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 nine months ended September 30, 2009 largely reflect the continued effects of the worldwide economic downturn. The overall slowdown in business activity has reduced print volumes, 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 $3,675 million and $10,960 million for the three and nine months ended September 30, 2009 declined by 16% and 17%, respectively, from the prior year comparable periods including unfavorable impacts from currency of 2% and 4%, respectively. Equipment sales revenue of $802 million and $2,400 million for the three and nine months ended September 30, 2009 decreased by 29% in each period from the prior year comparable periods reflecting the continued industry-wide slowdown in technology spending. Post-sale revenue of $2,873 million and $8,560 million for the three and nine months ended September 30, 2009 was down 11% and 13%, respectively, from the prior year comparable periods 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 39.8% and 39.6%, respectively, for the three and nine months ended September 30, 2009 increased 0.6-percentage points and 0.3-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 nine months ended September 30, 2009 declined $131 million and $408 million, respectively, from the prior year comparable periods reflecting favorable currency and the benefits from restructuring and operational improvements.

Cash flow from operations was $1,241 million for the nine months ended September 30, 2009, and cash used in investing activities of $274 million included $145 million for GIS's acquisition of ComDoc in the first quarter of 2009. Total Debt at September 30, 2009 was down $938 million from December 31, 2008.

Summary Results

Revenue



                                                    Three Months                              Nine Months
                                                Ended September 30,                       Ended September 30,
(in millions)                              2009          2008        Change         2009           2008         Change
Equipment sales                          $    802      $  1,125         (29 )%    $   2,400      $   3,383         (29 )%
Post sale revenue (1)                       2,873         3,245         (11 )%        8,560          9,855         (13 )%

Total Revenue                            $  3,675      $  4,370         (16 )%    $  10,960      $  13,238         (17 )%