UNITEDTable STATESof Contents

~~SECURITIES~~UNITED ~~AND~~STATES ~~EXCHANGE COMMISSION~~

~~WASHINGTON,~~SECURITIES ~~D.C.~~AND ~~20549~~EXCHANGE COMMISSION

~~FORM~~WASHINGTON, ~~10-K~~D.C. 20549

~~(Mark~~FORM ~~One)~~10-K

~~x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15~~(dMark One) ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~x ~~the~~ANNUAL ~~fiscal~~REPORT ~~year~~PURSUANT ~~ended:~~TO ~~December 31,~~SECTION ~~2006~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ORFor the fiscal year ended: December 31, 2008

~~¨ TRANSITION REPORT PURSUANT TO SECTION 13~~ OR ~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~¨ ~~the~~TRANSITION ~~transition~~REPORT ~~period~~PURSUANT ~~from: to~~ TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission~~For ~~file~~the ~~number:~~transition ~~1-8133~~period from: to

~~XEROX~~Commission ~~CREDIT~~file ~~CORPORATION~~ number: 001-8133

~~(Exact~~XEROX CREDIT ~~name~~CORPORATION ~~of Registrant as specified in its charter)~~

Delaware		06-1024525
(State or other jurisdiction ofincorporation or organization)		(I.R.S. EmployerIdentification No.)

(Exact name of Registrant as specified in its charter)

100 First Stamford Place, Stamford, Connecticut		06904
Delaware		06-1024525
(State of incorporation)		(I.R.S. Employer Identification No.)
P.O. Box 4505, 45 Glover Avenue, Norwalk, CT		06856-4505
(Address of principal executive offices)		(Zip Code)

(203) ~~325~~968-~~6600~~3000

(Registrant'’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Title of Each Class		Name of Each Exchange on Which Registered
7.20% Notes due 2012		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

~~Securities~~Indicate ~~registered~~by ~~pursuant~~check tomark ~~Section 12(g)~~if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: ¨ No: x ~~None~~

Indicate by check mark if the registrant is ~~a well-known~~not ~~seasoned~~required ~~issuer,~~to asfile ~~defined~~reports inpursuant ~~Rule~~to ~~405~~Section 13 or Section 15(d) of the ~~Securities~~ Act. Yes: ¨ No: x

Indicate by check mark ifwhether the ~~registrant~~Registrant is(1) has ~~not~~filed all reports required to ~~file reports~~be ~~pursuant~~filed toby Section 13 or ~~Section~~ 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ¨x No: x¨

Indicate by check mark ~~whether~~if ~~the~~disclosure ~~Registrant (1) has filed all~~of ~~reports~~delinquent ~~required~~filers pursuant to ~~be filed by Section~~Item 13405 ~~or 15(d)~~ of ~~the~~regulation ~~Securities~~S-K ~~Exchange~~is ~~Act~~not ofcontained ~~1934~~herein, ~~during~~and ~~the~~will ~~preceding~~not 12be ~~months~~contained, ~~(or~~to ~~for~~the ~~such~~best ~~shorter~~of ~~period~~registrant’s ~~that~~knowledge, ~~the~~in ~~Registrant~~definitive ~~was~~proxy ~~required~~or toinformation ~~file~~statements ~~such~~incorporated ~~reports),~~by ~~and~~reference ~~(2) has~~in ~~been~~Part ~~subject~~III toof ~~such~~this ~~filing~~Form ~~requirements~~10-K ~~for~~or ~~the~~any ~~past~~amendment 90to ~~days~~this Form 10-K. ~~Yes:~~ ~~x No:~~ ¨

Indicate by a check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~is ~~filers~~a ~~pursuant~~large accelerated tofiler, ~~Item 405~~an ofaccelerated ~~regulation~~filer, Sa non-Kaccelerated isfiler ~~not~~or ~~contained herein,~~a ~~and~~smaller ~~will~~reporting ~~not~~company. beSee ~~contained, to~~ the ~~best~~definition of ~~registrant's~~“large ~~knowledge~~accelerated filer,” in“accelerated ~~definitive~~filer,” ~~proxy~~and or“smaller ~~information~~reporting ~~statements~~company” ~~incorporated by reference~~ in ~~Part~~Rule ~~III~~12b-2 of ~~this~~the Exchange ~~Form 10-K or any amendment to this Form 10-K~~Act. ~~Not Applicable~~

~~Indicate~~Large ~~by a check mark whether the registrant is a large~~ accelerated filer,: ¨ Accelerated ~~an accelerated~~ filer~~, or a non~~: ¨ Non-accelerated filer.: x Smaller ~~See~~reporting ~~definition~~company: ¨ ~~of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act Rule~~

~~Large~~Indicate ~~accelerated~~by ~~filer: ¨ Accelerated~~a ~~filer~~check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ¨ ~~Non-accelerated filer~~No: x

~~Indicate~~The byaggregate amarket ~~check~~value ~~mark~~of ~~whether~~ the ~~registrant~~voting isstock of athe ~~shell~~registrant ~~company~~held ~~(as~~by ~~defined in Rule 12b~~non-2affiliates as of ~~the~~June 30, ~~Exchange~~2008 ~~Act) Yes~~was: ~~¨ No: x~~ $0.

~~The~~Indicate ~~aggregate~~the ~~market~~number ~~value~~ of ~~the~~shares ~~voting~~outstanding ~~stock~~of each of the ~~registrant~~issuer’s ~~held~~classes byof common ~~non-affiliates~~stock, as of ~~June 30,~~the ~~2006~~close ~~was:~~of $0 the latest practicable date.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.


Class		Outstanding as of January 31, 2009
Common Stock		2,000

		Class				Outstanding as of January 31, 2007
		Common Stock				2,000

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I (1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

THETable REGISTRANTof MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. Contents

Forward-Looking Statements

From time to time we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, and any exhibits to this Form 10-K that are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law.

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. The primary factor is the liquidity of our ultimate parent company, Xerox Corporation. Other factors include, but are not limited to, the risks that are set forth in the “Risk Factors” section, the “Management’s Discussion and Analysis of ~~Results~~Financial ofCondition ~~Operations~~ and Results ~~Financial~~of ~~Condition~~Operations” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission (“SEC”).

PARTTable Iof Contents

~~ITEM~~Table 1.Of ~~Business~~Contents

Xerox Credit Corporation, a Delaware corporation (herein referred to as the “Company,” “us,” “we,” or “our” unless the context otherwise requires), was organized in 1980. All of our outstanding common stock is owned by Xerox Financial Services, Inc. (“XFSI”), a wholly-owned subsidiary of Xerox Corporation (“XC” and together with its subsidiaries, “Xerox” unless the context otherwise requires).


			Page
Part I
	Item 1.	Business	4
	Item 1A.	Risk Factors	4
	Item 1B.	Unresolved Staff Comments	4
	Item 2.	Properties	5
	Item 3.	Legal Proceedings	5
	Item 4.	Submission of Matters to a Vote of Security Holders	5
Part II
	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	5
	Item 6.	Selected Financial Data	5
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations – Xerox Credit Corporation	5
		Capital Resources and Liquidity – Xerox Corporation	7
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	11
	Item 8.	Financial Statements and Supplementary Data	12
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	12
	Item 9A(T).	Controls and Procedures	12
	Item 9B.	Other Information	12
Part III
	Item 10.	Directors, Executive Officers and Corporate Governance	12
	Item 11.	Executive Compensation	12
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	13
	Item 13.	Certain Relationships and Related Transactions and Director Independence	13
	Item 14.	Principal Auditor Fees and Services	13
Part IV
	Item 15.	Exhibits and Financial Statement Schedules	13

We3 are a limited purpose entity, engaged until 2001 in the purchase of long-term contracts receivable from XC which arose from third-party installment sales and lease contracts originated by the domestic operations of XC. We historically funded such purchases by debt raised in capital markets offerings.

InTable 2001, we ceased purchasing contracts receivable from XC, given alternative funding sources obtained by XC, including the use of third-party secured borrowing arrangements and direct capital markets offerings. Since then, our portfolio of contracts has run off as amounts under the contracts were collected or the contracts receivable were sold back to XC. Contents

AsPART ofI December 2006, our sole monetary asset is a Master Demand Note from XC, which represents a demand loan for accumulated cash transfers to XC. We will demand repayment of amounts loaned to XC under the Master Demand Note to the extent necessary to repay our maturing debt obligations, fund our operations, or for such other purposes that we determine appropriate.

~~Our remaining~~Item ~~operating activities consist of servicing our third-party debt, which consisted of $462 million as of December 31, 2006~~1. ~~Our debt maturities range from 2007 through 2018. We have no current intention to pay any dividends.~~ Business

~~Pursuant~~Xerox toCredit Corporation, a ~~Support~~Delaware ~~Agreement~~corporation ~~with~~(herein referred ~~XC,~~to XCas ~~has~~the ~~agreed~~“Company,” to“us,” ~~retain~~“we,” ~~sole~~or ~~ownership of~~ “our” ~~voting~~unless ~~capital~~the ~~stock~~context ~~and~~otherwise ~~make~~requires), ~~periodic~~was ~~payments~~organized toin us1980. toAll ~~the extent~~of ~~necessary to ensure that~~ our ~~annual~~outstanding ~~pre-tax~~common ~~earnings~~stock ~~available~~is ~~for~~owned ~~fixed~~by ~~charges~~Xerox ~~ratio,~~Financial ~~as defined~~Services, ~~is equal to at least 1~~Inc.~~25. The Support Agreement~~ (“XFSI”), ~~which~~a ~~may~~wholly-owned ~~not~~subsidiary ~~be terminated or modified while any~~ of ~~our~~Xerox ~~debt~~Corporation ~~is outstanding, specifically provides that~~ (“XC” isand ~~not~~together ~~directly~~with orits ~~indirectly~~subsidiaries, ~~guaranteeing~~“Xerox” ~~any~~unless ofthe ~~our~~context ~~indebtedness,~~otherwise ~~liabilities or obligations~~requires).

~~Item~~We 1Aare a limited purpose entity, engaged until 2001 in the purchase of long-term contracts receivable from XC which arose from third-party installment sales and lease contracts originated by the domestic operations of XC. ~~Risk~~We ~~Factors~~historically funded such purchases by debt raised in capital markets offerings. In 2001, we ceased purchasing contracts receivable from XC. Since then, our portfolio of contracts has run off as amounts under the contracts were collected or the contracts receivable were sold back to XC.

~~Our~~As ~~liquidity~~of December 31, 2008, our sole monetary asset is ~~dependent~~an oninterest-bearing ~~the~~Master ~~liquidity~~Demand ofNote (the “Master Demand Note”) from XC, aswhich ~~our~~represents ~~sole~~a ~~monetary~~demand ~~asset~~loan isfor accumulated cash transfers to XC. We will demand repayment of amounts loaned to XC under the Master Demand Note to the extent necessary to repay our maturing debt obligations, fund our operations or for such other purposes that we determine appropriate.

AsOur ofremaining ~~December 31,~~operating ~~2006,~~activities consist of servicing our third-party ~~sole~~debt, ~~monetary~~which ~~asset~~consisted isof ~~the~~$60 ~~Master Demand~~million ~~Note~~as ~~from~~of ~~Xerox~~December 31, ~~Corporation~~2008. As$10 amillion ~~result,~~of our ~~liquidity~~debt ismatures ~~dependent~~in ~~upon~~2013 and the ~~liquidity~~remainder ofmatures XCin 2014. ~~Accordingly,~~We ~~certain~~have ~~disclosures~~no ~~contained~~current ~~herein~~intention ~~relate~~ to ~~events~~pay ~~and~~any ~~transactions that affect the liquidity of Xerox~~dividends.

~~Xerox~~Pursuant ~~Corporation’s~~to ~~operating~~a ~~results~~Support ~~and~~Agreement ~~liquidity~~with ~~have~~XC, ~~improved~~XC ~~over~~has ~~the~~agreed ~~last~~to ~~several~~retain ~~years~~sole ~~which~~ownership ~~further mitigate realizability risk~~ of our ~~Master~~ ~~Demand~~voting ~~Note.~~capital ~~Specifically,~~stock ~~Xerox~~and ~~Corporation’s~~make ~~net~~periodic ~~income~~payments ~~was~~to ~~$1.21~~us ~~billion,~~to ~~$978~~the ~~million~~extent ~~and~~necessary ~~$859~~to ensure ~~million~~that ~~for~~our ~~the~~annual ~~years~~pre-tax ~~ended~~earnings ~~December 31,~~available ~~2006,~~for ~~2005~~fixed ~~and~~charges ~~2004~~ratio, ~~respectively.~~as ~~Operating~~defined, ~~cash~~is ~~flows~~equal ofto ~~Xerox~~at ~~Corporation~~least ~~were $~~1.~~62 billion, $1~~25.42 ~~billion~~The ~~and~~Support ~~$1.75~~Agreement, ~~billion~~which ~~for~~may ~~the~~not ~~years~~be ~~ended~~terminated ~~December 31,~~or ~~2006,~~modified ~~2005~~while ~~and~~any ~~2004,~~of ~~respectively.~~our Indebt ~~addition~~is outstanding, ~~Xerox~~specifically ~~Corporation’s~~provides ~~credit~~that ~~ratings~~XC ~~were~~is not ~~improved~~directly toor ~~investment~~indirectly ~~grade~~guaranteeing ~~for~~any ~~Moody’s~~of ~~and~~our ~~Fitch~~indebtedness, ~~during~~liabilities ~~2006~~or obligations.

~~Xerox’s~~Item liquidity is a function of its ability to successfully generate cash flow from a combination of efficient operations and improvement therein, access to capital markets, securitizations, funding from third parties and borrowings secured by Xerox’s finance receivables portfolios1A. AsRisk of December 31, 2006, Xerox’s total cash, cash equivalents and short-term investments was $1.5 billion, and its borrowing capacity under its 2006 Credit Facility was $1.235 billion, reflecting no outstanding borrowings and $15 million of letters of credit that have been utilized. Xerox also has funding available through various secured borrowing arrangements. Xerox believes its liquidity (including operating and other cash flows that it expects to generate) will be sufficient to meet operating requirements as they occur; however, Xerox’s ability to maintain sufficient liquidity going forward depends on its ability to generate cash from operations and access to the capital markets, secured borrowings, securitizations and funding from third parties, all of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors that are beyond its control. Factors

~~Item~~Our ~~1B.~~liquidity ~~Unresolved~~is ~~Staff~~dependent ~~Comments~~on the liquidity of XC, as our sole monetary asset is the Master Demand Note.

~~None~~As of December 31, 2008, our sole monetary asset is the Master Demand Note from XC. As a result, our liquidity is dependent upon the liquidity of XC. Accordingly, certain disclosures contained herein relate to events and transactions that affect the liquidity of Xerox.

3Xerox’s net income was $230 million, $1.14 billion and $1.21 billion for the years ended December 31, 2008, 2007 and 2006, respectively. Operating cash flows of Xerox were $939 million, $1.87 billion and $1.62 billion for the years ended December 31, 2008, 2007 and 2006, respectively. 2008 operating cash flows included $615 million of net securities-related litigation payments. XC is currently rated investment grade by all major rating agencies. See Part II, Item 7, Xerox Corporation’s Capital Resources and Liquidity discussion, for ratings as of January 31, 2009.

~~ITEM~~Xerox’s 2liquidity is a function of its ability to successfully generate cash flows from a combination of efficient operations and improvement therein, access to capital markets, securitizations, funding from third parties and borrowings secured by Xerox’s finance receivables portfolios. ~~Properties~~As of December 31, 2008, Xerox’s total cash and cash equivalents was $1.23 billion, and its borrowing capacity under its Credit Facility was $1.7 billion, reflecting $246 million of outstanding borrowings. Xerox also has funding available through a secured borrowing arrangement with General Electric Capital Corporation (“GECC”). Xerox believes its liquidity (including operating and other cash flows that it expects to generate) will be sufficient to meet operating requirements as they occur; however, Xerox’s ability to maintain sufficient liquidity going forward depends on its ability to generate cash from operations and access to the capital markets, secured borrowings, securitizations and funding from third parties, all of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors that are beyond its control.

WeItem ~~do not own any facilities~~1B. ~~Our principal~~Unresolved ~~executive~~Staff ~~offices in Stamford, Connecticut, which consists of approximately 500 square feet of office space, are leased. These facilities are deemed adequate by management.~~ Comments

~~ITEM 3~~None. ~~Legal Proceedings~~

~~None.~~4

ITEMTable 4. Submission of Matters to a Vote of Security HoldersContents

~~Not~~Item ~~Required~~2. Properties

~~PART~~We IIdo not own any facilities. Our principal executive offices located in Norwalk, Connecticut, consist of a limited amount of shared space within Xerox headquarters. We are allocated a charge for our usage. These facilities are deemed adequate by management.

~~ITEM~~Item 53. ~~Market~~Legal ~~for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~Proceedings

~~Because we are a wholly owned subsidiary, there is no market for our common shares~~None. ~~There were no dividends declared during the five years ended December 31, 2006. There were no repurchases of our common shares during the period covered by this Report.~~

~~ITEM~~Item 64. ~~Selected~~Submission ~~Financial~~of ~~Data~~Matters to a Vote of Security Holders

Not Required.

~~ITEM~~PART 7.II ~~Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)~~

~~Due to the fact that our liquidity is dependent upon the liquidity of XC, this~~ Item 7 ~~includes excerpts from XC's MD&A, which is presented separately from our own~~5. ~~Certain~~Market ~~matters~~for ~~discussed in~~ the ~~excerpts of XC'~~Registrant’s ~~MD&A~~Common ~~will~~Equity, ~~relate~~Related toStockholder ~~events~~Matters and ~~transactions~~Issuer ~~that~~Purchases doof ~~not~~Equity ~~directly affect our liquidity.~~ Securities

~~RESULTS~~Because OFwe ~~OPERATIONS~~are a wholly owned subsidiary, there is no market for our common shares. There were no dividends declared during the five years ended December 31, 2008. There were no repurchases of our common shares during the period covered by this Report.

~~Refer to~~ Item 1 ~~of this Form 10-K for a description of our operating activities~~6. ~~Earned~~Selected ~~income~~Financial from the Xerox note receivable represents amounts earned on funds we have advanced to XC under the Master Demand Note, based on established interest rates. Contracts receivable income represents income earned under receivables we originally purchased from XC. Data

~~Total~~Not earned income, consisting of income from the Master Demand Note and contracts receivable income, was $103 million, $119 million and $126 million for the years ended December 31, 2006, 2005 and 2004, respectivelyRequired.

~~Earned~~Item ~~income~~7. ~~from~~Management’s ~~the~~Discussion ~~Master Demand Note was $103 million, $117 million~~ and ~~$109~~Analysis ~~million~~of ~~for~~Financial ~~the~~Condition ~~three years ended December 31, 2006, 2005~~ and ~~2004~~Results ~~respectively. The decrease in income in 2006 from 2005 was primarily due to a lower average Master Demand Note balance due to repayments~~ of ~~$900~~Operations million by XC in June 2005 that we used to repay our maturing debt, partially offset by higher interest rates. The increase in income in 2005 from 2004 was primarily related to higher interest rates, as partially offset by the aforementioned June 2005 repayment. (“MD&A”)

~~There~~Due ~~was~~to nothe ~~contracts~~fact ~~receivable~~that ~~income~~our inliquidity ~~2006,~~is asdependent ~~all receivables~~upon ~~were~~the ~~either~~liquidity ~~collected~~of ~~or resold to~~ XC, bythis ~~June~~Item 7 ~~2005.~~includes ~~Contracts~~excerpts ~~receivable~~from ~~income~~XC’s ~~was~~MD&A, $2which ~~million~~is ~~and~~presented ~~$17~~separately ~~million~~from our ~~for the years ended December 31, 2005 and 2004, respectively~~own. ~~The~~Certain ~~declines~~matters ~~reflect~~discussed ~~the aforementioned decrease~~ in the ~~outstanding~~ ~~portfolio~~excerpts of ~~finance~~XC’s ~~receivables~~MD&A ~~due~~will relate to ~~collection~~events orand ~~resale~~transactions tothat XCdo bynot ~~June~~directly ~~2005~~affect our liquidity.

~~Interest~~RESULTS ~~expense~~OF ~~was~~OPERATIONS $29 million, $44 million and $56 million for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in 2006 and 2005 from the prior year amounts reflected lower average debt levels primarily as a result of regularly scheduled payments. There were no debt repayments in 2006 or 2004 and $999 million in 2005, as described in the capital resources and liquidity section below.

~~The mark-~~Refer to~~-market~~ ~~valuation~~Item 1 of ~~our~~this ~~interest~~Form ~~rate~~10-K ~~derivatives~~for ~~and remeasurement of Yen denominated debt resulted in net losses of $3 million and $5 million in 2006 and 2005, respectively, as well as~~ a ~~net~~description ~~gain~~ of $2our ~~million~~operating ~~in 2004~~activities. ~~The net gains and losses were primarily due to changes in interest rates over the period.~~

4Earned income from the Xerox note receivable represents amounts earned on funds we have advanced to XC under the Master Demand Note, based on established interest rates. Total earned income, consisting of income from the Master Demand Note, was $57 million, $88 million and $103 million for the years ended December 31, 2008, 2007 and 2006, respectively. The decrease in earned income in 2008 from 2007 primarily relates to lower interest rates and a lower average note balance in 2008 as compared to 2007. In the third quarter of 2008, XC made repayments of $100 million under the Master Demand Note, for the early redemption of $100 million Medium Term Notes originally due 2012 through 2018. The decrease in earned income in 2007 from 2006 primarily relates to a lower average note balance due to $325 million in repayments by XC in the second quarter of 2007, which was used to repay maturing and other debt and settle intercompany derivatives.

~~The~~Interest ~~effective~~expense ~~income~~was ~~tax~~$9 ~~rate~~million, ~~was~~$19 ~~38.3%~~million inand ~~2006~~$29 ~~compared~~million tofor ~~37.3%~~the inyears ~~2005~~ended December 31, 2008, 2007 and 302006, respectively.8% The decreases in ~~2004~~2008 and ~~reflects~~ 2007 from the ~~U.S.~~prior ~~statutory~~year ~~rate~~amounts reflected lower average debt levels primarily as a result of ~~35%~~regularly ~~and~~scheduled ~~state~~payments ~~income~~as ~~taxes.~~well ~~The~~as ~~2004~~our ~~effective~~2008 ~~tax~~early ~~rate~~redemption ~~also~~of ~~included~~$100 ~~tax~~million ~~benefits~~Medium ~~from~~Term ~~the~~Notes ~~favorable~~due 2012 ~~resolution~~through 2018 and our 2007 early redemption of ~~audits~~$50 million Medium Term Notes due 2012. $100 million and ~~certain~~$296 ~~other~~million ~~tax-related~~of ~~adjustments,~~total asthird ~~well~~party ~~as,~~debt apayments ~~reduction~~were made in ~~our~~2008 ~~estimated~~and ~~state~~2007, ~~tax~~respectively. ~~rate~~See the Capital Resources and Liquidity section ~~due~~below. toWe ~~declines~~have innot ~~multi-state~~issued ~~receivables~~any new debt since 2001.

~~Application~~The mark-to-market valuation of ~~Critical~~interest ~~Accounting~~rate ~~Policies~~derivatives and remeasurement of Yen-denominated debt resulted in net losses of $1 million and $3 million in 2007 and 2006, respectively. The net losses were primarily due to changes in interest rates over the period. Our intercompany derivative instruments were settled in June 2007 for $29 million in conjunction with the repayment of our 2% Yen-denominated Medium Term Notes at maturity. We held no derivative instruments in 2008.

InOur ~~preparing~~effective ~~the~~income tax ~~financial~~rates ~~statements~~were ~~and~~36.3%, ~~accounting~~37.3% ~~for~~and ~~the~~38.3% ~~underlying~~in ~~transactions and balances~~2008, we2007 ~~apply~~and ~~our~~2006 ~~financial~~respectively, ~~policies~~all asreflective ~~disclosed~~of ~~in our Notes to~~ the ~~Financial Statements~~U.S. ~~The~~statutory ~~application~~rate of ~~our~~35% ~~accounting~~and ~~policies~~state ~~generally~~income ~~does not involve significant estimates or management's judgment~~taxes.

~~CAPITAL~~5 ~~RESOURCES AND LIQUIDITY~~

OurTable liquidity is dependent on the continued liquidity of XC. Due to our cessation of receivables purchases from XC in 2001 and our sale to XC of portions of our portfolio of contracts receivable, funds collected since 2001 have exceeded cash usage requirements, and such excess funds have been loaned to XC under the interest-bearing Master Demand Note. We will demand repayment of these loan amounts as and to the extent necessary to repay our maturing debt obligations, fund our operations, or for such other purposes that we determine appropriate. Contents

~~Net~~Application cash provided by operating activities was $23 million in 2006 compared to $48 million in 2005 and $61 million in 2004. The decrease in cash provided by operating activities in 2006 from 2005 was due to increased tax payments of ~~$27~~Critical ~~million~~Accounting ~~primarily~~Policies associated with realized taxable gains from prior year repayment of debt and by lower income of $16 million partially offset by a reduction in interest paid of $18 million on lower average debt balances. The decrease in cash provided by operating activities in 2005 from 2004 was primarily due to lower earned income of $7 million, an increase in income taxes paid of $16 million, as partially offset by a reduction in interest paid of $10 million on lower average debt balances.

~~Net~~In ~~cash~~preparing ~~used~~the infinancial ~~investing~~statements ~~activities~~and ~~was $23~~accounting ~~million~~for inthe ~~2006,~~underlying ~~compared~~transactions toand ~~net~~balances, ~~cash~~we ~~provided~~apply byour ~~investing~~financial ~~activities~~policies ofas ~~$951~~disclosed ~~million~~ in ~~2005,~~our ~~and~~Notes ~~net~~to ~~cash~~the ~~used~~Financial inStatements. ~~investing~~The ~~activities~~application of ~~$61~~our accounting ~~million~~policies ingenerally ~~2004~~does not involve significant estimates or management’s judgment.

~~Cash~~CAPITAL ~~used~~RESOURCES inAND ~~investing~~LIQUIDITY for the year ended December 31, 2006 consisted of $103 million of additional loans to Xerox from interest on the demand note. This was offset by $80 million of collections on the demand note primarily to fund tax payments and interest on third party debt.

~~Cash~~Our ~~provided~~liquidity byis ~~investing~~dependent ~~activities~~on ~~for~~ the ~~year~~continued ~~ended~~liquidity of XC. Due to our cessation of receivables purchases from XC in 2001 and our sale to XC of portions of our portfolio ~~December 31~~of contracts receivable, ~~2005~~funds ofcollected ~~$951~~since ~~million~~2001 have exceeded cash usage requirements, ~~primarily~~and ~~consisted~~such excess funds have been loaned to XC under the interest-bearing Master Demand Note. We will demand repayment of: these loan amounts, as and to the extent necessary, to repay our maturing debt obligations, fund our operations or for such other purposes that we determine appropriate.

•Net cash provided by operating activities was $~~869~~31 million ofin ~~net~~2008 ~~advances~~compared to $38 million in 2007 and $23 million in 2006. The decrease in cash provided by operating activities in 2008 from ~~Xerox~~2007 onprimarily ~~the~~reflects ~~Master~~lower ~~Demand~~net ~~Note~~income, ~~due~~partially tooffset ~~our~~by ~~demand~~changes ofin working ~~$900~~capital. ~~million,~~The ~~which~~increase ~~together~~in ~~with~~cash ~~proceeds~~provided ~~from~~by ~~collections~~operating ~~and~~activities ~~sales~~in of2007 ~~investments~~from 2006 was ~~used~~primarily due to ~~repay~~lower ~~maturing~~tax ~~debt,~~payments asin ~~offset~~2007 byof $3122 million ~~representing~~primarily due to the ~~net~~absence ~~amount~~of prior year payments associated with ~~additional~~realized ~~loans~~taxable togains ~~Xerox~~from the 2005 repayment of debt, as ~~offset~~well byas ~~amounts~~a ~~used~~reduction ~~for~~in ~~the~~interest ~~payment~~paid of ~~taxes~~$8 ~~and~~million ~~third~~on ~~party~~lower ~~interest~~average debt balances. The increases were partially offset by lower earned income of $15 million.

•Net ~~Collections~~cash provided by investing activities was $69 million in 2008 and $287 million in 2007 compared to net cash used in investing activities of $23 million in 2006. Cash provided by investing activities in 2008 consisted of $100 million increase from ~~finance~~our ~~receivables~~collections on the demand note used to repay debt, offset by a reduction of $31 million of net advances to Xerox (the net advances consisted of additional loans to Xerox of $57 million from interest on the Master Demand Note, net of $26 million of collections we used for the payment of taxes and interest). Cash provided by investing activities for the year ended December 31, 2007 consisted of collections on the demand note of $325 million used to repay maturing and other debt and to settle intercompany derivatives, partially offset by a reduction of $38 million of net advances to Xerox (the net advances consisted of additional loans to Xerox of $88 million from interest on the demand loan, net of $50 million of collections we used for the payment of taxes and interest). Cash used in investing for the year ended December 31, 2006 consisted of $103 million of additional loans to Xerox from interest on the demand note, partially offset by $80 million of collections on the demand note we used to fund tax payments and interest on third party debt.

•Net ~~Proceeds~~cash ofused in financing activities was $44100 million ~~from~~for the ~~sale~~year ofended ~~receivables~~December 31, to2008, XCreflecting asthe ~~described~~early inredemption ~~Note~~of 2a toportion ~~the~~of ~~Consolidated~~our ~~Financial~~Medium ~~Statements.~~Term Notes as follows:

~~Cash~~• ~~used~~$25 ~~in investing activities for the year ended December 31~~million, ~~2004~~7.20% ofMedium ~~$61~~Term ~~million~~Notes, ~~primarily~~Due ~~consisted of:~~ 2012

• $~~281~~50 million ~~of net advances to Xerox on the Master Demand Note~~, ~~due~~6.50% toMedium ~~the~~Term ~~transfers of cash resulting from the collection of finance receivables~~Notes, asDue ~~offset by payments of taxes and third party interest.~~2013

• ~~Collections~~$25 ~~from~~million, ~~finance~~7.00% ~~receivables~~Medium ofTerm ~~$211~~Notes, ~~million.~~Due 2018

•Net cash ~~Proceeds~~used in financing activities was $325 million for the year ended December 31, 2007, reflecting our June 2007 debt repayments of $9246 million ~~from~~for our maturing 2.00% Yen-denominated Medium Term Notes, $29 million for the ~~sale~~settlement of intercompany ~~receivables~~derivative toinstruments XCeconomically ashedging ~~described~~the inYen-denominated ~~Note~~debt 2and to$50 million associated with the ~~Consolidated~~early ~~Financial~~redemption ~~Statements~~of $50 million, 7.00% Medium Term Notes, Due 2012.

~~There~~No cash was noused ~~net~~in ~~cash~~or ~~from~~provided by financing activities in 2006 ~~or 2004~~, as there were no debt repayments or borrowings. Net cash used in financing activities was $999 million in 2005, reflecting the $924 million payment of our maturing 1.5% 2005 Yen denominated Medium Term Notes, as well as $75 million associated with the early redemption of the following notes:

•As of December 31, 2008, we had $2560 million, 7of debt outstanding.~~125%~~ ~~Medium~~Assuming ~~Term~~continued ~~Notes~~liquidity of XC, ~~Due~~the ~~August~~amounts 5due under the Master Demand Note of $1.1 billion as of December 31, ~~2012~~2008 are more than sufficient to meet our remaining maturing obligations.

•Contractual ~~$25~~Cash ~~million,~~Obligations ~~6.60%~~and ~~Medium~~Other ~~Term~~Commercial ~~Notes,~~Commitments ~~Due~~and ~~March~~Contingencies ~~24, 2008~~

•Refer ~~$25~~to ~~million,~~Note ~~7.35%~~3 ~~Medium~~- ~~Term~~ Notes, ~~Due~~Payable ~~July~~to ~~30,~~the ~~2012~~Financial Statements for additional information regarding our future contractual cash obligations.

5Financial Risk Management

AsGiven the nature of ~~December 31,~~our ~~2006~~operations, weour exposures ~~had~~are ~~$462~~limited ~~million~~to ofthe ~~debt~~fixed ~~outstanding.~~interest ~~Assuming~~rate ~~continued~~exposures ~~liquidity~~embedded ~~of XC,~~in the ~~amounts~~remaining ~~due~~unpaid ~~under~~debt ~~the~~and ~~Master~~will ~~Demand~~further ~~Note~~decrease ofover ~~$1,422~~time ~~million~~ as ofdebt ~~December 31,~~is ~~2006~~repaid. ~~are~~Our ~~more~~Master ~~than~~Demand ~~sufficient~~Note towith ~~meet~~XC ~~our~~earns ~~remaining~~interest ~~maturing~~at ~~obligations~~a variable market-based rate.

In6 ~~December 2006, Rating and Investment (“R&I”) upgraded XCC’s credit issuer rating from BBB- to BBB and upgraded its outlook from stable to positive.~~

ContractualTable Cashof Obligations and Other Commercial Commitments and Contingencies Contents

~~Refer~~The tofair ~~Note~~market ~~4—Notes~~values ~~Payable~~of our fixed-rate financial instruments are sensitive to ~~the~~changes ~~Financial~~in ~~Statements~~interest ~~for~~rates. ~~additional~~At December 31, ~~information~~2008, ~~regarding~~a ~~our~~10% ~~future~~change ~~contractual~~in ~~cash~~market ~~obligations~~interest rates would change the fair values of such financial instruments by approximately $2 million.

~~Financial~~READER’S ~~Risk~~NOTE: ~~Management~~THE FOLLOWING DISCUSSION HAS BEEN EXCERPTED DIRECTLY FROM XEROX CORPORATION’S ANNUAL REPORT TO SHAREHOLDERS WHICH IS INCORPORATED BY REFERENCE IN XEROX COPRORATION’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008. DEFINED TERMS HEREIN MAY NOT NECESSARILY HAVE THE SAME MEANING AS THE SAME DEFINED TERMS HAVE IN OTHER PARTS OF THIS DOCUMENT. SUCH TERMS SHOULD BE READ IN THE NARROW CONTEXT IN WHICH THEY ARE DEFINED IN THIS SECTION. REFERENCES TO “WE”, “OUR”, AND “US” REFER TO XEROX CORPORATION. ADDITIONALLY, AMOUNTS AND EXPLANATIONS CONTAINED IN THIS SECTION ARE MEANT TO GIVE THE READER ONLY A GENERAL SENSE OF XC’S OPERATIONS, CAPITAL RESOURCES AND LIQUIDITY. ACCORDINGLY, THESE EXCERPTS SHOULD BE READ IN THE CONTEXT OF INFORMATION INCLUDED IN, OR INCORPORATED BY REFERENCE WITHIN XEROX CORPORATION’S 2008 ANNUAL REPORT ON FORM 10-K FILED SEPARATELY WITH THE SEC.

~~Given~~Capital ~~the~~Resources ~~limited nature of our operations, our exposures are reduced to the interest rate~~ and ~~currency~~Liquidity exposures embedded in the remaining unpaid debt and will further decrease over time as debt is repaid. Currently, we hold debt of $252 million that is denominated in Japanese Yen and therefore we are exposed to changes in foreign currency exchange rates that could affect our results of operations and financial condition. However, these exposures are economically hedged with intercompany cross-currency interest rate swaps with XC (See Note 5-Financial Instruments to the Financial Statements for a discussion of our remaining derivative activity). Our Master Demand Note with XC earns interest at a market rate.

~~The~~Cash ~~fair~~Flow ~~market~~Analysis values of our fixed-rate financial instruments are sensitive to changes in interest rates. At December 31, 2006, a 10% change in market interest rates would change the fair values of such financial instruments by approximately $7 million.

~~READER'S~~The ~~NOTE:~~following ~~THE~~summarizes ~~FOLLOWING~~our ~~DISCUSSION~~cash ~~HAS~~flows ~~BEEN~~for ~~EXCERPTED~~each ~~DIRECTLY~~of ~~FROM~~the ~~XEROX~~three ~~CORPORATION'S~~years ~~ANNUAL~~ended ~~REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER~~ December 31, 2006. DEFINED TERMS HEREIN MAY NOT NECESSARILY HAVE THE SAME MEANING AS THE SAME DEFINED TERMS HAVE IN OTHER PARTS OF THIS DOCUMENT. SUCH TERMS SHOULD BE READ IN THE NARROW CONTEXT IN WHICH THEY ARE DEFINED IN THIS SECTION. REFERENCES TO "WE"2008, ~~"OUR",~~as ~~AND~~reported ~~"US"~~in ~~REFER TO XEROX CORPORATION. ADDITIONALLY, AMOUNTS AND EXPLANATIONS CONTAINED IN THIS SECTION ARE MEANT TO GIVE THE READER ONLY A GENERAL SENSE OF XC'S OPERATIONS, CAPITAL RESOURCES AND LIQUIDITY.~~our ~~ACCORDINGLY,~~Consolidated ~~THESE~~Statements ~~EXCERPTS~~of ~~SHOULD~~Cash BEFlows ~~READ~~in INthe ~~THE~~accompanying ~~CONTEXT~~Consolidated OFFinancial ~~THE~~Statements: ~~XC CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE INCORPORATED BY REFERENCE WITHIN XEROX CORPORATION'S 2006 ANNUAL REPORT ON FORM 10-K FILED SEPARATELY WITH THE SEC.~~

Summary Results:


										Change
(in millions)	2008			2007			2006			2008			2007
Net cash provided by operating activities	$	939		$	1,871		$	1,617		$	(932	)	$	254
Net cash used in investing activities		(441	)		(1,612	)		(143	)		1,171			(1,469	)
Net cash used in financing activities		(311	)		(619	)		(1,428	)		308			809
Effect of exchange rate changes on cash and cash equivalents		(57	)		60			31			(117	)		29

Increase (decrease) in cash and cash equivalents		130			(300	)		77			430			(377	)
Cash and cash equivalents at beginning of period		1,099			1,399			1,322			(300	)		77

Cash and cash equivalents at end of period	$	1,229		$	1,099		$	1,399		$	130		$	(300	)

~~Revenues~~Cash ~~for~~Flows ~~the~~from ~~three~~Operating ~~years~~Activities ~~ended December 31, 2006 were as follows:~~

(in millions)	Year Ended December 31,						Percent Change
	2006		2005		2004		2006		2005
Equipment sales	$	4,457	$	4,519	$	4,480	(1	)%	1	%
Post sale and other revenue		10,598		10,307		10,308	3	%	—
Finance income		840		875		934	(4	)%	(6	)%
Total Revenue	$	15,895	$	15,701	$	15,722	1	%	—
Total Color revenue included in total revenue	$	5,578	$	4,928	$	4,188	13	%	18	%

Net cash provided by operating activities was $939 million for the year ended December 31, 2008. The $932 million decrease in cash was primarily due to the following:

~~The~~• ~~following~~$330 ~~presentation~~million ~~reconciles~~decrease ~~the above information to the revenue classifications included~~ in ~~our~~pre-tax ~~Consolidated~~income ~~Statements~~before oflitigation ~~Income:~~and restructuring.

(in millions)	Year Ended December 31,
	2006			2005			2004
Sales	$	7,464		$	7,400		$	7,259
Less: Supplies, paper and other sales		(3,007	)		(2,881	)		(2,779	)
Equipment Sales	$	4,457		$	4,519		$	4,480
Service, outsourcing and rentals	$	7,591		$	7,426		$	7,529
Add: Supplies, paper and other sales		3,007			2,881			2,779
Post sale and other revenue	$	10,598		$	10,307		$	10,308

•

$615 million decrease due to net payments for the settlement of the securities-related litigation.

6• $90 million decrease due to higher net income tax payments, primarily resulting from the absence of prior year tax refunds.

~~Total~~• ~~2006 Revenue of~~ $~~15,895~~74 million ~~increased~~decrease 1%primarily ~~from~~due ~~the prior year comparable period. There was a negligible impact from currency on total revenue for the year ended December 31, 2006 as compared~~ to ~~the~~lower ~~prior~~benefit ~~year.~~and ~~Total~~compensation ~~revenue included the following:~~ accruals.

• 1%$71 ~~decline~~million indecrease ~~equipment~~due ~~sales,~~to ~~including~~higher ainventory ~~benefit~~levels ~~from~~as ~~currency~~a result of ~~1-percentage~~lower ~~point,~~equipment ~~primarily reflecting revenue declines in Office~~ and ~~Production~~supplies ~~black-and-white~~sales ~~products, which were partially offset by revenue growth from color products and growth~~ in ~~DMO~~2008.

• 3%$136 ~~growth~~million inincrease ~~post sale and other revenue, including a benefit~~ from ~~currency~~accounts ofreceivable ~~1-percentage~~due ~~point,~~to ~~primarily~~strong ~~reflecting~~collection ~~growth~~effectiveness inthroughout ~~digital Office and Production products and DMO, offset by declines in light lens and licensing revenue~~2008.

• ~~13% growth in color revenue. Color revenue of~~ $~~5,578~~107 million ~~comprised~~increase ~~35%~~from ofderivatives, ~~total~~primarily ~~revenue~~due ~~for~~to the ~~year~~termination ~~ended~~of ~~December~~certain ~~31,~~interest ~~2006~~rate ~~compared~~swaps toin ~~31%~~fourth ~~for~~quarter ~~the year ended December 31, 2005~~2008.

•Net 4%cash ~~decline~~provided inby ~~Finance~~operating ~~income,~~activities ~~including~~was a$1,871 ~~benefit~~million ~~from~~for ~~currency~~the ofyear ~~1-percentage~~ended ~~point~~December 31, ~~reflecting~~2007. ~~lower~~The ~~average~~$254 ~~finance~~million ~~receivables.~~increase in cash was primarily due to the following:

• ~~Overall~~$348 ~~our~~million ~~2006~~increase ~~post-sale~~in ~~annuity~~pre ~~revenue,~~tax ~~including~~income ~~Post~~before ~~sale~~restructuring, ~~and~~depreciation, other ~~revenue~~provisions and ~~Finance~~net ~~income, increased 2% and comprised 72% of total revenue~~gains.

~~Total~~• ~~2005 Revenue of~~ $~~15,701~~108 million ~~was~~increase ~~comparable~~in toother ~~the~~liabilities ~~prior~~primarily ~~year~~reflecting ~~period.~~the ~~Currency~~absence ~~impacts~~of onthe ~~total~~prior ~~revenue~~year ~~were negligible~~payment ~~for~~of ~~the~~$106 ~~year.~~million ~~Total~~related ~~2005~~to ~~revenue included~~ the ~~following:~~MPI litigation.

• 1%$57 ~~growth~~million inincrease ~~Equipment sales, including a negligible impact from currency, primarily~~ reflecting ~~revenue~~lower ~~growth~~pension ~~from~~contributions ~~color~~to inour ~~Office and Production, low-end black-and-white office products as well as growth in DMO~~U.S. ~~These~~pension ~~growth areas were partially offset by revenue declines in higher-end office black-and-white products, and black-and-white production products~~plans.

• ~~Comparable~~$30 ~~Post~~million ~~sale~~increase ~~and~~as ~~other revenues, including~~ a ~~negligible~~result ~~impact~~of ~~from~~lower ~~currency,~~restructuring ~~primarily~~payments ~~reflecting~~due ~~revenue~~to ~~growth~~minimal ~~from~~activity ~~digital products and~~ in ~~DMO which were partially offset by declines in light lens~~2007.

• 6%$114 ~~decline~~million indecrease ~~Finance~~due ~~income,~~to ~~including~~year-over-year ~~benefits~~inventory ~~from~~growth ~~currency~~ of ~~1-percentage~~$54 ~~points~~million primarily related to increased product launches in 2007, ~~which~~as ~~reflects~~well ~~lower~~as ~~finance~~a ~~receivables~~$60 million increase in equipment on operating leases reflecting higher operating lease install activity.

~~Net~~• ~~income~~$73 ~~and~~million ~~diluted~~decrease ~~earnings~~due ~~per~~to ~~share~~a ~~for~~lower ~~the~~net ~~three~~run-off ~~years~~of ~~ended~~finance ~~December 31, 2006 were as follows:~~ receivables.

(in millions, except share amounts)	Year Ended December 31,
	2006		2005		2004
Net income	$	1,210	$	978	$	859
Diluted earnings per share	$	1.22	$	0.94	$	0.86

2006Table Net income of $1,210 million, or $1.22 per diluted share, included the following: Contents

• $~~472~~49 million ~~income~~decrease ~~tax~~primarily ~~benefit~~due ~~related~~ to ~~the~~higher ~~favorable~~accounts ~~resolution~~receivable ofreflecting ~~certain~~increased ~~tax~~revenue, ~~matters~~partially ~~from~~offset ~~the~~by ~~1999~~$110 million year-~~2003~~over-year ~~IRS~~benefit ~~audit~~from increased receivables sales.

• $6845 million ~~(pre-tax~~decrease ~~and~~due ~~after-tax)~~to ~~for~~lower ~~litigation~~benefit ~~matters~~accruals, ~~related~~partially offset by higher accounts payable due to ~~probable~~the ~~losses~~timing onof ~~Brazilian~~payments ~~labor-related~~to ~~contingencies~~vendors and suppliers.

•Cash ~~$46~~Flows ~~million tax benefit resulting~~ from ~~the~~Investing ~~resolution~~Activities ~~of certain tax matters associated with foreign tax audits.~~

•Net $9cash ~~million~~used ~~after-tax~~in ~~($13~~investing ~~million~~activities ~~pre-tax)~~was ~~charge~~$441 ~~from~~million ~~the~~for ~~write-off of~~ the ~~remaining~~year ~~unamortized~~ended ~~deferred~~December 31, ~~debt~~2008. ~~issuance~~The ~~costs~~$1,171 asmillion aincrease ~~result~~in ofcash ~~the~~was ~~termination~~primarily ofdue ~~our~~to ~~2003~~the ~~Credit~~following: ~~Facility.~~

• $~~257~~1,460 million ~~after-tax~~increase (due to less cash used for acquisitions. 2008 acquisitions included $~~385~~138 million ~~pre-tax)~~for ~~restructuring~~Veenman B.V. and ~~asset~~Saxon ~~impairment~~Business ~~charges~~Systems as compared to $1,568 million for GIS and its additional acquisitions in the prior year.

~~2005~~• ~~Net~~$192 ~~income~~million ofdecrease ~~$978~~due ~~million,~~to orlower $0funds from escrow and other restricted investments in 2008.94 ~~per~~The ~~diluted~~prior ~~share,~~year ~~included~~reflected funds received from the ~~following:~~run-off of our secured borrowing programs.

• $~~343~~134 million ~~after-tax~~decrease ~~benefit~~in ~~related~~other investing cash flows due to the ~~finalization~~absence of ~~the~~proceeds ~~1996-1998~~from ~~IRS~~liquidations ~~audit~~of short-term investments.

•Net ~~$84~~cash ~~million~~used ~~after-tax~~in ~~($115~~investing ~~million~~activities ~~pre-tax)~~was ~~charge~~$1,612 million for ~~litigation~~the ~~matters~~year ~~relating~~ended toDecember 31, ~~the~~2007. ~~MPI~~The ~~arbitration~~$1,469 ~~panel~~million ~~decision~~decrease ~~and~~in ~~probable~~cash ~~losses~~was ~~for~~primarily ~~other~~due ~~legal~~to ~~matters.~~the following:

• $581,386 million ~~after-tax~~decrease (due to $931,615 million ~~pre-tax)~~in ~~gain~~2007 ~~related~~acquisitions toprimarily ~~the~~comprised ~~sale~~ of ~~our~~$1,568 ~~entire~~for ~~equity~~GIS ~~interest~~and its additional acquisitions and $30 million for Advectis, Inc., as compared to $229 million in ~~Integic~~acquisitions ~~Corporation~~in ~~(“Integic”)~~2006 comprised of Amici, LLC and XMPie, Inc.

• $~~247~~123 million ~~after-tax~~decrease (in other investing cash flows reflecting the absence of the 2006 $~~366~~122 million ~~pre-tax)~~distribution ~~restructuring~~related ~~and~~to ~~asset~~the ~~impairment~~sale ~~charges~~of investments held by Ridge Re.

~~2004~~• ~~Net~~$65 ~~income~~million ofdecrease ~~$859~~due ~~million,~~to orhigher ~~$0.86~~capital ~~per~~and ~~diluted~~internal ~~share,~~use ~~included~~software ~~the~~investments ~~following:~~in 2007.

• $8357 million ~~after-tax~~decrease ~~($109~~due ~~million~~to ~~pre-tax)~~higher ~~gain~~2006 ~~related~~proceeds tofrom sales of land, buildings and equipment, which included the sale of ~~substantially~~our ~~all~~corporate ofheadquarters ~~our~~and ~~investment~~a inparcel ~~ContentGuard~~of ~~Holdings,~~vacant ~~Inc~~land. ~~(“ContentGuard”).~~

7• $162 million increase due to a reduction in escrow and other restricted investments in 2007, as we continue to run-off our secured borrowing programs.

•Cash ~~$38~~Flows ~~million after-tax pension settlement benefit~~ from ~~Fuji~~Financing ~~Xerox.~~Activities

•Net ~~$30~~cash ~~million~~used ~~after-tax~~in (financing activities was $38311 million ~~pre-tax)~~for ~~gain~~the ~~from~~year ~~the~~ended ~~sale~~December 31, of2008. ~~our~~The ~~investment~~$308 million increase in ~~ScanSoft,~~cash ~~Inc.~~was ~~(“ScanSoft”).~~primarily due to the following:

• $571,642 million ~~after-tax~~increase (from lower net repayments on secured debt. 2007 reflects termination of our secured financing programs with GE in the United Kingdom and Canada of $86634 million ~~pre-tax)~~and ~~restructuring~~Merrill ~~and~~Lynch ~~asset~~in ~~impairment~~France ~~charges~~for $469 million as well as the repayment of secured borrowings to DLL of $153 million. The remainder reflects lower payments associated with our GE U.S. secured borrowings.

~~Capital~~• ~~Resources~~$888 million decrease from lower net cash proceeds from unsecured debt. 2008 reflects the issuance of $1.4 billion in Senior Notes, $250 million from a private placement borrowing and ~~Liquidity~~net payments of $354 million on the Credit Facility and $370 million on other debt. 2007 reflects the issuance of $1.1 billion Senior Notes, $400 million from private placement borrowings and net proceeds of $600 million on the Credit Facility, offset by net payments of $286 million on other debt.

~~Cash~~• ~~Flow~~$180 ~~Analysis:~~ million decrease due to additional purchases under our share repurchase program.

~~The~~• ~~following~~$154 ~~summarizes~~million ~~our~~decrease ~~cash~~due ~~flows~~to ~~for~~common ~~each~~stock ofdividend ~~the three years ended December 31, 2006, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:~~ payments.

(in millions)	2006			2005			2004			2006 AmountChange			2005 AmountChange
Net cash provided by operating activities	$	1,617		$	1,420		$	1,750		$	197		$	(330	)
Net cash (used in) provided by investing activities		(143	)		(295	)		203			152			(498	)
Net cash used in financing activities		(1,428	)		(2,962	)		(1,293	)		1,534			(1,669	)
Effect of exchange rate changes on cash and cash equivalents		31			(59	)		81			90			(140	)
Increase (decrease) increase in cash and cash equivalents		77			(1,896	)		741			1,973			(2,637	)
Cash and cash equivalents at beginning of period		1,322			3,218			2,477			(1,896	)		741
Cash and cash equivalents at end of period	$	1,399		$	1,322		$	3,218		$	77		$	(1,896	)

•

$79 million decrease due to lower proceeds from the issuance of common stock, reflecting a decrease in stock option exercises as well as lower related tax benefits.

~~Cash,~~• ~~cash~~$33 ~~equivalents~~million ~~and~~decrease ~~Short-term~~due ~~investments~~to ~~reported~~share inrepurchases ~~our~~related ~~Consolidated~~to ~~Financial Statements~~employee ~~were~~withholding astaxes ~~follows:~~on stock-based compensation vesting.

	2006		2005
Cash and cash equivalents	$	1,399	$	1,322
Short-term investments		137		244
Total Cash, cash equivalents and Short-term investments	$	1,536	$	1,566

Net cash used in financing activities was $619 million in year ended December 31, 2007. The $809 million increase in cash was primarily due to the following:

~~For~~• $538 million increase due to higher net cash proceeds from unsecured debt. This reflects the ~~year~~May ~~ended~~2007 ~~December 31,~~issuance ~~2006~~of the $1.1 billion Senior Notes, the issuances of two zero coupon bonds in 2007 resulting in net ~~cash~~proceeds ~~provided~~of byapproximately ~~operating~~$400 ~~activities~~million, ~~increased~~ and the net drawdown of $~~197~~600 million ~~from~~under ~~2005~~the ~~primarily~~2007 asCredit aFacility. ~~result~~These higher net proceeds were partially offset by the March 2006 issuance of the ~~increased~~$700 ~~net~~million ~~income~~Senior Notes and the August 2006 issuance of an additional $~~232~~650 million of Senior Notes, as well as, ~~the~~higher ~~following~~repayments ~~additional~~on ~~items:~~other unsecured debt in 2007 as compared to 2006.

• $~~173~~437 million increase due to lower ~~inventories~~purchases under our share repurchase program as cash was invested in acquisitions.

•8 ~~$87 million increase due to lower net tax payments including a $34 million refund associated with the settlement of the 1999 to 2003 IRS tax audit.~~

•Table $62 million decrease due to a lower net run-off of finance receivables.Contents

• $51100 million ~~decrease~~increase ~~due~~relating to ~~higher~~the ~~restructuring~~2006 ~~payments~~payment ~~related~~of our liability to ~~previously~~Xerox ~~reported~~Capital ~~actions~~LLC in connection with their redemption of Canadian deferred preferred shares.

• $96278 million decrease due to ahigher ~~lower~~net ~~year~~repayments of secured financing. Refer to Note 4-~~over-year~~Receivables, ~~reduction~~net in ~~other~~the ~~current~~consolidated ~~and~~financial ~~long-term~~statements ~~assets~~for further information.

•Financing ~~$77~~Activities ~~million decrease due to a reduction in other current and long-term liabilities, primarily reflecting the $106 million payment relating to the previously disclosed MPI legal matter.~~

~~For~~Customer ~~the~~Financing ~~year~~Activities ~~ended December 31, 2005, net cash provided by operating activities, decreased $330 million from 2004 primarily as a result of the following:~~

•We ~~$258~~provide ~~million~~equipment ~~decrease~~financing ~~due~~ to ~~modest~~the ~~growth~~majority inof ~~accounts~~our ~~receivable~~customers. inBecause ~~2005~~finance ~~compared~~leases allow our customers to pay for equipment over time rather than at the date of installation, we maintain a ~~decline~~certain level of debt to support our investment in ~~2004~~these customer finance leases. We currently fund our customer financing activity through cash generated from operations, cash on hand, borrowings under bank credit facilities and proceeds from capital markets offerings. We also have funding available through a secured borrowing arrangement with General Electric Capital Corporation (“GECC”) referred to as the Loan Agreement.

•We ~~$83~~have ~~million~~arrangements ~~decrease~~in ~~due~~certain international countries and domestically through the acquisition of GIS, where third party financial institutions originate lease contracts directly with our customers. In these arrangements, we sell and transfer title of the equipment to ~~lower~~these ~~finance~~financial institutions. Generally, we have no continuing ownership rights in the equipment subsequent to its sale; therefore, the related receivable ~~run-off~~and debt are not included in our Consolidated Financial Statements.

•The ~~$124~~following represents ~~million~~total ~~decrease~~finance ~~due~~assets toassociated ~~higher~~with ~~inventory~~our ~~growth~~lease inor ~~2005~~finance ~~compared~~operations toas ~~2004~~of ~~reflecting~~December 31, an2008 ~~increase~~and 2007 (in ~~the~~millions): ~~number of new products.~~

• Partially offsetting these items were lower tax payments of $96 million due to refunds from audit and other tax settlements, as well as, the timing of payments associated with restructuring.


	2008		2007
Total Finance receivables, net ⁽¹⁾	$	7,278	$	8,048
Equipment on operating leases, net		594		587

Total finance assets, net	$	7,872	$	8,635

•The ~~Partially~~reduction ~~offsetting~~of ~~lower~~$763 ~~pension~~million ~~contributions~~in Total finance assets, net includes unfavorable currency of $21473 million.

We(1) ~~expect~~Includes ~~2007~~(i) ~~operating~~billed ~~cash~~portion ~~flows~~of infinance ~~the~~receivables, ~~range~~net, of(ii) ~~$1.2~~finance ~~billion~~receivables, tonet ~~$1.5~~and ~~billion~~(iii) finance receivables due after one year, net as ~~compared~~included toin ~~$1.6~~the ~~billion~~Consolidated inBalance ~~2006.~~Sheets as of December 31, 2008 and 2007.

~~For~~The ~~the~~following tables ~~year~~summarize ~~ended~~our debt as of December 31, ~~2006,~~2008 ~~net~~and ~~cash from investing activities increased $152 million from 2005 primarily as a result of the following~~2007:

• $354 million due to an increase in proceeds from the net sale of short-term investments in 2006 of $107 million, as compared to the net purchases of $247 million in 2005, as 2005 represented the initial year we purchased short-term investments to supplement our investment income.


(in millions)	2008		2007
Debt secured by finance receivables	$	56	$	275
Capital leases		9		19

Total Secured Debt		65		294

Senior Notes		7,574		5,781
Credit Facility		246		600
Other Debt		499		789

Total Unsecured Debt		8,319		7,170

Total Debt	$	8,384	$	7,464

8At December 31, 2008, less than 1% of total debt was secured by finance receivables and other assets compared to 4% at December 31, 2007.

• $77 million due to higher proceeds from the sale of our Corporate headquarters and other excess land and buildings.


(in millions)	2008			2007
Principal Debt Balance	$	8,201		$	7,465
Less: Net unamortized discount		(6	)		(13	)
Add: FAS 133 fair value adjustments		189			12

Total Reported Debt		8,384			7,464
Less: Current maturities and short-term debt		(1,610	)		(525	)

Total long-term debt	$	6,774		$	6,939

•9 ~~$48 million due to higher proceeds from divestitures and investments, reflecting:~~

•Table $122 million related to the sale of investments held by Ridge Re* in 2006.Contents

•Principal debt balance at December 31, 2008 and 2007 includes short-term debt of $2161 million ~~distribution~~and ~~from~~$99 ~~the~~million, respectively. ~~liquidation~~Refer ofto ~~our~~Note ~~investment~~11 – Debt in ~~Xerox~~the ~~Capital~~Consolidated ~~LLC~~Financial inStatements ~~2006~~for additional information regarding the above balances.

•Liquidity, ~~$96~~Financial ~~million~~Flexibility ofand ~~proceeds~~Other ~~from~~Financing ~~the~~Activity ~~sale of Integic in 2005.~~

•Liquidity ~~Partially offsetting these items were the following:~~

•We ~~$229~~manage ~~million~~our ~~due~~worldwide toliquidity ~~payments~~using ~~related~~internal cash management practices, which are subject to (1) the ~~acquisition~~statutes, regulations and practices of ~~Amici~~each of the local jurisdictions in which we operate, ~~LLC~~(2) the legal requirements of the agreements to which we are a party and ~~XMPie,~~(3) the ~~Inc~~policies and cooperation of the financial institutions we utilize to maintain and provide cash management services.

•Our ~~$57~~liquidity ~~million~~is ~~increase~~a infunction of our ability to successfully generate cash flows from a combination of efficient operations and improvement therein, access to capital ~~expenditures~~markets, securitizations, funding from third parties and ~~internal~~borrowings ~~use~~secured ~~software~~by our finance receivables portfolios. Our ability to maintain positive liquidity going forward depends on our ability to continue to generate cash from operations and access to financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control.

•The ~~Lower~~following ~~cash~~is ~~generation~~a discussion of ~~$42~~our ~~million~~liquidity ~~due~~position toas ~~a lower net reduction~~ of ~~escrow~~December 31, ~~and~~2008: ~~other restricted investments.~~

*In• ~~March~~As ~~2006~~of ~~Ridge~~December Re31, a2008, ~~wholly~~total ~~owned~~cash ~~subsidiary~~and ~~included~~cash inequivalents ~~discontinued~~was ~~operations,~~$1.2 ~~executed~~billion anand ~~agreement~~our toborrowing ~~complete~~capacity ~~its~~under ~~exit~~our ~~from~~Credit ~~the~~Facility ~~insurance business~~was $1.7 Asbillion, areflecting ~~result~~$246 ofmillion ~~this~~outstanding ~~agreement~~borrowings and ~~pursuant~~no tooutstanding aletters ~~liquidation~~of ~~plan,~~credit. ~~excess~~In ~~cash~~addition ~~held~~we bycurrently ~~Ridge~~have Reapproximately ~~was~~$1.0 ~~distributed~~billion ~~back~~available tounder the ~~Company~~Loan ~~(Refer~~Agreement tothrough ~~Note~~2010, ~~21-Divestitures~~which ~~and~~has ~~Other~~not ~~Sales~~been accessed in ~~the~~almost ~~Consolidated~~three ~~Financial Statements for further information)~~years.

~~For~~• We have consistently delivered strong cash flow from operations over the ~~year~~past three years driven by the strength of our annuity based revenue model. Cash flows from operations were $939 million, $1,871 million and $1,617 million for the years ended December 31, ~~2005~~2008, ~~net~~2007 ~~cash~~and 2006, respectively. Cash flows from ~~investing~~operations ~~activities~~in ~~decreased~~2008 included $~~498~~615 million ~~from~~in ~~2004 primarily~~net aspayments afor ~~result~~our ofsecurities ~~the following:~~ litigation.

• ~~$247~~Our ~~million~~debt ~~from~~maturities ~~the~~are ~~net~~in ~~purchases~~line ofwith ~~short-term~~historical ~~investments~~and ~~which~~projected ~~were~~cash ~~intended~~flows toand ~~increase~~are ~~our~~spread ~~return~~over onthe ~~available~~next ~~cash.~~ten years as follows (in millions):

• Decrease of $143 million due to a lower net reduction of escrow and other restricted investments due to the 2004 renegotiation of certain secured borrowing arrangements and scheduled releases from an escrow account of supporting interest payments on our prior liability to a trust issuing preferred securities.


Year	Amount
2009	$	1,610
2010		962
2011		802
2012		1,169
2013		1,138
2014		69
2015		—
2016		950
2017		501
2018 and thereafter		1,000

Total	$	8,201

•On ~~Decrease~~January 15, 2009, we repaid in-full at maturity, our outstanding U.S. Dollar and Euro-denominated 9.75% Senior Notes. The total repayment of approximately $86900 million ~~due~~was tomade ~~lower~~using ~~proceeds~~cash ~~from~~on ~~divestitures~~hand and ~~investments,~~the ~~net~~proceeds ~~reflecting:~~of a $400 million borrowing under our Credit Facility.

•Debt ~~2005~~Activity ~~proceeds of $105 million primarily consisting of $96 million from the sale of our equity interest in Integic Corporation.~~

•Credit ~~2004~~facility: ~~proceeds~~In ofFebruary ~~$191~~2008, ~~million~~we ~~primarily~~exercised ~~consisting~~our ofright under our $662.0 ~~million~~billion ~~from~~Credit Facility to request a one-year extension of the ~~ContentGuard~~maturity ~~sale,~~date. Lenders representing approximately $791.4 ~~million~~billion ~~from~~(or approximately 70%) of the ~~ScanSoft~~commitments ~~sale~~under the Credit Facility agreed to the extension and ~~$36~~the ~~million~~portion ~~from~~represented by these Lenders now has a ~~preferred~~maturity ~~stock~~date ~~investment~~of April 30, 2013, with the remaining portion of the Credit Facility to mature on April 30, 2012.

•10 ~~Decrease of $48 million due to lower proceeds from the sale of excess land and buildings.~~

•Table Partiallyof offsetting these items was a $15 million decrease in capital and internal use software expenditures.Contents

WeIn ~~expect~~October ~~2007~~2008, ~~capital~~we ~~expenditures~~amended ~~including~~our ~~internal~~Credit ~~use~~Facility ~~software~~to increase the permitted leverage ratio (debt/consolidated EBITDA) to ~~approximate~~a fixed ~~$300~~ratio ~~million~~of 3.75x. The amendment also included a re-pricing of the Credit Facility such that borrowings will bear interest at LIBOR plus an all-in spread that will vary between 1.25% and 4.00% subject to our credit rating and percent of Credit Facility utilization at the time of borrowing. Based upon our current rating and utilization, the all-in spread is 1.75%.

~~For~~Capital ~~the~~markets ~~year~~offerings ~~ended~~and other: ~~December 31,~~In ~~2006~~2008, ~~net~~we ~~cash~~raised ~~used~~net inproceeds ~~financing~~of ~~activities decreased~~ $1.54 billion ~~from~~through ~~2005~~the ~~primarily~~issuance asof Senior Notes and $250 million from a ~~result~~private ofplacement ~~the following:~~transaction.

•Loan ~~$2,463~~covenants ~~million~~and ~~lower~~compliance: ~~usage~~At ~~primarily~~December 31, ~~resulting~~2008, ~~from~~we ~~the~~were ~~2005~~in ~~net~~full ~~repayments~~compliance onwith ~~term~~the covenants and other ~~unsecured~~provisions ~~debt,~~ of ~~$1,187~~the ~~million~~Credit Facility, asour ~~contrast~~Senior toNotes and the ~~2006~~Loan ~~net~~Agreement. ~~borrowings~~We ofhave ~~term~~the ~~and~~right ~~other~~to ~~unsecured~~prepay ~~debt~~any ofoutstanding loans ~~$1,276~~or ~~million.~~to ~~The~~terminate ~~2006~~the ~~net~~Credit ~~borrowings~~Facility ~~primarily~~without ~~reflect~~penalty. ~~the~~Failure ~~2016~~to ~~Senior~~be ~~Notes~~in ~~borrowing~~compliance ofwith ~~$700~~any ~~million~~material inprovision ~~March~~or ~~2006,~~covenant ~~2017~~of ~~Senior~~these ~~Notes~~agreements ~~borrowing~~could ofhave ~~$500~~a ~~million~~material inadverse ~~August~~effect ~~2006~~on our liquidity and ~~the~~operations ~~2009~~and ~~Senior~~our ~~Notes~~ability ~~borrowing~~to ofcontinue ~~$150~~to fund ~~million~~our incustomers’ ~~August~~purchase ~~2006~~of Xerox equipment.

•Refer ~~$42~~to ~~million~~Note ~~due~~11 – Debt toand ~~higher~~Note ~~proceeds~~4 – Receivables, ~~from~~Net in the Consolidated ~~issuance~~Financial ofStatements ~~common~~for ~~stock,~~additional ~~resulting~~information ~~from~~regarding ~~increases~~the inabove ~~exercised~~noted ~~stock~~transactions ~~options~~and Loan Agreement, respectively.

•Share ~~Partially~~Repurchase Programs ~~offsetting these items were the following:~~

•The Board of Directors has authorized share repurchase programs totaling $~~636~~4.5 ~~million~~billion ~~higher~~through ~~cash~~December 31, ~~usage~~2008, ~~for~~which ~~the~~included additional ~~acquisition~~authorizations of ~~common~~$1.0 ~~stock~~billion ~~under~~in both January and July of 2008. Since launching this program in October 2005, we have repurchased 194.1 million shares, totaling approximately $2.9 billion. Refer to Note 17 – Shareholders’ Equity – “Treasury Stock” in the ~~authorized~~Consolidated Financial Statements for further information regarding our share repurchase programs.

•Although we have $~~269~~1.6 ~~million~~billion ~~higher~~remaining ~~net~~authorization, ~~repayments~~at onthe ~~secured~~current ~~borrowings~~time, we have no immediate plans for further share repurchases.

•Dividends ~~$100 million payment of liability to Xerox Capital LLC in connection with their redemption of Canadian deferred preferred shares in February 2006.~~

~~For~~The ~~the~~Board ~~year~~of ~~ended~~Directors ~~December 31,~~declared ~~2005,~~a ~~net~~4.25 ~~cash~~cent ~~used~~per inshare ~~financing~~dividend ~~activities~~on ~~increased~~common ~~$1.7~~stock ~~billion~~in ~~from~~each ~~2004 primarily~~quarter ~~as a result~~ of ~~the following:~~ 2008.

•Financial AInstruments ~~$1.5 billion reduction in proceeds from new secured financings, reflecting a rebalancing of our secured and unsecured debt portfolio.~~

•Refer ~~$433~~to ~~million~~Note ~~cash~~13 ~~usage~~- ~~for~~Financial Instruments in the ~~acquisition~~Consolidated ofFinancial ~~common~~Statements ~~stock~~for ~~under~~additional ~~the~~information ~~authorized~~regarding ~~October~~our ~~2005~~derivative ~~share~~financial ~~repurchase program~~instruments.

9Credit Ratings

•We Aare ~~partially~~currently ~~offsetting~~rated ~~$235~~investment ~~million~~grade ~~decrease~~by inall ~~net~~major ~~payments~~rating onagencies. ~~term~~As ~~and~~of ~~other~~January 31, ~~debt~~2009 ~~reflecting~~the ~~lower~~ratings ~~debt~~were ~~maturity~~as ~~obligations.~~follows:

The following represents our total finance assets associated with our lease or finance operations as of December 31, 2006 and 2005, respectively:


	Senior Unsecured Debt	Outlook
Moody’s	Baa2	Positive
Standard & Poors (“S&P”)	BBB	Stable
Fitch	BBB	Stable

	December 31, 2006		December 31, 2005
Total Finance receivables, net (1)	$	7,844	$	7,849
Equipment on operating leases, net		481		431
Total Finance Assets, net	$	8,325	$	8,280

READER’S NOTE: THIS CONCLUDES THE DISCUSSION EXCERPTED DIRECTLY FROM XEROX CORPORATION’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008.

~~(1)~~Item ~~Includes~~7A. ~~(i)~~Quantitative ~~billed portion of finance receivables, net, (ii) finance receivables, net~~ and ~~(iii)~~Qualitative ~~finance~~Disclosures ~~receivables~~About ~~due~~Market ~~after one year, net as included in the Consolidated Balance Sheets as of December 31, 2006 and 2005.~~Risk

~~Refer to Note 4 – Receivables, Net in the~~The ~~Consolidated Financial Statements for further~~ information ~~regarding~~set ~~our~~forth ~~third~~under ~~party~~the ~~secured~~caption ~~funding~~“Financial ~~arrangements~~Risk asManagement” ~~well~~in ~~as a comparison of finance receivables to our financing-related debt as of December~~Item ~~31,~~7 ~~2006~~above ~~and~~is ~~2005.~~hereby Asincorporated ~~of December 31,~~by ~~2006,~~reference ~~approximately~~in ~~31%~~answer ~~of total finance receivables were encumbered as compared~~ to ~~44%~~this ~~at December 31, 2005~~Item.

~~The following~~11 ~~represents our aggregate debt maturity schedule as of December 31, 2006:~~

(in millions)	UnsecuredDebt		Debt Secured by Finance Receivables		OtherSecuredDebt		TotalDebt
2007	$	295	$	1,178	$	12	$	1,485	(1)
2008		9		722		5		736
2009		1,055		109		5		1,169
2010		687		44		2		733
2011		800		6		—		806
Thereafter		2,212		—		4		2,216
Total	$	5,058	$	2,059	$	28	$	7,145

~~(1)~~Item ~~Quarterly~~8. ~~secured~~Financial ~~and~~Statements ~~unsecured total debt maturities for 2007 are $215 million, $421 million, $626 million~~ and ~~$223~~Supplementary ~~million for the first, second, third and fourth quarters, respectively.~~Data

~~The~~Our ~~following~~financial statements, ~~table~~together ~~summarizes~~with ~~our~~the ~~secured~~report ~~and~~thereon ~~unsecured~~of ~~debt~~PricewaterhouseCoopers LLP, are set forth as part of ~~December 31,~~this ~~2006~~Form ~~and~~10-K. ~~2005:~~

(in millions)	December 31, 2006		December 31, 2005
Term Loan	$	—	$	300
Debt secured by finance receivables		2,059		2,982
Capital leases		28		38
Debt secured by other assets		—		213
Total Secured Debt		2,087		3,533
Senior Notes		4,224		2,862
Subordinated debt		19		19
Other Debt		815		864
Total Unsecured Debt		5,058		3,745
Total Debt	$	7,145	$	7,278

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

~~At December 31, 2006, approximately 29% of total debt was secured by finance receivables and other assets compared to 49% at December 31, 2005~~None. ~~Consistent with our objective to rebalance the ratio of secured and unsecured debt, we expect payments on secured loans will continue to exceed proceeds from new secured loans in 2007.~~

10Item 9A(T). Controls and Procedures

~~Liquidity,~~(a) ~~Financial~~Disclosure ~~Flexibility~~Controls and ~~Other Financing Activity:~~ Procedures

~~Liquidity:~~The WeCompany’s ~~manage~~management evaluated, with the participation of our ~~worldwide~~principal ~~liquidity~~executive ~~using~~officer ~~internal~~and ~~cash~~principal ~~management practices~~financial officer, ~~which~~or ~~are~~persons ~~subject~~performing tosimilar ~~(1)~~ functions, the ~~statutes~~effectiveness of our disclosure controls and procedures, ~~regulations~~as defined in Rules 13a-15(e) and ~~practices~~15d-15(e) under the Securities Exchange Act of ~~each~~1934, as of the ~~local~~end ~~jurisdictions~~of inthe ~~which~~period wecovered ~~operate~~by this report. Based on this evaluation, ~~(2) the~~our ~~legal~~principal ~~requirements~~executive officer and principal financial officer have concluded that, as of the ~~agreements~~end of the period covered by this report, our disclosure controls and procedures were effective to ~~which~~ensure that information we are arequired ~~party~~to ~~and~~disclose ~~(3)~~ in the ~~policies~~reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and ~~cooperation~~reported ofwithin the ~~financial~~time ~~institutions~~periods wespecified ~~utilize~~in the Securities and Exchange Commission’s rules and forms relating to ~~maintain~~Xerox Credit Corporation, and ~~provide~~was ~~cash~~accumulated and communicated to the Company’s management, ~~services~~including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As(b) ofManagement’s ~~December~~Report 31, 2006, we had $1.5 billion of cash, cash equivalents and short-term investments, and borrowing capacity under our 2006 Credit Facility of approximately $1.235 billion. Our ability to maintain positive liquidity going forward depends on ~~our~~Internal ~~ability~~Control toover ~~continue~~Financial to generate cash from operations and access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control. Reporting

~~Share~~Our management ~~Repurchase~~is ~~Programs:~~responsible ~~The~~for ~~board~~establishing ofand ~~directors~~maintaining ~~has~~adequate ~~authorized~~internal ~~programs~~control ~~for~~over financial reporting, as such term is defined in the ~~repurchase~~rules ofpromulgated under the ~~Company’s~~Securities ~~common~~Exchange ~~stock~~Act ~~totaling~~of $21934.~~0 billion~~ asUnder ofthe ~~December~~supervision ~~31,~~and ~~2006.~~with ~~Since~~the participation ~~launching~~of our ~~stock~~management, ~~buyback~~including ~~program~~our inprincipal ~~October~~executive, ~~2005~~financial and accounting officers, we have ~~repurchased~~conducted ~~100.6~~an ~~million~~evaluation ~~shares,~~of ~~totaling~~the ~~approximately~~effectiveness ~~$1.5~~of ~~billion~~our ofinternal control over financial reporting based on the ~~$2.0~~framework ~~billion~~in ~~authorized~~“Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

~~Refer~~Based toon ~~Note~~the ~~18-Common~~above ~~Stock~~evaluation, management ~~and~~has ~~Note~~concluded ~~22-Subsequent~~that ~~Event~~our ininternal ~~the~~control ~~Consolidated~~over ~~Financial~~financial ~~Statements~~reporting ~~for~~was ~~further~~effective ~~information~~as ~~regarding~~of ~~our~~December 31, ~~share purchase programs~~2008.

~~Loan~~This ~~Covenants~~annual ~~and~~report ~~Compliance:~~does Atnot include ~~December~~an ~~31,~~attestation ~~2006,~~report ~~we were in full compliance with the covenants and other provisions~~ of ~~the~~PricewaterhouseCoopers ~~2006 Credit Facility~~LLP, ~~the senior notes and the Loan Agreement. Any failure to be in compliance with any material provision or covenant of the 2006 Credit Facility or the senior notes could have a material adverse effect on~~ our ~~liquidity~~independent ~~and operations.~~registered ~~Failure~~public toaccounting befirm, inregarding ~~compliance~~internal ~~with~~control ~~the~~over ~~covenants in the Loan Agreement, including the~~ financial maintenance covenants incorporated from the 2006 Credit Facility, would result in an event of termination under the Loan Agreement and in such case General Electric Capital Corporation (“GECC”) would not be required to make further loans to usreporting. IfManagement’s ~~GECC~~report ~~were to make no further loans to us and assuming a similar facility~~ was not ~~established~~subject ~~and that we were unable~~ to ~~obtain replacement~~attestation ~~financing~~by in the Company’s registered public ~~debt~~accounting ~~markets,~~firm itpursuant ~~could materially adversely affect our liquidity and our ability~~ to ~~fund~~temporary ~~our~~rules ~~customers’ purchases~~ of ~~our~~the ~~equipment~~Securities and ~~this~~Exchange ~~could~~Commission ~~materially~~that ~~adversely~~permit ~~affect our results of operations. We have~~ the ~~right~~Company ~~at any time~~ to ~~prepay~~provide ~~without~~only ~~penalty~~management’s ~~any~~report ~~loans~~in ~~outstanding~~this ~~under~~annual ~~or terminate the 2006 Credit Facility~~report.

~~Financial Instruments:~~Pursuant ~~Refer~~ to ~~Note~~Item 308T(a) 13of Regulation S-~~Financial~~K, ~~Instruments~~this inManagement’s ~~the~~Report ~~Consolidated~~on ~~Financial~~Internal ~~Statements~~Control Over Financing Reporting shall not be deemed filed for ~~additional~~purposes ~~information~~of Section 18 ~~regarding~~of ~~our~~the ~~derivative~~Exchange ~~financial~~Act ~~instruments~~or otherwise subject to the liabilities of that section.

~~Capital~~(c) ~~Markets~~Changes ~~Offerings and Other: Refer to Note 11-Debt~~ in ~~the~~Internal ~~Consolidated~~Control over Financial ~~Statements for additional information regarding the 2006 issuance of our 2016 Senior Notes, 2017 Senior Notes and Floating 2009 Senior Notes, which raised aggregate net proceeds of $1.3 billion.~~ Reporting

~~Credit~~In ~~Ratings:~~connection ~~During~~with the ~~2006~~evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, ~~Moody’s~~there ~~and~~was ~~Fitch~~no ~~upgraded~~change identified in our ~~credit~~internal ~~rating~~control toover ~~investment~~financial ~~grade.~~reporting ~~Our~~that ~~credit~~occurred ~~ratings~~during asthe oflast ~~January 30~~fiscal quarter that has materially affected, ~~2007~~or ~~were~~is reasonably aslikely ~~follows:~~to materially affect, our internal control over financial reporting.

	Senior UnsecuredDebt	Outlook	Comments
Moody’s (1)	Baa3	Positive	The Moody’s rating was upgraded from Ba1 in November 2006. The outlook remains positive since being upgraded in November 2006.
Standard & Poors (“S&P”) (2)	BB+	Positive	The S&P rating was upgraded from BB- in March 2006 and the outlook was revised from stable to positive in January 2007.
Fitch (3)	BBB-	Stable	The Fitch rating was upgraded from BB+ in August 2006.

Item 9B.

Other Information

~~(1) In November 2006, Moody’s upgraded the Senior Unsecured rating from Ba1 to Baa3, a one notch upgrade~~None. Moody’s maintains a Positive Outlook on the credit. In conjunction with the upgrade to investment grade ratings for the senior unsecured debt, Moody’s has withdrawn all Loss Given Default assessments and Speculative Grade Liquidity ratings as they are only appropriate for non-investment grade issuers. Moody’s ratings upgrades also included: Senior unsecured shelf registration to Baa3 from Ba1; Trust preferred to Ba1 from Ba2; subordinated shelf registration to Ba1 from Ba2 and preferred shelf registration to Ba1 from Ba2.

~~(2)~~PART InIII March 2006, S&P upgraded the Senior Unsecured and Corporate Credit rating from BB- to BB+, a two notch upgrade. At the same time, S&P revised its outlook from Positive to Stable on all associated ratings, affirmed the short-term speculative-grade rating at B-1 and upgraded the ratings on Subordinated debt from B to BB- and Preferred Stock from B- to B+. As a result of the rating change, S&P removed Xerox from Credit Watch in March 2006. In January 2007, S&P revised its outlook from Stable to Positive on all associated ratings.

~~(3)~~Item ~~In August 2006, Fitch upgraded its debt ratings and assigned a stable outlook on Xerox~~10. ~~Fitch had upgraded the senior unsecured debt of Xerox from BB+ to BBB- and also upgraded the Trust Preferred securities from BB- to BB~~Directors, ~~both~~Executive ~~one~~Officers ~~notch upgrades. In March 2006, Fitch affirmed its ratings~~ and ~~positive~~Corporate outlook on Xerox in conjunction with its 2016 Senior Notes offering. Fitch had upgraded the senior unsecured debt of Xerox from BB to BB+, and also upgraded the Trust Preferred securities from B+ to BB-, both one notch upgrades in August 2005.Governance

~~Our~~Not ~~credit ratings, which are periodically reviewed by major rating agencies, have substantially improved over the past three years~~Required. Even though as of January 30, 2007, our current S&P credit rating still remains below investment grade, we expect effective implementation of our management strategies will return the company’s senior unsecured debt to investment grade by all major rating agencies in the future.

~~Contractual~~Item ~~Cash~~11. ~~Obligations~~Executive ~~and Other Commercial Commitments and Contingencies: At December 31, 2006, we had the following contractual cash obligations and other commercial commitments and contingencies (in millions):~~ Compensation

	Year 1		Years 2-3				Years 4-5
	2007		2008		2009		2010		2011		Thereafter
Long-term debt, including capital lease obligations (1)	$	1,485	$	736	$	1,169	$	733	$	806	$	2,216
Minimum operating lease commitments (2)		189		161		124		102		84		158
Liabilities to subsidiary trusts issuing preferred securities (3)		—		—		—		—		—		624
Retiree Health Payments		102		115		123		127		128		665
Purchase Commitments
Flextronics (4)		644		—		—		—		—		—
EDS Contracts (5)		277		270		132		—		—		—
Other (6)		39		30		30		—		—		—
Total contractual cash obligations	$	2,736	$	1,312	$	1,578	$	962	$	1,018	$	3,663

Not Required.

~~(1)~~12 Refer to Note 11-Debt to our Consolidated Financial Statements for interest payments by us as well as for additional information related to long-term debt (amounts above include principal portion only).

11Table of Contents

~~(2)~~Item ~~Refer~~12. toSecurity ~~Note~~Ownership ~~6-Land,~~of ~~Buildings~~Certain ~~and~~Beneficial ~~Equipment,~~Owners ~~net~~and toManagement ~~our~~and ~~Consolidated~~Related ~~Financial~~Stockholder ~~Statements for additional information related to minimum operating lease commitments.~~Matters

~~(3)~~Not Refer to Note 12-Liability to Subsidiary Trusts Issuing Preferred Securities to our Consolidated Financial Statements for interest payments by us as well as for additional information related to liabilities to subsidiary trusts issuing preferred securities (amounts above include principal portion only)Required.

~~(4)~~Item ~~Flextronics:~~13. WeCertain ~~outsource~~Relationships ~~certain manufacturing activities to Flextronics~~ and ~~are~~Related ~~currently operating under a one-year automatically renewed agreement which may expire on November 30~~Transactions, ~~2007,~~and ~~but~~Director ~~is subject to automatic renewal for an additional one year period. We expect to enter into a negotiated renewal agreement in 2007 which has a term of at least three years.~~Independence

~~(5)~~Not ~~EDS Contracts: We have an information management contract with Electronic Data Systems Corp~~Required. (“EDS”) to provide services to us for global mainframe system processing, application maintenance and support, desktop services and helpdesk support, voice and data network management, and server management through June 30, 2009. There are no minimum payments required under the contract. We can terminate the current contract for convenience with six months notice, as defined in the contract, with no termination fee and with payment to EDS for costs incurred as of the termination date. Should we terminate the contract for convenience, we have an option to purchase the assets placed in service under the EDS contract.

~~(6)~~Item ~~Other Purchase Commitments: We enter into other purchase commitments with vendors in the ordinary course of business~~14. ~~Our~~Principal ~~policy~~Accounting ~~with~~Fees ~~respect to all purchase commitments is to record losses, if any, when they are probable~~ and ~~reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.~~Services

~~Other~~Audit ~~Commercial~~services ~~Commitments~~are provided by PricewaterhouseCoopers LLP in conjunction with the audit of XC, and ~~Contingencies~~are included in the operating support we receive from XC, as discussed in Note 1 - Summary of Significant Accounting Policies to the Financial Statements. All fees associated with audit services are paid by XC.

~~Pension~~PART ~~and~~IV Other Post-Retirement Benefit Plans: We sponsor pension and other post-retirement benefit plans that may require periodic cash contributions. Our 2006 cash fundings for these plans were $355 million for pensions and $98 million for other post-retirement plans. Our anticipated cash fundings for 2007 are approximately $130 million for defined benefit pensions and approximately $100 million for other post-retirement plans. Cash contribution requirements for our domestic tax qualified pension plans are governed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code. Cash contribution requirements for our international plans are subject to the applicable regulations in each country. The expected 2007 pension contributions do not include contributions to the domestic tax-qualified plans because these plans currently exceed the ERISA minimum funding requirements for the plans’ 2006 plan year. However, once the January 1, 2007 actuarial valuations and projected results as of the end of the 2007 measurement year are available, the desirability of additional contributions will be assessed. Based on these results, we may voluntarily decide to contribute to these plans, even though no contribution is required. In prior years, after making this assessment, we decided to contribute $228 million and $230 million in 2006 and 2005, respectively, to our domestic tax qualified plans in order to make them 100% funded on a current liability basis under the ERISA funding rules. In addition, our debt ratings, which are periodically reviewed by major rating agencies, have steadily improved over the past three years. Since the rating on the Company’s senior unsecured debt has now reached investment grade, the Company will have increased flexibility when considering these funding decisions.

~~Our~~Item ~~other~~15. ~~post-retirement~~Exhibits ~~benefit plans are non-funded~~ and ~~are~~Financial ~~almost~~Statement entirely related to domestic operations. Cash contributions are made each year to cover medical claims costs incurred in that year. The amounts reported in the above table as retiree health payments represent our estimated future benefit payments. Schedules

~~Fuji Xerox: We had product purchases from Fuji Xerox totaling $~~(1.7) ~~billion,~~Index ~~$1.5~~to ~~billion,~~Financial ~~and~~Statements ~~$1.1~~filed ~~billion~~as ~~in 2006,~~part ~~2005 and 2004, respectively. Our purchase commitments with Fuji Xerox are in the normal course~~ of ~~business~~this and typically have a lead time of three months. We anticipate that we will purchase approximately $1.7 billion of products from Fuji Xerox in 2007. Related party transactions with Fuji Xerox are discussed in Note 7-Investments in Affiliates, at Equity to the Consolidated Financial Statements. report:

~~Brazil~~Report ~~Tax and Labor Contingencies: At December 31, 2006, our Brazilian operations were involved in various litigation matters and have been the subject~~ of ~~numerous~~Independent ~~governmental~~Registered ~~assessments~~Public ~~related~~Accounting ~~to indirect~~Firm and other taxes as well as disputes associated with former employees and contract labor. The tax matters, which comprise a significant portion of the total contingencies, principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our position. Based on the opinion of legal counsel, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. The labor matters principally relate to claims made by former employees and contract labor for the equivalent payment of all social security and other related labor benefits, as well as consequential tax claims, as if they were regular employees. Following our assessment of a negative trend in recent settlements and a decision to change our legal strategy, we reassessed the probable estimated loss on these matters and, as a result, recorded an additional provision of $68

12Balance Sheets at December 31, 2008 and 2007

~~million~~Statements ~~in 2006. As~~ of ~~December 31,~~Income ~~2006,~~for ~~the~~each ~~total amounts related to the unreserved portion~~ of the ~~tax~~years ~~and~~in ~~labor contingencies, inclusive of any related interest, amounted to approximately $960 million, with~~ the ~~increase~~three-year ~~from~~period ~~December 31,~~ended 2005 balance of $900 million primarily related to indexation, interest and currency partially offset by the additional provision. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute. As of December 31, ~~2006~~2008 we had $154 million of escrow cash deposits for matters we are disputing and there are liens on certain Brazilian assets with a net book value of $18 million and additional letters of credit of approximately $60 million. Generally, any escrowed amounts would be refundable and any liens would be removed to the extent the matters are resolved in our favor. We routinely assess all these matters as to probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable of occurring.

~~Off~~Statements of Shareholder’s Equity for each of the years in the three-~~Balance~~year ~~Sheet~~period ~~Arrangements~~ended December 31, 2008

~~Although~~Statements weof ~~generally~~Cash doFlows ~~not~~for ~~utilize~~each ~~off-balance~~of ~~sheet arrangements in our operations, we enter into operating leases in~~ the ~~normal~~years ~~course of business. The nature of these lease arrangements is discussed~~ in ~~Note 6-Land, Buildings and Equipment, Net to~~ the Consolidated Financial Statements. Additionally, we utilize special purpose entities (“SPEs”) in conjunction with certain financing transactions. The SPEs utilized in conjunction with these transactions are consolidated in our financial statements in accordance with applicable accounting standards. These transactions, which are discussed further in Note 4three-~~Receivables,~~year ~~Net~~period toended ~~the Consolidated Financial Statements~~December 31, ~~have~~2008 been accounted for as secured borrowings with the debt and related assets remaining on our balance sheets. Although the obligations related to these transactions are included in our balance sheet, recourse is generally limited to the secured assets and no other assets of the Company.

~~Refer~~Notes to ~~Note~~Financial 16Statements ~~– Contingencies for further information regarding our guarantees, indemnifications and warranty liabilities.~~

~~Financial~~(2) ~~Risk~~Supplemental ~~Management~~ Data:

WeQuarterly ~~are~~Results exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of ~~derivative financial instruments. These derivative financial instruments are utilized to hedge~~ ~~economic~~Operations ~~exposures~~(unaudited) as well as reduce earnings and cash flow volatility resulting from shifts in market rates. Refer to Note 13—Financial Instruments to the Consolidated Financial Statements for further discussion on our financial risk management.

~~Assuming~~(3) aIndex ~~10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2006, the potential change in the fair value~~ of foreign currency-denominated assets and liabilities in each entity would not be significant because all material currency asset and liability exposures were economically hedged as of December 31, 2006. A 10% appreciation or depreciation of the U.S. dollar against all currencies from the quoted foreign currency exchange rates at December 31, 2006 would have a $596 million impact on our Cumulative translation adjustment portion of equity. The amount permanently invested in foreign subsidiaries and affiliates, primarily Xerox Limited, Fuji Xerox, Xerox Canada Inc. and Xerox do Brasil, and translated into dollars using the year-end exchange rates, was $6.0 billion at December 31, 2006. Exhibits:

~~Interest Rate Risk Management:~~ The ~~consolidated~~exhibits ~~weighted-average interest rates related to our~~filed ~~debt~~herewith ~~and~~are ~~liabilities~~set toforth ~~subsidiary~~in ~~trusts issuing preferred securities for 2006, 2005 and 2004 approximated 6.8%, 6.0%, and 5.8%, respectively. Interest expense includes~~ the ~~impact~~Exhibit ofIndex ~~our~~included ~~interest rate derivatives~~herein.

~~Virtually~~13 all customer-financing assets earn fixed rates of interest. As discussed above, a significant portion of those assets has been pledged as collateral for secured financing arrangements and the interest rates on a significant portion of those loans are fixed.

AsTable of December 31, 2006, approximately $2.2 billion of our debt and liabilities to subsidiary trusts issuing preferred securities carried variable interest rates, including the effect of pay-variable interest rate swaps we are utilizing with the intent to reduce the effective interest rate on our debt. Contents

~~The~~Pursuant ~~fair~~to ~~market~~the ~~values~~requirements of ~~our~~Section 13 ~~fixed-rate~~or ~~financial~~15 ~~instruments~~(d) of ~~are~~the ~~sensitive~~Securities ~~to changes~~Exchange inAct ~~interest~~of ~~rates.~~1934, AtRegistrant ~~December 31,~~has duly ~~2006,~~caused athis ~~10%~~report ~~change~~to inbe ~~market~~signed ~~interest~~on ~~rates~~its ~~would~~behalf ~~change~~by the ~~fair~~undersigned, ~~values~~thereunto ofduly ~~such financial instruments by approximately $233 million~~authorized.

~~READER’S NOTE: THIS CONCLUDES THE DISCUSSION EXCERPTED DIRECTLY FROM~~ XEROX ~~CORPORATION’S~~CREDIT ~~ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006.~~ CORPORATION

13/s/ John F. Rivera John F. Rivera, Vice President, Treasurer and Chief Financial Officer

~~ITEM~~February 25, ~~7A.~~2009 ~~Quantitative and Qualitative Disclosures About Market Risk~~

~~The~~Pursuant ~~information~~to ~~set~~the ~~forth~~requirement inof the ~~first~~Securities ~~two~~Exchange ~~paragraphs~~Act ~~under~~of ~~the~~1934, ~~caption~~this ~~"Financial~~report ~~Risk~~has ~~Management"~~been insigned ~~Item 7~~below ~~above~~by isthe ~~hereby~~following ~~incorporated~~persons byon ~~reference~~behalf of the Registrant and in ~~answer~~the tocapacities ~~this~~and ~~Item~~on the date indicated.

~~ITEM~~February 25, 8.2009 ~~Financial Statements and Supplementary Data~~

~~Our financial~~Principal ~~statements,~~Executive ~~together~~Officer: ~~with the report thereon of PricewaterhouseCoopers LLP, are set forth as part of this Form 10-K.~~

~~ITEM~~Gary 9R. ~~Changes~~Kabureck in/s/ ~~and~~Gary ~~Disagreements~~R. ~~with~~Kabureck ~~Accountants~~President onand ~~Accounting~~Chief ~~and~~Executive ~~Financial~~Officer ~~Disclosure~~and Director

~~None.~~Principal Financial Officer:

~~ITEM~~John 9AF. ~~Controls~~Rivera /s/ John F. Rivera Vice President, Treasurer, Chief Financial Officer and ~~Procedures~~Director

~~(a)~~Principal ~~Evaluation~~Accounting ofOfficer: ~~Disclosure Controls and Procedures~~

~~The Company’s~~Robert management evaluated, with the participation of our principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this reportJ. ~~Based~~Sorrentino on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’/s/ ~~rules~~Robert ~~and~~J. ~~forms~~Sorrentino ~~relating~~Vice toPresident ~~Xerox Credit Corporation,~~ and was accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Controller

~~(b)~~Director: ~~Changes in Internal Controls~~

InRhonda ~~connection~~L. ~~with~~Seegal ~~the evaluation~~/s/ ~~required~~Rhonda byL. ~~paragraph~~Seegal ~~(d) of~~Chairman ~~Rule~~and 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Director

~~ITEM~~14 ~~9B. Other Information~~

None.Table of Contents

~~PART~~Report ~~III~~of Independent Registered Public Accounting Firm

~~ITEM~~To ~~10.~~the ~~Directors,~~Board ~~Executive~~of ~~Officers~~Directors and ~~Corporate~~Shareholder ~~Governance~~of Xerox Credit Corporation:

~~Not~~In our ~~Required~~opinion, the accompanying balance sheets and the related statements of income, shareholder’s equity and cash flows present fairly, in all material respects, the financial position of Xerox Credit Corporation at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

~~ITEM~~As 11disclosed in Note 1, the Company and its ultimate parent, Xerox Corporation, engage in extensive intercompany transactions and the Company receives all of its operational and administrative support from Xerox Corporation. ~~Executive~~Such ~~Compensation~~transactions cannot be presumed to be carried out on the same basis as transactions among wholly-unrelated parties. Additionally, as disclosed in Note 2, the Company had notes receivable from Xerox Corporation at December 31, 2008 amounting to $1.1 billion. Accordingly, the Company is dependent on Xerox Corporation complying with its contractual obligations.

~~Not~~/s/ ~~Required.~~PRICEWATERHOUSECOOPERS LLP

~~ITEM~~PricewaterhouseCoopers ~~12.~~LLP ~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~

~~Not~~Stamford, ~~Required.~~CT

~~ITEM 13. Certain Relationships~~February 25, ~~Related~~2009 ~~Transactions and Director Independence~~

~~Not~~15 ~~Required.~~

ITEMTable 14.of Principal Auditor Fees and ServicesContents

~~Audit~~XEROX ~~services are~~CREDIT ~~provided~~CORPORATION by PricewaterhouseCoopers LLP in conjunction with the audit of XC, and are included in the operating support we receive from XC, as discussed in Note 1—Summary of Significant Accounting Policies to the Financial Statements. All fees associated with audit services are paid by XC.

14BALANCE SHEETS

~~PART~~(in IVmillions)

ITEM 15. Exhibits and Financial Statement Schedules


	December 31,
	2008		2007
ASSETS
Assets:
Note receivable - Xerox Corporation	$	1,088	$	1,157
Other assets		2		3

Total Assets	$	1,090	$	1,160

LIABILITIES AND SHAREHOLDER’S EQUITY
Liabilities:
Notes payable after one year		60		160
Due to Xerox Corporation, net		3		2
Other liabilities		1		2

Total Liabilities		64		164

Shareholder’s Equity:
Common stock, no par value, 2,000 shares authorized, issued and outstanding		23		23
Additional paid-in-capital		219		219
Retained earnings		784		754

Total Shareholder’s Equity		1,026		996

Total Liabilities and Shareholder’s Equity	$	1,090	$	1,160

~~(1)~~The ~~Index~~accompanying tonotes ~~Financial~~are ~~Statements~~an ~~filed~~integral as part of ~~this~~these ~~report:~~Financial Statements.

~~Report~~16 ~~of Independent Registered Public Accounting Firm~~

BalanceTable Sheetsof at December 31, 2006 and 2005 Contents

~~Statements~~XEROX ofCREDIT ~~Income~~CORPORATION ~~for each of the years in the three-year period ended December 31, 2006~~

~~Statements~~STATEMENTS ofOF ~~Shareholder's~~INCOME ~~Equity for each of the years in the three-year period ended December 31, 2006~~

~~Statements of Cash Flows for each of the years~~ (in ~~the~~millions) ~~three-year period ended December 31, 2006~~

Notes to Financial Statements


	Year Ended December 31,
	2008		2007		2006
Earned Income from Xerox note receivable	$	57	$	88	$	103

Expenses:
Interest		9		19		29
Loss on derivative instruments, net		—		1		3
General and administrative		1		1		—

Total Expenses		10		21		32

Income before income taxes		47		67		71
Provision for income taxes		17		25		27

Net income	$	30	$	42	$	44

~~(All~~The ~~schedules are~~accompanying ~~omitted~~notes ~~as they~~ are ~~not~~an ~~applicable~~integral orpart ~~the~~of ~~information~~these ~~required~~Financial ~~is included in the financial statements or notes thereto~~Statements.)

~~(2)~~17 ~~Supplemental Data:~~

QuarterlyTable Results of Operations (unaudited) Contents

~~(3)~~XEROX ~~The~~CREDIT ~~exhibits~~CORPORATION ~~filed herewith are set forth in the Exhibit Index included herein.~~

15STATEMENTS OF SHAREHOLDER’S EQUITY

~~Pursuant to the requirements of Section 13 or 15~~ (din millions) of ~~the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~

XEROX CREDIT CORPORATION


	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total
Balance at January 1, 2006	$	23	$	219	$	668	$	—	$	910
Net Income/Comprehensive Income		—		—		44		—		44

Balance at December 31, 2006		23		219		712		—		954
Net Income/Comprehensive Income		—		—		42		—		42

Balance at December 31, 2007		23		219		754		—		996
Net Income/Comprehensive Income		—		—		30		—		30

Balance at December 31, 2008	$	23	$	219	$	784	$	—	$	1,026

~~/s/~~The ~~John~~accompanying F.notes ~~Rivera~~are ~~(NAME~~an ~~AND~~integral ~~TITLE)~~part ~~John~~of F.these ~~Rivera, Vice President, Treasurer and Chief~~ Financial ~~Officer~~Statements.

~~March 6,~~18 ~~2007~~

PursuantTable to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the date indicated. Contents

~~March 6,~~XEROX ~~2007~~CREDIT CORPORATION

~~Principal~~STATEMENTS ~~Executive~~OF ~~Officer:~~CASH FLOWS

~~Gary~~(in R.millions) ~~Kabureck /s/ Gary R. Kabureck President and Chief Executive Officer and Director~~

Principal Financial Officer:


	Year Ended December 31,
	2008			2007			2006
Cash Flows from Operating Activities
Net income	$	30		$	42		$	44
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax benefit		—			(1	)		(2	)
Loss on derivative instruments, net		—			1			3
Net change in other assets and other liabilities		1			(4	)		(22	)

Net cash provided by operating activities		31			38			23

Cash Flows from Investing Activities
Net repayments of loans from (to) Xerox Corporation		69			287			(23	)

Net cash provided by (used in) investing activities		69			287			(23	)

Cash Flows from Financing Activities
Cash payments on debt		(100	)		(296	)		—
Settlement of derivative instruments		—			(29	)		—

Net cash used in financing activities		(100	)		(325	)		—

Cash and cash equivalents, beginning of year		—			—			—

Cash and cash equivalents, end of year	$	—		$	—		$	—

~~John~~The F.accompanying ~~Rivera~~notes ~~/s/~~are ~~John~~an F.integral ~~Rivera~~part ~~Vice~~of ~~President,~~these ~~Treasurer, Chief~~ Financial ~~Officer~~Statements. ~~and Director~~

~~Principal~~19 ~~Accounting Officer:~~

RobertTable J.of Sorrentino /s/ Robert J. Sorrentino Vice President and ControllerContents

~~Director:~~XEROX CREDIT CORPORATION

~~Rhonda~~NOTES L.TO ~~Seegal~~FINANCIAL ~~/s/~~STATEMENTS ~~Rhonda L. Seegal Chairman and Director~~

16(Dollars in millions, unless otherwise indicated)

~~Report~~Note of1 ~~Independent~~- ~~Registered~~Summary ~~Public~~of Significant Accounting ~~Firm~~Policies

ToBasis ~~the Board~~ of ~~Directors~~Presentation ~~and Shareholder of Xerox Credit Corporation:~~

InThe ~~our~~financial ~~opinion, the accompanying balance sheets and the related~~ statements ofinclude ~~income, shareholder’s equity and cash flows present fairly, in all material respects,~~ the ~~financial~~accounts ~~position~~ of Xerox Credit Corporation ~~at December 31, 2006 and 2005, and~~ (the ~~results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United~~ ~~States of America. These financial statements are the responsibility of the~~ “Company's,” ~~management.~~“we,” ~~Our responsibility is to express an opinion on these financial statements based on~~ “our” ~~audits~~or “us”). We ~~conducted~~are ~~our~~a ~~audits~~wholly-owned ofsubsidiary ~~these statements in accordance with the standards~~ of ~~the~~Xerox ~~Public~~Financial ~~Company~~Services, ~~Accounting~~Inc. ~~Oversight Board~~ (~~United States~~“XFSI”)~~. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining~~, onwhich ais ~~test~~in ~~basis,~~turn ~~evidence~~wholly-owned ~~supporting~~by ~~the~~Xerox ~~amounts~~Corporation ~~and disclosures in the financial statements~~(“XC,” ~~assessing the accounting principles used~~ and ~~significant~~together ~~estimates~~with ~~made by management~~its subsidiaries, ~~and evaluating the overall financial statement presentation~~“Xerox”). ~~We believe that our audits provide a reasonable basis for our opinion.~~

AsDescription ~~disclosed in Note 1, the Company and its ultimate parent, Xerox Corporation, engage in extensive intercompany transactions, and the Company receives all~~ of ~~its~~Business operational and administrative support from Xerox Corporation. Such transactions cannot be presumed to be carried out on the same basis as transactions among wholly-unrelated parties. Additionally, as disclosed in Note 3, the Company had notes receivable from Xerox Corporation at December 31, 2006 amounting to $1.4 billion. Accordingly, the Company is dependent on Xerox Corporation complying with its contractual obligations.

~~/s/~~We ~~PRICEWATERHOUSECOOPERS~~are ~~LLP~~a ~~PricewaterhouseCoopers~~limited ~~LLP~~purpose ~~Stamford~~entity, CTengaged ~~March~~until 62001 in the purchase of long-term contracts receivable from XC which arose from third-party installment sales and lease contracts originated by the domestic operations of XC. We historically funded such purchases by debt raised in capital markets offerings. In 2001, ~~2007~~we ceased purchasing contracts receivable from XC. Since then, our portfolio of contracts has run off as amounts under the contracts were collected or the contracts receivable were sold back to XC.

17Our remaining operating activities consist of servicing our third-party debt which, as of December 31, 2008, totaled $60.

~~XEROX~~Since ~~CREDIT~~all ~~CORPORATION~~services necessary to our business are provided by XC, we share facilities and do not have separate infrastructure or employees. The Company and XC engage in extensive intercompany transactions and we receive all of our operational and administrative support from XC. Our financial statements reflect an allocation of general and administrative expenses for those costs incurred by XC on our behalf. By their nature, transactions involving related parties cannot be presumed to be carried out on the same basis as transactions among wholly-unrelated parties.

~~BALANCE~~Liquidity ~~SHEETS~~

Since the Master Demand Note from XC represents our sole monetary asset, our liquidity is dependent upon the liquidity of XC. Xerox’s liquidity is a function of its ability to successfully generate cash flows from a combination of efficient operations and improvements therein, access to capital markets, securitizations, funding from third parties and borrowings secured by Xerox’s finance receivables portfolios. As of December 31, 2008, Xerox’s total cash and cash equivalents was $1.23 billion, and Xerox’s borrowing capacity under its Credit Facility was $1.7 billion, reflecting outstanding borrowings of $246 million. Xerox also has funding available through a secured borrowing arrangement with GECC. Xerox believes its liquidity (inincluding ~~millions~~operating and other cash flows that it expects to generate) will be sufficient to meet operating requirements as they occur; however, Xerox’s ability to maintain sufficient liquidity going forward depends on its ability to generate cash from operations and access to the capital markets, secured borrowings, securitizations and funding from third parties, all of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors that are beyond its control.

ASSETS
	December 31,
	2006		2005
Assets:
Notes receivable—Xerox Corporation	$	1,422	$	1,405
Other assets		4		5
Total Assets	$	1,426	$	1,410
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Current portion of notes payable	$	277	$	—
Notes payable after one year		185		465
Due to Xerox Corporation, net		6		29
Other liabilities		4		6
Total liabilities		472		500
Shareholder's Equity:
Common stock, no par value, 2,000 shares authorized, issued and outstanding		23		23
Additional paid-in-capital		219		219
Retained Earnings		712		668
Total Shareholder's Equity		954		910
Total Liabilities and Shareholder's Equity	$	1,426	$	1,410

Revenue Recognition

~~The~~We ~~accompanying~~recognize ~~notes~~revenue ~~are~~associated anwith ~~integral~~the ~~part~~Master Demand ofNote ~~these~~in ~~Financial~~accordance ~~Statements~~with its contractual terms as described in Note 2 – Due to/from Xerox.

18Fair Value of Financial Instruments

~~XEROX~~The ~~CREDIT~~fair ~~CORPORATION~~value of notes payable and interest rate swaps are discussed in Note 3 – Notes Payable and Note 4 – Financial Instruments.

~~STATEMENTS~~New OFAccounting ~~INCOME~~Standards and Accounting Changes

We adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“FAS 157”) on January 1, 2008. FAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. FAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. In February 2008, the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in ~~millions~~the financial statements on a nonrecurring basis until the subsequent year. Accordingly, our adoption of this standard was limited to financial assets and liabilities. We also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“FAS 159”) on January 1, 2008. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The adoption of these standards did not have an effect on our financial condition or results of operations nor are they expected to have a material impact on future periods due to the limited nature of our assets and liabilities.

	December 31,
	2006		2005		2004
Earned Income:
Contracts receivable	$	—	$	2	$	17
Xerox note receivable		103		117		109
Total Earned Income		103		119		126
Expenses:
Interest		29		44		56
Loss (gain) on derivative instruments, net		3		5		(2	)
General and administrative		—		—		1
Total Expenses		32		49		55
Income before income taxes		71		70		71
Provision for income taxes		27		26		22
Net income	$	44	$	44	$	49

TheTable accompanying notes are an integral part of these Financial Statements. Contents

19XEROX CREDIT CORPORATION

~~XEROX~~NOTES ~~CREDIT~~TO ~~CORPORATION~~FINANCIAL STATEMENTS

~~STATEMENTS~~(Dollars OFin ~~SHAREHOLDER'S~~millions, ~~EQUITY~~unless otherwise indicated)

~~(in~~Note ~~millions)~~2 - Due to/from Xerox

	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total
Balance at December 31, 2003	$	23	$	219	$	575	$	—	$	817
Net Income/Comprehensive Income		—		—		49		—		49
Balance at December 31, 2004		23		219		624		—		866
Net Income/Comprehensive Income		—		—		44		—		44
Balance at December 31, 2005		23		219		668		—		910
Net Income/Comprehensive Income		—		—		44		—		44
Balance at December 31, 2006	$	23	$	219	$	712	$	—	$	954

At December 31, 2008 demand loans to XC totaled $1,088. The demand loans are evidenced by the amended Master Demand Note with XC (the “Master Demand Note”). As of December 31, 2008, the Master Demand Note was our sole monetary asset. Amounts outstanding under the Master Demand Note, up to a balance of $2,750, bear interest at a rate (the “Effective Rate”) equal to the sum of (i) the simple average of the H.15 Two-Year Swap Rate and the H.15 Three-Year Swap Rate (each as defined in the Master Demand Note) plus (ii) 2.00% (200 basis points). The Effective Rate was 3.75% at December 31, 2008. The H.15 is a Federal Reserve Board Statistical Release (published weekly) that contains daily interest rates for selected U.S. Treasury, money market and capital markets instruments. We will demand repayment of these loan amounts from XC to the extent necessary to repay our maturing debt obligations, fund our operations or for such other purposes that we determine to be appropriate.

~~The~~From ~~accompanying~~time ~~notes~~to ~~are~~time anwe ~~integral~~receive ~~part~~non-interest bearing advances from XC to primarily cover the unpaid portion of ~~these~~our income ~~Financial~~tax ~~Statements~~provision as determined in accordance with our Tax Allocation Agreement with XC. Amounts payable to XC were $3 and $2 as of December 31, 2008 and 2007, respectively, and are reported in our balance sheets as Due to Xerox Corporation, net.

20Note 3 - Notes Payable

~~XEROX~~A ~~CREDIT~~summary ~~CORPORATION~~of Medium Term Notes payable at December 31, 2008 and 2007 follows:

STATEMENTS OF CASH FLOWS


(in millions)	Weighted Average Interest Rate at December 31, 2008		2008		2007
Notes due 2012	—		$	—	$	25
Notes due 2013 ⁽¹⁾	6.42	%		10		60
Notes due 2014 ⁽¹⁾	6.06	%		50		50
Notes due 2018	—			—		25

Total Notes Payable after one year			$	60	$	160

(1) Medium Term Notes due in ~~millions)~~2013 and 2014 are callable by us.

	Year Ended December 31,
	2006			2005			2004
Cash Flows from Operating Activities
Net income	$	44		$	44		$	49
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax (benefit) expense		(2	)		(16	)		36
Loss (gain) on derivative instruments, net		3			5			(2	)
Net change in other assets and other liabilities		(22	)		15			(22	)
Net cash provided by operating activities		23			48			61
Cash Flows from Investing Activities
Proceeds from investments		—			38			211
Proceeds from sales of contracts receivable		—			44			9
Net advances (to) from Xerox Corporation		(23	)		869			(281	)
Net cash (used in) provided by investing activities		(23	)		951			(61	)
Cash Flows from Financing Activities
Cash payments on debt		—			(999	)		—
Net cash used in financing activities		—			(999	)		—
Cash and cash equivalents, beginning of year		—			—			—
Cash and cash equivalents, end of year	$	—		$	—		$	—

Cash interest paid on notes payable for 2008, 2007 and 2006 was $9, $20, and $28, respectively.

At December 31, 2008 and 2007, carrying values of notes payable totaled $60 and $160, respectively. The ~~accompanying~~fair values of our notes ~~are~~payable anat ~~integral~~December 31, ~~part~~2008 and 2007 were $50 and $160, respectively, based on current rates offered to us for debt of ~~these~~similar ~~Financial~~maturities. ~~Statements~~The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date.

21Note 4 - Financial Instruments

~~XEROX~~Intercompany ~~CREDIT~~derivative ~~CORPORATION~~instruments related to our Japanese Yen-denominated debt were settled in June 2007 for $29 in conjunction with the repayment of our Yen-denominated debt at maturity. We have no derivative instruments outstanding at December 31, 2008.

~~NOTES~~During TO2007 ~~FINANCIAL~~and ~~STATEMENTS~~2006 we recorded net losses of $1 and $3, respectively, from the mark-to-market valuation of intercompany interest rate derivatives as well as the remeasurement of our Japanese Yen-denominated debt. In addition, for the years ended December 31, 2007 and 2006, we recorded $5 and $9, respectively, as a component of interest expense presented in our Statements of Income, relating to intercompany cross-currency interest rate derivative instruments with XC.

~~(Dollars~~Note in5 ~~millions,~~- ~~unless~~Income ~~otherwise indicated)~~Taxes

~~(1)~~XCC ~~Summary~~is included within the consolidated XC U.S. Federal income tax return and the XC unitary state income tax returns. We record our federal tax provision using the separate return method and record our state income tax provisions using a pro-rata method. Pursuant to our Tax Allocation Agreement and other arrangements with XC, we paid taxes of ~~Significant~~$17, ~~Accounting~~$30 ~~Policies~~and $52, in 2008, 2007 and 2006, respectively.

~~Basis~~21 ~~of Presentation~~

TheTable financial statements include the accounts of Xerox Credit Corporation (the “Company,” “we,” “our” or “us”). We are a wholly-owned subsidiary of Xerox Financial Services, Inc. (“XFSI”), which is in turn wholly-owned by Xerox Corporation (“XC,” and together with its subsidiaries, “Xerox”). Contents

~~Certain~~XEROX ~~reclassifications~~CREDIT ~~have~~CORPORATION ~~been made to prior year financial information to conform to current year presentation.~~

~~Description~~NOTES ofTO ~~Business~~FINANCIAL STATEMENTS

We(Dollars ~~are~~in ~~a limited purpose entity~~millions, ~~engaged~~unless ~~until 2001 in the purchase of long-term contracts receivable from XC which arose from third-party installment sales and lease contracts originated by the domestic operations of XC. We historically~~otherwise ~~funded~~indicated) ~~such purchases by debt raised in capital markets offerings.~~

InThe ~~2001,~~components ~~we ceased purchasing contracts receivable from XC, given alternative funding sources obtained by XC, including the use~~ of ~~third-party~~income ~~secured~~before ~~borrowing~~income ~~arrangements~~taxes and ~~direct capital markets offerings. Since then, our portfolio of contracts has run off as amounts under~~ the ~~contracts~~provision ~~were~~for ~~collected~~income ortaxes ~~the contracts receivable~~ were ~~sold~~as ~~back~~follows: ~~to XC.~~

Our remaining operating activities consist of servicing our third-party debt which, as of December 31, 2006, totaled $462 and had maturities ranging from 2007 through 2018.


(in millions)	2008		2007			2006
Income before income taxes	$	47	$	67		$	71

Federal income taxes
Current	$	16	$	25		$	27
Deferred		—		(1	)		(2	)
State income taxes
Current		1		1			2

Total provision for income taxes	$	17	$	25		$	27

~~Since~~A ~~all~~reconciliation services necessary to our business were provided by XC, we maintained minimal facilities and had no separate infrastructure or employees. The Company and XC engage in extensive intercompany transactions and we receive all of ~~our~~the ~~operational~~effective ~~and~~tax ~~administrative~~rate ~~support~~ from XCthe U.S. Byfederal ~~their nature,~~statutory ~~transactions~~income ~~involving~~tax ~~related~~rate ~~parties~~for ~~cannot be presumed to be carried out on~~ the ~~same~~three ~~basis~~years ended asDecember 31, ~~transactions~~2008 ~~among~~follows: ~~wholly-unrelated parties.~~

Liquidity


	2008		2007		2006
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	1.1		2.5		2.9
Audit and other tax return adjustments	0.2		(0.2	)	0.4

Effective tax rate	36.3	%	37.3	%	38.3	%

~~Since~~There ~~the~~are ~~Master~~no ~~Demand~~deferred ~~Note~~tax ~~from~~balances XCat represents our sole monetary asset, our liquidity is dependent upon the liquidity of XC. Xerox’s liquidity is a function of its ability to successfully generate cash flow from a combination of efficient operations and improvements therein, access to capital markets, securitizations, funding from third parties and borrowings secured by Xerox’s finance receivables portfolios. As of December 31, ~~2006,~~2008 ~~Xerox’s~~or ~~total cash~~2007, ~~cash equivalents and short-term investments was $1~~respectively.5 billion, and Xerox’s borrowing capacity under its 2006 Credit Facility was $1.235 billion, reflecting no outstanding borrowings and $15 of letters of credit that have been utilized. Xerox also has funding available through various secured borrowing arrangements. Xerox believes its liquidity (including operating and other cash flows that it expects to generate) will be sufficient to meet operating requirements as they occur; however, Xerox’s ability to maintain sufficient liquidity going forward depends on its ability to generate cash from operations and access to the capital markets, secured borrowings, securitizations and funding from third parties, all of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors that are beyond its control.

~~Recognition~~Unrecognized ofTax ~~Earned~~Benefits ~~Income~~and Audit Resolutions

WeIn ~~utilize~~2006 the ~~interest~~FASB issued ~~method~~Interpretation No. 48, “Accounting for ~~the~~Uncertainty ~~recognition~~in ofIncome ~~earned~~Taxes—an ~~income~~Interpretation ~~associated~~of ~~with~~FASB ~~contracts~~Statement ~~receivable~~No. 109” ~~Under~~(“FIN ~~this~~48”), ~~method~~which we adopted on January 1, ~~the~~2007. ~~difference~~FIN ~~between~~48 clarifies the ~~amount~~accounting offor uncertainty ~~gross~~in ~~contracts~~income ~~receivable~~taxes ~~and~~by ~~the~~prescribing ~~cost~~a ofminimum ~~the~~recognition ~~contract~~threshold for a tax position taken or expected to be taken in a tax return that is ~~recorded~~required asto be met before being recognized in the financial statements. FIN 48 also provides guidance ~~unearned~~on ~~income~~derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no cumulative effect of adopting FIN 48. The ~~unearned~~total ~~income~~amount isof ~~amortized~~unrecognized ~~into~~tax ~~income~~benefits ~~over~~as of the ~~life~~date of adoption ~~the~~was ~~contract~~$2. ~~using~~The antotal ~~effective~~amount ~~yield~~of ~~method~~unrecognized tax benefits at December 31, 2008 and 2007 were $2 and $2, respectively.

~~Fair~~Due ~~Value~~to the limited geographical scope of ~~Financial~~our operations, we may be subject to tax examinations as part of our inclusion in the Xerox consolidated federal return or in various state and local jurisdictions. Accordingly, we may record incremental tax expense based upon ~~Instruments~~the more-likely-than-not outcomes of any uncertain tax positions. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results when the position is effectively settled. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease our effective tax rate, as well as impact our operating results. The specific timing of when the resolution of each tax position will be reached is uncertain. As of December 31, 2008, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

~~The~~We ~~fair~~recognize ~~value~~interest ofand ~~notes~~penalties ~~payable~~accrued ~~and~~on unrecognized tax benefits as well as interest ~~rate~~received ~~swaps~~from ~~are~~favorable ~~discussed~~settlements within inincome ~~Note~~tax ~~4—Notes~~expense. ~~Payable~~In 2008 and ~~Note 5—Financial~~2007, ~~Instruments~~net tointerest ~~the~~and ~~Financial~~penalties ~~Statements~~were immaterial. We had less than $1 accrued for expected interest and penalties associated with unrecognized tax benefits at December 31, 2008 and 2007, respectively.

~~New~~We ~~Accounting~~file ~~Standards~~income tax returns in the U.S. federal and ~~Accounting~~various ~~Changes~~state tax jurisdictions. We are no longer subject to U.S. Federal income tax examinations for years before 2007. With respect to our three major state jurisdictions we are no longer subject to tax examinations as follows: California – before 1998; Illinois – before 2005; and New York – before 2004.

In22 recent years the FASB has issued numerous new accounting pronouncements. We do not have, nor do we presently expect to have, any transactions that are affected by these statements with the exception of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109” (“FIN 48”) issued in July 2006.

22Table of Contents

XEROX CREDIT CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise indicated)

~~FIN~~Note 486 ~~clarifies~~- ~~the~~Xerox ~~accounting~~Corporation ~~for~~Support ~~uncertainty~~Agreement in income taxes by prescribing a minimum recognition threshold for a tax position taken, or expected to be taken, in a tax return that is required to be met before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The requirements of FIN 48 are effective for our fiscal year beginning January 1, 2007. We do not believe the adoption of FIN 48 will have a material effect on our financial condition or results of operations.

The terms of a Support Agreement with XC provide that we will receive income maintenance payments, to the extent necessary, so that our earnings shall not be less than 1.25 times our fixed charges. For purposes of this calculation, both earnings and fixed charges are as formerly defined in Section 1404 (formerly Section 81(2)) ~~Sales~~of the New York Insurance Law. In addition, the agreement requires that XC retain sole ownership of ~~Contracts~~our ~~Receivable~~voting capital stock. There have been no payments required to be made under this agreement since 1990.

~~During~~23 2005 and 2004, we sold to XC an aggregate of $44 and $9, respectively, of contracts receivable. There were no sales of contracts receivable in 2006. The sales to XC were accounted for as sales of contracts receivable at book value, which approximated fair value. We have no continuing involvement or retained interests in the receivables sold and all the risk of loss in such receivables was transferred back to XC.

(3)Table Dueof to/from Xerox Contents

AtXEROX ~~December 31,~~CREDIT ~~2006 demand~~CORPORATION loans to XC totaled $1,422. The demand loans are evidenced by the amended Master Demand Note with XC (the “Master Demand Note”), a copy of which was filed as an exhibit to the XC 2004 Annual Report on Form 10-K. As of December 31, 2006, the Master Demand Note was our sole monetary asset. Amounts outstanding under the Master Demand Note, up to a balance of $2,750, bear interest at a rate (the “Effective Rate”) equal to the sum of (i) the simple average of the H.15 Two-Year Swap Rate and the H.15 Three-Year Swap Rate (each as defined in the Master Note between Xerox and us) plus (ii) 2.00% (200 basis points). The Effective Rate was 6.98% at December 31, 2006. The H.15 is a Federal Reserve Board Statistical Release (published weekly) that contains daily interest rates for selected U.S. Treasury, money market and capital markets instruments. We will demand repayment of these loan amounts from XC to the extent necessary to repay our maturing debt obligations, fund our operations or for such other purposes that we determine to be appropriate. In June 2005, XC repaid $1.0 billion under the Master Demand Note in connection with our repayment of third-party debt.

~~From~~QUARTERLY ~~time~~RESULTS toOF ~~time~~OPERATIONS we(UNAUDITED) receive non-interest bearing advances from XC to primarily cover the unpaid portion of our income tax provision as determined in accordance with our Tax Allocation Agreement with XC. Amounts payable to XC were $4 and $29 as of December 31, 2006 and 2005, respectively, and are reported in our balance sheets as Due to Xerox Corporation, net.

~~Intercompany~~(in ~~cross-currency~~millions) ~~interest rate swaps with XC having net liability fair values as of December 31, 2006 and December 31, 2005 of $22 and $16, respectively were netted against the Master Demand Note.~~

(4) Notes Payable


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2008:
Earned income	$	14	$	16	$	15	$	12	$	57
Interest expense		3		2		3		1		9
General and administrative expenses		—		1		—		—		1

Income before income taxes		11		13		12		11		47
Provision for income taxes		4		5		4		4		17

Net income	$	7	$	8	$	8	$	7	$	30


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2007:
Earned income	$	25	$	25	$	20	$	18	$	88
Interest expense		8		6		3		2		19
Loss on derivative instruments, net		1		—		—		—		1
General and administrative expenses		—		1		—		—		1

Income before income taxes		16		18		17		16		67
Provision for income taxes		6		7		6		6		25

Net income	$	10	$	11	$	11	$	10	$	42

A24 ~~summary of notes payable at December 31, 2006 and 2005 follows:~~

(in millions)	Weighted Average Interest Rate at December 31, 2006	2006			2005
Japanese Yen Denominated Medium Term Notes due 2007	2.00		252			255
Medium Term Notes due 2012 (a)	7.07		75			75
Medium Term Notes due 2013 (a)	6.50		60			60
Medium Term Notes due 2014 (a)	6.06		50			50
Medium Term Notes due 2018 (a)	7.00		25			25
Subtotal		$	462		$	465
Less current maturities			(277	)		—
Total Notes Payable after one year		$	185		$	465

~~(a)~~XEROX ~~Medium~~CREDIT ~~Term~~CORPORATION ~~Notes due in 2012 through 2018 are callable by us. Scheduled principal repayments on notes payable during the next five years and thereafter are:~~

2007	$	277
2008		—
2009		—
2010		—
2011		—
Thereafter		185
Total	$	462

Form 10-K

23For the Year Ended December 31, 2008

~~XEROX~~Index ~~CREDIT~~of ~~CORPORATION~~Exhibits

~~NOTES~~Document ~~TO FINANCIAL STATEMENTS~~

(Dollars in millions, unless otherwise indicated)


(3)(a)		Articles of Incorporation of Registrant filed with the Secretary of State of Delaware on June 23, 1980, as amended by Certificates of Amendment thereto filed with the Secretary of State of Delaware on September 12, 1980 and September 19, 1988, as further amended by Certificate of Change of Registered Agent filed with the Secretary of State of Delaware on October 7, 1986, a Certificate of Ownership and Merger filed with the Secretary of State of Delaware on April 30, 1992 and a Certification of Correction of Certificate of Ownership and Merger filed with the Secretary of State of Delaware on March 3, 1994.

		Incorporated by reference to Exhibit (3)(a) to Registrant’s Annual Report on Form 10-K for the Year Ended December 31, 2004.

(b)		By-Laws of Registrant, as amended through September 1, 1992.

		Incorporated by reference to Exhibit (3)(b) to Registrant’s Annual Report on Form 10-K for the Year Ended December 31, 2006.

(4)(a)		Indenture dated as of October 2, 1995, between Registrant and State Street Bank and Trust Company (State Street), relating to unlimited amounts of debt securities which may be issued from time to time by Registrant when and as authorized by Registrant’s Board of Directors.

		Incorporated by reference to Exhibit 4(a) to Registrant’s Registration Statement Nos. 33-61481 and 333-29677.

(b)		Instruments with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis have not been filed. Registrant agrees to furnish to the Commission a copy of each such instrument upon request.

(10)(a)		Amended and Restated Operating Agreement originally made and entered into as of November 1, 1980, amended and restated as of June 30, 1998, between Registrant and Xerox.

		Incorporated by reference to Exhibit (10)(a) to Registrant’s Annual Report on Form 10-K for the Year Ended December 31, 2004.

(b)		Support Agreement dated as of November 1, 1980, between Registrant and Xerox.

		Incorporated by reference to Exhibit 10(b) to Registration Statement No. 2-71503.

(c)		Tax Allocation Agreement dated as of January 1, 1981, between Registrant and Xerox.

		Incorporated by reference to Exhibit 10(c) to Registration Statement No. 2-71503.

(d)		Master Note dated December 10, 2003 between Registrant and Xerox Corporation.

		Incorporated by reference to Exhibit 4(m) of Xerox Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

(12)		Computation of Registrant’s Ratio of Earnings to Fixed Charges.

(31)(a)		Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).

(b)		Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).

(32)		Certification of CEO and CFO pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

~~Cash~~25 ~~interest paid on notes payable for 2006, 2005, and 2004 was $28, $46, and $56, respectively. Gains or Losses associated with swaps terminated are amortized over the term of the related issue.~~

At December 31, 2006 and 2005, carrying values of notes payable totaled $462 and $465, respectively. The fair values of our notes payable at December 31, 2006 and 2005 were $468 and $464, respectively, based on quoted market prices for our notes or those of comparable issuers with similar features and maturity dates.

On February 28, 2007, the Company provided notice of redemption for $25 of the Medium Term Notes due 2012. The notes are expected to be redeemed on March 29, 2007. A related charge of less than $1, primarily representing remaining deferred swap termination costs, will be recorded in interest expense in our first quarter 2007 operating results upon redemption. These notes have been reclassified to the current portion of notes payable consistent with our intent to redeem.

(5) Financial Instruments

As of December 31, 2006 and 2005, we held Japanese Yen denominated debt of $252 and $255, respectively and therefore are exposed to changes in foreign currency exchange rates that could affect our results of operations and financial condition. As a result of our decision to fully hedge our Yen/U.S. dollar exposures, we have intercompany cross-currency interest rate swaps with XC. For the years ended December 31, 2006 and 2005, the U.S. dollar notional values of these intercompany swaps were each $276. The net liability fair values at December 31, 2006 and 2005 were $22 and $16, respectively, and are netted against Note receivable – Xerox Corporation within the balance sheets.

The aggregate notional amounts of our intercompany cross-currency interest rate swaps at December 31, 2006 and 2005 were as follows:

(in millions)	2006			2005
Pay fixed/receive fixed	$	136		$	136
Pay variable/receive fixed		140			140
	$	276		$	276
Average interest rates paid		5.29	%		4.99	%
Average interest rates received		2.00	%		2.00	%

These swaps mature in June 2007.

Differences between the contract terms of our derivatives and the underlying related debt restrict our ability to obtain hedge accounting in accordance with SFAS No. 133. This results in the mark-to-market valuation of our derivatives directly through earnings together with the remeasurement of our Japanese Yen denominated debt, which accordingly leads to increased earnings volatility. During 2006, 2005 and 2004, we recorded net (losses) gains of $(3), $(5) and $2, respectively from the mark-to-market valuation of intercompany interest rate derivatives as well as the remeasurement of our Japanese Yen denominated debt.

In addition, for the three years ended December 31, 2006, we recorded $9, $13 and $15, respectively, as a component of interest expense, as presented in our Statements of Income, relating to intercompany cross-currency interest rate swaps with XC.

We calculate the fair values for all interest rate swap agreements based on market conditions and supplemented with quotes from banks. They represent amounts we would receive (pay) to terminate/replace these contracts. We have no present plans to terminate/replace these agreements prior to their scheduled maturities.

(6) Income Taxes

XCC is included within the consolidated XC U.S. Federal income tax return and the XC unitary state income tax returns. We record our federal tax provision using the separate return method and record our state income tax provisions using a pro-rata method. Pursuant to our Tax Allocation Agreement and other arrangements with XC, we paid $52, $25 and $9, in 2006, 2005 and 2004, respectively.

XEROX CREDIT CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise indicated)

The components of income before income taxes and the provision for income taxes were as follows:

(in millions)	2006			2005			2004
Income before income taxes	$	71		$	70		$	71
Federal income taxes
Current	$	27		$	39		$	(9	)
Deferred		(2	)		(15	)		34
State income taxes
Current		2			3			(5	)
Deferred		—			(1	)		2
Total provision for income taxes	$	27		$	26		$	22

A reconciliation of the effective tax rate from the U.S. federal statutory income tax rate for the three years ended December 31, 2006 follows:

	2006		2005		2004
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	2.9		2.3		2.3
Audit and other tax return adjustments	0.4		—		(6.5	)
Effective tax rate	38.3	%	37.3	%	30.8	%

The deferred tax liabilities at December 31, 2006 and 2005 related to net unrealized derivative and exchange gains of $1 and $3, respectively.

(7) Xerox Corporation Support Agreement

The terms of a Support Agreement with XC provide that we will receive income maintenance payments, to the extent necessary, so that our earnings shall not be less than 1.25 times our fixed charges. For purposes of this calculation, both earnings and fixed charges are as formerly defined in Section 1404 (formerly Section 81(2)) of the New York Insurance Law. In addition, the agreement requires that XC retain sole ownership of our voting capital stock. There have been no payments required to be made under this agreement since 1990.

XEROX CREDIT CORPORATION

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(in millions)

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2006:
Earned income	$	24	$	27	$	27	$	25	$	103
Interest expense		8		9		8		4		29
Loss on derivative instruments, net		—		1		2		—		3
General and administrative expenses		—		—		—		—		—
Income before income taxes		16		17		17		21		71
Provision for income taxes		6		6		7		8		27
Net income	$	10	$	11	$	10	$	13	$	44

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2005:
Earned income	$	36	$	35	$	23	$	25	$	119
Interest expense		15		14		8		7		44
Loss on derivative instruments, net		—		4		—		1		5
General and administrative expenses		—		—		—		—		—
Income before income taxes		21		17		15		17		70
Provision for income taxes		8		6		6		6		26
Net income	$	13	$	11	$	9	$	11	$	44

XEROX CREDIT CORPORATION

Form 10-K

For the Year Ended December 31, 2006

Index of Exhibits

Document
(3)(a)		Articles of Incorporation of Registrant filed with the Secretary of State of Delaware on June 23, 1980, as amended by Certificates of Amendment thereto filed with the Secretary of State of Delaware on September 12, 1980 and September 19, 1988, as further amended by Certificate of Change of Registered Agent filed with the Secretary of State of Delaware on October 7, 1986, a Certificate of Ownership and Merger filed with the Secretary of State of Delaware on April 30, 1992 and a Certification of Correction of Certificate of Ownership and Merger filed with the Secretary of State of Delaware on March 3, 1994.
		Incorporated by reference to Exhibit (3)(a) to Registrant’s Annual Report on Form 10-K for the Year Ended December 31, 2004.
(b)		By-Laws of Registrant, as amended through September 1, 1992. (This document was previously filed in 2001 and is being re-filed in order to comply with SEC rules regarding incorporation by reference).
(4)(a)		Indenture dated as of October 2, 1995, between Registrant and State Street Bank and Trust Company (State Street), relating to unlimited amounts of debt securities which may be issued from time to time by Registrant when and as authorized by Registrant's Board of Directors.
		Incorporated by reference to Exhibit 4(a) to Registrant's Registration Statement Nos. 33-61481 and 333-29677.
(b)		Instruments with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis have not been filed. Registrant agrees to furnish to the Commission a copy of each such instrument upon request.
(10)(a)		Amended and Restated Operating Agreement originally made and entered into as of November 1, 1980, amended and restated as of June 30, 1998, between Registrant and Xerox.
		Incorporated by reference to Exhibit (10)(a) to Registrant’s Annual Report on Form 10-K for the Year Ended December 31, 2004.
(b)		Support Agreement dated as of November 1, 1980, between Registrant and Xerox.
		Incorporated by reference to Exhibit 10(b) to Registration Statement No. 2-71503.
(c)		Tax Allocation Agreement dated as of January 1, 1981, between Registrant and Xerox.
		Incorporated by reference to Exhibit 10(c) to Registration Statement No. 2-71503.
(d)		Master Note dated December 10, 2003 between Registrant and Xerox Corporation.
		Incorporated by reference to Exhibit 4(m) of Xerox Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.
(12)		Computation of Registrant's Ratio of Earnings to Fixed Charges.
(23)		Consent of PricewaterhouseCoopers LLP.
(31)(a)		Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
(b)		Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
(32)		Certification of CEO and CFO pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

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