MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Xerox Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes.

Throughout this document, references to "we," "our," the "Company," and "Xerox" refer to Xerox Corporation and its subsidiaries. References to "Xerox Corporation" refer to the stand-alone parent company and do not include its subsidiaries.

To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. dollars on revenue and expenses. We refer to this analysis as "currency impact" or "the impact from currency." This includes translating the most recent financial results of operations using foreign currency of the earliest period presented. Currencies for our developing market countries (Latin America, Brazil, the Middle East, India, Eurasia and Central-Eastern Europe) are reflected at actual exchange rates for all periods presented, since these countries generally have volatile currency and inflationary environments, and our operations in these countries have historically implemented pricing actions to recover the impact of inflation and devaluation. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency.

Overview

2009 first quarter results largely reflect the continued effects of the worldwide economic downturn with constraints in the overall business environment delaying purchasing decisions and the Company's distributors holding lower inventory levels. Total revenue of $3.6 billion declined by 18% from the prior year including a 6% unfavorable impact from currency. Equipment sales revenue decreased by 30% from the prior year reflecting the continued industry-wide slowdown in technology spending. Post-sale revenue was down 14% from the prior year reflecting lower supplies revenue as distributors continued to hold lower inventory levels and businesses implemented their own cost-cutting measures. This issue was exacerbated in developing markets due to major economic and currency swings in key regions.

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Table of Contents

Lower supplies sales as well as higher inventory costs due to currency impacted gross margin - which was 38.9 percent in the quarter, down about half a point from the prior year. Selling, administrative and general ("SAG") expenses declined $120 million from the prior year reflecting favorable currency and the flow through benefits from our cost and expense management initiatives including restructuring. SAG as a percent of revenue was 28.2 percent. We expect to achieve $250 million in annual savings from our 2008 restructuring initiatives, as well as an additional $300 million in other cost and expense reduction actions.

Cash flow from operations was $22 million in the 2009 first quarter and cash used in investing activities of $207 million included $145 million for GIS's acquisition of ComDoc. Total Debt at March 31, 2009 was down $485 million from year-end.