Anne Mulcahy - Chairman and CEO Ursula Burns - President Lawrence Zimmerman - EVP and CFO

Shannon Cross - Cross Research Ben Reitzes - UBS Matt Troy - Citigroup Carol Sabbagha - Lehman Brothers Chris Whitmore - Deutsche Bank Bill Shope - J.P. Morgan Jay Vleeschhouwer - Merrill Lynch

Good day, ladies and gentlemen, and welcome to the Xerox Corporation Second Quarter 2007 Earnings Release Conference Call hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President, and Lawrence Zimmermann, Executive 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, 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.

Thanks, Jackie and good morning everyone. Thanks for joining us today. If you will turn to slide 4, we will provide you with a summary of our Q2 performance. Our results reflect the strategic importance of annuities and acquisition, strengthening the top-line revenue and contributing to another quarter of earnings expansion. Earnings were $0.28 per share at the high-end of our guidance. For the first half of the year, we have delivered solid results that keep us on track to deliver a strong 2007. As a result, we're raising full-year earnings expectation to $1.16 to $1.18 per share. In the second quarter, total revenue grew 6%, largely due to post-sale revenue growth of 7%. This includes a 2-point benefit from currency. Digital, color and services remain key drivers of steady annuity growth. Post-sale from digital was up 8%; color post-sale was up 16%; and post-sale from our document management services increased 8% during the first half; all strong indicators that our growth model is delivering consistent and steady improvement. Our acquisition of Global Imaging Systems closed in early May giving us the benefit of Global's continued strong growth trend. The transition is progressing exceptionally well, and I was quite pleased with Global's growth this quarter. Our revenue results and install activity include the benefit from Global. At this point, Global does not track color revenues, so reference to color performance excludes Global Imaging. I will share more on the Global acquisition when I review our office business. In second quarter, color across the board remained a highlight, with color revenue up to 12% in the quarter. Gross margins were 40.3% in the second quarter, less than a one point decline from the second quarter of 2006, which was the highest-margin quarter of the year. Gross margins remain in line with our expectations and factor in the Global acquisition. Selling, administrative and general expenses were 25.7% of revenue, about flat from last year. The balance sheet continues to look good. We generated $388 million in operating cash flow; that's $575 million in the first half of the year, and on track with our full-year expectation. And our financial strength allowed us to buyback stock, while continuing to pursue our acquisition strategy.

So if you will turn to slide 5, here is a look at the revenue trends, and you should note the year-over-year comparison in actual and constant currency. Again, total revenue was up 6% in the quarter to $4.2 billion. The leverage from post-sale was significant with post-sale representing more than 70% of total revenue and growing 7% in the quarter, that's growth of $231 million. To provide a view of Global Imaging's results, the adjusted column on this chart assumes that Global's revenue for partial Q2 '06 is included in Xerox's results for the same period. Install activity was strong in key markets, especially color multifunction and production color. A greater proportion of our contracts, including some of our service deals, is recognized as operating leases, and not as equipment sale revenue. This revenue shift cost us two points of equipment sales in Q2, that's the revenue that benefits us in post-sale overtime, and declines in our OEM business for color laser printers cost us about a point in equipment sale revenue in the quarter. While we continue to see the impact of operating leases, product mix, and pricing investments on equipment sale revenue, the solid results from Global Imaging provided a lift in Q2. With Global and our core business, we will remain firm on competing aggressively to increase placements of Xerox Systems through new products and expanded distribution, and to bolster growth through Xerox consulting and managed services. Our results this quarter point to solid progress in install, in services annuity, and steady growth in post-sale. We said, we double our 14 product launches in 2007, and we have already reached that goal. To date, we have announced 28 new products, 10 of which are color. Our product portfolio remains the broadest in our business and in our industry, and this innovation feeds our install activity, which drives annuity growth. Our services business continues to trend favorably with mega-deals fueling an 8% increase in post-sale from services in the first half of the year, that's more than $1.6 billion in annuity from services contracts, like the one we recently signed with the United Kingdom's Department for Work and Pension. That's a Xerox-led group, and it is now the Department's primary supplier of print related services, supporting more than 2,000 offices across the U.K. It's a seven-year contract, and our largest total services win, and it reflects the strong value we have placed on partnership. At the same time, color continued to have leverage on post-sale. So, if you will turn to slide 6, we will take a look. With color, the power is always in the pages. Color page volume was up again this quarter, growing 30%, and now representing 12% of total pages, three points more than Q2 of 2006. Consider this: more than 30 billion color pages were printed on Xerox technology last year; and color pages are up, on average 29% for the first half of 2007. That means we are trending to benefit from about another 10 billion pages this year, if not more. We are strides ahead of the competition on color pages; and color pages remain our best source of annuity growth. Post-sale from color was up 16% in the quarter. Color revenue reflects good performance in office color MSPs and production color, and that's without factoring in any benefit from Global Imaging, but does include the declines from the OEM office printing. In addition, we're seeing more color product on operating leases, including DocuColor and iGen3 systems. We are spreading out the benefit of the equipment revenue for the duration of the contract and accounting for it in our annuity revenue. As a result, operating lease has cost about three points on color equipment sale revenue, but again we see the benefit in the post-sale over time. So if you will turn to slide 7, we will look at the production business. Total production revenue grew 2%, including a four-point benefit from currency, and it's largely due to the declines in high-end black-and-white printing, which is consistent with the Q1 trend. Early demand for the Xerox Nuvera EA and Nuvera 288 production systems is encouraging. It's too early to see significant contribution from these products in Q2. They launched in April and have longer lead-selling times. But we do expect that this is a second half of the year story, which will pick up in production. We are also well aware of the dynamics in production monochrome, with the market softening for high-end cutsheet. It's shifting to more light production, highlight color, or full color, and we are covered in each area, and will continue to benefit from the profitability in the total production market. Installs of production color grew 4% in the quarter due to strong demand for iGen3 and DocuColors 5000 and 8000. We have added to the products portfolio, which is already the broadest in the industry, with the launch of the DocuColor 8000AP. This product let's customers tackle a broader range of applications regardless of the paper weight or media type and that provides more flexibility, and how print jobs are run. As you know, we typically exclude our Developing Markets Operations or DMO from our production and office revenue results, since DMO is a separate reporting segment. But with DMO's expanding growth, I think it's important to start to show the leverage from our strengthened business in areas like Russia, Central Europe, and more. Production equipment sale revenue from DMO was up 20% in the second quarter, largely due to more DocuColor sales, and factoring in DMO, total production equipment sale revenue would be up another 2% this quarter. With any production device, especially color, the payoff is in the pages; production color pages were up 27% in the quarter. Every one of those pages flow through to our annuity, boosting post-sale and total revenue, and that was the key, as well, to the Global Imaging acquisition. Expanded distribution reaches more customers with Xerox Systems, generating more pages and more post-sale revenue. So, here is the progress report on the acquisition on slide 8. Global's performance in second quarter was what we expected -- consistent, solid revenue growth. We had the benefit of their sales beginning May 9, and we are impressed with the contributions to the second quarter results. Global's 21 core companies have access to Xerox's portfolio, and the number of products expands each week, as we complete training for Global service and sales representatives. One reason we bought Global was to tap into the expertise of their impressive leadership team and talent that they have in their core companies. We are really pleased with the retention of the team, and we are benefiting from their superior knowledge of the SMB market. We have encouraged Global to continue their steady progress and in acquiring new companies to further expand distribution. They just completed the purchase of an office dealer in Rhode Island and have more to come. Regarding supplier relationships, Canon and Ricoh elected to stop supplying products. Sharp and Konica Minolta renewed their contracts; and other vendors continue to work with Global as well. Regardless of vendor relationships, the first priority is serving Global's customers and maintaining their strong customer-retention levels, and we are doing just that. The core companies that did sell Canon and Ricoh have other vendor products that seamlessly fill the need, including products from the Xerox portfolio. With Global Imaging, we're reaching 50% more small and mid-size businesses, and accessing 200,000 new customers through 1,400 new sales reps. It's early in the transition and Global is already providing or proving the value of our investment. If you will turn to slide 9, we will take a broader view of the office results. Total office revenue was up 5% in the quarter, and 3% in constant currency, and Global contributed to this progress with growth in the SMB market. The office market overall remains competitive, and we continue to invest in pricing actions of between 5 to 10%. The benefit of the install activity comes through in our annuity stream, with office post-sale revenue up 6%. Install activities for segments 3 through 5 multifunction devices, which are designed for work groups in mid-size offices were up 9%. And last week, we added to this portfolio with the WorkCentre 5600 Series, our fastest office MFDs that print, copy, scan, and fax and offer expanded finishing and security feature. Color remains a significant growth driver in our office business. While demand for OEM color printers was down, Xerox branded printers grew 31% in the quarter. Installs for color MFDs were up 54%. We continue to bolster this product lineup, generating more activity, more pages, and more annuity growth. In fact, last week, we launched the WorkCentre 7675, an advanced color multifunction system, and the leverage from developing markets, revenue in the office continues to grow. As we highlighted on the slide, office equipment sale revenue from DMO was up 16%. Xerox's total office equipment sales would be up another 2% when factoring in DMO's contribution, a strong performance from DMO, and if you will turn to slide 10, we will provide more detail. Revenue from our Developing Markets Operations was up 13%, with post-sale up 11% and equipment sale revenue up 18%, and that's the pace of activity we expect from DMO, as they move aggressively to win share and build annuity through install growth and expanded service offerings. While office printers and multifunction devices are the typical product leaders in DMO, sales of production systems are ramping up. The commercial printers in countries like Russia and in Central and Eastern Europe are beginning to adopt Digital Production Presses with the advantages of print-on-demand and personalization. iGen3 adoption is especially encouraging in these emerging markets. So, on the revenue front, we saw the benefit of annuity, acquisitions and activity. Color plate well help to offset declines in high-end black-and-white systems and OEM printers. New products plus more demand for Xerox services tee us up for a strong second half. And that’s a good place for me to hand it over to Larry. He has more to share on the dynamics of our post-sale results and will review our financials. I will then be back to wrap up and discuss Q3 expectations. And then of course Larry, Ursula and I will take your questions. Larry?

Thank you, Anne, and good morning. Second-quarter results are on track and consistent with delivering our full-year commitments on earnings, earnings expansion and cash generation. The continued growth in equipment installs is driving growth in machines in the field, pages and annuity. In addition, the growth of color pages is increasing the average price per page, with opportunity going forward as color pages become a larger percentage of the total. Global Imaging, in its first 70 days as part of Xerox, is executing the transition extremely well and is already delivering growth. The team is truly outstanding. So as we go through the numbers with half of 2007 complete and a lot of work ahead of us, we're comfortable our business model is working. Slide 12. Our annuity scorecard continues to show positive trends that are leading indicators for future growth. If we start on the top left, we can see positive growth in digital revenue of 6%, 4% constant currency; 7% growth in machines in the field (MIF), while digital pages were flat. Growth in digital MIF and color pages, along with the positive influence of color on price-per-page, all indicate a positive trend. Year-to-date color revenue grew 19%, with MIF at 32% and pages at 29%. In addition, when you look at the bottom part of the slide, you will see how this is a huge opportunity going forward. With color at 34% of post-sale revenue but only 16% of the MIF and 12% of the pages, the growth opportunity is significant. These numbers will continue to grow and drive annuity growth. Keep in mind that the MIF in page numbers do not include printers or developing market segments or Global Imaging Systems, which would only improve the results. Additionally, post sale from services, another key indicator, grew 8% year-over-year, 5% constant currency. This also contributes to our annuity growth in the future. Black-and-white digital continues to be relatively stable. Revenue is slightly down, but pages slightly improved from Q1. And there is a steady growth in MIF, especially in areas like light production that drive higher page volumes. The last set of numbers on the bottom address Light Lens, the analog transition to digital that has put a drag on the post sale. It’s now only 2% of the total annuity revenue and going away fast. Overall, a very positive going-forward picture for annuity growth. Slide 13. Post sale and financing revenue continues to support what the annuity scorecard highlights -- digital growth on trend; DMO with an extremely positive quarter; and Light Lens down to only $47 million and 1-point detractor from growth. Overall, a 7% growth, 4% adjusting for 2006 for Global, with about a 2-point positive effect of currency. The trend is slightly lower than first quarter due to some seasonality of supply sales that we believe will normalize going forward. So, we see annuity going forward on trend and continuing to support our business model and cash generation. Slide 14. Earnings at $0.28 per share grew 12% when adjusted for 2006 highlighted items. Gross margin is 40.3%, within our range of 40 to 41%. We continue to manage expense well, with efficiency showing in both R&D and SAG, as both declined on a constant currency basis without Global and constant currency. Last year's GAAP earnings were $0.26 per share, but included an after-tax audit settlement of positive $46 million, which was partially offset by $25 million restructuring and $9 million credit facility fee write-off. So last year's adjusted earnings were $0.25 versus $0.28 this year. Our tax rate this year was slightly favorable to last year's adjusted tax rate. Good cost and expense management continue, as we expanded earnings by 12%. Slide 15. Cash flow continues to be a positive story; $382 million core and $388 million in total cash flow from operation, driven by earnings. Accounts receivable and inventory were uses of cash, but this represents seasonality and will improve by year-end. Pension funding was lower in the second quarter compared to last year, as we moved our 100% funding contribution to third quarter. However, '07 will be lower than '06's contribution. Investing shows $81 million of CapEx and $1.5 million for the acquisition of Global. Cash from financing shows the reductions in secured debt and approximately $1 billion of cash from our public offering of five-year notes at a very attractive 5.5% rate. In addition, we repurchased 64 million of shares, 280 million year-to-date, as we balanced share repurchase with our acquisition strategy. We still have 700 million remaining under our current authorization. Our annuity model continues to drive cash. Slide 16. Before I give it back to Anne, here is a summary of year-to-date results. Our annuity model is on a positive trend. Installs are driving MIF and pages, driven by color, and along with Global will deliver going forward. Good cost and expense management continues, with gross margin in the middle of our 40 to 41% range. RD&E and SAG percents to revenue show efficiency and keep improving. Earnings at $0.52 is showing the margin expansion we committed to, and at the halfway mark indicates our ability to deliver the full year. Year-to-date earnings are up more than 15% on an adjusted basis. Same holds true for cash, $500 million year-to-date driven by earnings. Cash flow and investment are managed in a balanced way, and we are confident in delivering our full-year expectations. With our investment-grade rating, we continue to be successful in going to the capital markets to support our financing business, with a $1.1 billion five-year note with attractive rates. We're committed to share the repurchase program with $289 million year-to-date investment. So, my optimism going forward continues as we achieve our commitments. Now, I will give it back to Anne.

Thanks, Larry. So I'm going to quickly recap. Growth in the quarter was a good mix of annuity, acquisitions, and activity. And color and services continue to be leading indicators of post-sale improvement. The Global Imaging team is delivering great results, adding value to our investment and growing Xerox's presence in the SMB market. We are continuing to expand our product portfolio, giving customers more options, available through more channels, at competitive pricing -- all supported by a broad set of consulting and managed services. We are managing the balance sheet effectively, containing costs while investing in growth. And we are financially strong and remain diligent about generating cash and prioritizing profitability. For quarter three, we expect to deliver earnings in the range of $0.24 to $0.26 per share. And the solid start to the first half of the year gives us the ability to increase full-year earnings expectations to $1.16 to $1.18. So, I would like to thank you all for your attention; and now Larry, Ursula and I would be pleased to take your questions.

(Operator Instructions). Your first question will come from the line of Shannon Cross from Cross Research. You may proceed ma’am. Shannon Cross - Cross Research: Hi, good morning.

Good morning, Shannon. Shannon Cross - Cross Research: A couple of questions. First, I might as well hit the equipment revenue. You know, I think it was a disappointment relative to where people were. And I understand that you're selling units and that’s going to help drive the razor/razor-blade model. But do you think we are going to get to a point where we actually see constant currency growth in that line again? Or is this a situation where the mix shift and the pricing pressures are just going to continue to outweigh unit growth?

Okay, so let me talk a little bit about the dynamics of equipment revenue in the quarter; and certainly begin by saying -- do we think we will deliver constant currency growth? The answer is absolutely. And Global I think is clearly the vehicle to do that in terms of the model it has, to tap into the SMB market, which is largely an equipment sale model versus the major account kind of operating lease approach. But in the quarter, we did see both operating leases and OEM business -- certainly the operating lease part of it was a larger impact than we have seen, which really reflects the growing nature of operating leases in the major account segment. So, that was a 2-point impact. The OEM business was a 1-point impact. And the other thing is that we announced 28 new products in the first half of the year. As a matter of fact, eight of them were launched 10 days ago, on July 16. And those eight products are the higher end of the office market where we generated a lot of equipment sale revenues. So, clearly that positions us for optimizing on the product side for the second half versus the first half. We have seen that dynamic before, when we have had a lot of product launches within a couple of quarters. So, we do feel optimistic about it and believe that the Global addition here is a huge plus as it relates to being able to deliver sustained equipment sale revenue growth over time. Shannon Cross - Cross Research: Okay. And then a question on bad debt. It appears to me that the increase year-over-year in bad debt was about a penny. So, can you talk about whether or not you expect that to be recurring? Is this something we need to worry about? Or was this just sort of a one-time catch-up?

So, when people have a chance to look through the MD&A, we do clarify the fact that it is off trend for us. It is an isolated incident. It is a European country, some customers within a European country that actually represented about $18 million of the bad debt. So, it obviously had an impact on us this quarter. There is nothing systemic about that. As a matter of fact, the bad debt scenario in the overall receivables portfolio continues to show the historical strength we have seen all along. So, definitely an anomaly in the quarter and one that actually also quite frankly makes the SAG ratio look a little bit out of whack as well. Shannon Cross - Cross Research: Okay. Thank you.

Thanks Shannon.

Thank you very much. And your next question will come from the line of Ben Reitzes from UBS. You may proceed sir. Ben Reitzes - UBS: Thanks. I've two questions, if I may. I'm just trying to reconcile your comments about your annuity being on track and picking up with slide 12. I'm just according to our calculations it looks like excluding Global maybe pages were down, and I'm not really sure because digital pages were flat, et cetera, and that may, I'm not sure if that includes Global or not. But then, if you include Light Lens, it would just seem that the pages are down, and you're saying the annuity is looking up. If there is a way we can reconcile that till then how post-sale will look? I'd appreciate any clarification.

Okay, so actually not just pages, but all the metrics are quite positive on the post-sale side. So, let me give you a little bit on the page side. If you look at digital pages, last quarter they were flat. This quarter, they are up 1%. Color pages were up 29%, and they are up 30%. So, that's improving as well. So overall, quite frankly, the page metrics are good. MIF is even better in terms of growth. So, the product placements looked very positive quarter-to-quarter. I think one of the reasons for the confusion about annuity and I said it earlier, when we were going through the slides, but or Larry said it I think, was that there was kind of an anomaly of supply revenues, quite frankly a disproportionate positive in the first quarter, a negative in the second quarter. But if you look at the first half annuity trend, it's right on track and clearly all the leading indicators are really quite positive, including pages and MIF particularly. Ben Reitzes - UBS: Okay. And these all exclude GIS?

Everything excludes GIS. We've no way right now of being able to track back to, and I don't think we'll in the foreseeable future. But both pages, and installs, and color revenues right now all excludes GIS. Ben Reitzes - UBS: Okay. And then with regard to your guidance, obviously the Street going in had $1.18, and obviously with the GISX calculated in there. So, with the lower tax rate maybe contributing about $0.03 in the quarter, and lower taxes for the year, actually the guidance you could look at maybe has less EBIT, less operating profit than the Street might have expected, actually maybe it's $10 to $20 million, maybe it's less. But is there anything that happened in the quarter on the margin side that would cause margins to be lower than you expected for the year? Or is it looking right in line with expectations?

I think we're very comfortable with margins. As I said, we had a high point in 2006, but it it's pretty consistent with Q1. I do think we had some exceptionally strong performance from DMO and services that did depress the margin a little bit in the quarter. But going forward, Global it's a help on margins. So, we're quite comfortable with our margin estimates going forward. I'll let Larry speak to just the impact on taxes and putting that into context; because I don't think you should read into any less, if you will, flow through on EBIT than quite frankly would indicate very strong growth across the board.

Yeah Ben, how are you? Ben Reitzes - UBS: Larry thanks.

First of all, I would just say that when we look at the expectations we had $1.12 to $1.16 out there; so we clearly have higher expectations than we gave at a prior time; and we've taken our expectations up. And therefore, there is nothing in any of the numbers that has a negative thought in it. We just compare to our own thoughts of where we think we were and where we are now, and we're in a better place now, and that's the good thing from our standpoint. On the taxes, the taxes are an interesting discussion because it's the way I look at it. Tax is just another line that has to be contended with in a quarter, just like bad debts, just like interest expense. And when you go through a quarter, and you have more interest expense because we bought Global or you have something happened in European countries, you might have a tax rate that where you had credits that helped you in a quarter. But when you step back and look at the whole thing, the numbers are the numbers, and I feel that's what this quarter represents. I think, we forecast taxes the best way we can, and we try to give you insight into them, and that's statutory tax rates. We never can predict whether a tax credit can be used in a particular quarter, where the profits are exactly going to come out, so that you have the rating, because you have hugely different tax rates country to country. And so, I think that we try to give some number, as a frame of reference for it, and I think we come pretty close, plus or minus to that. And I guess that would be kind of where I land on the taxes; it's just another line in the P&L.

And Ben, just to add to that, too, I think because now that we've two quarters behind us, we've also reassessed, and said that we think, we can deliver a 30% tax rate for the full year. So, that we've got a little bit more experience, so we're trying to guide something that accurately reflects the first half progress as well. So, that's good news, I think, overall. Ben Reitzes - UBS: And your answer really is EBIT's falling where you thought it would be?

Yeah. I mean, I'd like at this, and as Larry said, I mean, so interest cost us another 10 or $12 million bucks in the quarter. We had this one incident of bad debt for $18 million. I mean, quite frankly, all of that offsets the tax credit. So, quite frankly, that is the nature of a 90-day period of time; and we're not uncomfortable that it's a good reflection of the operational progress. Ben Reitzes - UBS: Thanks a lot, guys. I appreciate it.

Thank you.

Thank you. And your next question will come from the line of Matt Troy from Citigroup. You may proceed Matt. Matt Troy - Citigroup: Thanks. Good morning.

Good morning Matt. Matt Troy - Citigroup: I had a couple of questions, one on color as a driver of the aftermarket inflection. I'm just trying to get a sense for what a sustainable growth number in color is. If I look at slide 6 and compare it even to that slide in the last quarter, your total color revenue growth has decelerated in constant currency from 14 to 9%; equipment 6 to 2%; post-sale 17 to 13%. Does this now stabilize? I guess that’s the law of large numbers. It's just a bigger business for you now. But at 40% of revenues, I thought color would have a little bit more of an impact. And I look at that; and I reconcile it versus 10% of pages, and say there is opportunity. But I guess I'm just trying to understand, now that this is a bigger piece of your business, what is the sustainable growth rate for color going forward? And when you think about the page counts, 10% would seemingly seem low, but most color pages are going to remain black-and-white for the foreseeable future, is the theoretical limit 20, 25. If you could just help me put some context around that, and I've got a follow-up? Thanks.

Okay. So, I would look at a couple of things that really we need to factor in, and I mean one of the MIF pages. I mean, at the end of the day, we say it constantly color is more about pages than anything else. It's less about actual placements than it is about the pages being produced. And pages grew at 30% in the quarter, which is right in line with what we've been seeing, literally. So product mix can be a little different and drive some different kind of either equipment sale or placement numbers. But on the page side, we feel very, very positive about the sustainability of very high growth rates in color pages. I think that there are a couple of things that I would point out. I mean, if you look at the impact of operating leases on color, a lot of like iGens are going to operating lease, which is great news. It's enabling, quite frankly, more iGen installs. But that clearly does not hit the color revenue line, equipment sale revenue line. And just in color production, that cost us 4 points of equipment sale actually, it might have been 6 points. I think 6 points of equipment sale revenue for color production, 4 points for production, and 6 points for color production. So, it was a big impact on the operating lease side for color. And then again, on the OEM side as well, because that's a color business, and one that's a little volatile from quarter-to-quarter. But I'd look at it and say, this base of color is growing at a rate that we feel very, very comfortable with. The population growths are right in line, the page growth is right in line. We're very confident, and by the way, we've got 10 new product color introductions this year, some of which were just announced 10 days ago. So, we're quite positive about color in general and the fact that, and Ursula, you may want to talk to color share, as well because that's really a great indication of the fact that we're winning in color on the production color side.

Right. In production color specifically, we're pleased with our performance starting at the very high-end of the range. The iGen3 of production color family, we're pleased there and have good share performance on a quarter-over-quarter, and a year-over-year basis, and outstanding page performance and AMPV performance at that range. In the entry production color segment, we're the market. We've share numbers that are amazingly high there, and continue to win, and actually enhance and expand our product line there as well. At the lower end of color, the high end of office, low end of production color, we're pleased there as well. We've a good fleet of products with some enhancements one product we just announced coming off of a very strong 240 and 250 product, and 252 and 242 that we launched in the first quarter of the year. In the office, full range as well. So, as Anne said, very, very good color fleet, broad offerings, excellent placements, and share, and I'm holding our own or moving forward, as you would expect Xerox to do. Matt Troy - Citigroup: I guess I've certainly been a public fan of the breadth and strategy, and certainly the activity. I guess a lot of this feels like you just got to run like hell to stay in place…

Well, what I… Matt Troy - Citigroup: Means to, and that's not a Xerox issue; that's an industry issue, which brings me to the broader question. Are there investments, you could be making or actions you could be taking if you weren't a public company? Can you talk to me about your views on being public versus private that the pros and cons of each? Thanks.

Well, let me just say one thing, Matt, on running fast. I mean, I think, you need to look at total revenue in color. We’re totally confident that double-digit growth in total revenue is sustainable. Obviously, as the base gets bigger and bigger, those numbers get a little bit muted, but the absolutes are making a terrific contribution. So, we'll try to help a little bit in the future by giving you some absolute revenue numbers as well as growth numbers. Because this base is really powerful and even if the rate of growth comes down a little, as long as we're comfortable that we're getting the absolute growth, I think, it will continue to have a large impact as well. I'd just say this is a company that is very comfortable being a public company. We're pretty focused on doing the right things and investing for the future. We got a long history here of putting this company in shape for the long-term. So, I don't think, we're doing anything that we don't feel is appropriate to build long-term shareholder value. And quite frankly, I'm a big spokesperson now for the fact that we all ought to focus on the long-term shareholder value side of this and that really ought to be our primary focus as a public company. Matt Troy - Citigroup: I've noticed that; and hence the question. Last one you guys are leaving tons of footprints in the snow on the photo imaging side, which is a great new market for you. I get calls; I talk to people that say you are knocking on all kinds of doors. Can you talk about the learning curve there? I mean, you announced some products not too long ago, and you have been looking at the market for some time now. What are you seeing in terms of uptake, trajectory, and opportunity, and what is essentially a new green-field market for you? Thanks.

Ursula, why don't you take it?

So, we're it's a good question, I'm actually happy to answer it. We're excited about the photo finishing market. As you said, we're leaving footprints allover the place there, working with our partners, Fuji Xerox, to expand our market into kiosk photo printing and photo with Fuji film we've been able to start slow in the beginning of the middle of last year, but really pickup the pace and expand our offering. It's going very well. Actually, the photo kiosk market and business that we're in with Fujifilm is going very well. Well enough for us, it's still early, but good enough for us to start expanding into Canada and into other Western European markets. So, we are pleased there, good start in the United States. But it's not only through that venue or that path that we are getting into photo finishing. We also announced earlier this year, enhancement to our entry production color and our production color engines, the 8000 and 7000 family and iGen3. These enhancements allow us to actually get more pages moved from traditional photo finishing applications or processes to our digital cut sheet offering. So, I think, you're right, it's a good, exciting market. We're expanding it through our partnerships, but also through enhancements on our own engines, and we're moving it as fast as we can. Matt Troy - Citigroup: Thank you very much for the time.

Thanks Matt.

Thank you very much. And your next question will come from the line of Carol Sabbagha from Lehman Brothers. You may proceed Carol. Carol Sabbagha - Lehman Brothers: Thanks very much. Just a quick question on the industry, and a couple of questions on Global Imaging. Your equipment sales decelerating in the quarter, you talked about several reasons why that happened. What did you think the industry did in the quarter? Did that also weaken or do you think it's held up from 1Q levels?

Well, I think it depends, Carol, on the mix of business that you have. I mean, a Global kind of company, which is more of a dealer company, is an equipment sale model. And I think you will see less of a swing, if you will, to the annuity business. I mean, we happen to think that that is a very great positive that it swings to the annuity business. But I do think you will see some of the dealer companies or the printer companies that are equipment sale models being less impacted by that swing than a Xerox. I think this is really more, I think, indicative of a services company, which is less dependent on kind of the equipment capitalized transaction. And I think that is really what is driving, quite frankly, the shift in Xerox. Now having Global will make more muted, because obviously they are an equipment sale model company. But we didn't see anything in price, Carol that would suggest that there is anything more than the traditional pace of price investments during the quarter. I think the only real slowdown we saw on equipment sale is the OEM business. That was certainly year-over-year a big detractor on the equipment sales side. But that business by nature is going to be a little volatile. So I think we are confident that will pick up. And when you look at the full-year results, you will see a very good, strong, profitable business from the OEM sales. Carol Sabbagha - Lehman Brothers: Okay, thanks. And then on Global Imaging, if you looked at Global 2Q last year versus 2Q of this year, did it get to its 10 to 11% growth rate that I think you are targeting going forward? Was it better than that? And then the other question, maybe a little too early to ask this type of question. But of the leases that have come up for renewal with Global since you have owned it, what percent have you been able to renew? And what is kind of general for the industry renewal rates, typically?

So, just let me begin, I don't think we have really, first of all, I think we would suggest that Global's revenue, as you look at Q2 '06 and Q2 '07, is consistent. I am not sure that 10 to 11% would be the accurate number there. So, but it is consistent. We have not seen any degradation there. I think the bigger impact, early days, is on the fact that transitioning on the profit side obviously reflects the absorption of deal expenses and transitional costs that certainly mutes the profit flow through. Although we said for the balance of the year it will be modestly accretive. So, regarding revenue, we're really pleased to see a level of consistency in Global's performance. It is too early, I think, to give you anything that is statistically valid on the retention side. But when we asked the Global team, I would tell you that they are pleased with customer retention at this point in time. So, they have seen no early indicators that there is anything that they are concerned about. And I think they continue to give us feedback that the transition in the product portfolio is an opportunity based upon the strength of the Xerox products. Carol Sabbagha - Lehman Brothers: Okay. Then one last question on use of cash. Has your view changed at all from sort of the last conference call about what you would do after you pay down the incremental debt you put on for Global Imaging?

Larry?

You mean from the standpoint of the two things, our share repurchase and acquisitions? Carol Sabbagha - Lehman Brothers: Yes.

No, I had to change. Carol Sabbagha - Lehman Brothers: Okay. Thank you.

Thank you very much. And your next question will come from the line of Chris Whitmore from Deutsche Bank. You proceed Chris. Chris Whitmore - Deutsche Bank: I wanted to come back around to equipment sales one more time, but this time focus on the high-end production monochrome business. Hoping for some more color as to the unit weakness and install weakness there, and to get more color on what is happening. Is this a technology transition where Xerox is losing share to competitors? Is that the primary issue here? Or is the overall market just declining? Thanks very much.

So, I would say that this is not a market we are looking to for growth. And obviously, our shares continue to be leadership in the mono production cut-sheet market. So we're holding our own. You know, I think one of the things we are pleased with, if you looked year ago at the performance for example, Nuvera. We had a very strong year-over-year increase in Nuvera placements. But we are seeing, obviously, an overall weakening, if you will, of the market. So, it is not demonstrating in total revenue growth. I think the approach that it's taking, Ursula, you might want to talk about it is more kind of we have to look at this production market differently as a whole portfolio of different technologies.

Correct. Hello, Chris as Anne said, this is not a market that we are looking for in this segment alone for growth. It is largely a replacement market. We have a competitor who has launched a product that is actually replacing its base; that is the Canon product that was launched earlier this year. It is replacing its base and turning their current MIF. We actually look at this market in whole, not only in production mono cut-sheet, but we look at it with highlight color, with color production -- as you see the good results there -- and with light production and continuous feed. If you look at that entire set of offerings to the marketplace, we will see -- continue to see strong performance in production in general, not in mono only; but in production in general. And you have to look at it that way because the mono market is one that is declining. Chris Whitmore - Deutsche Bank: The second question relates to kind of competitive environment. Have you see much of HP's Edgeline product out there in the marketplace? Are they having any impact at all? Secondly, have you seen any change in the broader competitive landscape from a pricing standpoint? Thanks very much.

I don't think we have seen much of Edgeline at all. So it has been, I think, somewhat surprisingly quiet in terms of Edgeline's presence in the marketplace. So, you know, we are watching, and obviously very observant. But I think it is fair to say we have a pretty good touch with the marketplace and we're not seeing much happening there. I don't think there is really anything that we would view on the competitive side that is dramatically different quarter-over-quarter. And including pricing, as I mentioned, in the 5 to 10%. I think if anything, we probably changed the dynamics the most in terms of the amount of product introductions we have made during the first half of the year.

Right, the other product that Anne didn't mention that we were waiting for and looking for is Canon 7000 machine, in addition to the Edgeline, which has gotten a lot of press. We are still confident with our range of products. And the good news is that we are still winning decisions, especially in the color space, monochrome space as well, and we have not seen a lot of either Edgeline or the Canon 7000, yet. Chris Whitmore - Deutsche Bank: Thanks a lot.

Thank you very much. And your next question will come from the line of Bill Shope from J.P. Morgan. You may proceed sir. Bill Shope - J.P. Morgan: Okay, great. A few questions on Global. You stated that you're working to maintain the customer base despite the Canon and Ricoh departures. Can you give us some color on exactly how you are doing that promotions or training of the customers, and whatnot to switch them over to Xerox equipment?

Well, first of all, we are not -- I mean, these customers have Canon and Ricoh products on leases that are being maintained and serviced and supported throughout the duration of their leases. So there is no disruption to the customer base whatsoever. The opportunity for replacement comes at the lease renewal time. So that will be kind of staggered approach as leases come up for renewal. And the Global team has a lot of time, obviously, to market and prepare and quite frankly sell the value of replacement technology that offers more technology for quite frankly very competitive prices. So there is no disruptive approach here to integrate at the end of a lease a different offering. It is not something that we are faced with. They have got the parts and the ability to support these products throughout the duration of the leases. Bill Shope - J.P. Morgan: So, at the end of the lease, that is when you approach them with Xerox solutions?

If that is the right answer, yes. Bill Shope - J.P. Morgan: Okay.

Larry? Larry wanted to add something.

I just wanted to add one thing that I always find curious here, which is the Xerox brand-name and the fact that we invented this whole industry, I think plays a part in the fact that I don't think there is a huge difficulty here in migrating customers to our brand. So, I think everything Anne said is right here that these are staggered and our people are trained. And when we were talking to Global Imaging, they were so impressed with our product line, and they felt that they had so much more out there with our product line than they currently had in the marketplace, that it was a huge plus to them going forward to be able to sell the Xerox products. I think we all should just step back and consider that. It is all customer based. So, we will do what is right for customers here, but I think the Xerox brand and our breadth of our product line are going to lead here.

I think it is interesting, but part of what we're trying to do is to actually make sure that we are managing the pace of product adoption here. The Global folks are very excited about it -- our engineering products, our high-end production products, our package services offerings. So, we are really focused on making sure we do this right and we do it in a way where there is good training and understanding of the products before we deploy all the products out there. Bill Shope - J.P. Morgan: Okay. Then my second question will be on the accretion path for Global throughout the year. Should we assume that most of the accretion is going to be fairly back-end loaded into the fourth quarter? Should we assume that perhaps there are some integration savings that start to heat up as you roll the acquisition up, closing out the year?

Well, I think first of all, we should assume that strategically, which is the reason we bought Global that it is going to be a huge help to Xerox and it's going to make a huge difference going forward. I think, as you go through the first 160 days that you have an acquisition that there are a lot of transition costs. There is interest expense for two quarters here that we deal with. And so, we have tried to factor in, in our outlooks, everything about our business including Global. So, there is some accretion there. We don't think it has made a huge difference in the short term. But in the long term, this is really strategically right and going to be very accretive to the Company. Bill Shope - J.P. Morgan: Okay, great. Thanks a lot.

Thank you. One more question, I think we have time for.

Thank you. Your last question will come from the line of Jay Vleeschhouwer from Merrill Lynch. Jay Vleeschhouwer - Merrill Lynch: Almost right.

Hi, Jay. Jay Vleeschhouwer - Merrill Lynch: Good morning. Actually, I do have more than one question if that is okay. I would like to start first with placements and market share trends. I appreciate what you're saying about overall placement activity and of course Ursula's reference to your predominance at the high end. However, when we do look at some of the other further down segment data, we do see that there are a number of segments where your share gains are not necessarily as broad or as consistent as they once had been a couple of years back. Of course, Canon would now seem to be predictably in a bit of a bottoming process, given products other than the 7000 that they have produced since the summer. So, I guess the question is, where do you think you need to refocus your efforts on recouping share or otherwise redoubling some of your marketing effort and investments in some of those, let's say mid speed color copier and printer segments, where it does seem, as though you have lost some percentage share versus others? Then a follow-up?

Okay, I think that if you look at where we gained share, obviously the last share info we have is Q1. And where we think we made good progress -- and if you do look at the kind of office black-and-white Segment 3 to 5, we either hold or gain a point or 2 of share every quarter. So we have been I think doing pretty well there. However, we have just announced a complete refresh of that product line, so we expect that to accelerate. We really put a focus from a product perspective on the entry in color, and we gained share on the Segments 1 through 20. And where we have been not as aggressive, if you will, on the share gain side has been in the higher end of office color. And Ursula, we just introduced the 7675 and the refreshes on the 242, 252, 260. So, we got a whole line of new color office products that should strengthen our share position. We are doing great in EPC. I mean, our share is in the 80s; it continues to build. And we gained share in iGen. So, I would look at it and I think we would say, and maybe Ursula, the one place you would look and say we ought to invest for share is --?

Continuous feed.

Continuous feed?

Continuous feed, both monochrome and black-and-white is an opportunity area.

Monochrome and color.

Sorry, monochrome and color is an opportunity, Jay. We have talked about this before. It is an area that we are investing and will continue to invest to assure that we capture that market, which is capturing pages.

Right. But you know what, Jay? I think we would all sit here and look right now with the products that we have launched and say the biggest challenge we have to share gain is distribution. It is not product power. And that’s really where Global comes in, particularly its focus on the office SMB market; and that’s where we want and should demonstrate results in terms of share gains. Jay Vleeschhouwer - Merrill Lynch: Okay. Then to finish up, you did earlier in the year announced earlier initiatives on the SMB and VAR side prior to the Global announcement. So what is this status of all that? And then finally, sometime over the last year you have made some announcements regarding trying to improve supply chain and operations and procurement and the like; moving things into China, and so forth.

Yes. Jay Vleeschhouwer - Merrill Lynch: What is the operational improvement that you've been gaining from those earlier announcements?

Okay. So the piece I will talk about on the announcements we made earlier in the year was really on the agents and the reseller side. And I think we are pretty pleased with the progress that we are seeing. In fairness, we are rolling out a lot of the enhancements this quarter on the reseller and the agent side. So, I think the better test will probably be second half of the year. But I personally participated in the calls with some of our largest agents, and I think they are very excited about the enhancements we have deliver to the agent population. On the reseller side, I think we are seeing good progress. By the way, we didn't give you the number, but our Xerox-branded color printer sales were up 31%. And I think we are really strengthening, I think, our incentives for the reseller model. And that’s indicative of what we are seeing on the Xerox printer side. But I do think that the full test -- I mean, we announced a lot of this in the first quarter. But we are definitely still rolling it out; and I think the true test will be second half of the year. But Ursula, talking about supply chain?

Yes, two areas, Jay that we have put a lot of focus on. One that we have had to actually put into practice immediately with Global, the first area was a supply chain for the channel, a supply chain that matched the channel. I mean, we've an excellent high-end supply chain and can deliver and match up against any competitor in the marketplace, and excellence there. What we are doing is expanding our supply chain to ensure that we can actually meet the needs of high turn, so high frequency buy, and delivery customers. And we're doing that by developing a supply chain for that specific type of business, and we're putting it into practice with Global. I think that you will see if you would be able to speak to the Global people that they are very, very pleased with our ability to serve them and to deliver on their needs. So, the first area is the supply chain for every channel. The second area that you pointed out was expanding and basically relocating our production procurement activities outside of the United States. Most of our suppliers for either piece parts or equipment come from outside the United States and Europe. And we've moved our production procurement activities; it's now headquartered in the Far East, so that we can be close to the suppliers there, and leverage our excellence in engineering with their excellence in delivery. We've been able to do both those things. There are still activities going forward to continue to improve the supply chain, but we're very pleased with the progress so far. Jay Vleeschhouwer - Merrill Lynch: Thank you.

Okay. Thanks, Jay, and thanks for all of you for joining us today. We believe our progress in the first half of the year is on track, and that we're going to deliver a strong 2007. So, thanks for your participation. Have a great rest of week.

Thank you, ladies and gentlemen for your participation in today's conference. You may disconnect. And have a wonderful day.