1

Larry ZimmermanSenior Vice President & CFO

ShareholderValue

2

Today’s Discussion

• Investment Thesis

• Financial Strategy

• Year-to-date Results

• Revenue Dynamics

• Balance Sheet and Cash Flow

• Business Model

Shareholder Value

3

Investment Thesis

• $112B market opportunity• Xerox strategies capture growth opportunities

• Compete in B&W • Drive Color• Create the New Business of Printing• Lead in Services

• Xerox differentiators• Technology and innovation • Color everywhere• Document knowledge and expertise• Channels of distribution• Customer centric • Xerox brand

• Excellent business model• Annuity based – consistent and predictable• Earnings expansion – grow profits faster than revenue• Significant cash flow – will be delivered to shareholders

4

Financial Strategy

• Grow revenue• R&D investments drive equipment installations and pages, which grow annuity

and total revenue• Services-led offerings drive consulting and managed services and installs• Color adoption drives price per page, annuity growth and total revenue growth

• Manage gross profit and expenses to deliver bottom-line performance• Strategic cost competitiveness and productivity will drive results• Individual lines of our P&L will vary but we will deliver earnings

• Expand earnings at all levels of revenue growth• Profit will grow faster than revenue – small investment required for growth

• Optimize balance sheet and cash flow to deliver returns to shareholders

• Achieve investment grade rating• Leverage associated with financing / leasing business• Optimize cost of capital• Reduce secured debt• Maintain $1B cash & short-term investments• Optimize cash flow

5

Q3 2005 Year-To-Date Performance

Equipment sales 2% 23% growth in colorPost sale and financing Flat

Digital growth of 4% Total revenue Flat

Trend improving – grew 1% in Q3

Gross margin 41.2% Within adjusted model of 41- 42%

R,D&E % of revenue 6.2% Consistent investment in our future

SAG % of revenue 26.8% G&A improvements

ROE (LTM) 13%

Debt $7.5B Down $3.3B year-over-year

Cash flow from operations $789M Tracking to $1.2B - $1.5B

Share repurchase $500M Announced program in Q4

Return on investment

Diluted EPS $0.66 Expanding earnings

RevenueGrowth

Cost andExpense Management

StrongFinancialPosition

Earnings

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$8.4B73%

$8.4B73%

$3.1B27%

$3.1B27%

Large Recurring Revenue Stream

Q3 2005 YTD Revenue: $11.5 billion

Post sale & financing• Bundled lease contracts

3-5 years l Maintenancel Suppliesl Servicesl Financing l Operating leases

& rental• Maintenance, supplies

and paper

Equipment sales• Sales-type leases• Outright sales

Post sale & financing is more profitable than equipment sales

ExampleCustomer view

$2,000 monthly payment

Xerox view

• Sales-type lease – $34K equipment sales / $1,440per month in post sale and financing

• Operating lease – $2,000 post sale per month

7

Post Sale and Financing Turned Positive

Revenue2005

($ millions) Q3 Q1 Q2 Q3 $ Pts.

Memo: Color Revenue 730$ 14% 15% 18% Color as a % of Total 27%$

Q32005 Contribution

Growth

Growth Areas 1,980$ 3% 5% 5% 94$ 3 pts.

Developing Markets 312$ (2%) 4% 7% 21$ 1 pt.

Light Lens / SOHO 126$ (42%) (41%) (41%) (87)$ (3 pts.)

Other 323$ 2% 8% (1%) (4)$ -- pts.

Total Revenue 2,741$ (2%) 1% 1% 24$ 1 pt.

Currency Impact +2 pts. +2 pts. -- pts.

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Annuity Variables Drive Growth and Profitability

• Product installs

• Pages – maintenanceand supplies

• Price per page

• Color leverage

• Services annuity

• Finance revenue

• Light lens to digital transition

$8.4B73%

$8.4B73%

Post sale & financing Q3 2005 YTD

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Significant Growth in Product Installs

• Large YOY increase in installation of equipment• Strong activity will translate into pages and annuity revenue

Q3 2004 YTDQ3 2005 YTD Production

0

800

1,600

2,400

3,200

4,000

4,800

5,600

6,400

B&W Color

4%

14%

Office

0

70,000

140,000

210,000

280,000

350,000

420,000

B&WCopier / MFD

Color MFD

Color Printers

19%

50%

175%

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Annual per Unit Page Volumes

• Will continue to generate significant volume of pages to grow annuity revenue

Black & WhiteColor

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Digital LightProd.

High-end Prod.

Entry Prod. Color

iGen3

Mill

ions

Production 6.0

Segment3

Segment5

Office Color MFD

Office

0

100

200

300

400

500

600

700

Thou

sand

s

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Page Trends

0102030405060708090

100

B&WLight Lens

B&WDigital

ColorMFD

24% (51%)

4%

Office

Billi

ons

Q3 2004 YTDQ3 2005 YTD

0

40

80

120

160

B&W Light Lens

B&W Digital

Color

37% (45%)

(1%)

Production

Billi

ons

• Strong production and office color growth – huge opportunity • Office digital B&W growing 4%, production digital B&W decline moderating• Light lens decline accelerating

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Color Trends Q3 YTD

Color Leverage

• 2005 Q3 YTD color has leveraged price per page 32% • 6.4% of the pages drive 26% or $2.1B of annuity revenue • Color pages generate 5X more revenue and gross profit than B&W pages

Color leverage on revenue per page:Percent

ColorB&W

Pages

74%74%

$$2.1B2.1B

93.6%93.6%6.4%6.4%

Post Sale & Financing

2003 2004 2005Color revenue:% of post sale & financing 18% 22% 26%

Color pages: Growth 26% 29% 30%% of total pages 3.5% 4.8% 6.4%

2002

15%

23%2.5%

19% 26% 32%14%$$6.2B6.2B 26%26%

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Services Annuity

• Services revenue = managed services + value-added services

• Digital managed services + value-added services annuity is growing 6%

• Through Q3, operating leases had about 1.5 point impact on equipment sales growth

2004 2005

Value Added Services / Managed Services

Q3 YTD

$2,160M$2,133M$121$121

$1,793$1,793

$123$123

$1,904$1,904

Value-Added ServicesDigital Managed Services

2%

6%

$133$133$219$219 (39%)

LL Managed Services

1%

6%

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2005

Finance Revenue

$664M$702M

$668$668$649$649

2004

$7.8B$8.2B

2004 2005

Finance Receivables Q3 Ending Balance

Excluding Light Lens

Light Lens

• Leasing is integral to our go-to-market strategy• Bundle equipment, service, supplies

and services over 3 to 5 years• Xerox owns asset for migration• Maintain customer relationship • Profitable returns

• Finance revenue down 5%• Declining finance receivable portfolio • Light lens decline – 2 point impact

• Increase in operating lease

• Finance revenue improves in 2006 and grows in 2007

Finance Revenue Q3 YTD

$15$15$34$34

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Post Sale and Financing Revenue Drivers…

• Install growth in Production and Office

• Digital pages continue to grow

• Color increases leverage on price, revenue, and gross profit

• Digital services annuity continues to grow mid-single digits

• Finance revenue improves in 2006 and grows in 2007

• Light lens / SOHO becomes insignificant as we become a total digital portfolio

…lead to growth of 2% in 2006 and 4-5% steady state

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2006 Cash Flow Drivers

• Grow net income

• Continue A/R and inventory focus

• Debt supports finance receivables and on-lease equipment

• Re-balance secured and unsecured debt

• Share repurchase

• Investment in on-lease equipment increases

Cash from core operations*

On-lease equipment

Change in finance receivables

Cash from Operations

Cash from Investing

Cash from Financing

• $200 million in capital spending

• $50 million in software spending

• Portfolio dynamics

*See slide 22 for explanation of non-GAAP measure

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Cash Flow Dynamics

*See slide 22 for explanation of non-GAAP measure

YTD 2005Net income 696$ Depreciation & amortization 480Increase in inventories (358)Increase in A/R and billed portion of F/R (87)Contribution to pension benefit plans (363)All other 196Cash from core operations* 564

Increase in on-lease equipment (176)Decrease in finance receivables 401

Cash from Operations 789

Cash from Investing (214)

Change in secured financing, net (1,191)Cash payments on term debt & other (1,203)Cash from Financing (2,394)

Change in cash (1,873)Ending cash 1,345Short-term investments 235Cash and short-term investments 1,580$

($ millions) FY 2005E

$ 1,100-1,300

$ 1,200-1,500

$ ~1,400

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Optimizing Balance Sheet

Debt

Finance Receivables

Finance Receivables & On-Lease Equipment Compared to Debt

• Leveraging finance receivables and on-lease equipment 7:1

• Core leverage 0% by year-end 2005

• Expected cash balance provides flexibility for additional share repurchases and acquisitions

$8.9

$0

$3

$6

$9

$12

$8.3

YE 2004

$7.2$8.3

1.01.0

$ Bi

llions

On-Lease Equipment

YE 2005Estimate

YE 2006Estimate

$10.1

$7.2

~$2.0

$3.2

~$1.4

2004 2005E

Financing 88% 88% 88%

Core 26% 0% 0%

YE Debt to Capital*2006E

*Capital includes debt, liabilities for trust preferred, common equity, & preferred stock. 2004 year-end total capital was $18 billion.

$1B minimum

Cash and Short-term Investment

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Business Model – Balance Sheet

Cash from core operations*

Financing / on-lease leverage

Core leverage balanced with investment grade goal

Secured debt % total debt

Minimum cash balance

Return on equity

10 - 15% Growth

7:1

Modest

< 20%

$1B

16 - 18%

10 - 15% Growth

7:1

~0%

~35%

$1B

14%

20062006 Steady StateSteady State

*See slide 22 for explanation of non-GAAP measure

2006 cash from core operations* of $1.2B – $1.5B2006 cash from core operations* of $1.2B – $1.5B

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Business Model – Earnings Expansion

2006 EPS guidance of $1.00 – $1.072006 EPS guidance of $1.00 – $1.07

2 - 6%

2%

3%

41 - 42%

24 - 25%

6%

10%

10 - 15%EPS Growth

Equipment sale revenue

Post sale & financing

Gross margin

SAG as % of revenue

R,D&E as % of revenue

ROS*

2 - 6%

4 - 5%

5%

41 - 42%

24 - 25%

5 - 6%

12%

15 - 20%

Revenue Growth

20062006 Steady StateSteady State

*ROS = (profit before tax + equity income) / total revenue

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Delivering Shareholder Value

• Growth strategy

• Effective execution

• Strong, flexible business model that yields:

• Revenue growth – annuity-based, consistent and predictable

• Earnings expansion – ability to grow profit faster than revenue

• Significant cash flow – will be delivered to shareholders

22

Non-GAAP Measure

“Cash from core operations”: This measure of cash flows excludes the effect of investments made in finance receivables and on-lease equipment, which are the basis for growth in our leasing operation. These investments are viewed as income-producing assets and are important to the growth of our business. Management believes this measure gives investors an additional perspective of cash flow from operating activities.

See reconciliation of cash from core operations to cash flow from operations on slide 17.