OVERVIEW

Lexmark makes it easier for customers to move information between the digital and paper worlds. Since its inception in 1991, Lexmark has become a leading developer, manufacturer and supplier of printing and imaging solutions for the office. Lexmark's products include laser printers, inkjet printers, multifunction devices, and associated supplies, services and solutions. Lexmark also sells dot matrix printers for printing single and multi-part forms by business users.

The Company is primarily managed along divisional lines: the Printing Solutions and Services Division ("PSSD") and the Imaging Solutions Division ("ISD").

• The Printing Solutions and Services Division primarily sells laser products and serves business customers but also include consumers who choose laser products. Laser products can be divided into two major categories - shared workgroup products and lower-priced desktop products. Lexmark employs large-account sales and marketing teams, closely supported by its development and product marketing teams, to generate demand for its business printing solutions and services. The sales and marketing teams primarily focus on industries such as financial services, retail, manufacturing, education, government and health care. Lexmark also markets its laser and inkjet products increasingly through small and medium business teams who work closely with channel partners. The Company distributes and fulfills its laser products primarily through its well-established distributor and reseller network. Lexmark's products are also sold through solution providers, which offer custom solutions to specific markets, and through direct response resellers.

• The Imaging Solutions Division predominantly sells inkjet products to small office home office ("SOHO") users as well as business users who may choose inkjet products as a lower-priced alternative or supplement to laser products. The Imaging Solutions Division also sells select laser products in certain geographies to SOHO and business users that purchase products through retail channels. Additionally, over the past couple of years, the number of customers seeking productivity-related features has driven significant growth in all-in-one ("AIO") products. Key factors promoting this trend are greater affordability of AIOs containing productivity features like wireless connectivity, full fax capabilities, automatic document feeders and duplex capabilities. Lexmark distributes its branded inkjet products and supplies through retail outlets as well as distributors and resellers worldwide. Lexmark's sales and marketing activities are organized to meet the needs of the various geographies and the size of their markets.

The Company also sells its products through numerous alliances and original equipment manufacturer ("OEM") arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Lexmark's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of consolidated condensed financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, product returns, doubtful accounts, inventories, stock-based compensation, intangible assets, income taxes, warranty obligations, copyright fees, restructurings, pension and other postretirement benefits, and contingencies and litigation. Lexmark bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 ("FSP FAS 157-2") which deferred the effective date of FAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. As permitted by FSP FAS 157-2, the Company only partially applied the provisions of FAS 157 during 2008. Effective January 1, 2009, the Company began applying the valuation concepts of FAS 157 to its nonrecurring, nonfinancial fair value measurements, including the maximization of observable inputs as well as the consideration of market participant assumptions such as highest and best use of an asset. To the extent that a valuation is based on models, inputs or assumptions that are less observable in the market, the determination of fair value requires more judgment on the part of the Company. Such measurements are often classified as Level 3 within the fair value hierarchy.

Management believes that other than the adoption of FAS 157 for its nonrecurring, nonfinancial fair value measurements during the first quarter of 2009, there have been no significant changes to the items that were disclosed as critical accounting policies and estimates in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

RESULTS OF OPERATIONS

Operations Overview

Key Messages

Lexmark is focused on driving long-term performance by strategically investing in technology, products and solutions to secure high value product installations and capture profitable supplies and service annuities in document and print intensive segments of the distributed printing market.

· The PSSD strategy is focused on capturing profitable supplies and service annuities generated from workgroup monochrome and color laser printers and laser multifunction products ("MFPs").

· The ISD strategy is to build a profitable, growing and sustainable inkjet business with good margins and returns derived from a more productive and higher page generating installed base of products and solutions that serve SOHO and business users.

Lexmark continues to take actions to improve its cost and expense structure including continuing to implement restructuring activities of its business to lower its cost and better allow it to fund these strategic initiatives.

Lexmark continues to maintain a strong financial position with a solid balance sheet, which positions it to prudently invest in the future of the business and successfully compete even during challenging times.

Business Factors

The weakening of the global economy continued to impact the revenue in both of the Company's segments during the first quarter of 2009. Lexmark continues to take actions to reduce cost and expenses worldwide and improve the efficiency of the Company's inkjet cartridge manufacturing operations and, as a result, the Company announced an additional restructuring action in April 2009 that includes the planned closure of the Company's inkjet cartridge manufacturing facility in Juarez, Mexico by the end of the first quarter of 2010. See "Restructuring and Related Charges (Reversals) and Project Costs" that follows for further discussion.

PSSD

During the first quarter of 2009, Lexmark continued its investments in PSSD through new products and technology. The Company expects these investments to produce a steady stream of new products. Lexmark continued to strengthen its customer value propositions with the introduction of 70 new laser products in the fall of 2008 and spring of 2009 that significantly strengthened the Company's monochrome laser line, color laser line and laser MFPs.

The Company continued its investment in the expansion of managed print services and Lexmark also made investments to improve its coverage and expand the reach of its solutions and services proposition.

The primary focus of these PSSD investments is to drive workgroup laser growth and page generation.

ISD

In 2007, the Company undertook a significant shift in ISD strategy.

Beginning in the second quarter of 2007, the Company experienced the following issues in ISD:

· On-going declines in inkjet supplies and OEM unit sales;

· Lower average unit revenues due to aggressive pricing and promotion; and

· Additional costs in its new products.

As the Company analyzed the situation, it saw the following:

· Some of its unit sales were not generating adequate lifetime profitability due to lower prices, higher costs and supplies usage below its model;

· Some markets and channels were on the low-end of the supplies generation distribution curve; and

· Its business was too skewed to the low-end versus the market, resulting in lower supplies generation per unit.

As a result, Lexmark decided to take the following actions beginning in 2007:

· The Company decided to more aggressively shift its focus to geographic regions, market segments and customers that generate higher page usage.

· The Company continues working to minimize the unit sales that do not generate an acceptable profit over their life.

The above actions entail several initiatives, which were begun in 2007 and have continued through the current period:

· Shifting the Company's marketing focus and targeted customer segments to the heavier usage segments of SOHO and business users;

· Shifting the Company's investment in research and development to better design products and technology that will be attractive to these segments;

· Re-engineering the Company's supply chain to reduce costs and eliminate touches between the factory and the customers; and

· Consolidating supplies manufacturing capacity to lower cost and reduce working capital requirements. See "Restructuring and Related Charges (Reversals) and Project Costs" that follows for further discussion of the Company's various restructuring activities.

These initiatives have yielded the following for the Company's ISD segment since 2007:

· The introduction of new products such as Lexmark's Professional Series;

· An increasing amount of industry recognition and awards for its inkjet products; and

· An improvement in the Company's retail presence in U.S. Office Super Stores.

The transition of the business is continuing. Due to this transition and weakness in the OEM business, Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales. The objective is to ultimately stabilize the revenue based on a smaller installed base of higher profit generating devices.

Operating Results Summary

The following discussion and analysis should be read in conjunction with the
Consolidated Condensed Financial Statements and Notes thereto. The following
table summarizes the results of the Company's operations for the three months
ended March 31, 2009 and 2008:

                                    Three Months Ended March 31
                                 2009                         2008
(Dollars in millions)   Dollars       % of Rev       Dollars       % of Rev
Revenue                 $  944.1          100.0 %   $ 1,175.1          100.0 %
Gross profit               333.4           35.3         435.5           37.1
Operating expense          258.8           27.4         313.2           26.7
Operating income            74.6            7.9         122.3           10.4
Net earnings                59.2            6.3         101.7            8.7

For the first quarter of 2009, total revenue was $944 million or down 20% from 2008. Laser and inkjet supplies revenue decreased 16% YTY and laser and inkjet hardware revenue decreased 30% YTY. In PSSD, revenue decreased 19% YTY while revenue in ISD decreased 20% YTY.

Net earnings for the first quarter of 2009 decreased 42% from the prior year primarily due to lower operating income. Net earnings for the first quarter of 2009 included $12.8 million of pre-tax restructuring-related charges and project costs. Net earnings for the first quarter of 2008 included $12.6 million of pre-tax restructuring-related charges and project costs and a $6.7 million tax benefit resulting from adjustments to previously accrued taxes.

Revenue

For the first quarter of 2009, consolidated revenue decreased 20% YTY. Laser and
inkjet supplies revenue declined 16% YTY due to lower end user demand and the
negative impact of foreign currency exchange rates. Laser and inkjet hardware
revenue declined 30% YTY primarily driven by unit declines, as well as the
negative impact of foreign currency exchange rates.

The following table provides a breakdown of the Company's revenue by segment:

                             Three Months Ended March 31
(Dollars in millions)      2009            2008         % Change
PSSD                    $    598.7       $   741.3        (19 ) %
ISD                          345.4           433.8        (20 )
Total revenue           $    944.1       $ 1,175.1        (20 ) %

PSSD

During the first quarter of 2009, revenue in PSSD decreased $143 million or 19% compared to 2008 due to a 30% decline in hardware revenue as well as a decline in supplies revenue. The lower hardware revenue was primarily due to lower unit volumes, as well as a negative impact of foreign currency exchange rates. PSSD laser hardware unit shipments declined 25% YTY due to the weak economic environment. PSSD laser hardware average unit revenue ("AUR"), which reflects the changes in both pricing and mix, decreased 5% YTY primarily due to negative currency impacts and continued price pressures.

ISD

During the first quarter of 2009, revenue in ISD decreased $88 million or 20% compared to 2008 due to decreased hardware and supplies revenue. Hardware revenue declined 32% YTY due to lower unit shipments, as well as a negative impact of foreign currency exchange rates. The ISD hardware decline YTY was partially offset by improved product mix toward higher priced hardware devices. Hardware unit shipments declined 30% YTY principally due to the decision to transition the inkjet business as well as the weak global market. Hardware AUR decreased 3% YTY as positive product mix was more than offset by the negative impact of foreign currency exchange rates as well as continued price pressures.

Revenue by geography:

The following table provides a breakdown of the Company's revenue by geography:

                                                Three Months Ended March 31
(Dollars in millions)                        2009            2008        % Change
United States                             $    421.8       $   487.8           (14 ) %
EMEA (Europe, the Middle East & Africa)        351.2           454.9           (23 )
Other International                            171.1           232.4           (26 )
Total revenue                             $    944.1       $ 1,175.1           (20 ) %

For the three months ended March 31, 2009, revenue decreased in all geographies primarily due to global economic weakness. In addition, currency exchange rates had a 7% YTY unfavorable impact on revenue for the first quarter of 2009. For the first quarter of 2008, currency exchange rates had a 5% YTY favorable impact on revenue.

Gross Profit

The following table provides gross profit information:

                              Three Months Ended March 31
(Dollars in millions)      2009             2008         Change
Gross profit dollars    $    333.4       $    435.5          (23 ) %
% of revenue                  35.3 %           37.1 %       (1.8  )pts

For the three months ended March 31, 2009, consolidated gross profit and gross profit as a percentage of revenue decreased YTY. The changes in the gross profit margin YTY for the three months ended March 31, 2009 were primarily due to a decline in product margins of 4.5 percentage points, primarily driven by lower hardware margins, partially offset by a favorable mix shift reflecting a higher relative percentage of supplies versus hardware.

Gross profit for the three months ended March 31, 2009, included $4.9 million of pre-tax restructuring-related charges and project costs. Gross profit for the three months ended March 31, 2008 included $5.3 million of pre-tax restructuring-related charges and project costs. See "Restructuring and Related Charges (Reversals) and Project Costs" that follows for further discussion.

Operating Expense

The following table presents information regarding the Company's operating
expenses during the periods indicated:

                                                              Three Months Ended March 31
                                                          2009                          2008
(Dollars in millions)                            Dollars        % of Rev       Dollars        % of Rev
Research and development                        $     97.4           10.3 %   $    105.5            9.0 %
Selling, general & administrative                    158.9           16.8          209.0           17.8
Restructuring and related charges (reversals)          2.5            0.3           (1.3 )         (0.1 )
Total operating expense                         $    258.8           27.4 %   $    313.2           26.7 %

For the three months ended March 31, 2009, research and development decreased YTY due to the continuing focus on optimizing the efficiency of the development spend while continuing to invest in key strategic initiatives.

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2009 decreased YTY. The lower SG&A reflects the benefits of the Company's restructuring actions and other expense reduction measures as well as weaker foreign currencies. Additionally, SG&A expenses in the first quarter of 2009 and 2008 included project costs related to the Company's restructuring activities. See discussion below of restructuring and related charges and project costs included in the Company's operating expenses for the periods presented in the table above.

For the three months ended March 31, 2009, the Company incurred $7.9 million of pre-tax restructuring and related charges and project costs due to the Company's restructuring plans. Of the $7.9 million of pre-tax restructuring and related charges and project costs incurred for the three months ended March 31, 2009, $5.4 million is included in Selling, general and administrative while $2.5 million is included in Restructuring and related charges (reversals) on the Company's Consolidated Condensed Statements of Earnings.

For the three months ended March 31, 2008, the Company incurred $7.3 million of pre-tax restructuring and related charges and project costs due to the Company's restructuring plans. Of the $7.3 million of pre-tax restructuring and related charges and project costs incurred for the three months ended March 31, 2008, $8.6 million is included in Selling, general and administrative which is partially offset by the ($1.3) million reversal included in Restructuring and related charges (reversals) on the Company's Consolidated Condensed Statements of Earnings.

See "Restructuring and Related Charges (Reversals) and Project Costs" that follows for further discussion.

Operating Income (Loss)

The following table provides operating income by market segment:

                                     Three Months Ended March 31
(Dollars in millions)             2009         2008          Change
PSSD                            $   93.2     $  143.9        (35 ) %
% of segment revenue                15.6 %       19.4 %     (3.8 ) pts

ISD                                 52.4         78.7        (33 ) %
% of segment revenue                15.2 %       18.1 %     (2.9 ) pts

All other                          (71.0 )     (100.3 )       29   %
Total operating income (loss)   $   74.6     $  122.3        (39 ) %
% of total revenue                   7.9 %       10.4 %     (2.5 ) pts

For the three months ended March 31, 2009, the decrease in consolidated operating income was due to lower gross profit partially offset by lower operating expenses.

For the first quarter of 2009, PSSD operating income decreased YTY principally due to lower gross margin dollars, primarily reflecting the negative impact of weaker foreign currencies on revenue, partially offset by lower operating expenses.

For the first quarter of 2009, ISD operating income decreased YTY due to lower supplies revenue, reflecting the actions taken to re-position the ISD business, and the global economic weakness, as well as the impact of weaker foreign currencies.

For the three months ended March 31, 2009, the Company incurred total pre-tax restructuring-related charges and project costs related to the Company's restructuring plans of $1.3 million in PSSD, $3.0 million in ISD and $8.5 million in All other. See "Restructuring and Related Charges (Reversals) and Project Costs" that follows for further discussion.

For the three months ended March 31, 2008, the Company incurred total pre-tax restructuring-related charges and project costs of $1.6 million in ISD and $11.0 million in All other, while the Company did not incur any significant charges in PSSD. See "Restructuring and Related Charges (Reversals) and Project Costs" that follows for further discussion.

Interest and Other

The following table provides interest and other information:

                                                   Three Months Ended
                                                        March 31
(Dollars in millions)                              2009           2008
Interest (income) expense, net                   $     5.1       $  (7.5 )
Other expense (income), net                           (1.1 )         1.4
Total interest and other (income) expense, net   $     4.0       $  (6.1 )

During the first quarter of 2009, total interest and other (income) expense, net, was an expense of $4.0 million compared to income of $6.1 million in 2008.

For the three months ended March 31, 2009, total interest and other (income) expense, net, decreased YTY primarily due to increased interest expense from the Company's $650 million aggregate principal amount of fixed rate senior unsecured notes that were initiated in the second quarter of 2008.

Provision for Income Taxes and Related Matters

The Provision for income taxes for the three months ended March 31, 2009 was an expense of $11 million or an effective tax rate of 16.2% compared to an expense of $27 million or an effective tax rate of 20.8% for the first quarter of 2008. The difference in these rates is due principally to a difference in the expected geographic distribution of earnings for 2009 (9.4 percentage-point decrease from quarter to quarter), partially offset by the reversal during the first quarter of 2008 of $6.7 million of previously-accrued taxes (5.1 percentage-point increase from quarter to quarter), primarily due to the settlement of a tax audit.

During the first quarter of 2008, the Internal Revenue Service completed its examination of the Company's income tax returns for the years 2004 and 2005. As a result of completing that audit, the Company reduced the total amount of its unrecognized tax benefits by $22.9 million, of which $6.5 million reduced the Company's effective tax rate for the quarter ended March 31, 2008.

Net Earnings and Earnings per Share

The following table summarizes net earnings and basic and diluted net earnings
per share:

                                                    Three Months Ended
                                                         March 31
(Dollars in millions, except per share amounts)     2009           2008
Net earnings                                      $    59.2       $ 101.7

Basic earnings per share                          $    0.76       $  1.07
Diluted earnings per share                        $    0.75       $  1.07

Net earnings for the first quarter of 2009 decreased 42% from the prior year primarily due to lower operating income, partially offset by a lower tax rate.

For the three months ended March 31, 2009, the decrease YTY in basic and diluted earnings per share was primarily due to lower earnings.

RESTRUCTURING AND RELATED CHARGES (REVERSALS) AND PROJECT COSTS

Summary of Restructuring Impacts

The Company's first quarter of 2009 financial results are impacted by its ongoing restructuring plans and related projects and are discussed in further detail below. Project costs consist of additional charges related to the execution of the restructuring plans. These project costs are incremental to the Company's normal operating charges and are expensed as incurred, and include such items as compensation costs for overlap staffing, travel expenses, consulting costs and training costs. The table below summarizes the financial impacts of the Company's restructuring plans and related projects for the quarter ended March 31, 2009.

For the three months ended March 31, 2009, the Company incurred charges, including project costs, of $12.8 million for the Company's restructuring plans as follows:

                                             April 2009                  2009 Action                      2008 Action                     2007 Action
                                        Restructuring-related       Restructuring-related                                            Restructuring-related
                                               Charges                     Charges              Restructuring-related Charges               Charges
(in millions)                                  (Note 3)                    (Note 3)                        (Note 3)                         (Note 3)              Project Costs           Total
. . .