Good morning and welcome to the Xerox Corporation first quarter 2008 earnings release conference call hosted by Ann Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President, and Larry Zimmerman, Executive Vice President and Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the website at www.xerox.com/investor. At the request of Xerox Corporation, today’s conference call will be tape recorded. Other taping and/or rebroadcasting of this call are prohibited without express permission of Xerox. After the presentation, there will be a question-and-answer session. (Operator Instructions) During this conference call, Xerox executives 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 Mrs. Mulcahy. Mrs. Mulcahy, you may begin.

Thank you and thanks everyone for joining us today. If you’ll turn to slide four, we’ll provide a summary of our first quarter performance. As you know, we settled the securities lawsuit last month and took the $0.54 charge in the first quarter. Excluding this charge, we delivered earnings of $0.27 per share, up from $0.24 in the prior year. Total revenue including the benefit of acquisitions was up 13% this quarter to $4.3 billion. Wholesale revenue grew by 11%, led by a steady pace of activity, color, and services, and currency gave us a four point benefit. During the quarter, we increased our investments in marketing, distribution, and pricing, resulting in improved install activity across the board. It is this activity that fuels our annuity stream and long-term growth. While these actions paid off in activity gains, the investments, as well as the mix of business put pressure on our earnings this quarter. The decline in gross margin was offset by a lower tax rate delivering EPS in line with our expectations, but we know we can improve overall operational performance, balancing investments in the business with costs to bring margin back in line with our model. We are operating in a tougher economy and we are competing more aggressively to win share. At the same time, our commitment to earnings expansion is not wavering. We plan to continue investing in key marketing and sales initiatives while taking actions that will reduce costs. As a result, we believe it is prudent to take a $0.05 restructuring charge in the second quarter that helps us accelerate cost actions. We’ll walk you through how this affects Q2 and full year guidance after we review the first quarter results. During the first quarter, color revenue grew 13% and now represents 40% of…

Thank you, Anne and good morning. While we delivered $0.27 of adjusted EPS and met the middle of our guidance range, we had some external and internal elements that impacted the way we achieved it. I will go into more detail on the next few slides but my key messages are: consistent revenue trend but skewed to lower margin channels; lower total gross profit margin down 1.3 points, driven by a sales margin decline of 2 points; the decline is due to product and channel mix, price investments, as well as rapid weakening of the dollar to the YEN; growth in selling expense as we invest in coverage and distribution; a tax settlement that will yield cash this year that offset the gross margin decline; adjusted earnings of $0.27; GAAP earnings per share were lower by $0.54 as we took a $491 million after-tax litigation charge. Now let’s be more specific -- slide 11. Anne covered revenues so I won’t repeat it but I want to reiterate that in this economic environment, we were quite pleased with the revenue results this quarter. Channel mix, product mix, pricing as well as a 12% weakening of the dollar versus the YEN in the quarter gave us 39.3 gross margin, 1.3 points down year over year and below our model of 40% to 41%. Given the dynamics of the market, we’ve decided to accelerate cost actions and think it is prudent to assume we will be in the low end of the 40% to 41% range. We have successfully done this before and know how to adjust our business model so that it continues to deliver expanded earnings. The focus of our actions is on technical service and supply chain cost, G&A and other infrastructure. We expect this to be in the $60…

Thank you, Larry. So if you’ll turn to slide 15, we’ll view our earnings expectations going forward. So you are going to see here the adjustment for the litigation charge in both our Q1 results and full year guidance. In the second quarter, we expect earnings in the range of $0.23 to $0.25, and that includes $0.05 of restructuring. And as Larry mentioned, we will work hard to offset this $0.05 impact during the balance of the year. So for the full year, we’re confident we’ll deliver another year of earnings expansion with adjusted EPS in the range of $1.26 to $1.30. So if you’ll turn to slide 16 for a summary and then we’ll open it up to your questions. Our results this quarter are a good indication that our growth strategy is working, yielding profitable revenue through growth in activity, annuity, color, and services. And we are not letting up at all in any of these areas -- in fact, our marketing initiatives are strengthening our competitive position in all areas. The compounding effect of marketing investment, business mix, and the impact of the YEN could not be offset by our traditional cost productivity. We understand the issue, we know how to fix it, and we are already executing on the required actions. At the same time, we remain focused on building shareholder value through share repurchase, dividends, and acquisitions. We remain quite confident in our ability to deliver on our commitments, build value, and win in the marketplace. So thank you for your attention and now Larry, Ursula, and I will take your questions.

(Operator Instructions) Your first question comes from the line of Jay Vleeschhouwer with Merrill Lynch.

Thanks. Good morning. Anne, Larry, Ursula -- could you comment on the two side of the cost and expense coin? On the one hand, could you be more specific about the restructuring that you are going to be taking, particularly in terms of supply chain? This is not really a new issue. You seem to have had an ongoing focus anyway for some time on procurement, cost of manufacturing, ESR gross margin, so what’s incremental here in terms of what you are going to be doing? And on the other hand, could you be a little bit more specific in terms of the nature of the investments you’ve been making in coverage and marketing and would you expect that to be ongoing incremental spending as we saw in Q1?

Okay, Jay, thanks. I’ll start and certainly turn it over to Ursula as it relates to the supply chain restructuring, but let me start with the expense side and as we said on the call, the vast majority of SAG growth was really due to Global and currency. It was about $128 million of the growth. The remaining $42 million, half of that was with regard to compensation increases year over year. The other half was all incremental coverage and marketing and it came in the form of incremental territories as it relates to things like continuous feed and packaging and photo opportunities, as well as just pure coverage investments and more feet on the street. Marketing, particularly as it relates to low-end demand, which is yielding already in the short-term, so quite intentional as it relates to those marketing investments. We do view those investments as continuing, although we believe that the growth will moderate in absolute spend and the ratios will get better for the balance of the year as it relates to SAG. So I think that kind of gives you a sense of where we are headed. On the cost side, there’s no question that a combination of elements -- currency, pricing, channel mix -- the fact that we had very strong growth in developing markets and services, which have lower margins with relative weakness in the U.S. all played out there, and that’s why we decided we think it’s really smart to do the restructuring now. These are things that we have been doing and continue to plan doing over the next four to six quarters, but we know what to do so we can accelerate it and clearly drive improvement quicker to offset some of the other pressures that we are seeing. So the vast majority of the restructuring is aimed at cost and it is going to be driven by technical service and supply chain and for specifics on that, Ursula, you may want to comment.

Jay, you are correct we have been speaking about making sure that we keep ahead of ourselves on supply chain excellence, particularly in the area of costs, as we broaden our channels. We have to look at that just to keep effective and efficient. What Anne said, we decided to actually accelerate some of the actions. The two areas that we are going to focus on which will have an ancillary third area effect are warehousing for sure, some manufacturing, and as we restructure and look at our warehousing and manufacturing differently, it will drive some improvement in transportation costs as well. So broad infrastructural areas but focus on warehousing, manufacturing, and some transportation.

The next question has to do with pricing. You seem to have been at the wrong end of the pricing investment range we’ve talked about for some time. Could you foresee that it might go even beyond the minus 5% to 10% that we have typically seen in any rural areas?

Jay, I wouldn’t necessarily say it’s the wrong end -- it was the high end in the sense that we say it’s a 5% to 10% range and our pricing investments clearly were in the 10% range. Selectively we really focused on two areas. One was the mono production area, and you’ll see from the activity that it worked and it will continue to drive mono production activity, which is a great profit driver for us in terms of pages. And the other is to continue the acceleration of color adoption, so really being aggressive and making sure that it’s attractive to acquire color-enabled technology in this and you saw the activity levels in color, which were 40% in multi-function, 35% in color printing, a little bit more modest 5% or 6% range in production color but still good activity growth where there is so -- at the high end where the pages are. So I think we certainly intentionally did that and we -- this is more about us than it is about the competition and clearly we think we can manage it going forward so that we don’t see additional spikes in pricing. I think our intent is to actually deal with the cost side of the equation so that we can continue to be aggressive in pricing and get the benefits of the activity but not see the hit in margin that we did this quarter.

Finally you mentioned your view of U.S. corporate business conditions. How would you describe your other key markets like public sector, graphic arts, transactional, financial, and so forth?

I think public sector is fine. We’re seeing good continued activity in public sector. SMB, fine. Actually in financial services, we’re doing very well because we are providing a lot of document services to optimize infrastructure that are helping rationalize cost in the financial services industry. So we singled out the general corporate enterprise environment just because there is a level of caution and anxiety in terms of decision making that clearly is delaying. It’s primarily on big equipment deals though, because we were really pleased our services signings were double-digit growth in the quarter, so we felt good about that.

And graphic arts, Jay, remains strong for us as well and that’s where we are seeing the growth in our high-end cut sheet and production color --

Thank you.

Your next question comes from the line of Caroline Sabbagha with Lehman Brothers.

Thanks. Just a couple of quick questions, sticking with the economy question, have you seen any of the weakness, the economic weakness in the U.S. move overseas, Europe or anything -- well, you’re not big in Asia but anything you are seeing through Fuji Xerox in Asia?

I think the answer would be no. Our Europe results, we kind of highlighted as being strong and clearly developing markets, as you saw, was extraordinarily strong from a growth and a profitability perspective. We have not seen any downturn either in Europe or anyplace else.

Okay, and then on color, color equipment sales, not installs, but looked relatively weak in the production business. Can you just provide a few more details on what went on there? Was it a trading down, was it pricing in color production or are you seeing a little bit of a slowdown because of the economy there?

I would say it’s not economy because activity was quite strong and even though certainly pricing certainly is a factor, I would say that in color, it’s a continuing trend for us. There wasn’t any really major shifts in color pricing investments. Where we really shifted was on the mono production side. And if you look at color ESR, operating leases and rentals are really becoming a much bigger factor, particularly in the production environment. In the world of iGen and DocuColor, we’re seeing a lot more operating lease activity and if you actually looked at the year-over-year impact, it cost us two points of the equipment sales. So that would actually keep us, quite frankly, very much on trend on the equipment sales side with good activity that actually was as strong or stronger in most areas of the color portfolio.

And with more competition coming into that market as the year progresses, what is your view around the competitive threats in color production?

Ursula.

I think that we have seen very little near-term impact, hardly any. I think that the products that came to market already, the Canon 7000, we are very comfortable with our performance of our 7000 AP device that we launched last year and our 8000 AP device. Those two devices performed very well in the marketplace and faced off against the Canon 7000 very effectively. HP is talking about coming with a color device and if you look at our entire portfolio, [EPC] color and production color are comfortable as well there. I think the only other competitor that talked in this space is probably Ricoh and we see absolutely no impact on our activity from Ricoh. So I think that while the competitors are speaking about being there, we are there today and performing very well in EPC and production color.

And I would add we’ll have a lot more out there in the future too, so we’re not standing still by any means.

And is the pricing on the derivatives of the 7000, the 16 to 65 page per minute, what do you think about the pricing structures of those two products, I guess?

As Anne spoke about our equipment pricing are in line with pricing declines, are in line with what we expect in the marketplace. No special activity. I think the breadth of our portfolio allows us to hold pretty well to tight pricing activity in our segment, of 50, 60, 70, 80, 90, and 110, we can actually hold prices in those product lines because we have such a broad product line.

Thank you very much.

Your next question comes from the line of Ananda Baruah with Banc of America.

I guess the first one is it sounds like the restructuring charge that you are taking this quarter is one-time in nature. It sounds non-recurring in nature, so I guess I’m just interested in getting your view on why it’s being included in the ’08 outlook. And then I guess the next question would be you know, didn’t see the iGen pointed to in the production segment comments. I was just wondering what’s going on with the iGen.

Well, let me just begin by saying we didn’t highlight iGen because quite frankly the 7000, 8000 activity was the highlight, if you will, in terms of growth. But iGen absolute installs we’re quite pleased with and the trends have been very positive. We did have a very, very strong performance a year ago in iGen that muted the performance a little bit but in absolute numbers, it’s on trend and we re pleased. So you shouldn’t read anything negative into the iGen performance, and pages continue to look great in iGen, driving very, very strong post-sale growth from the iGen product line. On the restructuring charge, I think we’ve looked at it as we clearly -- these are cost actions that we had anticipated taking over the next four to six quarters. We are accelerating them. We think it’s the right thing to do in light of all that we know right now, and I think as a team we feel very committed that we really have an accountability to offset those and are -- although we are not prepared today to tell you how, that’s going to be a big focus of ours going forward, so that we can remain -- really keep the integrity of our outlook as we deliver expectations to the market. I know that different companies do it different ways, but we actually think this is the right way to do it.

Okay, I appreciate the commentary. And just I guess more of a clarification around pricing; it sounds like you are not seeing anything in the general marketplace or correct me -- I guess if you can just answer this question, I suppose -- what are you seeing in terms of pricing in the general marketplace sort of away from the specific actions that you guys have been taking to accelerate product placement?

I just don’t think there’s anything that we would look at that we would say is really outside of the trends we’ve been seeing. If anything, I think there is a level of cautiousness about profitable revenue growth in the industry, so we are not seeing anything that really is out of the ordinary. As I said, we did decide that accelerating the mono production business was a very wise thing to do in terms of the size of that market and the rest of our portfolio, and it’s working. Obviously we didn’t anticipate some of the currency impacts from a YEN perspective that we had to absorb during the quarter, but I think that overall there is nothing. Ursula, have -- from your perspective?

No, I think that you said it all. In the high-end cut sheet area, we took actions to drive placements but in color, across the board office and production, we see nothing out of the ordinary.

And Global, which has a great pulse, if you will, on the marketplace in terms of the SMB market, really hasn’t seen anything from a pricing perspective that’s impacted their margins.

Thank you and then just one last one, going back, circling back to the demand comments, if I could. It does seem from a broader IT, hardware perspective, demand has certainly softened in the U.S. some and it sounds like based on our checks, this is broader IT hardware, that Europe is kind of following a couple of months behind. So do you get any sense that -- it sounds like you are not seeing an impact to your European demand yet, but do you get any sense that something could be coming up over the next couple of months based on conversations you are having with customers? I guess that’s the first part. The second part, it sounds like you are saying Global is holding up kind of relatively well, maybe in line, putting up the kind of growth that they’ve been putting up in SMB in the U.S., which is pretty impressive given that SMB in the U.S. has been slowing markedly for general IT products. Do you get a sense that Global will be able to continue putting up those kinds of growth numbers as we move through the middle of the year here?

Europe first -- I think one of the things about Europe is that we actually have, if you looked at the portfolio in Europe, there are more -- there’s more of a services content in terms of contracts in Europe than there is anywhere else in the world. So very big services deals, very big portfolio of pipeline for services opportunities, and I do think that the services business is more resilient than the hardware business and so we actually get a relatively stable and even bullish outlook from Europe in terms of the impact that our services offerings are having in Europe. So I think that really is a help and so we are not as concerned about a downturn in Europe in general. And on Global, from a trends perspective, we are really pleased. I think it is important to note that first quarter of last year was their last fiscal quarter. They were on a different cycle than we were. It was their strongest quarter, so the compare clearly put pressure on their equipment sale performance. Their post-sale was great and we are not at all concerned about the trends that Global is on. We think they’ve got just an extraordinary discipline in delivering results, although the compare was a really tough one based upon the physical cycle, everything else looks great.

Thanks a lot, very helpful.

Your next question comes from the line of Chris Whitmore with Deutsche Bank.

Thanks very much. You mentioned some of your channel partners are reducing inventories. Can you give us some color where channel inventory levels are and the magnitude of the impact in the quarter?

I can give you some general numbers here but I would look at it and say just year over year, the impact to us was about -- I’d say about an $8 million profit impact, which you would translate into something like a $15 million to $20 million revenue impact in the -- for inventory levels in the channel, which is substantial but not unusual. We’ve been in these areas before and I do believe that it’s cyclical and they do come back and clearly this is one that we think will come back as it relates to channel inventory. So the difficult part of it is just that because of the flow through of profit from consumables, it really does have a big hit in terms of the profit perspective, but there is no question it will come back. If you look at the equipment sales, I mean, look at the 35% growth in color printers. There is nowhere to go but up in terms of catching up on the supplies perspective, so we do think it was kind of a tactical move in the quarter that has to repair itself over time.

And do you have a sense as to where those channel inventories are now? Are they going to continue to worsen lower do you think over the next couple of quarters or is that behind us at this point?

I don’t think -- I mean, I don’t think I want to share the specifics on channel inventory levels but I think that the strength of equipment sales would suggest to you that it would be difficult to actually manage the inventories any lower.

Okay, and second question relates to just printing volumes overall in conjunction with the economy. Are you seeing your customers -- any pressure there on volumes? And related, are corporates printing in color less on some of the color capable devices? Are you seeing any usage pattern changes in color printing? Thanks.

I think the answer is no. I mean, color pages were up 32% in the quarter. The average for all of last year was 31%, so we think color pages would indicate we’ve got a really consistent level of color printing. I do think it’s fair to say that there is more printing on color enabled devices, so that some of those may be kind of more black and white in nature, just based upon what color enabled does. But the overall pages coming from color devices is staying quite robust, which we are quite pleased with.

One final question for Larry; Larry, bad debt was up slightly in the quarter and you sold about $200 million in receivables. Can you talk just generally about your customers credit quality -- you know, DSOs, et cetera, and payment and the general health of that book? Thanks.

Well, generally speaking we were quite pleased with the aging and payment and the way AR is going. I mean, I think there are always areas in AR where you can improve DSOs but we’ve had really good improvement in DSOs over the last couple of years. We don’t see any real pattern, a negative pattern at all on receivables and I think you get these onesies and twosies of ups or downs adjusting the reserve, but we are comfortable with where it is right now -- don’t see any real change.

Okay, I think there’s time for another question.

Your last question comes from the line of Shannon Cross with Cross Research.

Good morning. Just a couple of final questions; Anne, maybe you could talk with regard to what’s been going on with your equipment sales. Obviously you’ve had substantial growth in terms of shipments, very strong placements this quarter, sort of I think accelerating but continuing the trend you’ve seen over the last few quarters. How should we think about what’s going on within your MIF, when we are going to start seeing it more reflected in post-sale? Just your thoughts on sort of how this trends and how we should be thinking about the year as we go forward, so that we do start to see again a reacceleration on the post-sale line.

Well, I think as we look at it, and that chart that Larry shows, which is really the indicators for annuity, gives us a lot of confidence with regard to post-sale. I mean, you can have an anomaly in a quarter just because 90 days, you can have some shifts in terms of, you know, whether it’s billing or supplies or that kind of thing. But those indicators really are the key to post-sale acceleration and the real keys are color and with 32% page growth, and we are seeing digital MIF growing, we’re seeing color MIF growing very nicely. So services growing at 8% -- I mean, all of those clearly are the way we look at what the future is going to bring in post-sale and I think we do believe that over the course of the year as we look back, you will see very good progress in post-sale, and it’s why we keep focusing so much on activity and making sure that we report activity growth because it truly is the best indicator for drivers of annuity.

Okay, and I’m sorry if I missed it, but did you give what your total MIF has done?

I didn’t. I can. Total MIF has grown 3%. That includes everything, Shannon, so it’s light lens included, all -- digital MIF rose 7% and our color MIF grew 39%, so if you look at the trends, as we looked at full-year 2007, MIF was growing at 2%. In the first quarter of ’08, it’s 3%. Digital MIF is stable and color growth went from 35% full year ’07 to 39% in the first quarter, so there is nothing that doesn’t look good in terms of install activity and MIF trend.

Okay, great. And then if you could just talk a little bit, I mean, there’s obviously been a lot of things going on on the distribution side with Danka and Konica, and you know with what Ricoh is doing and with IBM, if you could just talk a bit about what you are seeing from the competition, how you are viewing -- obviously Ursula talked a bit about on the color side with the Canon product, but just in general how you sort of see the copier world shape going I guess through 2008.

A good indication is Ursula and I were actually down with Global last weekend and you know, we talked a lot about what’s happening in the marketplace and kind of the channel perspective. I mean, I think we see consolidation out of weakness versus out of strength, and that positions us well to gain share in that environment. So we are actually looking at it and targeting it, whether it’s the Ricoh acquisition of the IBM continuous feed or the Konica Minolta acquisition of Danka, all of that we believe creates an opportunity for us to gain share in this market, which is one of the reasons why we thought it is time to be somewhat aggressive on the marketing and coverage side because we think we are best-positioned right now to gain share. And obviously we are taking a similar strategy in Europe with the acquisition of Veenman, which is a Global-like, well-run company, great returns that sold no Xerox technology that will now be integrating Xerox technology into great customer relationships. So I think we are real clear on this one. We know where we are going and we think we are advantaged from a distribution perspective and it just keeps getting better.

Okay, great. Thank you.

Okay. Thank you very much for your participation and your interest. Have a great day.

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Good day.