03 Q1 2008 Provision for litigation matters 491 0

Cash from Core Operations; Core Cash Flow: To better understand the trends inour business, we believe that it is helpful to adjust cash flows to exclude theeffect of investments made in finance receivables and on-lease equipment. Theseinvestments are viewed as income-producing assets and are important to thegrowth of our business. Management believes that excluding the effect ofinvestments made in finance receivables and on-lease equipment providesinvestors an additional perspective on cash flow from operating activities. Tobetter understand the trends in our business, we believe that it is helpful toadjust "Cash from Core Operations"; "Core Cash Flow" to exclude the fourthquarter 2008 net payments made for the securities-related litigation matters. Areconciliation of this non-GAAP financial measure and the most directlycomparable financial measure calculated and presented in accordance with GAAP isset forth in the following reconciliation table 3. Adjusted Total Gross Margin; Adjusted Sales Gross Margin: To betterunderstand trends in our business, we believe it is helpful to adjust totalgross margin and sales gross margin for the fourth quarter 2008 to exclude theeffect of charges associated with an equipment write-off. Management believesthat excluding the effect of this charge will enable investors to betterunderstand and analyze the current periods results and provide a better basisfor assessing future trends in gross margins because of the discrete nature ofthe equipment write-off charge.

A reconciliation of this non-GAAP financialmeasure and the most directly comparable financial measure calculated andpresented in accordance with GAAP is set forth in the following reconciliationtable 4. Adjusted Effective Tax Rate: To better understand the trends in our business,we believe that it is helpful to adjust the effective tax rate for the fourthquarter 2008 to exclude: (1) the fourth quarter 2008 restructuring and assetimpairment charges; and (2) the fourth quarter equipment write-off charge.Management believes that excluding the tax effects of these items will enableinvestors to better understand and analyze the current periods effective taxrate given the discrete nature of these items in the respective period. We refer to this adjustedrevenue as "constant currency." Currencies for developing market countries(Latin America, Brazil, Middle East, India, Eurasia and Central-Eastern Europe)that we operate in are reported at actual exchange rates for both actual andconstant revenue growth rates because (1) these countries historically have hadvolatile currency and inflationary environments and (2) our subsidiaries inthese countries have historically taken pricing actions to mitigate the impactof inflation and devaluation. Management believes the constant currency measureprovides investors an additional perspective on revenue trends. Currency impactcan be determined as the difference between actual growth rates and constantcurrency growth rates.

Management believes that these non-GAAP financial measures provide an additionalmeans of analyzing the current period results against the corresponding priorperiod results. A reconciliation of these non-GAAP financialmeasures to the most directly comparable financial measures calculated andpresented in accordance with GAAP are set forth below as well as in the 2008fourth quarter presentation slides available at 2008FY 2008 Adjusted Net Income/EPS NetEPS NetEPSIncome Income(in millions; except per share data)As Reported $1$- $230$0.26Adjustments: Q4 2008 Restructuring and asset impairment charges 240 0.27 240 0.27 Q4 2008 Equipment write-off240.03 240.03 Q1 2008 Provision for litigation matters - -491 0.54As Adjusted $265$0.30$985$1.10Adjusted Cash FlowQ4 2008FY 2008 (in millions) Operating Cash Flow - As Reported $185$939 Increase (decrease) in finance receivables 155 (164 ) Increase in equipment on operating leases89331 Core Cash Flow$429$1,106 Payments for securities litigation, net615 615 Core Cash Flow - As Adjusted$1,044$1,721Q4 2008 Adjusted Gross MarginAs ReportedEquipment As Adjusted Write-off (in millions) Revenue$4,370$4,370Cost of revenue 2,713 (39) 2,674 Gross Profit1,657 39 1,696Gross Margin37.9 38.8 Q4 2008 Adjusted Sales Gross MarginAs ReportedEquipment As Adjusted Write-off (in millions) Sales$2,146$2,146Cost of sales 1,460 (39) 1,421 Sales Gross Profit686 39 725Sales Gross Margin32.0 33.8 Q4 2008Adjusted Effective Tax Rate Pre-taxIncome Taxes Tax Rate Income (in millions)As Reported $(79)$(59)74.7 Adjustments: Q4 2008 Restructuring and asset impairment charges 349109Q4 2008 Equipment write-off39 15 As Adjusted $309 $6521.0APPENDIX IXerox CorporationEarnings per Common Share(Dollars in millions, except per share data. Shares in Thousands)Three Months EndedYear Ended December 31,December 31, 2008 2007 2008 2007 Basic Earnings per Share: Net Income$1$382$230$1,135Weighted Average Common Shares Outstanding 867,141 923,204 885,471 934,903Basic Earnings per Share$0.00 $0.41 $0.26 $1.21Diluted Earnings per Share: Net Income$1$382$230$1,135 Interest on Convertible Securities, net- - - 1 Adjusted net income available to common shareholders$1$382$230$1,136Weighted Average Common Shares Outstanding 867,141 923,204 885,471 934,903 Common shares issuable with respect to:Stock options541 7,500 3,885 8,650 Restricted stock and performance shares7,681 9,776 6,186 7,396 Convertible securities - 1,992 - 1,992 Adjusted Weighted Average Common Shares Outstanding875,363 942,472 895,542 952,941Diluted Earnings per Share$0.00 $0.41 $0.26 $1.19Dividends declared per Common Share $0.0425 $0.0425 $0.17 $0.04251,992 (in thousands) common shares issuable with respect to convertible securities were not included in the computation of diluted EPS for the three months and the year ended December 31, 2008 because to do so would have been anti-dilutive. APPENDIX II Xerox CorporationReconciliation of Segment Operating Profit to Pre-Tax Income (in millions)Three Months Ended December 31, 20082007Total Segment Operating Profit $318$519Reconciling items: Restructuring and asset impairment charges(349) (1 ) Restructuring charges of Fuji Xerox (1) (2 ) Litigation matters21-Equipment write-off (39 ) -Equity in net income of unconsolidated affiliates (21 ) (37) Other (8) (9 )Pre-tax (loss) income$(79 )$470 Our reportable segments are consistent with how we manage the business and viewthe markets we serve. Our reportable segments are Production, Office and Other.The Production and Office segments are centered around strategic product groups,which share common technology, manufacturing and product platforms, as well asclasses of customers.

Production: Monochrome 91 pages per minute (ppm) excluding 95 ppm with embeddedcontroller; Color 41 ppm excluding 50 ppm, 60 ppm and 70 ppm withembedded controller.Office: Monochrome up to 90 ppm as well as 95 ppm with embedded controller; Colorup to 40 ppm as well as 50 ppm, 60 ppm and 70 ppm with embedded controller. Other:Xerox Supplies Business Group (predominantly paper), value-addedservices, Wide Format Systems, Xerox Technology Enterprises (XTE),royalty and licensing, GIS network integration solutions and electronic presentation systems, equity income and non-allocated corporate items. ) Last season, West Virginia lost two games early and often struggled on offense throughout the season because they were having some real difficulties converting on third down and short yardage situations. Along with the inability to make the critical, short third-down conversions, the Mountaineers were desperately lacking a power running game. What a difference a year makes! Going into this season, coach Bill Stewart and offensive coordinator Jeff Mullen recognized this deficiency on the part of their offense and made its remedy one of their top priorities. The two of them made short-yardage situations a huge priority in spring ball and also in fall practice. Obviously, they have corrected the problemand it shows! Currently, the Mountaineers are leading the Big East Conference in third-down efficiency, converting 32-of-63 attempts in five games. Redshirt freshman Ryan Clarke has proven to be a nearly unstoppable force in the running game, scoring five touchdowns in 19 carries. In an ideal world, Clarke was supposed to be the Mountaineers big power fullback last year. At approximately 230 pounds, the tough fullback strongly took the ball into the end zone on his first carry. Not only is Clarkes presence making a difference, I also think that the Mountaineers' relatively young offensive line is doing a much better job of pass and run blocking than they did in 2008. I also believe the offensive lines improvement in run blocking is apparent in Noel Devines recent success in going up the middle, combined with his skills out on the perimeter. That should present the WVU and Marshall fans with a striking contrast in this weekends Friends of Coal Bowl. Going into West Virginias game with Marshall, it is quite likely that third-down conversions may be the critical difference in the final score. While the Mountaineers have been excellent in third-down conversions, the Thundering Herd defense has experienced some real difficulties in getting off the field in these same crucial situations. In their most recent game, Tulane was greatly successful in short-yardage situations, converting 11-of-17 third downs against Marshall. If Marshall allows West Virginia this same level of success on third down, then it could be an extremely long day for the Thundering Herd! Along with their struggles on stopping their opposition on third down, Marshall has also given up significant yardage on defense. Virginia Tech scored 52 points on Marshall and had over 600 yards of total offense.