ITEM 2 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

Results for the three and six months ending June 30, 2009 largely reflect the continued effects of the worldwide economic downturn. The overall slowdown in business activity has reduced demand for supplies, especially in heavily document-driven processes, and our customers, in an effort to manage costs, are delaying spending on technology upgrades until there are stronger signs of economic improvement. The weak economies in developing markets, like Russia and Eurasia, where access to credit is still quite limited, has impacted our revenues. Total revenue of $3,731 million and $7,285 million for the three and six months ended June 30, 2009

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declined by 18% in both periods from the prior year including unfavorable impacts from currency of 5% and 6%, respectively. Equipment sales revenue of $828 million and $1,598 million for the three months and six months ended June 30, 2009 decreased by 29% in both periods from the prior year reflecting the continued industry-wide slowdown in technology spending. Post-sale revenue of $2,903 million and $5,687 million for the three and six months ended June 30, 2009 was down 14% in both periods from the prior year reflecting lower supplies revenue as distributors continued to hold lower inventory levels and businesses implemented their own cost-cutting measures.

The benefits from restructuring and operational improvements are helping to relieve pressure from the revenue declines. Gross margins of 40.2% and 39.5%, respectively, for the three and six months ended June 30, 2009 increased 1.0-percentage points and 0.2-percentage points, respectively, from the prior year comparable periods despite the continued effect of higher product costs due to transaction currency. Selling, administrative and general ("SAG") expenses for the three and six months ended June 30, 2009 declined $157 million and $277 million, respectively, from the prior year comparable periods reflecting favorable currency and the benefits from restructuring and operational improvements.

Cash flow from operations was $631 million for the six months ended June 30, 2009, and cash used in investing activities of $243 million included $145 million for GIS's acquisition of ComDoc in the first quarter of 2009. Total Debt at June 30, 2009 was down $347 million from December 31, 2008.