Anne Mulcahy - Chairman, CEO Lawrence Zimmerman - SVP, CFO

Jay Vleeschhouwer - Merrill Lynch Ben Reitzes - UBS Warburg Keith Bachman - Banc of America Matthew Troy - Citigroup Carol Sabbagha - Lehman Brothers Shannon Cross - Cross Research

Good morning, ladies and gentlemen, and welcome to the Xerox Corporation third quarter 2006 earnings release conference call, hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by 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. After the presentation, there will be a question-and-answer session. (Operator Instructions) During this meeting, Ms. Mulcahy and Mr. Zimmerman will make comments that constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect management's current beliefs, assumptions and expectations, and actual results might differ materially from those projected in these statements. Information concerning factors that could cause such material differences is included in the Company's 2005 Form 10-K and second quarter 2006 Form 10-Q filed with the SEC. We do not undertake to update these forward-looking statements as a result of new information or future events or developments. At this time, I would like to turn the meeting over to Ms. Mulcahy. Ms. Mulcahy, you may begin.

Thank you. Good morning, everyone, and thanks for joining us today. If you'll turn to slide 4, you'll see a summary of our Q3 results. We delivered earnings per share of $0.54 and net income of $536 million. That's on a GAAP basis and includes a $0.45 benefit from finalizing a tax audit, partially offset by $0.07 from restructuring and $0.07 related to litigation matters. So, excluding these items, we're reporting adjusted EPS of $0.23, an increase of 28% from Q3 of last year and ahead of our expectations. We delivered steady improvements in revenue consistent with our growth strategy and trending positively. Total revenue up 2%. Post sale and financing revenue grew 3%. Color, which now represents 36% of total revenue, grew 16% in the quarter. In a bit, you'll hear me talk about the success of our new color products, key drivers of our continued leadership in this important market. Gross margins were 40.2% in the third quarter, down about a point. Larry will talk more about the margin dynamics this quarter, but in short, the decline was primarily due to product mix and equipment pricing. Margins were also lower in Global Services, as we incurred upfront costs to support new multi-year contracts. We did see this issue during the quarter and responded to it by capturing efficiencies in SAG and R&D. As a result, we still delivered on our earnings expectations, while making the necessary investments in pricing and ramping up significant services contracts. With that, selling, administrative and general expenses declined 1.3 points in the quarter. The balance sheet remains solid; we generated $530 million in cash from operations in Q3 and are at $897 million year-to-date. Our cash and short-term investments are $1.5 billion. That gives us flexibility to continue moving ahead with our acquisition strategy. We closed on the Amici acquisition in Q3 and announced our plans to purchase the variable information software company, XMPie. We've repurchased $1.1 billion in Xerox stocks since launching the program a year ago. So solid momentum on several fronts. I'll provide more detail on the revenue picture, then Larry will discuss the financials, and then I'll be back to wrap up and we'll both take your questions. So, if you'd like to turn to slide 5, you'll see a look at our revenue trends, noting the year-over-year compare in actual and constant currency. Currency did turn favorable this quarter, adding a 1 point benefit. Total revenue in the quarter was up 2%, largely due to the 3% increase in post-sale revenue, which represents about 75% of total revenues. The leading indicators of our growth strategy continue to trend positively. We're boosting our annuity stream through growth in Digital, Services and Color. Post-sale from Digital was up 4%; Color post-sale was up 16%. And document management wins increased post-sale from Services by 7%.The decline from our legacy Light Lens business cost 2 points on post-sale, and without the impact of Light Lens, which was about $78 million, post-sale would have grown 5% in the quarter. The revenue dynamics continue to shift as expected, with equipment sales providing less leverage, as the more profitable annuities stream kicks in from Color and our Services-led enterprise wins. Equipment sale revenue was down 1%; three factors came into play here: First, declines in high-end black & white production were only partially offset by stronger sales of light production and production color devices. Two, as expected, we continue to make pricing investments, especially in the office, that have an impact on equipment sale revenue, but also serve to drive activity growth. This dynamics played out in DMO as well, with significant sales of Segments 1 and 2 office products that deliver more leverage on post sale than on equipment revenue. Three, as we shift to more office services deals, the install activity associated with these deals are recognized as operating leases and not as equipment sales so we don't get the immediate benefit in the equipment sales revenue line, but it flows through to post-sale. That is why install activity remained such an important measure for us, and indeed, remained strong for several key markets. We launched 11 products through the third quarter, and last week announced enhanced features to our production and office systems. This innovation is driving accelerated activity, especially for our WorkCentre multifunction devices and our production color system. We continue to generate more than two-thirds of our equipment sales from products launched in the past two years. So now, if you'll turn to slide 6, we will take a look at activity. This slide represents year-to-date install trends. When I review the business segment, you'll see the quarterly install numbers. In the office, we're seeing a strong pickup in color, with MFDs up 34%. Installs of office black & white increased 7%. The majority of the activity is driven by growth in Segments 3 through 5, which generate more pages than desktop units and yield a greater return in post sale. Installs of high-end production systems are down 16%. Some of that activity is shifting to color. Even more of it is moving to mid and light production markets, with 19% growth in light production. We're quite pleased with the progress we're seeing with Nuvera, steady improvement in sales since launching the advanced features earlier this year. You'll see here that color install growth is off the charts at 99%. That is due to strong growth in iGen activity and the DocuColor series. So now, turn to slide 7 and see how color played across the board. I always start this slide with a reminder that Xerox has the industry's broadest portfolio of color systems for production and office environments of any size, and of course the benefit is in the pages. Color pages were up 35% in the quarter and now represent 10% of Xerox's total pages. Considering the leverage that Color has on our annuity stream, this steady increase in pages is a leading indicator of future post-sale growth. About 36% of total revenue is from Color and nearly half of all equipment sales now come from Color products, with the Color equipment sales up 17% in the quarter. We've bolstered our Color line with five new systems this year alone, including expanding the iGen3, WorkCentre Color and DocuColor families, and adding new features that enhance image quality and productivity. In fact, we recently hit the 18,000 mark for the number of DocuColor placements, a milestone that certainly exceeds production Color installs of any competitor. We continue to see a slowdown in sales of desktop color printers, primarily in our OEM products, but Xerox-branded printers were stronger this quarter. Without the impact from color printers, our Color equipment revenue was actually up nearly 26% this quarter. Again, Color now represents 36% of total revenue, up 4 points from a year ago. So if you turn to slide 8, we will take a look at the production business. Total production revenue grew 3% including a 1 point benefit from currency. Q3 installs of production monochrome systems were down 6%. Sales of the 4110 light production system drove 5% activity growth in production black & white, partially offsetting declines in higher-end production monochrome. As I mentioned, Nuvera contributed stronger sales this quarter. Last week at Graph Expo, we announced new finishing options for the DocuTech highlight color system. We expect these advanced features will drive increased interest, especially from commercial printers who are breaking into digital book publishing. Strong activity in iGen3 and DocuColor fueled a 107% increase in production color installs. Now, we have 142 customers with multiple iGen3's generating millions of color pages each month. This is a good place to provide more detail on our acquisition of XMPie. One of the key benefits of digital printing is its ability to personalize each and every document that turns off the press. It has created new opportunities for direct marketing that are generating response rates more than double that of static documents. That is where XMPie comes in. As the leading provider of variable information software, XMPie enables multimedia campaigns with personalized e-mail, website and, of course, catalogs, brochures and other documents. Since Xerox is a leader in digital printing and XMPie's largest reseller, it made perfect sense for us to capitalize on XMPie's projected growth by running it as a stand-alone business in Xerox. Response to the pairing of our two companies has been quite positive, and we expect the deal will close in the next couple of weeks. A quick note on Graph Expo. I was at the show last week, meeting with customers and partners who continue to demonstrate amazing progress in growing their businesses through digital printing. The show was a huge success for Xerox, highlighting the breadth of our products, workflow and services offerings and generating multi-million dollar orders, including multiple orders for iGen3's right from the show floor. So if you turn to slide 9, we will do a review of our office business. Total office revenue was flat in the third quarter, including a 2 point currency benefit. Revenue was impacted by pricing investments of 10%, the high end of the range we've talked about in the past. Again, our strategy in this space is to drive major placements of Segments 3 through 5 multifunction systems, which generate higher volumes of pages and fuel our annuity stream. Q3 activity is evidence that the strategy is working. Install growth in Segments 3 to 5 was up 19%. The pace of growth in color printers, primarily from OEMs, did slow this quarter, with color printers down 6%. They did have a tough compare from an especially strong Q3 of last year. Installs of office color MFDs grew 46% in the quarter. These solid growth rates are largely driven by the new WorkCentre color systems launched in May and the continued success of the office version of the DocuColor 240 and 250. As I mentioned, as we ramp up for some of our big contracts, we're incurring upfront costs that do have an impact on margins. Larry is going to discuss this more in a bit. We're also working through longer lead times to finalize services-driven wins. As a result, signings for document management services were about flat in Q3, but are up 16% year-to-date. Those wins are flowing through to support our annuity stream, with post-sell revenue from Services up 7% in the quarter. Results in DMO continue to improve. So take a look at slide 10. Revenue was up 7%; equipment sales up 7%; and post-sale up 7%. We are continuing to see strong demand in DMO countries for our Segment 1 and 2 MFPs so we are expanding our channel offerings in this space, targeting the small- and medium-sized businesses with affordable, high-quality multifunction devices. At the same time, we're encouraged by increased install activity for production systems, specifically light production and production color. And DMO's operational improvements continue to expand its operating margins. So positive trends on all fronts in DMO. So now, I'm going to turn it over to Larry for the financial review, and I'll be back to wrap up and share what we expect for Q4. And then, of course, Larry and I will be pleased to take your questions. Larry?

Thank you, Ann, and good morning. Third quarter results accomplished our goals of growing annuity revenue, expanding earnings and generating solid operating cash flow. This performance, along with share repurchase and acquisitions, continues to bring value to our shareholders. The basic theme this quarter is consistent with past results. We installed significant volumes of equipment to drive future annuity. Equipment sales growth was impacted by mix of products, price and operating leases. We continue to see post-sale grow, driving total revenue growth. Gross margin was lower this quarter than our model; this was primarily due to equipment pricing and mix, as well as managed services, where we had large contract wins either starting up or scaling. Excellent expense management more than offset gross profit margin pressure. We expect this will continue as we restructure and balance our gross profit margin expectation, with a more efficient SAG and R&D going forward. Earnings growth, 28% on an adjusted basis, was driven by income before tax, a better tax rate and fewer shares outstanding. Finally, cash flow was quite positive, continuing to support our business model. So please turn to slide 12 to review progress on our post-sale business. Let's start at the bottom to see the benefits of Color growth, 16%, and Services growth of 7%. LightLens is still a 2% drag, but the dollars continue to get smaller and will have a smaller effect next year. With continued growth in digital and DMO, total post-sale grew 3%; that is 2% on a constant currency basis. We expect all of these positive trends to continue. Slide 13. The earnings chart is consistent with the format we use to distinguish adjusted items from the underlying business trends. It is also consistent with last year's third quarter data. The top part of the chart represents the underlying ongoing business results, 2% revenue growth driven by post-sale annuity. Gross profit margin of 40.2%, down 1.1 points from last year, driven by Equipment and Managed Services. Equipment is the result of mix and price investments to drive volume to support our annuity business. The margin impact from Managed Services is really the result of our success in winning large global services contracts. We add people and infrastructure to support the contracts, often prior to the buildup of revenue. The result is an initial impact on margin; however, as these contracts reach a steady state, the revenue generating from the deal helps to improve overall gross margin. This is the nature of the Services business as it scales, but like the operating lease impact on equipment sales, the initial upfront costs will support growth and profitability in the future. We demonstrated what we have said many times before: we focus on bottom-line results and adjust our model to compete and deliver. This quarter, SAG and RD&E were better year-over-year and more than offset the decline in gross profit margin. We reduced SAG $26 million and R&D by $12 million. We did so without reducing coverage or cutting our investments in innovation and important engineering. Instead, reductions came through general and administrative areas, where we continue to capture efficiencies in our value chain and improve our cost of competitiveness. In fact, our restructuring in the third and fourth quarters is aimed at adjusting our model to the current business environment, giving us even more flexibility to invest for future growth and expand earnings. We believe it is prudent to adjust our business model going forward to lower SAG and RD&E in order to comprehend the 40% to 41% gross profit margin. Again, we will not reduce coverage or product development, but will look at several opportunities to streamline our operations. We still believe there is opportunity to reduce cost of goods sold and improve gross profit margin, but for now, we thought it important to clarify the dynamics of our current business model, setting realistic expectations on how we will manage the business to continue expanding earnings, while competing effectively. GAAP earnings for the third quarter were $0.54 per share. Take a look at the boxed area of the chart to review the remaining elements of the P&L, other net, restructuring and tax rate. You'll recall the after-tax adjustments in the third quarter of '05 were: $26 million for EU waste directive and accounting changes; $88 million of litigation matters, principally the MPI arbitration panel ruling, which is still in appeal; and $11 million of restructuring. This year's after-tax adjustments are: a $68 million charge for probable loss on previously disclosed labor disputes in Brazil; tax audit settlement for the years 1999 through 2003, which we previously announced at a favorable $448 million; and $72 million of restructuring. The tax audit settlement was disclosed in our second quarter 10-Q filed on August 4th. At that time, we estimated after-tax restructuring in the second half of the year would be in the range of $125 million to $175 million. We now estimate about $200 million of after-tax restructuring in the second half; that would be about $130 million in the fourth quarter. Excluding these items, our adjusted net income is $228 million, up 21% year-over-year, and 28% on an adjusted EPS basis. Our adjusted tax rate was 26% for the quarter. So a quick summary. Significant adjusted net earnings growth of 21%; significant adjusted EPS growth of 28%; strong performance in cost and expense management; gross margin decline of 1.1 points, offset by SAG, RD&E improvement of 1.7 points; 40% to 41% gross profit margin expectation going forward. Slide 14. The cash story remains quite positive. We had core cash flow and total cash flow from operations of approximately $500 million, which was essentially driven by earnings. Year-to-date we're at $740 million of core cash and $897 million of total cash from operations, keeping us on track to meet the high end of the $1.2 billion to $1.5 billion range. Cash from investing included the closing of our acquisition of Amici, as well as CapEx. Cash from financing is driven by our unsecured debt offering of $650 million, $260 million reduction in secured debt, with another $250 million to $300 million expected to run off in the fourth quarter. Year-to-date, we have reduced secured debt by $1.2 billion and replaced it with unsecured debt at attractive rates to support our financing business. We have used $689 million in cash this year to repurchase approximately 47 million shares. Since launching the program a year ago, we've used $1.1 billion to repurchase approximately 78 million shares. At the end of September, 965 million common shares were outstanding. Slide 15. Our balance sheet and capital structure are meeting our goals, investing in our business and rewarding shareholders. As I've mentioned, cash flow is on track and has been consistent quarter after quarter and year after year. Healthy cash balance enables run off of secured debt and our share repurchase in the fourth quarter. Our financing business will remain leveraged at 7:1. The $1.25 billion credit facility and the investment-grade credit rating from Fitch give us optimistic opportunity in this area. Total secured debt was 32% of total debt versus 49% year at year end 2005, and getting lower. Essentially, we have no core debt. In addition to share repurchase, we've announced two strategic acquisitions and maintain a fully funded U.S. pension plan on a current liability basis, all positive results that position us well going forward. On that note, I'll end where I started. Our third quarter results demonstrated steady improvement, with revenue growth through annuity, expanded earnings and strong cash flow. Our strategies are yielding. And now back to Anne.

Thanks, Larry. So here is a quick summary. We are pleased with our revenue and activity this quarter. Post-sale is up, leading with Digital, Color, Pages and Services, and strengthening an annuity stream that serves us well for the long term. Equipment installs in key markets, especially Color and Office Multifunction, remain strong. The 11 product launches this year alone plus advanced product features keep us on a steady pace for continued activity growth. Disciplined cost controls and a focus on capturing efficiencies across the value chain are helping us expand earnings and creating some headroom for further investments. Our business is always changing with the demands of the market and our business model needs to adapt as quickly. So as previously communicated, we will do more restructuring in Q4 and expect restructuring charges of about $0.13 per share. As Larry noted, our cash position is strong and we're investing it and areas to grow our business through acquisitions and to build shareholder value through stock buyback. So for Q4, we expect adjusted earnings in the range of $0.34 to $0.37 per share, excluding the $0.13 of restructuring. This keeps us in line with delivering full year adjusted earnings of $1 to $1.07 and earnings expansion of greater than 10%. So thank you all for listening, and Larry and I will now be pleased to take your questions.

(Operator Instructions) Your first question comes from Jay Vleeschhouwer - Merrill Lynch. Jay Vleeschhouwer - Merrill Lynch: Thanks. Good morning. Anne, with respect to the gross margin outlook, what can you do more on improving your cost of goods? You're expending hundreds of millions of dollars a year, of course, with Fuji Xerox and Flex, plus other suppliers. What can you do, if anything, to help bring down those costs on a per-unit basis or by any other means in terms of improving the effectiveness of your supply chain, for example?

Yes. I think maybe this is a good opportunity, Jay, to take you through a little bit of what we're focused on with our restructuring efforts, because a lot of it is focused on gross margin improvement. We do believe it's an opportunity. I think from a planning and expectation perspective, we thought it was prudent to plan for 40 to 41, but really look at the opportunity in front of us to improve gross margins by a very focused restructuring effort. So there are some things that we've done and that are in process. We've actually moved our production procurement to China, and we do believe that is going to yield some good results. We're continuing to have opportunity in our technical services infrastructure, and that will also be part of our restructuring actions in the second half. Global back office efficiencies, which are more SAG related, but clearly help us from an expense perspective, are certainly enabled by some of the things we're looking at, like some selective offshoring activities. We're real pleased that our R&D productivity continues to progress, and we think we can use some restructuring to enable some continued productivity in that area. You are right, supply chain optimization is a focus. As a matter of fact, we've had multiple pilots running throughout the world, testing some different supply chain efficiencies, particularly as it relates to two-tier distribution. So that as well will be a target and enabled by the restructuring. So it is across the board. I think we've really got an opportunity for continued value chain improvement. As I said, a lot of that is aimed at gross margin improvement. So that is opportunity for us going forward. Jay Vleeschhouwer - Merrill Lynch: Similarly, what are you doing or what you do you need to do more on the sales and support side in terms of improving sales productivity, reorienting direct and indirect sales in any particular way, given the complexity of the product line now, and some of the new verticals that you seem to be targeting, as you did at Graph Expo last week?

Yes. I think it's all about much more pinpointed and channel-specific strategies on the sales side. I mentioned that we're so pleased with the progress that has been made at DMO that were really using DMO to be an engine of growth, particularly for the SMB side. So both with new and expanded product offerings appropriate for the SMB market that certainly play in Europe and North America as well, but the huge opportunity is in the DMO market. So both from a product and a channel perspective, I think expansions there. Certainly we really are seeing opportunities to optimize our coverage in terms of the way we cover the marketplace from a major account and a services perspective that give us some efficiency, but actually improve our coverage and productivity. So we believe that as we continue to ramp up our services capabilities, particularly, that we can integrate some of those sales resources in front of the customer and really have good productivity impact. On the PSG side, the production side is all about verticals. I mean, more than any other company, we've invested, obviously, really aggressively in a graphic arts sales force, which I think is an enormous differentiator for the company. Now we're building expertise in a lot of areas. You saw at Graph Expo the focus on book publishing, which we think is one of the most exciting and emerging market opportunities for digital. So it's going to be all about applications and vertical penetration, which I think allows us to be efficient from a sales perspective, but really capitalize on the high-growth markets. So all in all, we believe that our focus on these kinds of sales investments will be an opportunity in terms of growing the overall revenue base. Jay Vleeschhouwer - Merrill Lynch: Lastly, just in terms of market trends, it was an interesting presentation last week by InfoTrends, the research firm, at Graph Expo, about where the pages are going to be coming from. On the one hand, they believe that there has been a large, proportionate increase in very short-run prints; in other words, 500 pages and less have become the faster growing part of the market, according to them. On the other hand, they also foresee a massive increase in large duty cycle prints, hundreds of thousands if not millions of pages a year, with the most rapid growth coming from high-speed inkjet rather than toner. So, how do you see yourselves being positioned for one or both of those?

Well, I think we would agree. Certainly, if you look at the entire production portfolio on the digital cut sheet side, I think it is benefiting from the growth in the short-run print-on-demand personalization trends that we see across the board, obviously with iGen and DocuColor. On the mono side, we're breathing life into mono with things like book publishing and highlight color, which allow for a lot of those short-run applications, like teachers' edition books, to be done so efficiently. On the very high end, I think there is a little bit of a bifurcation, and we certainly plan to participate in that as well, both through continuous feed and the product opportunities we have with as you know, the Fuji Xerox, Fujitsu continuous feed portfolio, which we are certainly very pleased about. As well as some of the technologies that we are bringing on market as well, from solid ink to also staying very open to other inkjet technologies that play well within the Xerox portfolio. So I don't think we're tied or biased, if you will, to any single technology; this is about the pages. We will continue to develop and exploit, if you will, the strength on the cut sheet side, and as well, do more as it relates to the high-end, high-volume kinds of applications in the large duty cycles as well. Jay Vleeschhouwer - Merrill Lynch: Thank you.

Your next question comes from Ben Reitzes - UBS. Ben Reitzes - UBS Warburg: Good morning. Thanks a lot. I wanted to ask about the restructuring, $0.13 in the fourth quarter. I think you said you'd continue to do restructurings on the last call but that one seems a little bigger. And I was wondering what kind of savings come to the bottom line from the restructurings and whether they end after this quarter?

Okay, so let me just remind you, when we actually put out the announcement on the tax refund, we did estimate about $125 million to $175 million restructuring on an after-tax basis. We are now looking at about $200 million, so slightly above, but not significantly out of range in terms of the outlook. That gets split with about $70 million or $72 million in Q3, and then another $130 million or so in Q4. So it is somewhat leveraged into the fourth quarter, strictly because of time reasons to really do the planning required. We do believe that this is really focused on the kinds of things that will position us well for the future in some of the things that I just ran through in terms of the impacts on improving gross margin, as well as the continuing focus on expense efficiencies make a lot of sense. This is, I would say, less reactive as it is really thinking about optimizing future growth and profitability. Obviously, we think this is a real investment in terms of leveraging future earnings. So we saw it as an opportunity. We have identified exactly what those actions are and how they will impact the business going forward. The whole point of the restructuring is to enable both the productivity on the revenue side, but the leveraged earnings we've been able to deliver to date that we want to continue to be able to deliver in the future. I don't think anyone lives in a world where you can say we are done. I think we continue to be opportunistic about it. We're not holding back, if you will, so we're taking advantage of everything we see possible in Q3 and Q4 announcements to really address and get in front of this curve. So there is nothing that we're holding out on that we would anticipate in the future, but that doesn't preclude us from saying whenever we see opportunities to get more efficient, better aligned and we can do it and still meet our GAAP expectations, we will do that, because we think that is the best way to serve our shareholders. Ben Reitzes - UBS Warburg: Two more quick ones. Larry, if you could just tell us what tax rate we should be using now and in the future. I believe it is 31 or so percent in the fourth quarter? And then, Anne, if you could just comment on the competitive environment and what you are seeing with pricing, maybe not only in the 4Q, but what you think you'll see into next year, with some of your competitors coming out with products that are well anticipated.

Yes, Ben, in the fourth quarter we are saying 31% for the tax rate. Going forward, we will, at the investor conference, address it again. But normally what we do is we look at statutory tax rate; it's about 34% or 35%. We try to forecast what sort of discrete items we might have in the future and then give you a better idea of what 2007 will look like.

Ben, just on the competitive environment. I should mention that pricing really hasn't changed a great deal in terms of pricing pressures and investment throughout the course of the year. We've talked about around a 5% price investment on the production business, anywhere 9%, 10% on the office side. So that is not inconsistent with what we saw in Q3. It was clearly leveraged in a couple of areas, the office black & white being the one that we were most aggressive on and was at the high end of that price investment range. But we really are pleased with the results of that. If we're going to invest in pricing, it's going to be to drive the technologies that drive the most pages. That is why we are so focused on Segment 3 to 5 Office, because it is money in the bank for the future. On the environment, I'd put the most competitive part of the environment, it continues to be the very low end of color printers. We're seeing that in terms of the pressure on our OEM partners, in terms of some of that performance, although we were really pleased with our own branded activity, which was up 13% this quarter. Our branded color printers are also at the high end of the product range, which drive more pages. So given our druthers, our preference would be to have a more significant performance in the branded printers. But we do see continuing pressure at the low end of the color printing. As you know, there is a lot of color announcements by competitors, some of which are not yet out on the market and have been delayed to next year, I know you are aware of, but we are prepared for that. That is why we have continued to make sure that the portfolio is completely filled out and competitive. We have the benefits of being out in the marketplace first, which is always the best place to be. Therefore, we also have some opportunity to be flexible and adaptable to make sure that we are aggressive in the marketplace, as competitors enter into the marketplace. But we know who they are, we know clearly where the strengths and weaknesses are, and we're positioned to be very aggressive and maintain our growth rates in the marketplace for Color. Ben Reitzes - UBS Warburg: Thanks a lot, Anne.

Your next question comes from Keith Bachman - Banc of America. Keith Bachman - Banc of America: Good morning, everybody. Thanks for taking the question. I just have a couple. Anne, with XMPie, you guys have started off on a little different course. It looks interesting. Maybe you could just back up and tell us how you are thinking about the opportunity to look at acquisitions to fill out or extend what Xerox currently does.

Yes. Well, I think when we talked about acquisitions in the past, we said our number one priority was really the expansion and acceleration of our Services business. That certainly was characteristic of what we did with Amici in terms of the litigation support practice. And we continue to, I think, hold that in very much of a lead priority position in terms of our Services expansion. But the opportunity for us to acquire XMPie was really significant in terms of value creation and, quite frankly, support for our production business, which really is so well supported by the value of XMPie software. It was almost just a no-brainer for us to say that we already are such strong partners, why not take advantage of 100% ownership of this, still manage it as an independent entity, and quite frankly acquire the skills and capabilities in the software area that have not been our forte in the past. So, we built on our competency portfolio. It's an absolute logical fit in terms of the value created by our production suite of products. We have great experience with them, and this is a low-risk, high-value opportunity for us to drive more pages in the production area. So I wouldn't preclude that there could be more of those as well. I think our acquisition strategy is all about value creation, and XMPie was a really good fit there. Keith Bachman - Banc of America: Anne, just to follow up, would you think that if there were to be additional acquisitions, they would be more in the production side of the business?

I think on the software side, because the production side of the business is so applications-driven and vertically focused, I think it makes more sense as it relates to acquisitions in that space. But I wouldn't preclude, I think the Office business actually is better supported by some of the Services verticals that are more horizontal in nature than perhaps the production business. So my take would be right now that on the Office side, we will be looking more for Services extensions, and in the high end it will be all applications-driven, which probably has more of a software flavor to it. Keith Bachman - Banc of America: Okay. I have two real quickies then. XMPie is supposed to close here shortly. That is part of your fourth-quarter guidance?

Well, we've said basically that it is immaterial in the fourth quarter. But we do expect it to close in the fourth quarter. Keith Bachman - Banc of America: Okay. The last question I had, Larry, when you mentioned that the earnings growth, the adjusted earnings growth was 21% this quarter, could you just refresh my memory, what was the tax rate that compares to for last year?

I think it was 31%. Keith Bachman - Banc of America: Thanks very much, guys.

Your next question comes from Matthew Troy - Citigroup. Matthew Troy - Citigroup: Good morning. Thanks much for taking the question. I had a few. I guess first of all, I'm trying to reconcile your commentary about pricing. Specifically, in your words, pricing really hasn't changed so much year-to-date, yet you are citing pricing at the high end, 10% or so, as one of the reasons you are re-contemplating your gross margin guidance. So I'm wondering how do you reconcile the two? You're obviously the ones out there that have been leading on the price investments. Is it commoditization creeping up faster than you would have expected in some of the low-end color? Are you seeing something competitively from Canon near-term and some other folks perhaps in the medium term that says it makes sense to turn the dial a little bit more aggressively on pricing? If you could just help me, just a little bit more detail there. I have some follow-ups. Thanks.

Okay. So I was talking about an average pricing year-to-date, average pricing investment and when I said 10% at the high end, that is at the Office level. It is not 10% of the production; it's about 5%, and it averages generally 3% to 5% in the production market. So that has been much more modest. When we talk about pricing investments, we're talking about equipment sales. You know, it's not on the post-sale stream, which obviously represents three-quarters of our revenues. So I think we think about the pricing investments on equipment as being the acquisition of the customer, if you will, that allows us to capitalize on the post sale. The high end, I think what we're finding is that it makes good sense for the business to drive really strong activity rates, get the placements, win in the marketplace, and therefore put more pressure at times on the gross margin driven by the equipment side of this business, so that we ensure the best possible fuel for post-sale streams down the road and post-sale growth down the road. So I would say that it is really the implications of that. I think the other thing that we're looking at as well is that as we saw 7% growth in our Services annuity business in Q3, that is really good news. We expect that to continue. Quite frankly, the more we can get growth in Services annuity, it does put a little pressure on the gross margin, but it's really good news on gross profit. That is a trade-off and that is actually the strategy for our Services business, is to leverage gross profit, even though it won't be at the average of the equipment business from a gross margin perspective. So when we add all those dynamics together, Matt, we think it is prudent to actually plan potentially for a little pressure on gross margin in the short-term and still make sure that we can meet the overall expectations of the business. So it is prudent planning. We do expect that over time we can improve gross margin based upon the restructuring investments that we're making. But in the short-term, we don't want to sacrifice the engine of growth that drives our post-sale business, which is quite frankly being aggressive upfront and driving the activity appropriately into the market place. Matthew Troy - Citigroup: I understand the strategy. I guess two follow-ups, one to that point. I guess part of my question was geared towards Canon's product cycle and others. Do you see something in terms of the sacred cow, the aftermarket, the annuity stream, in terms of some of the pricing plans they have put forward are fairly aggressive on a per-page basis? Now granted, you can put forth your best foot in any kind of marketing presentation. But you folks have historically talked about a 5:1 to 6:1 ratio, color to black & white revenue per page. Do you see that all at risk in the coming product cycle? Is that is that perhaps fueling some of the pricing investments? And then I have one follow-up. Thanks.

Well, I mean, in the current world, obviously Canon is late to market with their 70. So we have not seen any, obviously, activity from them at all that would suggest that that's driving any particular price pressure in the current. We do see, generally speaking, some modest, if you will, pricing declines. But the 5:1 ratio still holds in the aftermarket in terms of revenue and profitability. And by the way, if you look at any of the announced products, there is no breakthrough from a technology perspective that should provide any specific leverage, if you will, to the overall economics of the post-sale stream. So we work on things like consumables, solid ink, a whole set of capabilities that will allow us to drive price down when appropriate to accelerate the adoption of color. But we feel we are pretty well positioned for that, Matt, and better positioned than most, having a huge profile already in the marketplace with regard to our color installs, great technology capabilities that should allow us to leverage our pricing in the future and maintain the profitability; and nothing on the horizon that would suggest there is any really distinct advantage from a pricing and profitability perspective with any of the new entrants in the marketplace. Matthew Troy - Citigroup: Okay, and one last question. Just in terms of industry verticals, obviously graphic arts, commercial print, a nice area for you folks. It's nice to walk around Donnelly's facilities and see your presses populating their floors. But I wanted to talk, outside of commercial print, I raised an eyebrow at Photokina a couple weeks ago, you folks had a bigger presence than I remember in the past with a partner there. Also at Graph Expo, showing some photofinishing capabilities, the iGen. Very interesting. I was wondering if you could talk about some of the alternative verticals, be it packaging, be it photofinishing, where you are focusing the iGen, where you are focusing the DocuColor, and what you see over the next six to 12 months. Thanks.

Yes. I think we have been a little low key about it; I think you'll see a lot more to come. But there is no question that we are starting to play significantly in the photofinishing market, and that we believe there is going to certainly be some Lighthouse announcements in terms of iGen as the technology of choice in that market. You may have seen at Graph Expo we've announced some image enhancement capabilities for iGen that are totally focused on the photo market. We've actually partnered with some of our customers in that area to make sure that the iGen is well positioned to capture a big share of the photofinishing market. So I'm really excited about that. I think that we have selected installs right now that are doing some wonderful things with packaging applications that truly we have not yet exploited, and we believe that is an opportunity in the future as well. So, I think we consciously started out to really make an impact in the broad-based commercial print business, printing marketplace. And now our opportunity to really focus on things like photofinishing and packaging represent significant growth opportunities in the future. Matthew Troy - Citigroup: I thank you for the color and I look forward to the Lighthouse announcement in photofinishing. Good to see you guys there. Thanks.

Your next question comes from Carol Sabbagha - Lehman Brothers. Carol Sabbagha - Lehman Brothers: Thanks very much. A couple of quick questions, Anne. Just a clarification on gross margin outlook. I take it from your comments and Larry's comments that we're looking for gross margin of 40% to 41% in the fourth quarter. But it seems like that is a little bit more of a longer-term outlook also, until the restructuring savings start to kick in. Is that a fair takeaway from what you said?

I would not say it's a fair takeaway necessarily in terms of Q4. I think we're looking at this and saying over the next few multiple quarters, an average of 40% to 41% is probably an appropriate way to plan, still being able to obviously deliver the kind of leveraged earnings expectations that we can. I would expect, Carol, that we could see a quarter where it would improve sequentially because of the strength potentially of our seasonality of Q4 potentially. So it's not necessarily rigid by quarter, it is really more of the longer-term outlook. You are right, and we do believe that over time that our opportunity with restructuring will drive better gross margin performance. Carol Sabbagha - Lehman Brothers: And looking out on gross margin a little bit longer term, just conceptually speaking, given how competitive the industry is, do you think if you look out over several years that it's still reasonable to expect gross margins to hold flat at whatever, 40%, 41% or 41%,42%? Or do you think in the thought process we should expect some compression every year, with that made up elsewhere in the P&L?

Well, and that's one of the reasons I wanted to describe our view on what our Services strategy is, is that Services will provide some pressure on gross margins, but it's going to be great news in terms of revenue and gross profit. So that is a trade-off that we think is very attractive that could continue to put pressure on gross margins. But in terms of overall delivery, that is going to be a win-win proposition. I think we just said 10% of the pages are now being done in color in the portfolio. Think about the leverage that Color has going forward. 48% of our equipment sale revenues were Color this quarter. I kind of believe that Color is going to be an enormous source of leverage in terms of as it gets to be a bigger and bigger part of the portfolio that it will help very much on the gross margin side. So there is a balancing effect here with some of the growth engines in the Company that we certainly believe would result in an ability to maintain, potentially improve, just based upon the portfolio of revenues that we see going forward in the Company. But I think it's important to understand the dynamics of a Services business versus a Technology business and how that plays out for the bottom line, which we think is a really good, quite frankly, balance in terms of leveraging earnings. Carol Sabbagha - Lehman Brothers: A question on the fourth-quarter outlook. What would allow you to get to the high end versus low end? Although my estimate within that range is a little lighter than I thought you might provide, given that you had talked about last quarter being closer to the high end of the $1 to $1.07. So what changed in your thought process there?

Well, I think it gets back to this discussion on gross margin. As we go through the quarter, really recognizing that we want to be opportunistic about market opportunity, but yet certainly deliver within expectations is something that I think we are doing a good job of getting visibility to and making appropriate trade-offs. So there are always decision points on things like mix and price that we will have the opportunity to look at in Q4. But I would say that the thing that would bring us to the high end of the range would be our ability to exceed some of the range of 40% to 41% gross margins. Carol Sabbagha - Lehman Brothers: Okay. And then my last quick question is on high-end black & white production. You've done a lot to strengthen that portfolio. Do we see an inflection point there in the fourth quarter, or do you expect an inflection point in one of these upcoming quarters? Or is it something where the high-end black & white production just improved slightly sequentially, as it has been doing so far this year?

Well, I think seasonality obviously helped us in Q4; it is the strongest production quarter of the year. I said it in the remarks, we're very pleased with the progress on the Nuvera production system. There is no question that the growth rates year-over-year on Nuvera are very, very encouraging and taking off. So I do think we'll see some momentum on the Nuvera side. The Graph Expo announcements, which really focused on the highlight color publishing device, this is a complex market, but that is a big deal, to get highlight color into the publishing market. It has only been available for the transaction market. So that is an opportunity. That gets obviously assumed within the black and white space; that is how highlight color is viewed. The strength of the Nuvera clearly are both positives in terms of the production market going forward. We certainly don't seem to see a lot of slowdown in light production, which has been consistently strong. So I think we are coming through a period of time that certainly has been difficult and we're focused on some enhancements that really should drive better production mono business going forward. Carol Sabbagha - Lehman Brothers: Thank you very much.

Okay. Thanks, Carol. One last question.

Your final question comes from Shannon Cross - Cross Research. Shannon Cross - Cross Research: Hi, I got in under the wire. I'll keep them very brief. Can you just give us some color on what is going on in the MIF? I think a couple of quarters ago you said it had flattened out. I'm just curious as to what we're seeing in your MIF? And then just any more thoughts on cash usage, just to clarify continued share repurchase, acquisitions, anything we are missing there?

Okay. So I think MIF continues to be good news. Total MIF is flat to slightly up, Shannon, which is great, because bottom line that comprehends both digital and all of the Light Lens degradation in the MIF. Our digital MIF is up 9%, which is very strong. The color MIF, and these are all machines in field, are up 36%, which we are pleased with. When we give you MIF numbers, it's important that we don't include printers or DMOs. So when you think about the activity that is being driven by our developing markets and the amount of activity that goes into the printer market, I think we are clearly understating MIF. But it is probably a safe way to look at a measurable compare. We think the MIF trend is nothing but good news as it relates to the impact on post sale. Shannon Cross - Cross Research: Just one quick follow-up, before we move over to cash. Can you give us an idea, if you go back to '03, your post sale net of currency was down 8% year over year. Can you give us some idea as to sort of what the MIF look liked then, just to give an idea of the sequential improvement that we've seen over the last few years?

Well, certainly if you go back to 2003, and we can validate this for you, but MIF was actually declining even higher than the actual post-sale, because the post-sale takes time to absorb the revenue implications. But the Light Lens coming out at that point in time was so much more leveraged that we had double-digit declines in MIF consistently, probably for a two or three-year period of time. Now, obviously, that turn is significant and why we highlighted MIF being neutral and the digital MIF and the color MIF growing exponentially. It's a big deal. It absolutely is the most important driver of the post-sale growth, certainly in the short term. So we are pleased. We can certainly track that back, and it's a pretty provocative story in terms of the shift in terms of double-digit declines in MIF to where we are today. Shannon, on the cash, you wanted to know what? Shannon Cross - Cross Research: Just to clarify, I mean, it is still share repurchase, even though you've got $380 million left, your focus is still share repurchase over the long-term, as well as the acquisitions you've been making? Anything else we are missing there? Just wanted to make sure.

Yes. No, I think our focus was that share repurchase is not an event, it's a strategy, it's an ongoing program. So we will continue down the path of share repurchase. We feel positive about that. We are very opportunistic in terms of what we're looking for from an acquisition perspective. Fortunately, the cash flow is enabling both of those to continue in a very strong fashion. Shannon Cross - Cross Research: Thanks much.

Let me just thank all of you for joining us again. As a reminder, we do look forward to seeing many of you at our investor conference in New York on November 20th. So thanks very much and have a great day.

Thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect your lines.