Anne Mulcahy, Chairman & CEO Larry Zimmerman, CFO & SVP

Shannon Cross, Cross Research Ben Reitzes, UBS Warburg Matt Troy, Citigroup Caroline Sabbagha, Lehman Brothers Jack Kelly, Goldman Sachs Bill Shope, JPMorgan Jay Vleeschhouwer, Merrill Lynch

During this meeting, Ms. Mulcahy and Mr. Zimmerman will make comments that constitute forward-looking statements. This presentation contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect management's current beliefs and expectations, and are subject to a number of factors that may cause actual results to differ materially. Information concerning these factors is included in the company's third-quarter 2005 Form 10-Q filed with the SEC. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments. At this time, I would like to turn the meeting over to Ms. Mulcahy. Ms. Mulcahy, you may begin. Anne Mulcahy, Chairman & Chief Executive Officer: Thank you, Rachel. And thanks everyone for joining us today. If you'll turn to slide 4, we'll provide you a summary of our Q4 results. So, EPS was $0.27 per share meeting our earnings expectations with operational improvements and growth in key segments of our business, especially color. As expected, the $0.27 includes $0.05 of restructuring. Net income for the quarter was up 18% from Q4 2004. Another proof point of our commitment to expand the earnings and deliver value for our shareholders. Currency did have an impact on revenue in the quarter. Total revenue was down 2%, but up 1% on a constant currency basis. Equipment sales were lower than expected. During the quarter, we saw more significant shift in product mix, with stronger sales of lower-priced systems. At the same time, install activity accelerated, which fuels future postsale revenue. In fact, we continue to see steady improvement in postsale, with postsale up 1% in the second half to constant currency. So we're confident that the short-term impact on equipment sales will not limit our ability to deliver long-term gains in top-line growth. A good part of this confidence comes from seeing our investments in color continue to pay off. Color revenue was up 17%, primarily due to strong sales of our new DocuColor 240/250 systems, and more success with the iGen3 digital production press. And our focus on cost and expense management strengthened the bottom line. We reduced SAG to 24.6% of revenue, the lowest level in 15 years. And our tax rate came down significantly as a result of a detailed strategy to better manage our global tax obligations. And the changes we've made to align our business model with the shifts in product mix are working. Gross margins were 41.4% in the quarter, up nearly half a point. The balance sheet remained healthy with significant operating cash flow of 631 million. We ended the year with 1.6 billion in cash and short-term investments, even after buying back 433 million in Xerox stock. At the same time, we reduced year-over-year debt by 2.8 billion. And we're now announcing an additional 500 million in our stock buyback plan. Larry will talk more about that when he walks you through the financial statements, but first I'd like to spend a few minutes on revenue and activity, and before we take your questions, I will wrap up with some thoughts on Q1. So if you will turn to slide 5, here's a look at our revenue trends, noting the year-over-year compare in actual and constant currency. Total revenue in the quarter was down 2%, yet up 1% excluding the currency impact. On a constant currency basis, equipment revenue was up 1%. Again, this is primarily due to a shift down in product sales, a dynamic you'll see more clearly in a moment, when I talk about install rates. The new technology did benefit Q4 results, especially through strong sales of color systems. And we continue to generate about two-thirds of our equipment sales from products launched in the past 2 years. We've talked a lot about the significance of our postsale revenue, and that's because we're an annuity-based business with 70% of revenue from postsale and financing. Adjusting for currency, you'll see a steady improvement in postsale, up 1% in the second half. The drag from older, Light Lens products was offset this quarter by good news in postsale from digital, growth in color pages, and a benefit from our developing markets. It's clear that the revenue dynamics are shifting. For full-year 2006, our total revenue expectations remain unchanged. However, equipment sales will provide less leverage due to mix, as well as the strength of our services-led enterprise wins. These are annuity-based deals, and in Q4 alone this resulted in a 1.5 point decline in equipment sale revenue. The good news is, is that the postsale gets stronger with increased activity growth and the revenue streams from services. We remain quite confident in the long-term gains from this model, especially as install activity continues to accelerate. In fact, we continue to win a number of large fleet deals that call for major installations of Xerox systems. For example, Lockheed Martin has selected Xerox to upgrade thousands of the company's printers and multifunction systems. And more wins like this are fueling activity that is delivering double-digit increases. So if you'll turn to slide 6. Looking at full-year 2005 compared to full-year '04, you'll see that install rates are climbing. The 1 exception is production publishing, where we continue to see some trade-off to light production. We expect a turn in this space as new finishing features are added to our Nuvera line in the first half of this year. We're not backing down in any of these areas. In fact, we're playing to win, as evidenced by the breadth of our product line, faster time to market, and competitive pricing. We're capturing share and winning the deals that fuel long-term gains. So while equipment revenue was impacted by stronger sales of lower priced offerings, the benefit of rapidly growing install rates is clear. Despite the price of the product, the sale will translate to postsale revenue. More machines in the field, drive more pages, and pages flow through to boost annuity. All of which contributes to postsale growth. Larry will walk you through more details on postsale shortly. But first here's a look at how color is influencing this model. So if you'll turn to page 7. Color is a significant driver of our growth and helps to offset declines in black and white office and publishing. We've created the industry's broadest portfolio of color systems for production and office environments of any size. And the payoff is in the pages. Look at the trends in growing our color equipment sales, how these sales flow through to boost annuity revenue, and the steady increase in color pages. Consider that color revenue per page is about 5 times greater than digital black and white. And it's clear that color provides significant leverage for our top-line growth. In Q4, equipment sales from color were up 24% in constant currency, and revenue from color postsale grew 19%. This growth is changing the profile of our revenue picture, with color now representing 32% of our total revenue, that's up 5 points from 2004. The number of Xerox pages printed on color devices continues to increase at a steady rate. It's now at 8%, double from 2 years ago, yet obviously with opportunity to grow considerably. We're firmly holding on to our color leadership in the marketplace, and winning more business by helping our customers think differently about using color in the workplace. Like at Fisher Price, where we're managing their document production and office services, including the installation of Xerox DocuColor systems that are used for proofs of packaging design. So, we're bullish about this model, and the market, and our strong position to lead and deliver solid returns. So if you'll turn to slide 8. In our production business, color was again a highlight with sales of the newly launched DocuColor 240/250 fueling up 58% increase in production color activity, and a 20% increase in production color revenue. iGen3 was a strong contributor as well. The industry's most advanced digital color press remains a highly successful product, not only for Xerox, but also for our customers who rely on iGen3 to grow their business. We now have about 100 customers who own more than one iGen3. In the fourth quarter alone, close to 100 customers printed more than 1 million pages in a single month on their iGen3 press. As impressive is the activity trend for the total production business with installs up 30% in Q4, fueling a 14% full-year activity increase. Of that, installs of production monochrome systems were up 19%, the benefit of continued success with our 4110 light production systems and stronger sales of Nuvera systems. Recent market share reports show Xerox gaining back the No.1 share position in the U.S. for light production. If you remember we weren't even in this market 3 years ago but we entered to win and we are. In constant currency, production digital revenue grew 4%. Total production revenue was up 1% fueled by a 1% gain in production postsale revenue, again a strong side of improving trends. So if you'll turn to slide 9. In our office business, total revenue was flat at constant currency with digital revenue up 1%. This is where we see the most significant impact from the shift in product mix, with increased activity in segment 1 for lower priced desktop systems. Color sales were strong. Revenue from office color grew 22% constant currency in the quarter largely driven by the office version of the DocuColor 240/250, which is proving to be an incredibly successful product in the marketplace. And again, we're encouraged by the install activity. In total, office MFD activity was up 23% in Q4, contributing to 24% growth for the full year. Including OEM products, installs of office color printers grew 27% in Q4, as OEM activity stabilized in Q4. And all of this activity contributes to page growth. In Q4 office color pages continue to trend favorably, up 30%. And as important, our relationships with office customers extend beyond pages to consulting services, where Xerox expertise helps businesses better manage their entire document infrastructure. Like at GE Security, where Xerox is redesigning their document workflow process, which includes upgrades to Xerox multifunction systems, and on-site document management. More and more of these services-led wins are providing greater traction for postsale. And as I mentioned earlier, service contracts are annuity-based, and do result in short-term pressure on equipment sales, but they give us significant leverage for the long term. That's why we continue to move forward with an aggressive services focus, especially for our large enterprise accounts. So if you'll turn to slide 10. We are very pleased with the continuing improvements in our developing markets operations. Revenue was up 11%, with equipment sales up 16%, and postsale and financing up 8%. Much of the growth is from continued success in Eurasia and central and Eastern Europe, where the trends remain exceptionally strong. We are making steady progress in Latin America, it's in line with our expectations, as the 2-tiered distribution model boosts results. We expect that the positive trends we're seeing this quarter will continue, and we're quite encouraged by the momentum building in all areas of our DMO business. So, now I'll turn it over to Larry to review the financials. I'll be back to take a last look at 2005, and review what to expect for the first quarter of this year. And then Larry and I will be pleased to take your questions. Larry? Larry Zimmerman, Chief Financial Officer & Senior Vice President: Thank you, Anne, and good morning. 2005 was a year of significant progress. We delivered on our commitment to increase shareholder value. Through the year, we adapted our business model to align with the changes in market dynamics. We brought new innovation to the market, and we delivered significant earnings growth and cash flow. I'm confident this progress will continue in the New Year, as we take the right steps to expand margins and deliver greater returns to our shareholders. Slide 12. Postsale and financing revenue is the engine of growth for this Company. As this slide shows, we are seeing significant improvement, both year-over-year, and quarter-over-quarter. You'll see on this slide the constant currency affect on a full-year basis. We chose to break this out because of the dramatic swing, year-over-year from positive to negative of the Euro and the Pound, versus the U.S. dollar. So on a constant currency, full-year basis, the digital areas continue to grow at 3%, DMO improves significantly and grows, and Light Lens and SOHO is declining at a consistent rate. Because these 2 elements are a smaller percentage of the total revenue, they continue to have less of a negative impact on the total, moving from 5 points in 2004, to 3 points in 2005. We expect the effect in 2006 will be about a point and a half. Color continues to grow and represents only 8% of our pages. We have a huge opportunity ahead of us. So the bottom line on postsale, again from a constant currency basis, is that it was down 5% in 2004, down 1% in 2005, and grew 1% in the second half of '05. In fourth quarter postsale rounded down to flat at constant currency, but it was actually up almost half a percentage point. So the results in fourth quarter were consistent with what we saw in third quarter. We believe this trend will continue, and that postsale will be positive in '06, which fuels total revenue growth. Slide 13. Here's a look at the P&L. To keep it simple, we're only showing 2005 and 2004 results on a GAAP basis. The results could be adjusted to show a more operational view, but I'm comfortable that the GAAP review identifies the important points. Typical of most quarters, there are pluses and minuses, but overall we have delivered bottom-line performance. Anne walked you through the revenue, which was down 2% as reported and up a point on constant currency. Gross profit margin at 41.4, that's up four-tenths of a point of the fourth quarter of '04. Certainly product mix has affected our overall margin, but we have taken actions and adjusted our model appropriately. SAG is 24.6, down to one of the lowest levels in more than a decade, primarily driven by G&A reductions of 34 million. RD&E as a percent of revenue is up two-tenths of a point, about flat on absolute dollars. With 49 new products launched last year, it's clear we continue to make the necessary investments to be competitive and drive activity growth. Other net is down, as we continue to lower debt and interest expense. We expect that this will level off in 2006. Restructuring is higher this year, consistent with our guidance last quarter. Our tax rate was 24% in the fourth quarter, with our sustained tax profitability in the U.S. we are now in a position to claim foreign tax credits. Our expectation is that our full-year 2006 tax rate will be 34%, and includes the utilization of foreign tax credits. Although this tax impact helped fourth quarter, it is offset -- it offset a decline in equity income, and the additional MPI interest accrual, which are not expected to repeat going forward. Equity income is down 14 million in the quarter, driven by the absence of Integic, which we sold, lower Fuji/Xerox equity income, and currency. Net income is up 18% year-over-year, and GAAP EPS was $0.27, meeting expectations, and growing compared to fourth quarter '04. Slide 14. Cash continues to be a strong story. Operating cash flow was 631 million in the fourth quarter, and 1.4 billion full year. Excluding uses of cash for leased equipment and finance receivables, which are leveraged to support our financing leasing business, we had 850 million in cash flow in the fourth quarter, and 1.4 billion full year. Going forward, we will continue to leverage growth in finance receivables and on-lease equipment. Q4 was driven by net income and a $250 million improvement in accounts receivable and inventory. For the full year, cash flow was basically an earnings-driven, with pension inventory and accounts receivable using cash. We expect inventory and accounts receivable to improve in 2006. Since there are still pending U.S. legislation on pensions, it's hard to predict, but I don't expect a significant change in 2006. Full-year cash from investing is driven by 237 million of CapEx. Full-year cash from financing is driven by a $1.3 billion secure debt repayments, 1.2 billion unsecured debt repayments, and 433 million for the share repurchase. In the fourth quarter we repaid 131 million of secured debt, we repurchased 433 million of stock, we invested 72 million of CapEx in our business, and we ended the quarter at 1.6 billion in cash, the same as the third quarter. This cash performance gives us the ability to add an additional 500 million to our stock buyback plan, from the 500 million announced in Q3. As we committed to do, this too is about increasing our returns to shareholders. For 2006, we expect core cash flow should be in the high end of the range, at the number I gave at the investor conference, 1.2 to 1.5 billion. Slide 15. The balance sheet is now at a point where all -- where all our debt is associated with our leasing financing activities at 7 to 1 ratio. Our cash performance gives us the flexibility for the additional 500 share repurchase, and to consider acquisitions going forward. The 500 million share repurchase is planned for the next 6 to 12 months. We expect our on lease and finance receivables to be relatively flat in 2006, so our debt will be about what it is today, 7.3 billion, which keeps our lease finance receivable leverage at 7 to 1. In 2006, we plan to continue to focus on our capital structure strategy, to drive improved cost of capital, and better overall terms and conditions. In line with our goal to return to investment grade credit rating, we intend to reduce our secured debt. So we're extremely pleased with the balance sheet and cash flow performance in 2005, and we expect continued good news on this front, given our postsale model. Slide 16. Before I hand it back to Anne, let me take a moment to wrap up the year. This is really a summary of 365 days versus the 90-day sprints, and a better way to see the longer term trend of our business. Equipment sale revenue was clearly lower than our expectations this year. However, we did see dramatic growth in our equipment installs, which will drive incremental pages and revenue, all flowing through to our postsale growth in 2006. So signs are now positive in postsale as we move forward. Install growth, color pages, small Light Lens impact, and DMO growth. Again, the second half grew at 1% constant currency. Cost and expense management continues to be excellent. Our gross profit margin at 41.2 reflects our realigned cost structure, and is within our model of 41 to 42%. SAG is improved to 26.2% and we are making the necessary investment in R&D to drive further activity growth. Interest expense has declined significantly over the last 2 years with our improved balance sheet, but now that we only leverage associated with our financing activities, we will be relatively flat going forward. Earnings on a GAAP basis has grown and delivered shareholder value, same is true for our cash flow and total balance sheet performance. All our debt is associated with leasing financing activities, with debt down almost 3 billion year-over-year. Full cash -- full-year cash flow of 1.4 billion. 433 million share repurchase completed, with another 500 million announced. So in summary, I'm confident our model is working. We have adapted where needed, and delivered earnings and cash, demonstrating our ability to deliver shareholder value. And we will do it again in 2006. Now back to Anne. Anne Mulcahy, Chairman & Chief Executive Officer: Thanks, Larry. So what I'd like to do, is quickly recap. If you'll turn to slide 18. Our progress in 2005 really is an excellent foundation for 2006. We certainly faced some challenges during the year, but made the necessary changes to address them. The end result, we expanded earnings in '05, and began building back annuity growth. Postsale turns the corner, and now will be an engine of growth. At the same time, we've strengthened our competitive position through 49 new award-winning products. Most notably, our investment in color technology is fueling growth in activity, pages, and postsale. Our color leadership is unparalleled in the industry, and we intend to keep it that way. Through Xerox Global Services we're providing customers with a clear advantage, better ways to manage document intensive work flow. These contracts boost postsale results, providing more leverage for our top-line growth. Our lean, flexible business model is aligned with the dynamics of our competitive market. We're financially strong, and remain diligent about reducing costs, generating cash, and prioritizing profitability. And this momentum will continue in 2006. For Q1, we expect to deliver earnings in the range of $0.20 to $0.23 per share, setting the stage for continued earnings expansion and profit growth in 2006. For the full year, we now believe we'll deliver earnings in the high end of our range, of $1 to $1.07 per share. We know the effectiveness of our business model is working, and we're confident in our ability to continue delivering on our commitments, building value, and winning in the marketplace. So, thank you for your attention. And Larry and I would now be pleased to take your questions. Questions & Answers:

Q - Shannon Cross: Hi. Good morning. Can you just -- I'll hit the share repurchase question first, because it was a lot faster than we'd anticipated. How quickly do you think you'll run through the incremental 500, and I guess you've got about 70 million left? So 570 million you have right now. A - Anne Mulcahy: Good morning, Shannon. I would say that, we've put the window at 6 to 12 months, because we think that it won't be quite as -- at quite the pace of the last share repurchase announcement. But still on a timely basis. Larry? A - Larry Zimmerman: Yes. What we're trying to do is align our share repurchase along with our cash flow. So as cash flow continues to do really well, we will accelerate, and do -- keep the pace with that. Q - Shannon Cross: Okay. And that's a good lead into my next question, which is, Larry, can you give us any puts or takes we should keep in mind in first quarter for cash flow, inventory, seeing seasonality, et cetera, we should think about as we forecast cash flow for first quarter? A - Larry Zimmerman: Well, normally cash flow in the first quarter is not a particularly high number. You know, we kind of built as we go through the year, and I don't think we're going to see significant inventory or AR improvements in the first quarter. So, I don't think -- I think it's a low mark of the full year cash flow. Q - Shannon Cross: Okay. And then the final question is with regard to your pension contribution. I know you don't know exactly, but just wanted to confirm. Your comments were basically, you don't see a change from about the 300 -- well you did 388 last year, but around 350 million maybe for '06? A - Larry Zimmerman: Yes. With just putting a qualifier that there's legislation. I don't think I have to say more than that. But there's legislation going on. I'm not confident I know which way it will end up. If you look at what's been worked on so far, you would not see a dramatic change in our contribution, one way or the other. Q - Shannon Cross: Okay. And actually I have one more question, and then I promise to give up. The postsale revenue, I think it will sort of probably bounce along, in sort of flat to up a little bit, just like it bounced along flat to down a little bit for a few quarters. Is there anything that is out there that might make it kick-start a little bit faster on the upside? A - Anne Mulcahy: Yes. I might -- obviously there's a lot of dynamics that go into postsale. The most significant negative impact is the pace of analog reduction, and we've seen that be pretty constant. So I'd say the real catalyst for postsale growth will be color growth and services contract impacts. As the services business builds momentum, clearly it will have an impact on postsale growth, a positive impact. Q - Shannon Cross: Okay. Thank you. A - Anne Mulcahy: Thank you.

Thank you ma’am. Our next question comes from the line of Ben Reitzes with UBS. Q - Ben Reitzes: Yes, hi. Good morning. Thanks. A - Anne Mulcahy: Hi, Ben. Q - Ben Reitzes: Hi. Anne, what are you thinking now for the revenue growth for 2006 after coming in a little short this quarter? A - Anne Mulcahy: Well, I think that -- and I said that we're confident that 3% is still a very reasonable expectation at constant currency. I think what we have seen is, if you look at Q4, we clearly drove very strong activity. We were aggressive in the marketplace, which we wanted to do. Placements for us is obviously the engine of the future. So we wanted to gain share, we wanted to drive big activity, particularly with some of the new products. But we did, through the impact from price pressures and mix pressures in the quarter. The other thing was is that the impact of operating leases was a little bit larger than we probably anticipated, at a point and a half of impact on the equipment sale line. But, that's our strategy. It's money in the bank. Annuity contracts are absolutely a great business for us, good margins, and a really healthy way for us to drive the annuity business. So all in all, the drivers were very positive. Although when you added it all up on the mix and the price side, equipment sale was a little bit lower than anticipated. But we got a good trend going in postsale, we've got a good trend going in DMO. The color growth has stayed very robust. And services momentum is clearly building. So all in all, we're quite confident about the commitment we've made on 3%. It may be a little bit less equipment sale, and a little bit more postsale, in terms of delivering that 3%. But we are quite confident about the flow-through from the activity and the performance of Q4. Q - Ben Reitzes: Just to put it like in a different light. You've said in your presentation that color has a clear benefit on the top and bottom line. And obviously, you're delivering in color. But something -- we're not obviously seeing the leverage on the top line or the bottom line. I mean obviously a lower tax rate helped quite a bit in the quarter. So we're not -- I don't -- what is the big offset? Like, what is the -- is it Nuvera? Is it the offset of the DocuTechs? Or is there -- how would you kind of -- if something was holding back the leverage in the quarter, and what we might see turn going forward, am I looking at it in the right way? Like, is color going to eventually offset the weakness in the high-end black and white? Or how would you kind of couch the leverage we're going to see in the future in that regard? A - Anne Mulcahy: So Ben I would say color's already offsetting any weakness in the postsale production part of the business. I think the growth opportunity really comes from two things. one is the Light Lens impact declining, and then the scaling of Nuvera, which clearly will be a strong impact on both top and bottom line. And we've been clear that we're thrilled with our light production results. We expect those to continue. But the Heartland production publishing business will be helped significantly as we bring on the enhanced features of Nuvera, which are happening in the first half of the year. The other dynamic that happens is on the color side. We're very pleased with color activity growth, and color production activity growth in pages. But it's still what we would call is not a fully mature business, in terms of critical amount of installs, which drive better economics and efficiencies. So the more color that goes in, the more profitable it becomes. And therefore, a much richer, if you will, impact overall. So there's an investment strategy here on color that we're ramping up and we'll get the full benefit on down the road. So I think those dynamics are the ones that you have to watch, and that is the continued pace and growth of color, and clearly the return of production publishing. By the way, we had a very strong, decent DocuTech performance in Q4. So even in the absence of Nuvera, we had flat performance on production publishing, which was an improving trend. So I think it's going in the right direction, but those would be the elements I'd point to. Q - Ben Reitzes: Okay. Thanks a lot, Anne. A - Anne Mulcahy: Thank you, Ben.

Thank you. Our next question comes from the line of Matt Troy with Citigroup. Q - Matt Troy: Good morning. A - Anne Mulcahy: Hi, Matt. Q - Matt Troy: I had a question on DMO. Specifically, you referenced that you were pleased with the momentum there, and certainly that was part of the story in the back half of '05. A - Anne Mulcahy: Yes. Q - Matt Troy: Certain leverage potential, but I'm just looking at the revenue numbers. They've improved sequentially through the year. A - Anne Mulcahy: Yes. Q - Matt Troy:

A - Anne Mulcahy: Well, operating income was up year-over-year in DMO. Q - Matt Troy: I'm talking sequentially. A - Anne Mulcahy: Sequentially. And what I would say, is that a lot of the revenue growth in developing markets comes from, particularly, the indirect distribution part of the business, which is low-end printers, low-end multifunction. So the strength of that business does put pressure overall on the operating margin of DMO. But that's part of our model for DMO, as well, in the sense that our expectation is they're going to be an engine of growth. And clearly that's right now being driven by Eastern Europe and overall, it's going to be a win. If you look year-over-year at operating margins in DMO, it improved 2 full points. And we expect significant improvement year-over-year from 2005 to 2006 as this model gets stronger. So, the quarters can have some anomalies in it. But overall, you should see operating margin improvement in 2006 out of DMO. Q - Matt Troy: Is it fair to say the majority of that opportunity is coming from the Latin American operation, still? A - Anne Mulcahy: Well, I think the opportunity for improvement is more significant. We've got a -- right now Eastern Europe, Eurasia, is doing fabulously and we expect that to continue. The -- yes. The opportunity for improvement is clearly going to come from Latin American operations. Q - Matt Troy: Okay. And second question, echoing on some of the earlier inquiries, on the postsale story. I mean, you guys have been talking about that for a couple quarters now. The numbers, sequentially, are improved. But it's flat in the fourth quarter, not gangbusters. I'm wondering if you look at by segment, the performance of the install base, if you could maybe just walk us through. Is that hitting your expectations by segment? And is there opportunity to potentially lower cost per page to fuel more activity through the install base? A - Anne Mulcahy:

Q - Matt Troy: Right. A - Anne Mulcahy: Office digital grew at 8%, production digital grew at 9%, the color MIF grew at 31%, driving total digital placements in the field growing at 8%. So, it's kind of a science, and the fact is, is that with strong activity rates, good retention rates, which drives higher populations in the field, the flow-through is absolutely going to happen. And that's why when it comes to postsale, we can look at it with a high degree of confidence as to how this model works. And all the indications with regard to pages, populations, and row activity are very, very positive. Q - Matt Troy: And just on that last point that I asked. Is there a crossover point where the install base hit sufficient density where you can lower your price per page, and maybe stoke a little bit more activity, or we're not close to that yet? A - Anne Mulcahy: Well, we actually did a little bit of that in Q4, I would say. And that's why perhaps the equipment revenue was a little bit disappointing in terms of even what we expected. But we did it in 2 areas. We did it with our new black and white introductions in segments 3 to 5 because we wanted to get out there and really gain share and be competitive on the black and white business. And the second area is we continue to be very aggressive in color printing, particularly solid ink, which certainly is not attractive on the equipment sales price side, but is extraordinarily attractive downstream. So some of the equipment sale performance in Q4 was an attempt to invest in driving even more significant activity that will flow through to postsale in 2006. Q - Matt Troy: All right. Thanks for the detail, Anne. A - Anne Mulcahy: Okay. Thanks, Matt.

Thank you sir. Our next question comes from the line of Caroline Sabbagha with Lehman Brothers. Q - Caroline Sabbagha: Thanks very much. Anne, just going back to equipment sales on the -- in the quarter. You said it disappointed. Clearly, the low end did well, but something in the high end must have disappointed you. Which areas would you point to on that front? And in looking at '06, you suggested that equipment sales may not be what you expected it to be in November. I think at that time you gave expectations of 2 to 6% on constant currency. A - Anne Mulcahy: Yes. Q - Caroline Sabbagha: Where would you -- what do you think that range looks like, and would you still expect equipment sales on -- given what you saw on the fourth quarter, to be up next year on a constant currency? And then 1 more follow-up after that, please. A - Anne Mulcahy: Okay. So let's just talk about some of the dynamics on equipment sale and, you -- clearly on a constant currency basis, actually production did quite well and was growing on a constant currency basis. I think if there was any disappointment there, it was one that we expected, which is we don't have the full impact yet of Nuvera. But light production was gang busters, thrilled with the 240/250, and thrilled with iGen, in terms of performance, and DocuColor continued to perform strong. So all in all, I don't think we would say that production was a disappointment. In office, I think we saw a couple of things that did suppress what we might have expected in equipment sales. One is I think big-time price pressures in office color printing, some of which we drove with solid ink. We kind of lapped ourselves on the OEM business in Q4, so that it was not a source of growth, and actually was no -- didn't provide any growth for us in Q4. Obviously that comes in at very low margin, so it's not a big deal as it relates to profit. And I think that our aggressive posturing in the marketplace in segments 3 to 5 did dampen if you will, the revenue story coming out of black and white office digital. So I would look at it and say office was really impacted more than production on the equipment sale side. The other thing was that point and a half I talked about from operating leases, came from a strength in our office services deals, which clearly had the impact on the office business. So I would look at it and say, aggressive pricing in office, by the way, which we drove, and also the office services impact in office as well as the fact that OEM -- our OEM business provided no growth really, year-over-year, in terms of the growth it had provided in previous quarters. And in terms of our expectations, I think we're still within the range on equipment sales, Carol. We're not going to be out of the range by any means. I think we just are at the lower end of the range, versus the higher end of the range on equipment sale. And I think that on the postsale side, we'll do better than we anticipated, still feeling confident about the 3% growth in constant currency. Q - Caroline Sabbagha: Okay. Perfect. And then the follow-up question is, there seems to be this mix shift downwards across the board and it seems it's been happening relatively all year. A - Anne Mulcahy: Right. Q - Caroline Sabbagha: Would you say that that trading down dynamic is more of an industry dynamic, or something more specific to Xerox and the product introductions you've had? And if it's an industry dynamic, what do you think the factors are, and does it anniversary out at some point in time? A - Anne Mulcahy: Well, I think the -- we would say that we're calling it an industry dynamic, and we're going with it, and we're going to perform really going with the fact that there is a trend downwards. We do think it's driven in the office by segments 1 and 2. There's no question that there's a movement to a more distributed approach that has put pressure on the higher segments of the office. And in production, the light production strength is clearly there to stay. We intend to capitalize on it, and certainly grow as fast or faster than the market exhibited by our repositioning on the number 1 market share across the world in light production. I think the flip side of that is really the color story, which obviously is providing probably more growth than we would have anticipated, but on a much smaller percentage of the base. And therefore, we do believe that going forward that we can deliver growth by the strength of activity, and the leveraging of the color business. But we think that there's an industry trend here that we're going to work with and clearly optimize going forward. Q - Caroline Sabbagha: Great. Thank you very much. A - Anne Mulcahy: Thanks, Carol.

Thank you ma’am. Our next question comes from the line of Jack Kelly with Goldman Sachs. Q - Jack Kelly: Good morning. A - Anne Mulcahy: Good morning, Jack. Q - Jack Kelly: Anne, could you discuss the 13% decline in operating profits in the production segment? In the press release you -- one of the comments that was made was there was a mix shift, which has been discussed already, which negatively impacted margins. But that wouldn't necessarily explain an absolute decline. It could, but might not. So if you could just give us a little color on that. A - Anne Mulcahy: Okay. So there was a decline in the operating margin for production and I would actually point to 2 specific areas that are responsible. 1 is a lot more color coming in. We talked about kind of the maturity curve on color, so you have a lot more color coming in at lower margins. All of which improve in 2006. So it's not a constant impact. And the other piece is the very high performance in light production, offset by not having the strength of the full Nuvera compliment in place. So those two clearly did have an impact overall on the operating margin of production. I would point out, Jack, that was almost entirely offset by strength in office. And that the total operating margin, if you look at segment profit, was up 1.7 points for the Company. We were at 10.5% versus 8.8 the year before. So the operating segment profit, although down in production, was more than offset by the rest of the Company which really shows the strength of the core business flow-through there. So we believe that, and we're anticipating that we're going to improve the production margin going forward, and we're going to maintain the good trends we have in DMO and office, as it relates to operating segment profit. Q - Jack Kelly: So the swing in profitability in margins in production '06 over '05, would be replacing some of that high-end business, which you lost in '05. Is that -- because the color probably will continue to be -- whatever impact it had in '05, it probably would have a similar impact in '06. A - Anne Mulcahy: Well, I think actually color margins are going to get better, just because of the critical mass of installs. When you look at the base of DocuColor installs we have and (inaudible) installs out right now, the economics are -- there is an improving, certainly within the year in 2005 and they're just going to get better. So color will have a positive impact. But it's not so much the loss of production, it's the fact that we've got the strength of light production against the absence of new Nuvera placements. And Nuvera really, with its full enhanced finishing, is designed to really do the -- attack the offset market, book publishing market, the one-on-one market. So it's the absence of that, more than it is the actual losses in the production side of the house. Q - Jack Kelly: Okay. And then in terms of the '06 forecasts where you kind of shifted to the higher end. On the sales side, revenue side doesn't sound like things have changed, maybe there's a little mix change between postsale and equipment. A - Anne Mulcahy: Yes. Q - Jack Kelly: Does the upward shift or bias just reflect the lower tax rate, Anne? Going from I guess 36 to 37, which you guys had built in to the 34? A - Anne Mulcahy: Yes. I think certainly going from 36 to 34 does represent a positive against expectations. I would note that that's still year-over-year, 34% actually provides no leverage in the sense that our tax rate in 2005 was lower than 34. So on a year-over-year basis, actually there's not leverage. But against original expectations, there is. So I think our comment on really guidance at the high end of our range certainly indicates that we have some - not a lot - of positive leverage from tax, and that we are confident about our operational expectations for 2006. And that really comes from the strength of activity and share and color that we've seen in Q4. Q - Jack Kelly: Okay. And just finally. The 1.5% drag you mentioned from… A - Anne Mulcahy: Yes. Q - Jack Kelly: The service contracts. I know it's tough, because you don't know the mix of business. But how do you see that trending throughout '06? Would that be less of a drag or more of a drag? A - Anne Mulcahy: Well, I think it might be more of a drag, in the sense that we expect our services activity to be accelerating and to be gaining momentum. But it's a positive trade-off, Jack. Q - Jack Kelly: Right. A - Anne Mulcahy: Because it's hitting the postsale line which obviously is a higher margin line. So services is part of the strategy to really take advantage of the engine of growth of postsales. So I would expect that if we're as successful as we could be in services, and we are quite confident based upon the pipeline, that you might see even a little bit more of an impact in 2006, as it relates to the equipment sale line. But it's all money in the bank in the postsale line. Q - Jack Kelly: Good deal. All right. Thank you. A - Anne Mulcahy: Thanks, Jack.

Thank you sir. Our next question comes from the line of Bill Shope with JP Morgan. Q - Bill Shope: Okay, great. Thanks. I wanted to dig into postsales a bit more. Obviously, you guys are doing extremely well in color. But could you help me to understand when color starts to actually become a much larger driver of the actual postsales growth revenue? Basically, color's now more than 30% of the total. I would have thought by now your postsales growth overall would have been much higher as a result. Is this more about getting color pages up as a percentage of total, or am I looking at it the wrong way? A - Anne Mulcahy: Yes, I think when you look at the impact that color's had, I think we talked about the fact that we've had a 5 point -- in terms of the amount of -- the percentage of revenue that color represents, it's a 5 point increase year-over-year, which is pretty significant. But there's no question it's all about pages, okay. You have to look at pages. We talked about it representing 8% of the pages today. And that it's coming up fairly consistently, and the color pages are growing overall at 32% from Q4. And that's been pretty consistent Q3. I think it was 33%, and it's been consistent in office and production. So clearly, it will be a page story that will really leverage the total portfolio for the Company. The revenue already impact-- already shows the impact of the 5 X ratio, if you will, of revenue per page. So it is driving those pages up as quickly as possible that will really cross over in terms of increasing the leverage that color has. So that's what I would use as the single-most important metric in terms of page growth. And that's why we're -- I mean we're thrilled with our activity in Q4. But when you look at where the activity's coming from, I mean just some of the statistics in terms of iGen. We had a 30% activity increase year-over-year in iGen placements, averaging 400,000 pages per month. We have over 100 of those iGens doing a million pages in a single month. So -- and then you look at the thousands of DocuColor installs out there. It's -- I mean from a page leverage story, we are so far ahead of the game in terms of other competitors, that that's annuity. It's pages under contract. Think about it like that. And that's why we're pretty bullish about the fact that color's going to take on greater significance for Xerox than it will for other companies that don't have the kind of page-producing engines out in the field that we do. Q - Bill Shope: Okay. Great. And then a quick question on the OEM business. As you mature through the ramp of the -- that business, are you beginning to see an uptick in the related supply stream? In other words, expect the businesses depressing gross margins in the early stages, are we now approaching a positive inflection point now that we're (inaudible) the initial launches in that relationship? A - Anne Mulcahy: Yes. I think, as I said, we saw kind of a flat equipment sale impact as we kind of cycled quarter-over-quarter the equipment sale placement side of it. But the profit flow through has been improving. We're pleased with that business. It's been a nice contributor, but this is where -- as nice as the profit increase will be from that, it pales in comparison to the production color business, where the vast majority of pages are produced in the marketplace. So when we look at either our color low-end printing business, including our OEM business, it actually represents a fairly small part of our portfolio, versus some of our competitors. And we think that bodes well for the future, actually. Q - Bill Shope: Okay. Great. Thank you. A - Anne Mulcahy: Thank you. I think we have time for one last question.

Yes ma’am our final question now will come from the line of Jay Vleeschhouwer, Merrill Lynch. Q - Jay Vleeschhouwer: Thanks. Good morning. A - Anne Mulcahy: Good morning, Jay. Q - Jay Vleeschhouwer: Before I ask about the equipment and mix issue again, I just want to get your overall view of the end markets, and the health of those. Our economist, anyway, is anticipating some slowdown in the overall U.S. economy, offset, however, by improvements elsewhere, particularly in Japan. And I'm wondering what your thinking is globally. And similarly, if you could comment, as you have before on other calls, on the graphic arts markets, commercial markets, and so on. Then an equipment question. A - Anne Mulcahy: Okay. So just in terms of global economy, I mean I think we saw some modest improvement, quite frankly, in the U.S. as it relates to our business in Q4. So we actually have seen some improvement there. A lot of good services, contracts and pipeline, as well as good activity. A little bit slower in Europe, but not material in terms of our views. Obviously, incredible health in Eurasia, Eastern Europe, and our Russian markets. We're very, very pleased. Improvement in Latin America. And we do expect to see some positive trends in Japan, and we're quite confident that we'll see good improvement in equity income, certainly in line with the kind of operational improvements you'll see at XC as well. So some positive flow-through on the equity income side from Fuji Xerox. So I'd kind of say nothing dramatic in terms of major changes. A little bit more strength in North America, which is good because it's the biggest operation we have. And graphic arts, very strong, very pleased with what's happening in graphic arts. The big graphic arts customers clearly are taking advantage of digital printing. For us to have 100 customers out there with more than 1 iGen3, I think is a fairly dramatic improvement versus the first half of the year. So pretty pleased overall with the graphic arts environment. Q - Jay Vleeschhouwer: All right. And then the equipment question is -- came up earlier about whether this was an industry dynamic or not. When you look at the data over the course of 2005, there did seem to be some reversion to a higher proportion of higher-speed machines, both copier and printer. If you want to demarcate it between the above 30 and below 30. Over the course of the year, the percentage of units going out is above 30 PPM, for example, did seem to grow. And on the other hand, you're saying that on the low end grew proportionately. So are you just using price more to capture that low-end business where you've typically been not as much exposed as at the high end? A - Anne Mulcahy: Yes. I mean I think I'll separate it out into black and white and color, Jay, and say in the black and white market, we clearly used price. I should say that we did it intentionally on the segments 3 to 5 because we have new technology with -- where we cannot deteriorate profitability by using better pricing in the 3 to 5 segment. So we were aggressive, and therefore I think that probably was more about us, than it was about anyone else. Segments 1 and 2 are, as you know, very, very competitive segments and clearly we see a continuing competitive thrust in segments 1 and 2. On color, I would say that we are very strong, at the high end of the color office segment, and that's really where we saw just extraordinary activity. I think it was 58% growth in terms of color multifunction, and that's the new 40/50 driving that, Jay, and that is at the high end of the office color segment. So if you think about the 11 to 40 segment, our performance will clearly be leveraged towards the high end of that segment. And I'd say the only other dynamic is -- and it's more about us, than the market, is the -- obviously the production publishing side. I mean, with our share in production publishing, we've sort of defined that market. And therefore without having the full complement of new technology out there, the growth has been slower than it should have been, based upon the Nuvera piece of it. On the other hand, light production's going gangbusters and we're growing faster than the market. So I would say overall, black and white it's industry shift downward and price pressures to really gain share. And on color, I think it's robust, and I think it is more higher end growth than it is lower end growth. Q - Jay Vleeschhouwer: Okay. Got it. Lastly, you said that your total postsale constant currency went from minus 5 in '04 to minus 1 in '05. A - Anne Mulcahy: Yes. Q - Jay Vleeschhouwer: Could you foresee another, perhaps 4 point positive swing into low double -- low single-digit territory in '06? A - Anne Mulcahy: Larry just whispered God willing, but I think I would perhaps dampen that expectation and say that the Light Lens base is a lot lower than it was certainly year-over-year, so you will not get the same dramatic turn on the Light Lens side. On the other side you get more color leverage. I think we'll see certainly a nice swing in postsale, but not quite the 4 point swing that we saw year-over-year from 2004 to 2005. Q - Jay Vleeschhouwer: Okay. Thank you very much. A - Anne Mulcahy: Okay. Thank you, Jay. And let me just add my thanks to all of you. We appreciate your interest, and thank you for your time and participation. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation, and you may now disconnect. Have a wonderful day.