save even more money if we designed the product from scratch with reuse and remanufacture in mind. The results have been pretty impressive. Last year alone, we diverted nearly 106 million pounds of waste from landfills, bringing the total to over 2.2 billion pounds since 1991. Our commitment to sustainability doesn’t stop there.

• We’ve reduced greenhouse gas emissions from our company-wide operations by 20 percent in the past six years and we’re just getting started.
• We introduced the industry’s first “Sustainability Calculator” to help our customers estimate the environmental footprint of their office printing, which has helped them reduce on average 20 to 30 percent of their related energy, greenhouse gas and solid waste.
• Our Palo Alto Research Center – through its Clean Tech research initiatives – is focusing on delivering affordable renewable energy, clean air and water and other environmentally preferred solutions – not just for Xerox but across the industry.

We bring these initiatives up not to brag, but to make a point. We were an early leader in the sustainability movement because we thought it was the right thing to do for the environment. But we discovered something else along the way. Every one of our innovations ended up either saving us money or creating new markets and new revenue. We found, in other words, that we don’t have to choose between the environment and profit. We can do both.

We can do both for our customers, too. Take for example our recent launch of the Xerox ColorQube™ – an innovation that not only helps our customers cut their costs, but reduces the impact on the environment. ColorQube is the world’s first high-speed solid ink printer that also copies, scans and faxes. And, it cuts the cost of color pages by up to 62 percent compared to traditional color laser printers.

“We don’t have to choose between the environment and profit.
“We can do both.”

ColorQube uses Xerox’s proprietary solid ink technology – non-toxic, cartridge-free, crayon-like sticks – that generates 90 percent less supplies waste and reduces the effects of manufacturing and transportation on the environment. A life cycle assessment study conducted by Xerox and confirmed by the Rochester Institute of Technology estimates that the ColorQube series uses 9 percent less life cycle energy and produces 10 percent fewer greenhouse gases than comparable laser devices. So no matter how you cut it, ColorQube is good for our customers and better for our planet.

That’s true for just about everything we do under the broad umbrella of citizenship. So when people ask us why we continue these initiatives in challenging times, it’s a curious question to us. Of course we do. It’s the way we do business.

We also find it curious when we get questions these days about diversity at Xerox. To many, it seems remarkable that a black woman has succeeded a white woman as chief executive officer of a major global company. What is remarkable to some seems natural to us. That’s because our diversity initiatives date back to the 1960s when our founder and predecessor, Joseph C. Wilson, determined that the answer to the race riots sweeping American cities was a concerted effort to provide equal opportunity for all our citizens.

We’ve been at that ever since as well and find that, like sustainability, a focus on diversity is good for our business. It gives us access to the broadest pool of talent possible. Today we like to think that our workforce is the most diverse and best in our industry – and that is not a coincidence.

So although we take a lot of pride in our record on citizenship, we know that we owe a lot to Xerox people who have gone before us. They paved the way and built a culture in which good citizenship is integrated into the way we conduct ourselves today. Even in the midst of economic stress and uncertainty, Xerox people continue to volunteer in their communities under company-sponsored programs. The Xerox Foundation continues to invest in making our world a little better. And Xerox people lend their expertise to a myriad of boards and advisory councils in the non-profit world. We are in awe of how seriously they take our collective responsibility to give back.

You will see that philosophy running throughout this report. It’s organized around five goals that capture the essence of our citizenship efforts:

• Conducting our business with integrity and transparency builds credibility and attracts investors.
• Aligning our resources around customer need provides the revenue stream that enables investment in innovation and future growth.
• Nurturing a greener world through sustainable innovation and development saves money, creates value and helps develop new markets.
• Creating a great workplace for our people strengthens our competitiveness.
• Leveraging our resources to make our world better improves the quality of life for our people and the economic climate for our customers.

Proud as we are, we are far from satisfied. Xerox people are passionate about honoring the legacy we have been given and passing it on even stronger to those who will follow us. We are reminded of the words of Robert Frost:

“But we have promises to keep, and miles to go before we sleep.”

You can be sure we will not rest on our laurels. As we so often state and always believe, we are part of an ongoing experiment to prove that good citizenship and good results are not only compatible but synergistic – in good times and in challenging times.

Ursula M. Burns
Chief Executive Officer

Anne M. Mulcahy
Chairman