Good morning and welcome to the Xerox Corporation third quarter 2008 earnings release conference call hosted by Ann Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President, and Larry Zimmerman, Executive Vice President and Chief Financial Officer. During this call, Xerox's executives will refer to slides that are available on the web at www.xerox.com/investor. At the request of Xerox Corporation, today's conference call is being tape recorded. Other taping and/or rebroadcasting of this call are prohibited without express permission of Xerox. After the presentation, there will be a question-and-answer session. (Operator Instructions) During this conference call, Xerox executives will make comments that contain forward-looking statements, which by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Mrs. Mulcahy. Mrs. Mulcahy, you may begin. Anne M. Mulcahy: Thank you. And good morning and thanks to all of you joining us today. During our call today we will focus on what we know is top of mind for you, the strength of our financial positions, the resiliency of our business model, how the economy is impacting our business today, and how we are positioned to weather economic challenges ahead while strengthening our competitive leadership. So if you will turn to slide four, we will review the current dynamics of our business. From our perspective the economic challenges are primarily impacting our business with large enterprises, especially in the United States and to some extent in the United Kingdom. We are seeing a good deal of this pressure on sales of our high volume production systems. Continued strong demand for our products for small and mid-sized businesses is helping to offset this economic impact. We are generating a solid return on our investments through our developing markets and global imaging operations. And we continue to benefit from demand for our outsourcing and document services. Certainly a broad worldwide presence helps us in today's environment. So does a business model that is annuity-based. More than 70% of our revenue is recurring, providing stability in tough economic conditions. This annuity is a primary source of our operating cash and we are consistently generating solid cash flow with modest capital investments. To date operating cash flow is 754 million, including 260 million in the third quarter. We recognize that the changes in our revenue mix, both from geographic and product line perspectives require us to reduce our cost base so we can maintain growth investments and increase earnings. We are focusing on operational improvements through additional restructuring that will improve operating margins. As in past years we expect the fourth quarter to be our strongest for cash flow. But as we look ahead we remain confident in the strength of our financial position. We are not immune to economic issues and the unpredictability of these coming months will likely make for a challenging environment. But we are better positioned than most and believe we have the flexibility to manage our business successfully through today's challenges as well as serving the long-term value of our shareholders. So let me take a moment now and review our Q3 results. Larry then will share more detail about our financial results. I will discuss our Q4 expectations and then Larry, Ursula and I would be pleased to take your questions. If you turn to slide five we will summarize our third quarter performance. We are reporting earnings of $0.29 per share for the third quarter. That includes a $0.04 benefit from tax settlements partially offset by $0.01 of restructuring. Revenue has remained stable over the past few quarters, even as economic pressures have increased. Total revenue of 4.4 billion was up 2% and flat at constant currency. Despite seeing pressure on page volume in large enterprises, wholesale revenue growth stayed steady and was up 3% with a 1 point currency benefit. Again, where we are experiencing the most impact from the economy is in production equipment sales which led to a decline in equipment revenue of 4% at constant currency, a slight sequential improvement from Q2 as we begin to see the benefit of new products that started shipping in September. I will show you in a moment, install activity was relatively healthy in key areas like office color. And that is an important indicator of our future success. More installs of Xerox technology help to fuel our profitable post-sale revenue. But as install activity and post-sale are very closely linked and flow through to annuity for the long term. Gross margin was 39.2% of revenue, consistent with the prior quarter, but down about a point from last year. And selling, administrative and general expenses were 26% of revenue, up a bit more than half a point. The price and mix dynamic continues. Strengths in developing markets and services put pressure on gross margins but also resulted in a favorable adjusted tax rate from the geographic shift in revenues. At the same time we have maintained our marketing and sales coverage investments so we can build on our industry leadership. However, to better align our operations with the changing dynamics in our business, we will continue to reduce costs across the board. These activities will accelerate in the fourth quarter helping us build more flexibility in our business so we can improve operating margins and earnings while maintaining investments to drive growth. As a result we will take a restructuring charge of about 400 million in the fourth quarter. Larry will talk more about this in a moment. And as I mentioned, we are managing the balance sheet well, generating 260 million in cash from operations this quarter. So if you will turn to slide six, we will further review our revenue. Here is a more detailed view of our revenue results for Q3 where you will see the direct impact of the economy on our production revenue and the lift from our expanded SMB coverage in office. In production revenue was down 1% in the quarter, including a 2% benefit from currency. The challenges in production were primarily U.S.-based, with the beginning of some pressure in the UK on our sales to large enterprises. The biggest impact is in production monochrome with 11% install activity decline. During the quarter we had only a few weeks of benefit from the launch of Xerox's iGen4 production press and the Xerox 700 entry color press, both of which just became available worldwide in September. We are encouraged by early signs of demand for these products. In fact activity was particularly strong in Europe and we expect additional momentum from these launches on a global basis during Q4 and into 2009. In the office, Q3 revenue was up 3% with a two point currency benefit. And that was led by strong growth in global imaging systems and our developing markets. Expanded sales coverage to the SMB market through global imaging and resellers and agents and concessionaires contributed a 15% increase in activity for black and white multi-function devices and as we continue to drive demands for color in the office with installs of color multi-function systems up 23%. Color revenue grew 5% in the third quarter. Color pages were up 27% and now represent 17% of total pages printed on Xerox technology. These results exclude the benefit from global imaging systems. As mentioned earlier, growth in our developing markets is providing positive leverage to our overall business, with GMO revenue up 15% in the quarter from positive performance in all regions. Equally important is the continued growth of our document management services. Through Xerox Global Services we are providing clients with more cost-effective ways to manage their document technology, convert paper to digital and simply document intensive work processes, especially in industries like legal, healthcare, education and insurance. Through Q3, annuity from a multiyear global service contracts is up 6%. We're scaling the business not only through industry focused-efforts such as our Xerox Litigation Services for eDiscovery in the legal space, but also through key partnerships with leading IT companies. In fact, Xerox recently signed a worldwide agreement with IBM that will leverage our document management expertise to support back office functions. Xerox Imaging Services will give IBM and its customer's digital access to better manage and use information currently stored in millions of paper-based documents. We're forming similar alliances around the world that played out industry-leading strength in end-to-end document management. So now I'll turn it over to Larry for a deeper dive on our financials and then I'll return to discuss Q4 expectations. Larry.

Thank you Anne, and good morning. In the third quarter we delivered EPS of $0.29 and $260 million cash flow from operations. While cash flow continues its positive performance in trend with $754 million year-to-date, earnings-per-share were helped by the positive effect of prior-year tax settlements. The challenging areas of our business that put pressure on results were a significant slow-down in U.S. large enterprise accounts, as well as continuing mix pressure on gross profit margin as growth came from lower-margin parts of our business, geographies, products and services. We believe that given this continued environment and trend it is appropriate to accelerate cost and expense reductions and announce an approximately $400 million restructuring charge for the fourth quarter. Work is in progress to identify the specifics but the size of the charge and the required savings going forward are clear. In addition, I believe it's important to also focus on some of the positive aspects of the quarter. Our annuity model yielded 2% constant currency recurring revenue growth which drove good cash performance, excellent growth in developing markets and global imaging. Solid performance in Europe, good overall office performance, continued growth in our services business. These positive results, coupled with our restructuring cost and expense actions will protect us on the down side and give us an opportunity on the upside going forward. So let's go through a few slides that I hope will add some clarity. I will start with cash flow, talk a little bit about liquidity and receivables given the current environment, and then go to the P: &L and end with the annuity recurring revenue score card. Slide 8: We are pleased with third quarter results of $242 million for cash flow and $260 million total cash from operations with year-to-date core cash flow at almost $700 million. We are on track to meet our full-year guidance of $1.1 billion core cash flow, allowing for the litigation we talked about in Q1. As of October 1st, all of the costs and settlement cash is in escrow. Settlement cash will run through cash from operations in the fourth quarter. Cash flow is driven by earnings and includes $205 million of pension payment. Inventory and accounts receivable are on track and will significantly contribute to fourth quarter cash flow. Capital and internal software was $85 million in the third quarter and $244 million year-to-date and consistent with $350 million for full-year. Cash from investing also includes the litigation cash moving to escrow. Cash from financing includes share repurchase of $91 million and dividend of $37 million. And our cash balance is $873 million. Though as we talk about good cash performance, I thought I would spend a slide on two questions I get asked. Slide 9. The first question is what are the debt maturities for unsecured notes supporting our financing business and second, what is the trend of receivable write-offs? Let's start with two points. First we have consistently delivered significant cash flow from operations and cash balances. It is the strength of our annuity recurring revenue model. You can see in the top left box $1.4 billion to $1.9 billion cash from operations over the last three years. And we will do it again this year, factoring in the impact of securities litigation. Second, bottom left, our debt maturities are spread evenly over the next 10 years and are in line with cash flow. 2009 is made up of $934 million of notes due January 15th, 2009, $150 million of notes due December 2009 and $448 million in private placements with a final maturity of $2,022, which is included because there is a put option in third quarter 2009. If we move to the bottom right you can see that in addition to our $1.4 to $1.9 billion of operating cash flow every year, we have a $2 billion revolving credit facility through 2012, with only $248 million drawn at September 30th, 2008. We also have a significant secured credit line commitment that we have not used in almost three years that goes through the end of 2010. The $1.4 billion and $250 million private placement talked to the access we have had in credit markets in the last five months. So given the 10-year spread of our debt, our strong cash generating capabilities, particularly in the fourth quarter, our access to capital markets as well as over $2.5 billion of available borrowing, I think it is clear that our debt is well-supported and that we approach it in the same way going forward. Lastly, top right, our receivable write-offs and reserves are consistently below 1% of revenue and the dollar growth is largely associated with revenue growth. We inspect these reserves, along with write-off experience every quarter on a conservative basis and have not seen a material change in trend or aging. Now I would like to move to the P&L, slide 10. Revenue for the quarter was flat at constant currency, with 2% growth in post-sale revenue and a 4% decline in equipment revenue also at constant currency. Given the U.S. enterprise environment, the revenue performance was driven by developing markets, global imaging, office and services. These growth areas offset U.S. challenges as our investments in them paid off and kept our revenue on trend. This did, however, keep pressure gross profit margin as it decline nine-tenths of a point. We believe our cost reduction efforts will help improve this over time. RD&E continues on a consistent basis and will also benefit from the efficiency improvement. SAG grew $47 million with $18 million of the increase due to selling and $10 million due to currency. We believe these selling investments are yielding and are an investment in our future. Bad debt provision also impacted SAG, but as discussed, is within our historical range as a percent of revenue. Other net increase reflects the year-over-year impact from gains or losses on currency of $17 million. We had $14 million of restructuring in the quarter and a 6% tax rate, driven by the conclusion of prior years as well as higher content of non-U.S. profit and a lower effective tax rate. This lower tax rate will have a positive cash effect in the future. The tax rate, net of restructuring, helped $0.03 in the quarter and would have been 24% without it. Our EPS was $0.29. Slide 11. As mentioned earlier, we are accelerating our restructuring efforts and will implement an approximately $400 million charge in the fourth quarter. Significant work is underway to identify the specifics. The focus is to improve efficiency and effectiveness of our operations from our support infrastructure, delivery of our product and services as well as development and engineering. These actions will have significant savings in 2009 of 200 million and ending in the savings against the charge will have about an $80 million incremental use of cash in '09. These are regressive actions in challenging times that also will play out well as opportunities present themselves in the future. Slide 12. In spite of the challenges from the economic environment, our recurring revenue business model continues to improve and point favorably to the future. As Anne mentioned earlier, page volumes, particularly in the U.S. enterprise, have been a bit pressured, but this has had only a marginal effect on post-sale revenues. Post-sale revenue growth at constant currency was 2% in third quarter, and year-to-date post-sale constant currency growth is 3%, adjusted for global imaging. The leading indicators for our annuity remain solid. As we go through this scorecard, keep in mind that machines in the field as well as page data do not include printers, developing market countries, and global imaging, and all revenue measures exclude global imagining. Including these items would improve the results. As we discussed during last quarter, we incorporated a new metric for total pages to provide an estimate of what our page growth is if DMO, printers, and global imaging are included. Looking first at the top left box, digital revenue in the quarter was up 6%, machines in the field was up 6% and digital pagers were down 1% or up 2% including DMO, global imagining and printers. Power continues to drive digital growth with 14% revenue, 34% machines in the field and 28% page growth. Although color equipment revenue growth was not as robust in this environment, the post-sale annuity revenue in pages had excellent growth. In addition, the positive impact of color on price per page will continue to be an opportunity as color represents only 22% of machines in the field and 16% of pages. Black and white digital pages therefore are stable, with declines in pages being driven in part by the transition of pages onto color and color-capable devices. Black and white machines in the field stability along with color growth and the solid installed performance Anne reviewed earlier are all positive indicators for future annuity. We also continue to see good growth in services. Services annuity is up 6% year-to-date and we see this growth continuing as more and more customers look to Xerox to help them to reduce their costs by optimizing and simplifying document infrastructure. With over 70% of our revenues coming from post-sale, these positive indicators support the resiliency of our business model and stability of our revenues. This stability of recurring revenue, coupled with our actions to manage cost and expense will yield earnings expansion and cash generation going forward. Now I'll give it back to Anne.

Thanks, Larry. So wrapping up, as we look at Q4, we're assuming continued economic challenges, resulting in pressure on margins, through the shift in our revenue mix, as well as currency headwinds. Restructuring we took earlier this year would help to offset some of this pressure. Again, the fourth quarter is seasonally our strongest for operating cash. We also expect and are already seeing some benefit in Q4 from our new production systems, as well as more demand for the broader line of competitively priced office printers and MFPs we launched this year. We expect to deliver fourth quarter earnings-per-share in the range of $0.03 to $0.05. That includes $0.31 of restructuring. Excluding restructuring, Q4 earnings expectations are $0.34 to $0.36 cents per share and we believe the $200 million in savings from restructuring that will realize in 2009 will increase operational profits and margin, positioning us well to deliver double-digit earnings growth in 2009. We'll share more detail with you about 2009 expectations at our investor conference next month. So if you'll turn to the last slide, we can't reiterate enough that our annuity-based business is a true asset in tough economic times. It delivers recurring revenue through multi-year contracts and generates strong operating cash flow. As Larry mentioned, we expect to have another strong year in cash from operations. (Inaudible) of boosting our post-sale is increasing install activity of Xerox products. Our investments in the SMB channels through coverage and a broad portfolio of service and technology are paying off and helping to offset the challenges we're facing in large enterprises. That's why with the strong growth from developing markets, revenue has remained stable this year. We're managing the balance sheet with a close eye on the bottom line. The restructuring action this year positioned us well for 2009, reducing our cost base and giving us greater flexibility in our model to operate even more efficiently and effectively in any economic environment. Well, let me end where I started. We remain confident in the strength of our financial position need our ability to manage the business successfully through today's challenges, and for the long-term value of our shareholders. So thank you again for joining us today. Now Larry, Ursula and I will open the line to your questions.

(Operator Instructions) And our first question comes from the line of Carol Sabbagha with Barclay's Capital. You may proceed.

Thank you very much. Just a couple of questions, Anne. First, on '09 guidance, not going into great detail because I'm sure you're going to give that in November, but sort of when you look out is it just the restructuring that's giving you confidence and say you can achieve double-digit growth. Second, what are you assuming sort of the economic backdrop is for '09 in that forecast? Third, how much of the $200 million in savings from the restructuring would you expect to drop to the bottom line, and what is your thought process around FX going into that year?

So I would start, Carol, by saying we're certainly not depending on any economic recovery in 2009 to guide us in terms of our ability to deliver earnings growth. We are assuming more of the same if not quite frankly some hedge on a deterioration in economic environment. Clearly we have some opportunities based upon the strength of the product portfolio and another strong year of product introductions and the momentum we have in services. But the reality is we intend to take the full $200 million in savings to the bottom line plus. So this really is an opportunity to insure, despite very, very tough economic circumstances where expecting continued pressure as it relates to currency in 2009. And that's really why we're being so aggressive in terms of the cost reductions so that we can be assured of delivering the earnings growth that we would expect in 2009.

Okay. And one other question. You did buy back some stock this quarter. Just looking out over the next 12 months, given the credit environment we're in, what is sort of your approach going to be to stock buybacks?

Well, I think obviously we had indicated to you that we'd slowed down the buybacks. That was really due to the litigation settlement in the second half of this year. And I think we'll continue to monitor and be conservative as we go into 2009. Obviously we look at a very low stock price that is an opportunity but we're going to be cautious and ensure that like always we're conservative with our uses of cash and to the extent that it makes sense to repurchase we will.

Thank you very much.

Thanks, Carol.

Our next question comes from the line of Richard Gardner with Citigroup. You may proceed.

Oh, great. Thank you very much. Anne, I was a little surprised to hear you say that Europe is relatively stable. I was wondering if you could provide any more detail there, and specifically do you think that any of the strength that you're seeing in Europe is due to pent-up demand coming out of Drupa that may not last here as we go into Q4 in the first half of '09? Thank you.

Yeah, thanks. Our comment on Europe stability was specifically with regard to Q3. I think we have started to see weakening, certainly in the UK and clearly are not anticipating continued stability in Europe. So we have comprehended a weakening environment. By the way, currency plays a big role in that because as you look at both the euro and the yen it has a significant impact. So we've built in, quite frankly, a fairly I think realistic outlook of what we can expect from Europe next year. And it's certainly not reflective of the stability that we saw in Q3.

Okay. And then one follow-up if I could. I was hoping you might be able to help us figure out how to think about the impact of recent currency movements on your margins and what type of remediation actions you can take and how quickly to maintain margins in the face of adverse currency movements here. Thanks.

Okay. I think I'm going to start and maybe Larry will want to jump in here but as we look at the euro the impact on revenue if we looked at, for example, today's spot rates on what we expect for Q4 is about a 5% negative impact on revenue for Q4. Obviously it has some positive implications as it relates to cost as well, and we comprehend those then as we look at the outlook. But there is clearly a negative with regard to the impact of the euro on our revenue flow-through. But we are always live in the world of constant currency and we'll continue to report that way so you'll always get a sense from the underlying strength of the activity. Probably the bigger issue for us is the dramatic turn in the yen. And as we look at the yen, I mean, we hedge the balance sheet in terms of activity that we can currently identify, if you will, in the pipeline. But going forward on forward purchases, it's really impossible to kind of hedge that activity. So if I look at, for example Q3 we lost probably about $20 million. So I think that was an unexpected impact on our earnings. If we looked at the biggest single disappointment that we didn't anticipate in Q3 it was really the impact on the cost base which obviously got reflected in gross margin for Q3. We're expecting that going forward to continue, so when you ask about we'll do what we can on the hedging side, but it is not sufficient to offset the impact, so our plan is to restructure. And that we're going to live in the real world; we're going to comprehend the flow-through of that and we are going to actually restructure our cost base so that the kind of continuing negative pressures that we've seen continue and we can still improve our results to deliver double-digit earnings.

Okay. And would you be willing to give us some sense of the impact of recent yen movements on gross margins for the fourth quarter and then I'll see you at the floor. Thank you.

Okay. I mean, I think what we saw in the third quarter was probably two or three tenths of gross margin impact. You know, that was in the third quarter. That will accelerate going forward. Probably two or three times that when we look at, quite frankly, the yen impact as it relates to the total cost base that -- now obviously all of our competitors are in the same place as well, so this is not something that disadvantages us; we all kind of get our supply from Asia. So this is kind of a level playing ground, but having said that we definitely expect it to get worse going forward and that's why we really have quite frankly done the due diligence on what kind of cost-base restructuring needs to happen so that we can offset that and more to deliver better bottom-line earnings.

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

Thanks very much. To follow up on that last question, how are competitors responding to the weaker environment? Have you seen any change in the pricing environment in both the production and the office side?

Well, I mean, I think we would say that pricing has somewhat stabilized and it actually has improve a little bit from what we were seeing so we're giving you a 5% to 10% range on kind of price discounting that is pretty consistent for us. So we had seen a little bit of a spike earlier in the year that has moderated. So pricing itself is not a significant additional pressure, if you will. I think what we're seeing from competitors is competitors taking prices up, particularly supplies pricing. We've seen almost all of our competitors take supply pricing up. Obviously we are doing that opportunistically as well. I think we're just starting to see that happen, so I mean, we are obviously intending to stay competitive and make sure that we win in the marketplace. But I think we're seeing more, quite frankly, uplift in price, particularly on the post-sale side than we've seen in quite a while.

Anne, last cycle was characterized, particularly in the production segment, with excess capacity amongst the commercial printers. What's your sense in terms of the amount of capacity out there. Do you expect to see a capacity overhang in that commercial printing segment as we roll forward here given the weakness in pages?

Well, I think, I mean, I think we would characterize it that there is probably -- I'm not sure if I'd call it excess capacity in black and white, but sufficient capacity without having to reinvest, if you will, in new technology where we see the opportunity for growth is in digital and color. And that's where all the growth is happening in the commercial print marketplace. Obviously the excess capacity is in the analog world in the offset world, and that is a big problem. And I think that we find that the commercial print world is prioritizing their investments for growth. So we're seeing color, number one on the list. And then digital in general being the only place investments being made in the commercial print marketplace. So you're right; we're seeing some pressure on pages but I do think that those who want to survive and grow in this particular economy are going to have to get into the value-based part of the market, which is all about color digital printing. So we're optimistic that that actually will come back favorably in terms of the graphic communications marketplace.

Okay. Last question around strength in DMO and SMB. How sustainable is the strength in those segments, given the global economy? What gives you confidence that SMB in particular won't soften going forward? Thanks.

Well, for us global imaging is a great barometer for SMB growth and quite frankly they have been extraordinarily resilient in terms of the ability to deliver great results. And so that's been a great kind of bell weather for us that their ability to perform in what we would view as a weak economy all this year, is fabulous. I think we are clearly moderating our expectations for DMO. That's already comprehended in our outlooks. Both from a currency perspective as well as some potential weakening of the DMO economy and I would characterize that as saying still growing, but perhaps not at the rate of growth that we've seen, which has been extraordinary, obviously, over the last few years. I mean, one of the reasons we invested in SMB is because we have such a low share there. So from our expectation we have more to gain than we have to lose as we go after the SMB. Those that are obviously very heavily vested already, particularly in the black and white side of the SMB marketplace have a lot to lose. We have relatively nothing there so we tend to benefit from the upside there versus, quite frankly, the downside risk.

And our next question comes from the line of Mark Moskowitz with JP Morgan. You may proceed.

Yes, thank you. Good morning. A couple questions, if I could, just following up on Chris's question. With the SMB market and the vulnerability of that segment to macro duress and tightening credit, are you trying to flex your financing arm a little bit to help out those folks? Or are you kind of status quo right now?

You know, we really don't do a lot of financing in the SMB market. most of our financing takes place in the large enterprise area and what we do offer, which is very attractive to the SMB market is leasing, operating leases, which allows them to invest in the technology without having to do a capital outlay. So it's one of the reasons that it puts pressure on equipment sale margins for us but we think it's a really great offering in tough economic times to have operating leases. So it basically extends the ability to acquire the technology without taking, quite frankly, the balance sheet risk as it relates to the capital investments. And so far so good; we're seeing that really as an attractive option for the SMB market.

Just so we're clear, too, we're not taking additional credit risk.

Okay.

If you were asking that.

That was going to be my second point. If you were flexible to taking on extra risks to maybe inspire greater demand generation with the SMB segment.

No.

Okay. And then as far as global imaging, any change in the margin structure? I know it's been a pretty attractive margin profile for you. Has there been any change in that structure in this type of environment?

Well, we've seen margin improve because they're selling more Xerox products and that give us, quite frankly, the manufacturing flow-through on that. So nothing but good news from global imaging.

Okay. And then just lastly, maybe bigger picturing. Anne, can you maybe just kind of give us some context around what you're seeing from your large customers this time versus the '01-'02 downturn? Are they doing anything differently? Are they slamming the brakes on some projects, all projects? What kind of sense do you get from your major customers?

Yeah, I think we do see a big difference. I think we see both time to revenue, time to contract, all -- so I guess I'd kind of put the anxiety factor around the large enterprise business that feels a lot stronger right now than previously. So that it's not as much that we have seen a downsizing of activity. It's a lack of new activity coming out of commercial enterprise -- the big enterprises than we've seen historically in the past.

Okay. So there hasn't been a major deferrals, then, just a lack of new generation then?

Yeah. I think it's just -- and by the way, that's where fortunately our Services business has been well-positioned. I think we're looking at, we're doing big services contracts with financial services and weaker parts of the industry so that they can reduce the cost of their infrastructure. So this is where the services business is really well-positioned in terms of the economic downturn.

Okay, thank you.

Our next question comes from the line of Shannon Cross with Cross Research. You may proceed.

Hi, good morning.

Hi, good morning, Shannon.

Just a question in terms of sort of market share and competitive positioning, what you're seeing out there. I mean, it seems as if this is more of the market issue as opposed to Xerox losing share. But I'm just kind of curious as to what you're seeing. And then sort of how we should think about some of the consolidation that's gone on in the industry with for example the Ricoh purchase of Icon. Thanks.

Well, I'll begin and then maybe Ursula can talk a little bit about the implications of the Icon/Ricoh purchase. But there is no question that I think we're faring well in terms of the market indicators. For example, although it's a little bit of a lagging indicator, market share literally -- I mean we regained our color revenue leadership. We are number one in revenue leadership across the board, all segments. We gained share in every segment except one which was production color and that's really where the 700 and the iGen4 are going to have a dramatic impact. Our installs as we look at just install increases in the quarter, we are up across the board with the exception of mono production which quite frankly isn't really a lot different in terms of what we are reporting from the past, so every market indicator would say that we are holding our own and potentially will gain share in tough times which for us is the strategy because that's the annuity of the future. Ursula, the Icon Rico piece? Ursula M. Burns: We expect, it hasn't closed yet, but we expect as it closes for this to go fairly well, the Icon and Rico management business going forward, but we are prepared to take advantage of any fallout that happens there for sure in a delayed or confused buying decision by their customers. More importantly though I think the biggest impact that combination will have will be on Canon. It is clearly an advantage for Xerox Corporation so if you look at Canon's business, Global Imaging and now Icon Rico has tightened up Canon's go to market abilities pretty significantly. We do not think it will be a negative for Xerox. Anne M. Mulcahy: As a matter of fact, I might add that we are actually seeing winds in Canon's installs population due to the fact that those all become decisionable now with this particular Icon Canon installation so we are a little bit bullish about this.

Okay great, and Larry can you talk a bit about cash flow? Obviously it's so important in the fourth quarter, given all of the -- everything that's going on, can you just sort of walk us through the biggest drivers of cash flow in fourth quarter and what we should keep in mind and how -- what leaves you at your comfort level with this sort of billion dollars approximately you're going to be expecting? Lawrence A. Zimmerman: Well I think if you look at what we've consistently done in the fourth quarter, working capital has dramatic changes in fourth quarter so inventory and accounts receivable improve significantly and I am confident that we will do that again. We also have our highest earnings of the year so the combination of that and improvements in working capital makes me confident that will happen in the future.

Okay and then one last question, with regard to the debt that will be coming due in the first quarter, how do we think about the interest cost on that debt relative to ways that you are going to be able to move it to the credit facility or whatever? Should that be a net positive? How should we sort of think about it from an interest cost standpoint? Lawrence A. Zimmerman: Well right now I would say that you ought to consider sort of a neutral point of view because you don't know what the market rates are but if you think of us using cash flow which will build up cash on hand in the fourth quarter, if you think of the revolver which has lower rates, I mean you could build a case here where we are going to save money because those are at 9.75 so assuming you don't go to capital markets and not crazy, I think with cash on hand and revolver, we certainly have more than adequate funds and it will be a lower rate.

Great, thank you very much.

Our next question comes from the line of Ananda Baruah, with Bank of America. You may proceed.

Hi guys. Thanks for taking the questions. Anne, can you at least anecdotally maybe give us a sense for if you hadn't done the restructuring with the two $200 million cost savings, what might we have expected from baseline APEX in '09? And I guess the reason I'm asking is because '07 and '08 you grew out back to maybe mid single digits, '08 today which is a bit higher than you traditionally have and you had some things going on the last couple of years in terms of product build out, distribution build out, things of that nature, that we might have expected to kind of taper off a little bit in '09, which might offset the '09 baseline APEX spend. I don't have a package of traditional levels but maybe a little bit lower on year regrowth level than they were the last couple of years, then you have the $200 million on top of that so I guess I just wanted to see if you could maybe give us a sense of where we might actually have seen things above and beyond the $200 million cost savings? Anne M. Mulcahy: Well I think, I mean it's a really hard question to answer because I mean there are so many variables that we are dealing with right now. I would look at it and say if we hadn't quite frankly run into the tough economy, if we hadn't run into the currency impacts of quite frankly to the cost base particularly, then clearly there was little or no need to take a $400 million restructuring. Having said that, we are always working the issues and we would have taken these over time anyway. These are all when optimization of technology enabled productivity, remote diagnostics, all sorts of opportunities for us to quite frankly be more efficient and more productive, which we have tried to take over time and comprehend within our earnings. I think the whole reason for accelerating this and doing it in the fourth quarter is prepare for the fact that we do believe that 2009 will be a very tough year from an economy perspective, from a currency perspective, and we want to set expectations for earnings growth that we can count on quite frankly restructuring to deliver. It certainly gets our business more fixed, which is not a bad thing, and should conditions turn better, I think it's all upside for us. I mean, one of the things that clearly haven't yielded in total yet is we have been making coverage investments and we've stayed the course on our marketing and coverage investments because we know we have got the portfolio and the capability to deliver more with coverage and clearly that is a little dampened in a weakened economy and that investment is staged to deliver as the economy turns as well, so I guess that doesn't really answer your question but it's probably as good as we can do.

That's fair enough. Just wondering what your thoughts are around your graphic arts business, I guess your mom and pop commercial business, because at their heart, many of those folks are actually small/medium businesses. And we continue to hear from other large companies their concerns about the small/medium business, either customers or distributors getting access to financing and things like that, so can you just give us, I guess let us know what you are seeing there and what your thinking is around those folks and how concerned you are, if you are concerned about them getting financing? Anne M. Mulcahy: Well, let me begin by saying I think we are trying to enable the graphic arts industry with operating leases so this really, once again, has an impact on equipment sale revenue but it enables quite frankly our graphic arts customers do what they have to do to be successful which is bring in digital technology and get into the value based kind of printing business without us taking the balance sheet risk quite frankly on capital investment on their part so we think that is a good strategy. Having said that, there is no question that we see some weakness, more so in pages I would say than just installs and our production color installs grew 4% in the quarter which certainly isn't at the rate that we've had in the past but it grew. Ursula M. Burns: And the different new products are good. Anne M. Mulcahy: I mean, color pages, Ursula grew it like -- Ursula M. Burns: Twenty-seven percent. Anne M. Mulcahy: Twenty-seven percent so I do think that we are optimizing the graphic arts industry by helping the healthy graphic arts players have access to digital technology by ensuring that quite frankly these operating leases enable that and making sure that they are well positioned to deliver the value based printing capabilities that will be absolutely crucial to their survival and success going forward.

Thanks and then I guess just this last one for me, clearly you guys are pointing to sort of the numbers varied out, I guess production being the most significant area of weakness this quarter and it's production enterprise, I guess you had sort of the iGen4 and the 700 color press for only a few weeks this quarter in North America. It sounds like you guys feel relatively comfortable with the shipment trends you saw kind of the first couple of weeks from those guys, so where was the relative areas of weakness compared to what you guys were expecting in production for both mono and color, was it really more on the mono side that you guys were surprised a little bit? Ursula M. Burns: I think Anne said in her talk earlier that the activity decline that we saw, the biggest weakness was clearly in production mono. We did have the 700 and the iGen4 for a couple of weeks only, particularly in North America, iGen4 worldwide only for a couple of weeks, 700 in a couple of weeks, the shipment trends are very, very strong so I believe that we will continue to actually perform well in the color production side and we will continue to see weakness in production mono. Anne M. Mulcahy: The color press 700 by the way is a great play for an economically sensitive world because it's great value for what you deliver.

Thanks.

Our next question comes from the line of Keith Bachmann with Bank of Montreal. You may proceed.

Hi, thanks. I have two, first one for you Larry, on a broader scale when you think about what you have to roll over next year during the course of all of calendar year '09, how do you think about the puts and takes? And what I mean specifically if you have $1.6 billion that you want to refinance, how do you think about the use of cash? How much would you anticipate from the cash flow side versus using some of that as you mentioned on the term debt side? How should we be thinking about that? But I assume also that term loan comes due so at some point I would think when the markets settle down you will have to go back and tape the public markets, what I'm really trying to understand is as Shannon indicated, how should we be thinking about the cost of funds, not just in the first quarter but during the course of '09 versus what you might do on the share buy back side? Lawrence A. Zimmerman: Well the key word there was have to go to capital markets and we are in a position where we don't have to go to capital markets.

But Larry when does the term come due? Lawrence A. Zimmerman: The first payment is on January 15th.

No sorry, when does the term, you can always substitute the term loan. You can use some of your term debt to pay down. Lawrence A. Zimmerman: You mean on revolver?

Yeah the revolver. Lawrence A. Zimmerman: Okay, that's a different term. Yeah it's 2012.

Okay so you could keep that in place for the balance, you could access that and keep in place for the balance of '09? Lawrence A. Zimmerman: No, we intend to keep that in place through 2012 and we would never think of not having a revolver.

No, Larry, sorry, perhaps I'm not being clear. You could substitute that financing and you could use that for the duration of '09 to pay down what is due in January and thereafter. Lawrence A. Zimmerman: Yes, definitely. Between cash flow and the revolver, we do not have to go to capital markets. Anne M. Mulcahy: By a wide margin. Lawrence A. Zimmerman: By a wide margin.

Sorry I understand that, what I'm trying to ask is if you think about what you have due versus what you anticipate in cash flow, should we think about the share buy back, keeping what levels of share buy back should we anticipate next year? In other words, would you anticipate using the whole revolver and then using your cash flow, then go ahead and buy back your stock at these price levels? Lawrence A. Zimmerman: No you should think of the fact that we are going to treat cash as a scarce asset. We are going to be careful on everything we do with cash in this environment.

Okay. Lawrence A. Zimmerman: If the environment changes, we will do it differently.

Okay second question, Anne, the office margins were actually pretty good, given the back drop. The production environment, the operating margins were down, certainly on a year by year basis. I assume by the volume variance and also the mix issue should we think about if this, given the backdrop that we have, the production operating margins will stay at these levels in the mid 6's? Anne M. Mulcahy: No. I mean I think there are a couple of things going on here. One is on the office margins, I mean they are strong because everything was strong, activity was strong, clearly it was by the way probably the most lucrative area for us is color multifunction. It was up 23% so office was just actually performed very, very well. On the production side, I mean clearly the issue for us was actually even though we grew production color installs, it was not at the same rate that we normally grow it and with the iGen4 and the Color Prep 700, color will have a much more positive impact on the operating margins in the production world going forward. By the way, we are not necessarily expecting to grow the business at the rate we might have because of the weakening economy but we think the mix towards production color will actually improve based upon the 700 and iGen4 availability full Q4 in 2009.

Okay thank you. Anne M. Mulcahy: Thank you. I think we have time for one more question.

And our final question comes from the line of Jay Vleeschhouwer with Merrill Lynch. You may proceed.

Thanks. Good morning. Follow up on the questions regarding the restructuring, Anne, could you say to what degree it will affect production versus office? Have you thought through the relative impact on those two parts of the business in a follow-up? Anne M. Mulcahy: Jay, I think as we look at it right now, it's hard for me to give you the definitive. We have got it broken out pretty well in terms of area of the business and I might add personally just to spend a minute talking about it. I would say that some of the development in engineering optimization that we have will probably have a bigger impact on production than office just because we do that in house so some of the manufacturing optimization and the development optimization will have a disproportionately positive impact on production. But there is going to be enough of a general infrastructure that it's going to be pretty significant for office, too, so Ursula, I think it's important to kind of characterize some of the things that we are doing because I think that they are pretty well thought out and they really position us well for the future. Ursula M. Burns: There are three areas I will focus on, Jay, the first is on the point that Anne ended on which is on the development of engineering resources and how we are planning to optimize there. You know that we have been on a platform strategy for awhile in the hardware space. We are brining that from office and production to focus on the team product so that we can be more consistent across office and production. We are also focusing on software platforms across the groups as well. A large amount of our R&D has been on soft ware development so we are coming to focus on that some more of a platform perspective than versus office and production. That is the first area. Second is trying to get efficiencies because we are now a digital business and a lot more of our products are connected, a lot more of our business is services based, so we should be able to use more of the infrastructure that already exists to drive efficiency through our systems. So, things like remote diagnostics, things like delivering tools to manage services significantly better, those areas will drive efficiency through our business. Supply chains were significantly more of a, focusing more on smaller businesses across the world, around the world, so doing significantly more point to point delivery versus many different touches in the supply chains and streamlining our manufacturing infrastructure as well. The last area is on the basic infrastructure of marketing, finance, H.R. training, areas like that where we are trying to go shared service infrastructure to leverage the fact that we actually are significantly more mature business so everywhere that you can look, as Anne said, we are moving it up one level and taking it quickly, taking it now. Anne M. Mulcahy: And the good news is that we come to this prepared because we have doing, quite frankly these have been the source of our lean sigma black belts after, in terms of process change for a longtime now, and so they are in a position where we can actually execute and do them without quite frankly disrupting the business.

Are you prepared to say whether or not you are adhering to the 40 to 41% long-term gross margin nominal range or is that perhaps in some flux given what's going on? Anne M. Mulcahy: I think we're actually preparing for delivering double digit earnings with gross margins below 40% Jay. I mean I think that is fair to say. The context that we have here is not counting quite frankly on margin improvement and saying maybe that's the real world for the foreseeable future, lets deal with it, lets get our cost base and our economics in line so that is not a detractor from our ability to deliver the kind of growth in both operating margin and earnings that we expect.

Alright and maybe just a wrap up, do you foresee having to curtail in some way your investments in market coverage, particularly given the breadth of market to address like G.A. and Transpromo, Financial Services, new specialty A-flex photo printing and all the rest, are you going to have to maybe pull back in any of those kinds of investments or coverage capabilities? Anne M. Mulcahy: We are staying the course. We chose our words carefully by saying we are maintaining our marketing and coverage investments so we made a lot of investment. We are going to maintain it. We are going to get the yields from it because we really haven't seen the payback on a lot of that yet, but as we look at the year over year, you will see those increased investments going forward because we have done them. They are sunk investments and now it's all about getting returns and as you know when you are investing in coverage, it's a landing return because you have got to bring people up to speed, particularly in areas like continuous speed and production environment so that really, that return is in front of us versus seeing it currently so we are going to stay the course and maintain those investments and get real tough in other areas of the business so that we can maintain those investments in growth for the future.

Could I squeeze in just one more? Did you see in terms of your Drupa or At Show Order Book or your immediate post show order book any cancellations in the last few months or is everything held in the order book and you are now just having to deliver? Ursula M. Burns: We've seen no cancellations in the order book, Europe or in North America.

Okay, great, thanks very much. Anne M. Mulcahy: Well thank you everybody. We appreciate your time today and we look forward to sharing more detail with you as we look towards 2009 at our investor conference on November 24th. Thank you again.

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