Good morning, ladies and gentlemen, and welcome to the Xerox Corporation first quarter 2007 earnings release conference call hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President; and Lawrence Zimmerman, Senior Vice President and Chief Financial Officer. During this call Ms. Mulcahy and Mr. Zimmerman will refer to slides which are available on the Xerox investor website at www.xerox.com/investor. At the request of Xerox Corporation, today's meeting will be tape recorded. Taping and rebroadcasting of this call are prohibited without express permission of Xerox. (Operator Instructions) During this meeting, Ms. Mulcahy, Ms. Burns and Mr. Zimmerman will make comments that contain forward-looking statements, which by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Ms. Mulcahy. Ms. Mulcahy, you may begin.

Thank you, and thank you all for joining us today. If you will turn to slide 4, we will provide you a summary of our Q1 results. We delivered solid results this quarter with install activity, color and services all fueling our annuity. Through revenue growth and strong operational performance, we grew earnings by 20%, exceeding our expectations. So it is a good start to the year. We reported earnings per share of $0.24 and net income of $233 million, up 17% from the first quarter of 2006. EPS includes a $0.02 charge for our share of the Fuji Xerox restructuring. On the top line, total revenue grew 4%, largely due to post-sale revenue growth of 6%. This includes a 3 point benefit from currency. Digital, color and services remain key drivers of steady annuity growth. Post-sale from digital up 7%, color post-sale, up 21%, and post-sale from our document management services increased 10%; all strong indicators that our growth model is delivering consistent and steady improvement. Color across the board remains a highlight with color revenue up 17% in the quarter. Gross margins were 40.6% in the first quarter, which is about a half point improvement from the first quarter of 2006 and in line with our expectations. Selling, administrative and general expenses were 24.9% of revenue, down 1.7 points. The balance sheet continues to look good. We generated $187 million in operating cash flow, and our financial strength allowed us to buy back stock while continuing to pursue our acquisition strategy. As many of you know, we made news the first week of April with our announcement to acquire Global Imaging Systems, and this acquisition is on track to close in mid-May. When it does, we will tap into Global's extensive sales and distribution network for small and…

Thanks, Larry. I'm just going to quickly recap. We started this year with good momentum on revenue and 20% EPS growth. Install activity, color and services are fueling our healthy annuity stream. We are bringing new technology to market at a brisk pace, already surpassing the number of launches last year. We expect our investment in innovation will continue to pay off with accelerated activity during the year. Our document management services and respected customer relationships with Global accounts give us a competitive advantage. We've got an exceptionally strong product portfolio, and we are aggressively pursuing new sales channels and expanding our distribution through agents, resellers and our planned acquisition of Global Imaging. We're managing the balance sheet effectively, costs are down, all giving us the flexibility to invest in marketing and growth areas. We are financially strong and remain diligent about generating cash and prioritizing profitability. For the second quarter, we expect to deliver earnings in the range of $0.26 to $0.28 per share. As we factor in the expected benefits from the acquisition of Global Imaging and this quarter's $0.02 impact from the Fuji Xerox restructuring, we expect we will be at the high end of the range for our full year earnings expectations of $1.12 to $1.16. We are confident in our ability to deliver on our commitments, build value and win in the marketplace. So thanks for your attention, now Larry, Ursula and I would be pleased to take your questions.

(Operator Instructions) Your first question comes from Ben Reitzes - UBS. Ben Reitzes – UBS: Thanks a lot, good morning. Anne, any updates on your thoughts about Global Imaging in terms of accretion and the amount and what that would do to your guidance this year?

No updates, Ben. I mean obviously we've got to close this deal before we can really dig in a lot deeper. I think what we have said is that it will be accretive. That accretion we would characterize as modest for the second half of the year. Obviously there is more to come, but certainly from what we know we are confident that with the aspects of absorbing the Fuji Xerox restructuring, what we see as modest accretion we can actually take our full-year expectations to the high end of the range. Ben Reitzes – UBS: Larry, inventories were up 11% sequentially. I was wondering if you could comment on that, and it seems like a little more than seasonal. I think you usually do build inventory for new products in the first quarter, but if you could talk about that and any efforts to reduce that, if it is a concern or not of yours? Thank you.

Thanks, Ben. No, it is not a concern of mine. Our expectation was that it would be around this number. We always see growth in the first quarter and particularly now where we have new products that we announced, so we feel comfortable with the level that it is at.

Just to add to that, it really isn’t just seasonal. I mean 19 new products so far this year, we have already outpaced the total of 14 new products in 2006. I think it really does support the rise in inventory to support the aggressive nature of product launches during the first quarter. Ben Reitzes – UBS: Last thing, just housekeeping. Larry, what tax rate should we use for the year?

33%. Ben Reitzes – UBS: Okay. So it goes up a little back to 33%. Thank you very much.

Your next question comes from Jay Vleeschhouwer - Merrill Lynch. Jay Vleeschhouwer - Merrill Lynch : Thanks, good morning. The first question concerns your equipment sales revenue. Excluding the addition of Global Imaging, would it be reasonable to expect that for at least one quarter of the year there would be a positive year-over-year comparison for ESR, particularly as you roll out the new products over the course of the year? The second question concerns expense management. When the Fuji Xerox hit arose in the February quarter and that you would have to take a GAAP hit to earnings in the first quarter, you stayed within the range for the year, suggesting that you would be able to recoup the earnings hit later in the year through additional expense management and like efficiencies. Now that you have already beaten for Q1 operationally, is the inclination perhaps a little bit less to do that for the remainder of the year than you might have thought at first?

On ESR, I think what we have been trying to certainly point to, Jay, is that total revenue driven by annuity truly is our business. That is why as we look at the post-sale increase of $157 million and you compare that with the $16 million decline in ESR, it is really starting to pale in comparison to the post-sale growth. That is just going to continue. The nature of ESR is going to be a little volatile. It is going to be about product launches and price investments and mix and that is why we are so focused on optimizing activity every quarter because that is what is really going to pay the long-term dividends for this company. So to your point, it can be and should be kind of moving around both in a positive and negative direction; and yes, with product launch strength and certainly our ability to drive share in certain categories, we certainly do plan on it being positive. Yes, it will move around a bit, and we will certainly manage that with the opportunity to deliver very sustainable annuity growth. On expense management, if you look particularly on the SAG line, we delivered very good productivity this quarter. We do believe that we have the opportunity to do a little bit more on the marketing front going forward so that we support this discussion, particularly on the activity side. We're not looking to sustain the amount of productivity that we delivered in the first quarter, although certainly we have always been focused on year-over-year benefits in SAG. Jay Vleeschhouwer - Merrill Lynch : Other than Global, can you comment on the other initiatives you announced in Orlando with respect to adding channel capacity? Anything incremental happen in the two months since that was announced?

Yes, I think we're working in, as a matter of fact our whole office team is focused on both the incentives for agents, the identification of the resellers that we're going to take up market in terms of the equipment side and working with those channels to make sure that they see more opportunity both in product breadth as well as business returns. So that work continues, and obviously that is an advance of the Global Imaging piece of this, which we will dig into after it closes in mid-May.

Your next question comes from Matt Troy - Citigroup. Matt Troy - Citigroup : I had a question centering on two areas. I guess first on Global, can you give us an update in terms of your surprise level or learning curve with the reaction from the Japanese, specifically their desire to pull equipment from the Global platform? Has that been in line with your expectations? It may have happened a little bit more quickly than you would have thought. If you could just talk about the ripple effects of this announcement.

We’re not really prepared to discuss any of that in detail. I think what I would say is that these teams have worked very hard to anticipate any reaction on the part of the suppliers and make sure that customers are put first in terms of a seamless transition if required. So I don't think that there is any particular response we want to talk to at this point in time, other than to say that the Global and Xerox teams have anticipated and will be able to support any reaction by any supplier to the benefit of customers. This was one of the things that we made sure we really had our act together on in terms of making sure that nobody was surprised regardless of the reaction. Matt Troy - Citigroup : As a quick refresher, you had indicated an announcement that the primary driver, at least in the first 12 to 18 months, of synergy and opportunity would just be revenues; pushing the Xerox product through and getting that manufacturing margin on a more direct basis. Is that correct in terms of where the majority of the synergies come from?

Well, definitely the synergies are revenue-based. I would say though it is quite frankly just a business model of Global to deliver growth and great returns. Certainly on top of that, opportunities to intersect Xerox products into the portfolio really offers both leverage on the bottom line because of manufacturing margin and also a greater breadth of access to products that they currently don't sell, which would be incremental. So the good news is that even without some of those opportunities, Global grows very consistently and has a great business model. Matt Troy - Citigroup : The second area touches on that, and that is new technologies. Certainly at On Demand this past week, Xerox is just an absolute clear standout in terms of the product breadth that you offer there. As you splinter across ever finer price points and your ability to surround any kind of competitive offering in the marketplace as they might emerge, is clear. The way I think about it, it looks like you have got about a year or two lead on a breadth basis. If I turn my attention forward thinking of Drupa 2008, and I think about where Xerox plays, your page feeds off of the iGen3 platform are at about 110 pages per minute. There is inkjet technology out there in development that can go as high as 1,500 to 2,000 pages, and there is a whole market and opportunity in between. I was wondering if you could help us think about that opportunity from a Xerox shareholder perspective? Do you extend the iGen or existing platform? Do you introduce a new type of technology, perhaps at Drupa? Is there an opportunity for an acquisition here? Can you just help me in terms of the page count opportunity and how you think about that on a two or three-year basis? Thanks.

Well, this is really a good opportunity to have Ursula address it. She is the one responsible for, quite frankly, the positive differentiation between Xerox and our competitors and for the strength that is being shown at On Demand. So Ursula, if you would take that question.

We have, as you said, shown a force that is unmatched in the industry from a platform perspective, both black and white and color. We continue to leverage that platform, especially the color platforms that we have in the marketplace, the DC family, DocuColor family and the iGen family, up market but more importantly to actually solve customers' application problems. So not just speeds and feeds, but also knitting together whole sets of technologies to solve application problems. We are investing and continue to invest in moving the iGen platform across, up and down frankly, and are looking at other technologies. But we are confident and clear that the technology set that we have today will be able to meet the needs of the customers in the next couple of years. But our eyes are always open, and we are always a little bit paranoid, as I have told you before, when I spoke to you, Matt, on technology. So we invest, we look, we keep close to the customers to make sure that we can actually deliver on their needs. Matt Troy - Citigroup : Absolutely and congrats, Ursula.

Your next question comes from Carol Sabbagha - Lehman Brothers. Carol Sabbagha - Lehman Brothers : Thank you very much. Just a quick question on what you're seeing across the market in terms of enterprise spending. Are you seeing any signs of a potential slowdown?

I think we would not highlight any difference or change in terms of enterprise spending that we certainly are aware of in Q1. We look at pipelines and activity and feel that there is a level of consistency that we are seeing with regard to our enterprise accounts. So I know that that has become a subject of certainly debate, but I don't think we would share the view that there is any noticeable slowdown right now on the enterprise side in the US. Carol Sabbagha - Lehman Brothers : On your gross margin, the gross margin on sales which had been going down for a while actually went up this quarter, and I think you benefited from positive product mix. Given the new launches you have announced and where you expect the activity to be for the rest of the year, do you still continue to expect positive product mix to help that gross margin, that part of the gross margin line?

I think some of the things that we have seen in mix we have worked hard at that are driving some positive gross margin influence. If you look at even our Mono 3 to 5 performance, I mean we actually took over number one share in Mono 3 to 5 in Q4, and obviously that is a better margin leverage for us than the lower end of the office. The strength of color, I mean color multifunction up 71% in the quarter is just amazing and more to come with similar margins going forward, and that offsets; quite frankly, that kind of strength really positively leverages our color margins as well versus just the low end of color printing where there is so much margin pressure. Because we have got this huge base of high-end production color as well, we are starting to benefit from the maturity and the size of our fleet in production color. I mean when you're doing 50% of the pages in the production color business in the marketplace, your ability to drive better margins just on scale is really a big deal. So I would say yes, it is clearly mix, but it is also scale and the fact that we are out there early with products, and we have gained maturity that are allowing us to really leverage margins going forward. So we would expect that our ability to stay in our margin range and still make the kinds of investments in pricing that we do, should be sustainable. Carol Sabbagha - Lehman Brothers : Is it possible to get what your total mix has been year over year this quarter versus a year ago and what the total page growth was for the whole company?

So we don't give you absolutes on that, but I can tell you what the MIF numbers are. Our total MIF grew 1%. If you remember in Q4, we said it was flat, so it is trending in the right direction. Color grew 31%, so obviously leveraged by color. Digital MIF grew 7%, so all trending in the right direction. Our color pages grew 29% for the quarter, which is certainly continued very robust growth on color pages. Basically our total digital pages were flat. Mono was down a little bit, although we think that is more seasonal than it is trend-based right now, so that we are not very concerned about. I think one of the things that we really are pleased about is revenue per page is growing very nicely as well. So, as we look at it, that kind of annuity scorecard that Larry provides, that is why we can have such a feeling of confidence about our ability to sustain annuity growth going forward.

Your next question comes from Chris Whitmore - Deutsche Bank. Chris Whitmore - Deutsche Bank : Overall revenue looked about in line. You mentioned gross margins were in line. Was the upside in the quarter primarily the result of the timing of restructuring and SAG and R&D related?

Actually no, I would be real clear about this one, Chris. The whole benefit in the quarter really was the annuity growth, the $157 million of revenue and gross profit growth of $71 million. We did great on the expense line, but you would look at that and the Fuji Xerox restructuring offset a lot of that. By the way, tax rate year over year certainly also was not a help. It was a hinderer this quarter. So I would make the case that, quite frankly, revenue growth and gross profit were really the drivers of the incremental net income that was driven this quarter. Chris Whitmore - Deutsche Bank : Is there any way to quantify the impact of currency on both the DMO business and the top and bottom lines?

You know, we don't only because DMO is such a diverse set of geographies that at any point in time we have so many negative and positive factors. I think I would certainly say it was not terribly material in terms of the impact on overall DMO revenues or profits. Chris Whitmore - Deutsche Bank : Any impact to currency on gross margins in the bottom line?

It is really hard to quantify. That is why we try to give you currency in terms of revenue. Clearly currency helped on the European revenue side, and we have quantified that. But you get some positive flow through on the revenue side, but then, on the SAG side, for example, it cost us about $30 million or $40 million in SAG. So it is hard to kind of net all that out and know exactly where you wind up. But it was clearly a help on the top line, and that will actually mitigate a bit for the balance of the year based upon the year-over-year spot rates. Chris Whitmore - Deutsche Bank : Fair enough. Lastly, can you talk about longer-term expectations for the DocuTech line? That has been lagging a bit recently. What I am looking for is kind of the two to three outlook for that business.

I am going to turn that over to Ursula. So your question is really about what do we expect from the DocuTech or the high-end mono production part of the business.

We clearly maintain a leadership share in the mono production business. We just announced at AIM a significant refresh at the high end, focused at the very high end, and introduced some new capability as well and spoke about the Nuvera EA line that we just announced and our continuous feed engine that we announced as well. We now have 11 continuous feed products in the marketplace by the way, which is sneaking up there a bit. So we still have a very strong win rate, and we still have a growing participation in the light production segment. All that together I think will help us maintain our leadership share in the Mono space, even though that space is flat to declining.

Your next question comes from Bill Shope – JP Morgan. Bill Shope – JP Morgan : Given the continued positive trends on the cash flow and the balance sheet metrics, particularly when you look past the Global Imaging acquisition, could you remind us of your thinking on dividends versus share repurchase and how that could change over time?

Well, I think we have been clear that this is not a question of “if” it is a question of “when”. We continue to prioritize for the best returns for shareholders. We only actually, it is hard to believe, began our share repurchase about a year and a few months ago, and we have already invested $1.7 billion into share repurchase. and I think delivered some very nice returns on that. We have always said that acquisitions had to be a big part of the shareholder return proposition over the long term to really fulfill the strategic goals we have on growth in the business. Obviously that has also materialized. I think that certainly for the balance of this year our intent is to absorb our acquisitions, return to the set of metrics that Larry outlined in terms of the balance sheet metrics, slow down our share repurchase as we pay for the Global Imaging acquisition, and then quite frankly, get back in the business of share repurchase in a very business as usual way. I don't think it would be short-term, but as we said, we think in the long-term dividend makes good sense for this company, and we, and certainly the board, would be very receptive to that conversation over time. Bill Shope – JP Morgan : We also saw nice acceleration in color revenue growth this quarter. Can you give us a little more clarity perhaps on which products were most effective in the segment for the first quarter? If possible, can you give us a read on possibly which verticals may have shown increased color momentum this quarter as well?

I think what I would say is that we were very pleased with the production performance of iGen and DocuColor 5000. iGen particularly after a very strong Q4, came back roaring in Q1 and was just a fabulous outcome. Color in total performed very well. As a matter of fact, uptick performance when you look at 9% equipment sale growth, 21% post-sale growth, 17% total revenue growth, you will see improvement overall in the total revenue growth for the company. Our high end of the office line, which is the MFP line, was fabulous at 71% activity growth. The one I would say weaknesses, if you will, on the equipment sales side, not on the total revenue side, but on the equipment sales side, was really the OEM color printers. But that has become invest in getting the customers and see the returns in total revenue, and we are. I mean the total revenue picture looks good, but the pricing pressures there are pretty extraordinary. I think you would say it was pretty strong performance across the board, and segment-wise color multifunction and graphic arts particularly I think with iGen would be the highlights.

Your next question comes from Jack Kelly - Goldman Sachs. Jack Kelly - Goldman Sachs : Larry, on the SAG line, there was very strong performance with the 170 basis point drop. Can you talk about the total 2007 savings that we might get from the 2006 restructuring plans? I'm specifically talking about that $34 million number that you mentioned that was generated in savings from the '06 plan. Could that be $100 million, or are we pretty much there for '07? Just a sense of where we are in that process.

Well, first of all, I don't think we forecast by line on SAG or gross profit margin. We try to give you a basic idea of where we are going. I think Anne covered it. We expect to see improvement in productivity and SAG. We don't expect to see as much as we saw in the first quarter, and I think that is what you should factor in your models.

So in terms of the infrastructure, because that is what I guess a lot of that restructuring charge was taken for, are we pretty much where you want to be in terms of the infrastructure supporting the sales force?

We are pleased with the pace of restructuring. I think to do almost a half point of margin improvement and certainly to see the kind of benefits in SAG, certainly a good portion of those are due to the restructuring efforts. As we go through the year and this is where Larry is alluding, one of the great things about this business model is that we are able to also make some investment decisions that can help fuel the long-term success of the company; and therefore, some opportunities in the marketing area we think are really a big opportunity for us balance of the year, positioned where we are from point of strength now. Will our investments in restructuring pay off? The answer is absolutely yes, they already are, some in the shorter-term, some in the longer-term. Obviously some of the European restructuring pays off over a longer period of time than the U.S.-based piece. But we tracked this really rigorously, and we are quite pleased with the discipline we have had in getting the returns from our restructuring.

In the production segment, you had indicated that there was about a 7% decline in installs of production black and white with high end down and light production up. If we just focused on those two items looking forward this year, do we reach at some point a stage where we could get a positive comparison out of those combined sales, the high-volume versus the light production?

I think the answer is pretty much this is all about the pages. We look at this thing very holistically in terms of our production pages.

As Anne said, the key here and the play here is about pages. So share is important, activity is important and MIF is important. If you look at those three metrics: share, activity and the resulting MIF that drives pages. As we mix our business, what we are trying to do is make sure that we get as much activity, as many machines in the field to assure that we can drive our MIF up. We are growing MIF in digital mono at 6%. Production digital overall including color is growing at 12%. So we are trying to actually drive activity such that we can get MIF, such that we can get pages. When you do that, we will take whatever install the customer wants. We have the breadth of machine to be able to do that so that we can actually get the results in MIF and pages.

Your next question comes from Shannon Cross - Cross Research. Shannon Cross - Cross Research : Good morning. Congratulations, Ursula, first of all. With some of the launches that you have done in the low end, and I would assume it comes through from the same standpoint of the year-over-year growth you're talking about, but when we look at the low-end MFPs where Lexmark and HP gained a fair amount of share last year with some of their laser-based MFPs, can we get an idea of some of the early indications that you guys are doing well with the products you have launched?

Ursula should take it up from here; I'm not sure we have had enough time yet. Those products got launched in February, the new suite of SMB products. But I have to say that the feedback during our summit meeting with our partners was pretty outstanding, and some of those products are pretty exciting. Ursula, you may want to add to that.

Shannon, you correctly noted that we did have a fairly significant level of introductions in the first quarter. It is early. We just launched them in the middle of February, but we're excited. As Anne said, the partners who look at these products and who are ultimately going to sell them say two things: one is that the breadth is good, and the quality and costs are excellent. So with those two things and the distribution traffic that we have, we are excited about them and expect significant uptick. Shannon Cross - Cross Research : Any comments you can make on enterprise in Europe? You talked about the U.S. as being not weak relative to what we have heard from some others.

I think a couple of things just about Europe. Actually the enterprise services opportunities in Europe are really very, very good in terms of actually big deals have kind of lead the way. So the services environment is pretty robust, but Europe is very cost competitive too. So there is a lot of pricing pressure in Europe that certainly we don't see as much pricing pressure in some segments of the U.S. Nothing of note in terms of economic deterioration or issues that we would say are inconsistent, but our services business in Europe is very robust and pricing pressures continue. Shannon Cross - Cross Research : If you could just give us sort of your latest thinking on Edgeline now that it has been launched? I know they did not have it at On Demand, but any thoughts on the positioning of your products vis-a-vis what Edgeline is offering?

We have a very robust portfolio of offerings from 40 pages a minute all the way up to 110 pages a minute cutsheet. We are confident that we can meet any customer's needs in that office segment of color. We thought we would learn a lot more about Edgeline at AIM, and as you said, we did not see them there. We were a little surprised at that. We think that we have coverage that is good, we have pricing that is outstanding, and we have a robust set of offerings. Shannon Cross - Cross Research : From a cost per page basis, though, with some of the pressure we have seen on color, a multiple of $0.05, obviously Edgeline coming out somewhere around that. Are you at all concerned about where the cost per page is going, or do you think the elasticity of demand will offset that?

Two things. One is there is more to come from Xerox, obviously. We've got a lot more on the horizon. Some of it we just announced this week, but there is more to come, and Solid Ink is a headline in the more to come. Secondly, we're prepared to do whatever we need to do on the pricing side. We have got the critical mass, we have got the base, we have got the economics whether it is just price reductions or whether it is different kind of segment pricing for color, we can certainly do any of that with the product set that we have got in the market. We are not overly concerned about that, and we think we've got a great head start. Thank you very much, Shannon and we thank all of you for your participation and your attention today. We very much appreciate it. Have a great day and weekend as well.