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Article by DailyStocks_admin    (08-20-08 05:22 AM)

The Daily Magic Formula Stock for 08/20/2008 is Lexmark International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 25-50%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General

Lexmark International, Inc., (“Lexmark” or the “Company”) is a Delaware corporation and the surviving company of a merger between itself and its former parent holding company, Lexmark International Group, Inc., (“Group”) consummated on July 1, 2000. Group was formed in July 1990 in connection with the acquisition of IBM Information Products Corporation from International Business Machines Corporation (“IBM”). The acquisition was completed in March 1991. On November 15, 1995, Group completed its initial public offering of Class A Common Stock and Lexmark now trades on the New York Stock Exchange under the symbol “LXK.”

Lexmark makes it easier for businesses and consumers to move information between the digital and paper worlds. Since its inception in 1991, Lexmark has become a leading developer, manufacturer and supplier of printing and imaging solutions for offices and homes. Lexmark’s products include laser printers, inkjet printers, multifunction devices, and associated supplies, services and solutions. Lexmark develops and owns most of the technology for its laser and inkjet products and related solutions. Lexmark also sells dot matrix printers for printing single and multi-part forms by business users. The Company operates in the office products industry. The Company is primarily managed along Business and Consumer market segments. Refer to Part II, Item 8, Note 17 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s reportable segments.

Revenue derived from international sales, including exports from the United States of America (“U.S.”), accounts for approximately 57% of the Company’s consolidated revenue, with Europe accounting for approximately two-thirds of international sales. Lexmark’s products are sold in more than 150 countries in North and South America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the Caribbean. This geographic diversity offers the Company opportunities to participate in new markets, provides diversification to its revenue stream and operations to help offset geographic economic trends, and utilizes the technical and business expertise of a worldwide workforce. Currency exchange rates had a material favorable impact on international revenue in 2007. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations — Effect of Currency Exchange Rates and Exchange Rate Risk Management for more information. A summary of the Company’s revenue and long-lived assets by geographic area is found in Part II, Item 8, Note 17 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Market Overview 1

Lexmark management believes that the total distributed office and home printing output opportunity was approximately $95 billion in 2007, including hardware, supplies and related services. This opportunity includes printers and multifunction devices as well as a declining base of copiers and fax machines that are increasingly being integrated into multifunction devices. Based on industry analyst information, Lexmark management estimates that this market will grow annually at low- to mid-single digit percentage rates through 2011. Management believes that the integration of print/copy/fax/scan capabilities favors companies like Lexmark due to its experience in providing industry-leading network printing solutions. In general, as the hardcopy industry matures and printer and copier markets converge, management expects competitive pressures to continue.

The Internet is positively impacting the distributed home and office printing market opportunity in several ways. As more information is available over the Internet, and new tools and solutions are being developed to access it, more of this information is being printed on distributed home and office printers. Management believes that an increasing percentage of this distributed output includes color and graphics, which tend to increase supplies usage. Growth in high-speed Internet access to the home is also contributing to increased printing on distributed devices.

The laser product market primarily serves business customers. Laser products can be divided into two major categories — shared workgroup products and lower-priced desktop products. Shared workgroup products are typically attached directly to large workgroup networks, while lower-priced desktop products are attached to personal computers (“PCs”) or small workgroup networks. Both product categories include color and monochrome laser offerings. The shared workgroup products include laser printers and multifunction devices, which typically include high-performance internal network adapters that are easily upgraded to include additional input and output capacity as well as additional memory and storage. Most shared workgroup products also have sophisticated network management tools and some printers include multifunction upgrades that enable copy/fax/scan to network capabilities.

Industry laser printer unit growth in recent years has generally exceeded the growth rate of laser printer revenue due to unit growth in lower-priced desktop color and monochrome laser printers and unit price reductions. Additionally, color and multifunction laser printer units represent a more significant component of laser unit growth. Management believes these trends will continue. The pricing pressure is partially offset by the tendency of customers in the shared workgroup laser market to add higher profit margin optional features including document management solutions, additional memory, paper handling and multifunction capabilities. Pricing pressure is also partially offset by the opportunity to provide business solutions and services to customers who are increasingly looking for assistance to better manage and leverage their document-related costs and output infrastructure.

The inkjet product market is predominantly a consumer market but also includes business users who may choose inkjet products as a lower-priced alternative or supplement to laser products. Also, there is an increasing trend in inkjet products being designed for business purposes such as small office home office (“SOHO”), small business, student and home offices. Additionally, over the past couple years, the number of consumers seeking productivity-related features has driven significant growth in all-in-one (“AIO”) products. Key factors promoting this trend are greater affordability of AIOs containing productivity features like full fax capabilities, automatic document feeders, duplex capabilities and wireless connectivity.

Management believes the combination of business features made for the home will continue to drive AIO growth. Growth in inkjet hardware revenue on an industry basis has been lower than unit growth due to price reductions.

Strategy

Lexmark’s strategy is based on a business model of investing in technology to develop and sell printing solutions, including printers and multifunction products (“MFPs”), with the objective of growing its installed base, which drives recurring supplies sales. Supplies are the profit engine of the business model. Supplies profit then funds new technology investments in products and solutions, which drive the cycle again and again. Management believes that Lexmark has the following strengths related to this business model:


• First, Lexmark is exclusively focused on distributed home and office network or desktop computer printing and imaging, and related solutions. Management believes that this focus has enabled Lexmark to be more responsive and flexible than competitors at meeting specific customer and channel partner needs.

• Second, Lexmark internally develops all three of the key print technologies associated with distributed printing, including inkjet, monochrome laser and color laser. The Company’s laser printer technology platform has historically allowed it to be a leader in product price/performance and also build unique capabilities into its products that enable it to offer customized solutions.

• Third, Lexmark has leveraged its technological capabilities and its commitment to flexibility and responsiveness to build strong relationships with large-account customers and channel partners, including major retail chains, distributors, direct-response catalogers and value-added resellers. Lexmark’s path-to-market includes industry-focused consultative sales and services teams that deliver unique and differentiated solutions to both large accounts and channel partners that sell into the Company’s target industries. Retail-centric teams also have enabled Lexmark to meet the specific needs of major retail channel partners.

Lexmark’s business market strategy requires that it provide its array of high-quality, technologically-advanced products and solutions at competitive prices. Lexmark continually enhances its products to ensure that they function efficiently in increasingly-complex enterprise network environments. It also provides flexible tools to enable network administrators to improve productivity. Lexmark’s business target markets include large corporations, small and medium businesses (“SMBs”) and the public sector. Lexmark’s business market strategy also requires that it continually identify and focus on industry-specific issues and processes so that it can differentiate itself by offering unique industry solutions and related services.

The Company’s consumer market strategy is to generate demand for Lexmark products by offering competitively-priced products to consumers and businesses primarily through retail channels and original equipment manufacturer (“OEM”) partner arrangements. Lexmark’s goal is to create printing products and innovative solutions that make it easier for consumers and small business owners to create, share and manage information and images. Lexmark continues to invest in brand building efforts that are reflected in its core product offerings, advertising campaigns and public relations efforts, all of which reinforce Lexmark’s value proposition.

Lexmark’s strategy involves the following core strategic initiatives:


• Expand the penetration of the product segments in which the Company participates. Lexmark is focused on increasing its participation in a number of higher-usage growth segments such as workgroup monochrome lasers, workgroup color lasers, workgroup laser MFPs and non-entry inkjet AIOs.

• Expand the penetration of the market segments in which the Company participates. Lexmark is driving to expand the Company’s presence in enterprise, SMB and the non-entry segment of the consumer market.

• Continue to develop Lexmark’s brand awareness and brand positioning. Management believes that its product and market segment initiatives will be aided by improving its brand awareness and brand image with the objective of reaching higher-usage customers that drive supplies sales. To drive these improvements, Lexmark launched a new advertising campaign in 2006 that has continued through 2007. The core message of the campaign highlights the Company’s deep and proven experience helping some of the world’s leading companies to be more productive. In 2007, the campaign also highlighted the industry-leading recognition and awards for its laser product line. Lexmark believes that this campaign will continue to build brand image and awareness, and in the long term will support the execution of its strategic initiatives.

In addition to investments in the Lexmark brand, the successful execution of this strategy involves increased investments in both the Company’s sales force and product and solution development. The Company increased its research and development spending by 9% in 2007, by 10% in 2006 and by 8% in 2005. This investment has led to new products and solutions aimed at targeted growth segments as well as a pipeline of future products.

Because of Lexmark’s exclusive focus on printing solutions, the Company has formed alliances and OEM arrangements to pursue incremental business opportunities through its alliance partners.

The Company’s strategy for dot matrix printers is to continue to offer high-quality products while managing cost to maximize cash flow and profit.

Products

Laser Products

Lexmark offers a wide range of monochrome and color laser printers and MFPs in addition to customized solutions and services designed to help businesses move beyond printing to optimizing their printing environment and improve associated workflow and business processes.

In the monochrome category, the Company offers the Lexmark E series, which includes the Lexmark E120, the Lexmark E250, Lexmark E350 and Lexmark E450 printers. The E250, E350 and E450 combine new printhead technology, an instant warm-up fuser and two-sided printing standard on every model.

The Company continues to offer the Lexmark T640 series, which includes three models designed to support small, medium and large workgroups. All three models have optional paper input and output features, including a stapler and offset stacker. The Company’s monochrome laser printer line extends into the wide format sector of the market with the Lexmark W840, which supports an array of paper handling and finishing options.

In 2007, the Company announced the new Lexmark C780 series and the Lexmark C935dn in the color laser printer category, which serve medium to large workgroups. Lexmark continues to offer the Lexmark C500n and the Lexmark C530 series for small and medium workgroups.

Lexmark’s range of monochrome MFPs begins in the small workgroup category with the Lexmark X340 series and extends to the Lexmark X640 series, which is geared to medium to large workgroups. The Company also offers the Lexmark X850e series of monochrome MFPs that support large departments with wide format printing, finishing, and feature the same color eTask touch screen interface found on the Lexmark X644e and Lexmark X646e models.

In 2007, Lexmark introduced an entire new line of color laser MFPs, featuring five new products. The Lexmark X500n and Lexmark X502n are designed for small businesses and desktop users. The Lexmark X782e, Lexmark X940e and Lexmark X945e are designed for business workgroups and print on a wide variety of documents, including difficult media like heavy card stock and vinyl labels and specialty papers like weather- and fade-resistant outdoor media and oversized banners. All three feature Lexmark’s eTask color touch screen interface, which can be customized to simplify complicated processes to the touch of an icon. This interface drives Lexmark’s industry-specific workflow solutions, which are designed to help customers in industries like retail, banking, health care, government, manufacturing and education improve paper-based processes.

Lexmark is vertically integrated, which gives the Company the ability to quickly respond to unique customer requirements and develop customized solutions to improve workflow. As a result of its insights into the specific processes required within industries, the Company can effectively customize the eTask interface on its MFPs to allow customers to reduce complicated, multi-step processes within these industries to the touch of an icon. The interface can easily be customized to meet each customer’s unique workflow needs.

Also in 2007, the Company announced three new products customized specifically for vertical markets: the Clinical Assistant for health care, the Education Station for K-12 schools and the Legal Partner for law firms. All three are based off the Lexmark X646dte platform and feature workflow solutions on the eTask interface designed specifically to help customers in those industries improve productivity and reduce costs.

Inkjet Products

Lexmark’s inkjet products include various desktop single function and AIO printers that offer print, copy, scan and fax functionality targeted at home users and SOHO users.

As broadband and wireless network penetration continues to increase substantially, Lexmark is meeting the growing demand for new printing products that afford the freedom of mobility. In fact, in 2007, Lexmark has established its wireless leadership by introducing the most affordable line of wireless inkjet products in the market, with products ranging from $79 — $249. This year, Lexmark introduced 11 inkjet products, six of which offer built-in 802.11g wireless connectivity and one that offers wireless connectivity as an option.

Additionally, Lexmark is better meeting the needs of SOHO professionals by offering higher end features such as automatic document feeding and automatic two-sided printing. Professional users also prefer print output with greater permanence. To meet this need, Lexmark offers pigmented ink technology which delivers output that resists fading, highlighting, water and humidity.

Leading the new Lexmark wireless lineup is the Lexmark X6570 Wireless All-in-One, a wireless four-in-one printer geared to SOHO users that includes business-class features such as two-sided printing, fax, a 25-page automatic document feeder for copying and faxing, and photo printing with Lexmark’s pigmented inks. In 2007, Lexmark also introduced the Lexmark X7550 , the Lexmark X4850 and the Lexmark X4550 AIO printers, all of which offer wireless connectivity. At the time of introduction, the Lexmark X4550 was the most affordable three-in-one printer in the inkjet market with built-in wireless capability. In addition, the Company announced the Lexmark X3550 AIO with wireless as an optional feature and continues to offer the Lexmark X9350 wireless AIO.

Lexmark also offers two wireless single-function printers, the Lexmark Z1420 and the Lexmark Z1520 color printers. At the time of introduction, the Z1420 was the most affordable wireless printer in the inkjet market.

For users who do not require wireless printing but need a feature-packed printer that is easy to use, the Company offers the new Lexmark X2500, the Lexmark X5070 and the Lexmark X5495 color AIO printers as well as the Lexmark Z1300 color inkjet printer.

In addition to the growing demand for wireless products, consumer trends in the market include a preference for the robust functionality of AIO printers and a shift away from printing photos at home, reducing the demand for stand-alone photo printing products. For those who want the convenience of photo printing at home, Lexmark offers quality photo printing in all of its inkjet AIOs, with photo features including a Pictbridge port, photo media card slots, flatbed scanner, color LCDs, scan-back proof sheets and optional six color printing.

Dot Matrix Products

Lexmark continues to market several dot matrix printer models for customers who print multi-part forms.

Supplies

Lexmark designs, manufactures and distributes a variety of cartridges and other supplies for use in its installed base of laser, inkjet and dot matrix printers. Lexmark’s revenue and profit growth from its supplies business is directly linked to the Company’s ability to increase the installed base of its laser and inkjet products and customer usage of those products. Management believes Lexmark is an industry leader with regard to the recovery, remanufacture, reuse and recycling of used laser supplies cartridges, helping to keep empty cartridges out of landfills. Attaining that leadership position was made possible by the Company’s various empty cartridge collection programs around the world. Lexmark continues to launch new programs and expand existing cartridge collection programs to further expand its remanufacturing business and this environmental commitment.

Service and Support

Lexmark offers a wide range of services to bring together the Company’s line of printing products and technology solutions along with maintenance, consulting, systems integration and distributed fleet management capabilities to provide a comprehensive output solution. Lexmark Global Services provide customers with an assessment of their current environment and a recommendation and implementation plan for the future state and ongoing optimization of their output environment and document related workflow/business processes. Managed print services allow organizations to outsource fleet management, technical support, supplies replenishment and maintenance activities to Lexmark.

Through its Distributed Fleet Management (“DFM”) services, Lexmark provides large enterprise customers with managed print services, giving them complete visibility and control over their printing environment. These services include asset lifecycle management, consumables management and utilization management. These services can be tailored to meet each customer’s unique needs and give them more extensive knowledge about their printing assets and infrastructure. Lexmark Fleet Manager is an offering for partners who wish to leverage Lexmark’s enterprise infrastructure and capabilities to provide their small and medium business customers with managed print services.

The Company’s printer products generally include a warranty period of at least one year, and customers typically have the option to purchase an extended warranty.

Marketing and Distribution

Lexmark employs large-account sales and marketing teams whose mission is to generate demand for its business printing solutions and services, primarily among large corporations as well as the public sector. Sales and marketing teams primarily focus on industries such as finance, services, retail, manufacturing, public sector and health care. Those teams, in conjunction with the Company’s development and manufacturing teams, are able to customize printing solutions to meet customer needs for printing electronic forms, media handling, duplex printing and other document workflow solutions. Lexmark also markets its laser and inkjet products increasingly through SMB teams who work closely with channel partners. The Company distributes and fulfills its products to business customers primarily through its well-established distributor and reseller network. Lexmark’s products are also sold through solution providers, which offer custom solutions to specific markets, and through direct response resellers.

Lexmark’s international sales and marketing activities for the business market are organized to meet the needs of the local jurisdictions and the size of their markets. Operations in North America, Latin America, Asia Pacific and Western Europe focus on large-account demand generation with orders primarily filled through distributors and resellers.

The Company’s business printer supplies are generally available at the customer’s preferred point-of-purchase through multiple channels of distribution. Although channel mix varies somewhat depending upon the geography, most of Lexmark’s business supplies products sold commercially in 2007 were sold through the Company’s network of Lexmark-authorized supplies distributors and resellers, who sell directly to end-users or to independent office supply dealers.

For the consumer market, Lexmark distributes its branded inkjet products and supplies primarily through retail outlets worldwide. Lexmark’s sales and marketing activities are organized to meet the needs of the various geographies and the size of their markets. In the U.S., products are distributed through large discount store chains, consumer electronics stores, office superstores and wholesale clubs. The Company’s Western European and Latin American operations distribute products through major information technology resellers and in large markets through key retailers. Australian and Canadian marketing activities focus on large retail account demand generation, with orders filled through distributors or resellers.

Lexmark also sells its products through numerous alliances and OEM arrangements. During 2007, 2006 and 2005, one customer, Dell, accounted for $717 million or approximately 14%, $744 million or approximately 15% and $782 million or approximately 15% of the Company’s total revenue, respectively. Sales to Dell are included in both the Business and Consumer segments.

Lexmark launched a new advertising campaign in the third quarter of 2006 that has continued through 2007. The objective of the campaign is to gain broad awareness of the Company’s proven track record of helping world-class companies to be more productive. Management believes that this campaign continues to build brand image and consideration, and in the long term will strengthen its position in the industry as the printing and imaging solutions service provider that makes it easy to get more done.

Economic and Seasonal Trends

Lexmark’s business and results of operations have historically been affected by general economic conditions. From time to time, the Company’s sales may be negatively affected by weak economic conditions in those markets in which the Company sells its products.

The Company experiences some seasonal market trends in the sale of its products and services. For example, sales in the business and consumer market segments are often stronger during the second half of the year and sales in Europe are often weaker in the summer months. Additionally, sales during the first half of the year may also be adversely impacted by market anticipation of seasonal trends such as new product introductions. The impact of these seasonal trends on Lexmark has become less predictable.

Competition

Lexmark continues to develop and market new products and innovative solutions at competitive prices. New product announcements by the Company’s principal competitors, however, can have, and in the past, have had, a material adverse effect on the Company’s financial results. Such new product announcements can quickly undermine any technological competitive edge that one manufacturer may enjoy over another and set new market standards for price, quality, speed and functionality. Furthermore, knowledge in the marketplace about pending new product announcements by the Company’s competitors may also have a material adverse effect on Lexmark as purchasers of printers may defer buying decisions until the announcement and subsequent testing of such new products.

In recent years, Lexmark and its principal competitors, many of which have significantly greater financial, marketing and/or technological resources than the Company, have regularly lowered prices on printers and are expected to continue to do so. Lexmark has experienced and remains vulnerable to these pricing pressures. The Company’s ability to grow or maintain market share has been and may continue to be affected, resulting in lower profitability. Lexmark expects that as it competes with larger competitors, the Company’s increased market presence may attract more frequent challenges, both legal and commercial, including claims of possible intellectual property infringement.

The distributed printing market is extremely competitive. The distributed laser printing market is dominated by Hewlett-Packard (“HP”), which has a widely-recognized brand name and has been estimated to hold approximately 40% of the market as measured in annual units shipped. With the convergence of traditional printer and copier markets, major laser competitors now include traditional copier companies such as Canon, Ricoh and Xerox. Other laser competitors include Brother, Konica Minolta, Kyocera Mita, Oki and Samsung.

Lexmark’s primary competitors in the inkjet product market are HP, Epson and Canon, who together account for approximately 80% of worldwide inkjet product unit sales. The Company must compete with these same vendors and other competitors, such as Brother and Kodak, for retail shelf space allocated to printers and their associated supplies. Lexmark sees other competitors and the potential for new entrants into the market possibly having an impact on the Company’s growth and market share. The entrance of a competitor that is also focused on printing solutions could have a material adverse impact on the Company’s strategy and financial results.

Refill, remanufactured, clones, counterfeits and other compatible alternatives for some of Lexmark’s cartridges are available and compete with the Company’s supplies business. However, these alternatives generally offer inconsistent quality and reliability. As the installed base of laser and inkjet products matures, the Company expects competitive supplies activity to increase. Historically, the Company has not experienced significant supplies pricing pressure, but if supplies pricing were to come under significant pressure, the Company’s financial results could be materially adversely affected.

Manufacturing

Lexmark operates manufacturing control centers in Lexington, Kentucky; Shenzhen, China; and Geneva, Switzerland; and has manufacturing sites in Boulder, Colorado; Juarez and Chihuahua, Mexico; and Lapu-Lapu City, Philippines. The Company also has customization centers in each of the major geographies it serves. Lexmark’s manufacturing strategy is to retain control over processes that are technologically complex, proprietary in nature and central to the Company’s business model, such as the manufacture of inkjet cartridges, at Lexmark-owned and operated facilities. The Company shares some of its technical expertise with certain manufacturing partners, many of whom have facilities located in China, which collectively provide Lexmark with substantially all of its printer production capacity. The Company continually reviews its manufacturing capabilities and cost structure and makes adjustments as necessary.

Lexmark’s manufacturing operations for toner and photoconductor drums are located in Boulder, Colorado and Juarez, Mexico. The Company continues to make significant capital investments in its Juarez, Mexico operation to expand cartridge assembly and selected key component manufacturing capabilities. Laser printer cartridges are assembled by a combination of in-house and third-party contract manufacturing. The manufacturing control center for laser printer supplies is located in Geneva, Switzerland.

Lexmark’s manufacturing operations for inkjet printer supplies are located in Juarez and Chihuahua, Mexico and Lapu-Lapu City, Philippines. The manufacturing control center for inkjet supplies is located in Geneva, Switzerland.

Materials

Lexmark procures a wide variety of components used in the manufacturing process, including semiconductors, electro-mechanical components and assemblies, as well as raw materials, such as plastic resins. Although many of these components are standard off-the-shelf parts that are available from multiple sources, the Company often utilizes preferred supplier relationships, and in certain cases sole supplier relationships, to better ensure more consistent quality, cost and delivery. Typically, these preferred suppliers maintain alternate processes and/or facilities to ensure continuity of supply. Lexmark occasionally faces capacity constraints when there has been more demand for its products than initially projected. From time to time, Lexmark may be required to use air shipment to expedite product flow, which can adversely impact the Company’s operating results. Conversely, in difficult economic times, the Company’s inventory can grow as market demand declines.

During 2006 and 2007, the Company continued to execute supplier managed inventory (“SMI”) agreements with its primary suppliers to improve the efficiency of the supply chain. Management believes these SMI agreements improve Lexmark’s supply chain inventory pipeline and supply chain flexibility which enhances responsiveness to our customers. In addition, management believes these agreements improve supplier visibility to product demand and therefore improve suppliers’ timeliness and management of their inventory pipelines. As of December 31, 2007, a significant majority of printers were purchased under SMI agreements. Any impact on future operations would depend upon factors such as the Company’s ability to negotiate new SMI agreements and future market pricing and product costs.

Many components of the Company’s products are sourced from sole suppliers, including certain custom chemicals, microprocessors, electro-mechanical components, application specific integrated circuits and other semiconductors. The Company is making changes in sourcing and design to drive commonality of sub components across product families while increasing dual sourcing for key components. In addition, Lexmark sources some printer engines and finished products from OEMs. Although Lexmark plans in anticipation of its future requirements, should these components not be available from any one of these suppliers, there can be no assurance that production of certain of the Company’s products would not be disrupted. Such a disruption could interfere with Lexmark’s ability to manufacture and sell products and materially adversely affect the Company’s business. Conversely, during economic slowdowns, the Company may build inventory of components as demand decreases.

Research and Development

Lexmark’s research and development activity is focused on laser and inkjet printers, MFPs, and associated supplies, features, and related technologies. The Company has accelerated its investment in research and development to support new product initiatives and to advance current technologies and expects this to continue. Lexmark’s primary research and development activities are conducted in Lexington, Kentucky; Boulder, Colorado; Cebu City, Philippines; and Kolkata, India. In the case of certain products, the Company may elect to purchase products or key components from third-party suppliers rather than develop them internally.

Lexmark is actively engaged in the design and development of new products and enhancements to its existing products. Its engineering efforts focus on technologies associated with laser, inkjet, connectivity, document management and other customer facing solutions, as well as design features that will increase performance, improve ease of use and lower production costs. Lexmark also develops related applications and tools to enable it to efficiently provide a broad range of services. The process of developing new products is complex and requires innovative designs that anticipate customer needs and technological trends. Research and development expenditures were $404 million in 2007, $371 million in 2006 and $336 million in 2005. The Company must make strategic decisions from time to time as to which technologies will produce products and solutions in market sectors that will experience the greatest future growth. There can be no assurance that the Company can develop the more technologically-advanced products required to remain competitive.

Backlog

Although Lexmark experiences availability constraints from time to time for certain products, the Company generally fills its orders within 30 days of receiving them. Therefore, Lexmark usually has a backlog of less than 30 days at any one time, which the Company does not consider material to its business.

CEO BACKGROUND

Dr. Curlander has been a Director of the Company since February 1997. Since April 1999, Dr. Curlander has been Chairman of the Board of the Company. In May 1998, Dr. Curlander was elected President and Chief Executive Officer of the Company. Prior to such time, Dr. Curlander served as President and Chief Operating Officer and Executive Vice President, Operations of the Company.

Mr. Gamble has been Executive Vice President and Chief Financial Officer of the Company since September 2005 when he joined the Company. Prior to joining the Company and since February 2003, Mr. Gamble served as Executive Vice President and Chief Financial Officer of Agere Systems, Inc. (“Agere”). From January 2003 to February 2003, Mr. Gamble served as Senior Vice President and Business Controller of Agere.

Mr. Rooke has been Executive Vice President and President of the Company’s Consumer Printer Division since July 2007. From October 2002 to July 2007, Mr. Rooke served as Executive Vice President and President of the Company’s Printing Solutions and Services Division (“PS&SD”).

Mr. Canning has been Vice President and President of PS&SD since July 2007. Prior to such time and since January 2006, Mr. Canning served as Vice President and General Manager, PS&SD Worldwide Marketing and Lexmark Services and PS&SD North American Sales and Marketing. From August 2002 to January 2006, Mr. Canning served as Vice President and General Manager, PS&SD Worldwide Marketing and Lexmark Services.

Mr. Cole has been Vice President and General Counsel of the Company since July 1996 and Corporate Secretary since February 1996.

Ms. Isbell has been Vice President of Human Resources of the Company since February 2003. From January 2001 to February 2003, Ms. Isbell served as Vice President of Worldwide Compensation and Resource Programs in the Company’s Human Resources department.

Mr. Stromquist has been Vice President and Corporate Controller of the Company since July 2001.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

Products and Segments

Lexmark makes it easier for businesses and consumers to move information between the digital and paper worlds. Since its inception in 1991, Lexmark has become a leading developer, manufacturer and supplier of printing and imaging solutions for offices and homes. Lexmark’s products include laser printers, inkjet printers, multifunction devices, and associated supplies, services and solutions. Lexmark also sells dot matrix printers for printing single and multi-part forms by business users.

The Company is primarily managed along Business and Consumer market segments:


• The Business market segment primarily sells laser products and serves business customers but also include consumers who choose laser products. Laser products can be divided into two major categories — shared workgroup products and lower-priced desktop products. Lexmark employs large-account sales and marketing teams, closely supported by its development and product marketing teams, to generate demand for its business printing solutions and services. The sales and marketing teams primarily focus on industries such as finance, services, retail, manufacturing, public sector and health care. Lexmark also markets its laser and inkjet products increasingly through SMB teams who work closely with channel partners. The Company distributes and fulfills its laser products primarily through its well-established distributor and reseller network. Lexmark’s products are also sold through solution providers, which offer custom solutions to specific markets, and through direct response resellers.

• The Consumer market segment predominantly sells inkjet products to consumers but also includes business users who may choose inkjet products as a lower-priced alternative or supplement to laser products for personal desktop use. Also, there is an increasing trend in inkjet products being designed for business purposes such as SOHO, small business, student and home offices. Additionally, over the past couple years, the number of consumers seeking productivity-related features has driven significant growth in AIO products. For the consumer market, Lexmark distributes its branded inkjet products and supplies primarily through retail outlets worldwide. Lexmark’s sales and marketing activities are organized to meet the needs of the various geographies and the size of their markets.

The Company also sells its products through numerous alliances and OEM arrangements.

Refer to Part II, Item 8, Note 17 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s reportable segments, which is incorporated herein by reference.

Operating Results Summary

2007

Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales reflecting the Company’s decision to focus on more profitable printer placements, a mix shift between cartridges resulting in a higher percentage of moderate use cartridges and the weakness the Company is experiencing in its OEM business.

Beginning in the second quarter of 2007, the Company’s Consumer segment experienced on-going declines in inkjet supplies and OEM unit sales, lower average unit revenues (“AURs”) and additional costs in its new products. As the Company has analyzed the situation, it saw that some of its unit sales were not generating adequate lifetime profitability, some markets and channels were on the low-end of the supplies generation distribution curve and its business was too skewed to the low-end versus the market.

As a result, the Company decided to more aggressively shift the Company’s focus to geographic regions, market segments, and customers that generate higher page usage and minimize the unit sales that do not generate an acceptable profit over their life.

The above actions will entail several initiatives:


• Investing in research and development and core inkjet technology.

• Optimizing the Company’s marketing and sales initiatives and prioritizing specific markets and channels relative to page generation and lifetime profitability.

• Improving the Company’s cost and expense structure.

In 2007, Lexmark continued to make progress on its product expansion with the introduction of a new line of color multifunction devices and wireless inkjet products. Lexmark also continued to make progress in brand development with the continuation and evolution of its advertising campaign from 2006. In 2007, the Company experienced strong branded unit growth in workgroup laser devices and high-end inkjets.

2006

During 2006, the Lexmark announced a number of actions in January 2006 that were implemented during that year:


• The Company implemented a more rigorous process to improve lifetime profitability and payback on inkjet sales.

• The Company announced a plan to restructure its workforce, consolidate some manufacturing capacity and make certain changes to its U.S. retirement plans.

In 2006, Lexmark continued to make progress on its core strategic initiatives in both product segment expansion and brand development resulting in numerous new product introductions. In 2006, the Company also experienced branded unit growth in its key focus segments with strong growth in low-end monochrome lasers, color lasers, laser MFPs and inkjet AIOs.

Additionally, in late 2006, Lexmark launched the next step in its brand development initiative with the start of a new advertising campaign which the Company continued in 2007.

Refer to the section entitled “RESULTS OF OPERATIONS” that follows for a further discussion of the Company’s results of operations.

Trends and Opportunities

Lexmark management believes that the total distributed office and home printing output opportunity was approximately $95 billion in 2007, including hardware, supplies and related services. This opportunity includes printers and multifunction devices as well as a declining base of copiers and fax machines that are increasingly being integrated into multifunction devices. Based on industry analyst information, Lexmark management estimates that this market will grow annually at low- to mid-single digit percentage rates through 2011.

Market trends driving long-term growth include:


• Continuing improvement in price/performance points;

• Increased adoption of color and graphics output in business;

• Advancements in electronic movement of information, driving more pages to be printed by end users when and where it is convenient to do so;

• Continued convergence in technology between printers, scanners, copiers and fax machines into single, integrated AIO devices; and

• Advancements in digital photography driving the opportunity to print digital images on distributed output devices.

As a result of these market trends, Lexmark has growth opportunities in monochrome laser printers, color lasers, laser MFPs and inkjet AIOs.

Industry laser printer unit growth in recent years has generally exceeded the growth rate of laser printer revenue due to unit growth in lower-priced desktop color and monochrome laser printers and unit price reductions. Additionally, color and multifunction laser printer units represent a more significant component of laser unit growth. Management believes these trends will continue. This pricing pressure is partially offset by the tendency of customers in the shared workgroup laser market to add higher profit margin optional features.

In the inkjet product market, advances in inkjet technology have resulted in products with higher resolution and improved performance while increased competition has led to lower prices. Also, there is an increasing trend in inkjet products being designed for business purposes such as SOHO, small business, student and home offices.

Additionally, over the past couple years, the number of consumers seeking productivity-related features has driven significant growth in AIO products. Key factors promoting this trend are greater affordability of AIOs containing productivity features. Management believes the combination of business features made for the home will continue to drive AIO growth. Growth in inkjet hardware revenue on an industry basis in recent years has been lower than unit growth due to price reductions.

While profit margins on printers and MFPs have been negatively affected by competitive pricing pressure, supplies sales are higher margin and recurring. In general, as the hardcopy industry matures and printer and copier markets converge, management expects competitive pressures to continue.

Lexmark’s dot matrix printers include mature products that require little ongoing investment. The Company expects that the market for these products will continue to decline, and has implemented a strategy to continue to offer high-quality products while managing cost to maximize cash flow and profit.

Challenges and Risks

In recent years, Lexmark and its principal competitors, many of which have significantly greater financial, marketing and/or technological resources than the Company, have regularly lowered prices on printers and are expected to continue to do so.

Other challenges and risks faced by Lexmark include:


• New product announcements by the Company’s principal competitors can have, and in the past, have had, a material adverse effect on the Company’s financial results.

• With the convergence of traditional printer and copier markets, major laser competitors now include traditional copier companies.

• The Company must compete with its larger competitors for retail shelf space allocated to printers and their associated supplies.

• The Company sees other competitors and the potential for new entrants into the market possibly having an impact on the Company’s growth and market share.

• Historically, the Company has not experienced significant supplies pricing pressure, but if supplies pricing was to come under significant pressure, the Company’s financial results could be materially adversely affected.

• Refill, remanufactured, clones, counterfeits and other compatible alternatives for some of the Company’s cartridges are available and compete with the Company’s supplies business. As the installed base of laser and inkjet products matures, the Company expects competitive supplies activity to increase.

• Lexmark expects that as it competes with larger competitors, the Company’s increased market presence may attract more frequent challenges, both legal and commercial, including claims of possible intellectual property infringement.

Refer to the section entitled “Competition” in Item 1, which is incorporated herein by reference, for a further discussion of major uncertainties faced by the industry and Company. Additionally, refer to the section entitled “Risk Factors” in Item 1A, which is incorporated herein by reference, for a further discussion of factors that could impact the Company’s operating results.

Strategy and Initiatives

Lexmark’s strategy is based on a business model of investing in technology to develop and sell printing solutions, including printers and MFPs, with the objective of growing its installed base, which drives recurring supplies sales. Management believes that Lexmark has the following strengths related to this business model:


• Lexmark is exclusively focused on distributed home and office network or desktop computer printing and imaging, and related solutions.

• Lexmark internally develops all three of the key print technologies associated with distributed printing, including inkjet, monochrome laser and color laser.

• Lexmark has leveraged its technological capabilities and its commitment to flexibility and responsiveness to build strong relationships with large-account customers and channel partners.

Lexmark’s strategy involves the following core strategic initiatives:


• Shift the Consumer market strategy to focus on customers, markets and channels that drive higher page generation and supplies;

• Leverage the Company’s unique strengths in the Business market segment to grow workgroup devices; and

• Continue to develop Lexmark’s brand awareness and brand positioning.

In addition to investments in the Lexmark brand, the successful execution of this strategy involves increased investments in both the Company’s sales force and product and solution development. The Company increased its research and development spending by 9% in 2007, by 10% in 2006 and by 8% in 2005. This investment has led to new products and solutions aimed at targeted growth segments as well as a pipeline of future products.

The Company’s strategy for dot matrix printers is to continue to offer high-quality products while managing cost to maximize cash flow and profit.

Refer to the section entitled “Strategy” in Item 1, which is incorporated herein by reference, for a further discussion of the Company’s strategies and initiatives.

RESULTS OF OPERATIONS

Operations Overview

Key Messages

Lexmark is focused on driving long-term performance by strategically investing in technology, demand generation and brand development to enable the Company to profitably capture supplies in high page-growth segments of the distributed printing market.


• The Business market segment strategy is focused on growth in higher page-generating workgroup class lasers including monochrome and color laser printers and MFPs. During 2007, the Company experienced double-digit unit growth in its branded workgroup and laser MFP units and growth in laser supplies.

• The Company is aggressively shifting its focus in the Consumer market segment to geographic regions, product segments, and customers that generate higher page usage. This strategy shift will increase the Company’s focus on higher priced, higher usage devices, customers and countries and will accelerate its investments to better meet the needs of those customers and product segments. The Company’s initiative in wireless inkjets is a part of the strategic shift and although wireless is a small part of the overall inkjet market, the Company believes it’s the fastest growing part of the market and it has already captured some significant market share.

Lexmark is taking actions to improve its cost and expense structure including continuing to implement a restructuring of its business to lower its cost and better allow it to fund these strategic initiatives.

Lexmark continues to maintain a strong financial position with good cash generation and a solid balance sheet, which positions it to invest in the future of the business and compete effectively even during challenging times.

2007 Business Factors

Business segment

During 2007, Lexmark continued its investments in the Business market segment through new products and technology. The Company expects these investments to produce a steady stream of new products. Lexmark continued to make progress on its product expansion initiative with the introduction of a new line of color multifunction devices.

Lexmark continued to make progress on its brand development initiative with the continuation and evolution of its advertising campaign from 2006. The Company continued its investment in the expansion of managed print services and industry sales initiatives. Lexmark also made a significant investment in its enterprise sales force in 2007 to improve its coverage and expand the reach of its solutions and services proposition.

The focus of all of these Business market investments is to drive workgroup laser growth and page generation.

Consumer segment

Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales reflecting the Company’s decision to focus on more profitable printer placements, a mix shift between cartridges resulting in a higher percentage of moderate use cartridges and the weakness the Company is experiencing in its OEM business. Additionally, Lexmark expects to see continued declines in OEM unit sales and aggressive pricing and promotion activities in the inkjet and laser markets.

Beginning in the second quarter of 2007, the Company experienced the following issues in its Consumer segment:


• On-going declines in inkjet supplies and OEM unit sales.

• Lower average unit revenues due to aggressive pricing and promotion.

• Additional costs in its new products.

As the Company analyzed the situation, it saw the following:


• Some of its unit sales were not generating adequate lifetime profitability due to lower prices, higher costs and supplies usage below its model.

• Some markets and channels were on the low-end of the supplies generation distribution curve.

• Its business was too skewed to the low-end versus the market, resulting in lower supplies generation per unit.

As a result, Lexmark decided to take the following actions:


• The Company has decided to more aggressively shift its focus to geographic regions, market segments and customers that generate higher page usage.

• The Company is working to minimize the unit sales that do not generate an acceptable profit over their life.

The above actions will entail several initiatives:


• Investing in research and development and core inkjet technology to better support this higher usage customer set.

• Optimizing the Company’s marketing and sales initiatives and prioritizing specific markets and channels relative to page generation and lifetime profitability. For the highest priority markets, this will mean a focus on expanding retail and non-retail sales, and associated marketing campaigns. For the lowest priority markets, this will mean less or no retail sales. As a result of this market prioritization and the previously mentioned business optimization, the Company estimates that approximately 30% of its full-year 2007 inkjet unit sales will not be anniversaried in 2008.

• Improving the Company’s cost and expense structure. The Company announced a restructuring plan (“the 2007 Restructuring Plan”) to reduce its cost and infrastructure, including the closure of one of its inkjet supplies manufacturing facilities in Mexico and additional optimization measures at the remaining inkjet facilities in Mexico and the Philippines. See “Restructuring-related Charges, Project Costs and Other” that follows for further discussion.

2006 Business Factors

To improve profitability and the Company’s cost and expense structure, Lexmark announced a number of actions in January 2006 that were implemented during that year:


• The Company implemented a more rigorous process to improve lifetime profitability and payback on inkjet sales which resulted in a reduction of approximately 20% of its worldwide inkjet business.

• The Company announced a plan (collectively referred to as the “2006 actions”) to restructure its workforce, to consolidate some supplies manufacturing capacity, to reduce costs and expenses in the areas of supply chain, general and administrative expense, as well as marketing and sales support functions and to make certain changes to its U.S. retirement plans. Except for approximately 100 positions that were eliminated in 2007, the restructuring-related activities related to the 2006 actions were substantially completed at the end of 2006.

In 2006, Lexmark continued to make progress on its core strategic initiatives in both product segment expansion and brand development resulting in new product introductions with new families of low-end monochrome lasers, color lasers, laser MFPs and inkjet AIOs. These new products received significant industry recognition and awards.

In 2006, the Company also experienced branded unit growth in its key focus segments with strong growth in low-end monochrome lasers, color lasers, laser MFPs and inkjet AIOs.

Additionally, in late 2006, Lexmark launched the next step in its brand development initiative with the start of a new television advertising campaign along with radio, print and outdoor advertising in targeted geographic and market segments. This integrated campaign highlights Lexmark’s deep and proven experience serving 75% of the top banks, retailers and pharmacies while highlighting the opportunity for small and medium businesses and consumers to benefit from our business class expertise. The Company continued this campaign in 2007 as Lexmark’s focus is to drive branded unit growth in its key growth segments.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Operations Overview

Key Messages

Lexmark is focused on driving long-term value by strategically investing in technology, demand generation and brand development to enable the Company to profitably capture supplies in high page-growth segments of the distributed printing market.





The Business market segment strategy is focused on growth in higher page-generating workgroup class lasers including monochrome and color laser printers and laser MFPs.





The Company is aggressively shifting its focus in the Consumer market segment to geographic regions, product segments, and customers that generate higher page usage. This strategy shift will increase the Company’s focus on higher priced, higher usage devices, customers and countries and will focus its investments to better meet the needs of those customers and product segments.

Lexmark is taking actions to improve certain portions of its manufacturing and business support cost and expense structure. These actions will better allow the Company to fund these strategic initiatives.

Lexmark continues to maintain a strong financial position with a long track record of good cash generation and a solid balance sheet, which positions it well to invest in the future and compete effectively, even during challenging times.

Business Factors

Business segment

During the second quarter of 2008, Lexmark continued its investments in new products and technology in the Business market segment. The Company expects these investments to produce a steady stream of new products.

The Company continued its investment in its managed print services and industry sales initiatives. Lexmark also made a significant investment in its enterprise sales force in 2007 to improve its coverage and expand the reach of its solutions and services proposition.

The primary focus of the Business market investments is to drive workgroup laser growth and page generation.

Consumer segment

Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales reflecting the Company’s decision to focus on more profitable, higher usage printer placements and the weakness the Company is experiencing in its OEM business.

Beginning in the second quarter of 2007, the Company experienced the following issues in its Consumer segment:



On-going declines in inkjet supplies and OEM unit sales.


Lower average unit revenues due to aggressive pricing and promotion.


Additional costs in its new products.

As the Company analyzed the situation, it saw the following:



Some of its unit sales were not generating adequate lifetime profitability due to lower prices, higher costs and supplies usage below its model.


Some markets and channels were on the low-end of the supplies generation distribution curve.


Its business was too skewed to the low-end versus the market, resulting in lower supplies generation per unit.

As a result, Lexmark decided to take the following actions beginning in 2007:



The Company decided to more aggressively shift its focus to geographic regions, market segments and customers that generate higher page usage.


The Company continues working to minimize the unit sales that do not generate an acceptable profit over their life.

The above actions entail several initiatives, which were begun in 2007 and have continued through the current period:



Shifting the Company’s marketing focus and targeted customer segments and working to fully understand the needs and application requirements of the heavier usage segments of student and professional users.



Shifting the Company’s investment in research and development to better design products and technology that will be attractive to these segments.



Re-engineering the Company’s supply chain to reduce costs and eliminate touches between the factory and the customers.



Working on supplies to lower cost and consolidate manufacturing capacity. In 2007, the Company announced a restructuring plan to reduce its cost and infrastructure, including the closure of one of its inkjet supplies manufacturing facilities in Mexico and additional optimization measures at the remaining inkjet facilities in Mexico and the Philippines. In July 2008, the Company announced a plan that will result in the closure of an additional one of the Company’s inkjet supplies manufacturing facilities in Mexico. See “ RESTRUCTURING AND RELATED CHARGES (REVERSALS) AND PROJECT COSTS ” that follows for further discussion.

These initiatives have yielded the following for the Company’s Consumer segment:


Strong growth YTY in wireless inkjet units.


An improvement in the Company’s inkjet AUR, despite an aggressive pricing environment.


The introduction of new products such as Lexmark’s Professional Series and its Home & Student Series.


An increasing amount of industry recognition and awards for its inkjet products.

Current quarter

For the second quarter of 2008, total revenue was $1.1 billion or down 6% from 2007. Laser and inkjet supplies revenue was flat year-to-year (“YTY”) and laser and inkjet hardware revenue decreased 19% YTY. In the Business segment, revenue increased 4% YTY while revenue in the Consumer segment decreased 21% YTY.

Net earnings for the second quarter of 2008 increased 30% from the prior year primarily due to higher operating income partially offset by lower other non-operating income and a higher effective tax rate. Net earnings for the second quarter of 2008 included $8.8 million of pre-tax restructuring-related charges and project costs and a non-recurring tax benefit of $5.1 million. Net earnings for the second quarter of 2007 included $5.1 million of pre-tax restructuring-related project costs, an $8.1 million pre-tax foreign exchange gain realized upon the substantial liquidation of the Company’s Scotland entity as the assets were sold in the first quarter of 2007 and a one-time tax benefit of $4.8 million.

Year to date

For the six months ended June 30, 2008, consolidated revenue was $2.3 billion or down 6% YTY. Laser and inkjet supplies revenue declined 1% YTY and laser and inkjet hardware revenue declined 18% YTY. In the Business segment, revenue increased 2% YTY while revenue in the Consumer segment decreased 19% YTY.

Net earnings for the six months ended June 30, 2008, increased 18% from the prior year primarily due to higher operating income partially offset by lower other non-operating income. Net earnings for the six months ended June 30, 2008, included $21.4 million of pre-tax restructuring-related charges and project costs and non-recurring tax benefits of $11.9 million. Net earnings for the six months ended June 30, 2007, included $10.8 million of restructuring-related project costs, a $3.5 million gain on the sale of the Company's Scotland facility, an $8.1 million pre-tax foreign exchange gain as noted above and one-time tax benefits of $6.0 million.

Revenue

For the second quarter of 2008, consolidated revenue decreased 6% YTY. Laser and inkjet supplies revenue was flat YTY as growth in laser supplies was offset by a decline in inkjet supplies. Laser and inkjet hardware revenue declined 19% YTY primarily driven by unit declines particularly in inkjet units.

For the six months ended June 30, 2008, consolidated revenue decreased 6% YTY. Laser and inkjet supplies revenue decreased 1% YTY as growth in laser supplies was more than offset by a decline in inkjet supplies. Laser and inkjet hardware revenue declined 18% YTY primarily driven by the shift in inkjet strategy.

During the second quarter of 2008, revenue in the Business segment increased $29 million or 4% compared to 2007 due to growth in laser supplies revenue partially offset by a decline in laser hardware revenue. Laser hardware unit shipments declined 12% YTY. The decline in laser units was attributable to 1) declines in the Company’s low end laser units as the Company has held the line on price and is not chasing entry level devices with low page usage and 2) workgroup unit declines in the Company’s North American enterprise sales, including the government, retail and financial services sectors, due to the current weak market conditions. Laser hardware average unit revenue (“AUR”), which reflects the changes in both pricing and mix, increased 4% YTY as the negative impact of pricing was offset by currency and favorable product mix.

For the six months ended June 30, 2008, Business segment revenue increased $33 million or 2% YTY primarily due to growth in laser supplies revenue partially offset by a decline in laser hardware revenue. Laser hardware unit shipments decreased 10% YTY while laser hardware AUR increased 2% YTY.

Consumer segment

During the second quarter of 2008, revenue in the Consumer segment decreased $98 million or 21% compared to 2007 due to decreased inkjet hardware and supplies revenue. Hardware revenue declined YTY due to lower unit shipments partially offset by increased AURs. Inkjet hardware unit shipments declined 49% YTY principally due to the Company’s decision to prioritize certain markets, segments and customers and to reduce or eliminate others. Units were also impacted by the Company’s decision to focus on more profitable printer placements in every geography. Inkjet unit sales are being further impacted by market weakness in the U.S. and Europe and aggressive competitive pricing/promotion activities. In the U.S., inkjet unit sales are also being impacted by reduced shelf space as compared to the prior year. Inkjet hardware AUR increased 24% YTY as price declines were more than offset due to a significantly improved mix reflecting a shift towards higher-end devices, as well as currency benefits.

For the six months ended June 30, 2008, Consumer segment revenue decreased $188 million or 19% compared to 2007 due to decreased inkjet hardware and supplies revenue. Inkjet hardware unit shipments declined 45% YTY while inkjet hardware AUR increased 19% YTY.

For the three and six months ended June 30, 2008, consolidated gross profit and gross profit as a percentage of revenue increased YTY. The changes in the gross profit margin YTY for the three and six months ended June 30, 2008, were primarily due to favorable mix shifts among products of 6.1 percentage points and 5.2 percentage points, respectively, primarily driven by the decline in inkjet hardware units and the increased laser supplies.

Gross profit for the three and six months ended June 30, 2008, included $4.5 million and $9.8 million, respectively, of restructuring-related charges and project costs. Gross profit for the three and six months ended June 30, 2007, included $4.5 million and $6.1 million, respectively, of restructuring-related project costs. See “ RESTRUCTURING AND RELATED CHARGES (REVERSALS) AND PROJECT COSTS ” that follows for further discussion.

CONF CALL
John Morgan

Okay. Good morning and thank you for joining us today. With me for Lexmark's second quarter 2008 earnings conference call are Lexmark's Chairman and CEO Paul Curlander and John Gamble, Lexmark's Executive Vice President and Chief Financial Officer. After their prepared remarks, we'll open the call for your questions as time permits. We ask that you please limit yourself to one question and, if needed, one follow up so that we can get to everyone's question.

Later today a replay of this call will be available on our Investor Relations website located at http://investor.Lexmark.com. Currently on the homepage of this website you'll find today's earnings release as well as the supplemental slide deck for the second quarter, which includes the reconciliations of GAAP and non-GAAP financial information. You'll also find details on upcoming events, which includes our participation at the Citigroup 15th Annual Global Technology Conference on September 4th.

As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements and involve certain risks and uncertainties that are disclosed in the safe harbor section of our earnings releases and SEC filings. Actual results may differ materially from such statements, and Lexmark undertakes no obligation to update any forward-looking statements.

Now before I turn it over to Paul, as many of you know we reached out to both top shareholders and sell-side analysts recently to better understand views on the company's guidance practices. I want to thank those that took the time to provide input on this. The significant majority of our shareholders responding to the survey indicated that they would like the company to continue offering quarterly earnings guidance. The majority of the sell-side analysts responding agreed. Currently our plan is to continue to offer quarterly earnings guidance. We continue to look at this, and we are, of course, open to additional input. Please don't hesitate to contact me with your thoughts on this.

Now with that, I'll turn it over to Paul.

Paul J. Curlander

Thank you, John.

Well, today we're announcing second quarter financial results that continue to reflect the strategy we began implementing in the latter part of 2007. Revenue for the quarter was $1.140 billion, down 6% year-to-year and about in line with our April 22nd guidance.

Earnings per share in the second quarter were $0.89 and were significantly better than our guidance. Excluding restructuring and related charges, earnings per share in the second quarter would have been $0.96, up 48% yeartoyear. This earnings per share overachievement was primarily driven by lower than expected sales of inkjet units.

Second quarter 2008 net cash from operating activities was $135 million, up from $124 million in the second quarter of 2007.

During the quarter we retired $150 million in short-term debt and then issued $650 million in long-term debt for a net increase of $500 million, effectively increasing our cash balance in the United States.

Also during the quarter we repurchased about 4.5 million shares of Lexmark stock with a total expenditure of $158 million.

For the quarter, our restructuring program that we announced in October 2007 continued to be on track. In addition, today we are announcing a plan to further consolidate our inkjet supplies manufacturing capacity. This plan includes the closing of our inkjet supplies facility in Chihuahua, Mexico by year end 2008. Now this is expected to impact about 650 positions, with most of these positions being moved to a lower-cost country. We estimate that this action will result in a total pre-tax cost of approximately $24 million, of which $8 million is cash, and an annualized savings of $9 million beginning in 2009.

Hardware revenue for the second quarter was down 19% year-to-year, primarily driven by unit declines, particularly in inkjet units.

Supplies revenue was about flat year-to-year in the second quarter but came in about as expected, with strong growth in laser supplies being offset by a decline in inkjet supplies. For the first half of 2008 Supplies revenue was down 1% year-to-year. As we look ahead, we expect continued good growth in laser supplies and see the potential for continued erosion in inkjet and user demand. In the third quarter of 2008, our current expectation for Supplies revenue is a low single-digit decline year-to-year, about in line with the first half of 2008 results.

During the second quarter we continued to shift our consumer strategy to focus on devices, customers and countries that drive a higher paid usage. As a result, our Consumer segment revenue was $376 million, down 21% year-to-year, and Consumer segment operating income excluding restructuring was $27 million, up 98% year-to-year. For the second quarter, inkjet unit sales were down 49% year-to-year and were less than expected. The shortfall versus expectation came primarily in the U.S. and Europe as we continue to implement our change in consumer strategy.

Unit sales are being further impacted by market weakness and aggressive competitive price promotion activities while we have consciously been less aggressive on price and promotions than we were in the first half of 2007. In the U.S. our unit sales are also being impacted by our reduced shelf space versus last year.

For the quarter, inkjet average unit revenues were up 24% year-to-year, reflecting the strategy to prioritize high-end units which driver stronger usage while reducing entry level units. This increase in average unit revenue reflects strong year-to-year growth in our wireless inkjet sales, however the inkjet market continues to be very price aggressive, which is putting downward pressure on our average unit revenues.

Now as we look back at the second quarter, while we are not satisfied with the level of inkjet unit sales, this is just one part of a broad set of initiatives we're executing to shift the consumer strategy and turn this business around. We're shifting our marketing focus and targeted customer segments and are working to fully understand the needs and application requirements of the heavier-usage segments of student and professional users. We're shifting our investment in R&D to better design products and technology that will be attractive to these segments, and you're starting to see us deliver these targeted new products.

Interestingly, we're already getting industry recognition and winning awards as we improve the look and the capability of our inkjets, and we expect this to get even stronger as we continue to advance our technology. We're reengineering our supply chain to reduce costs, eliminate touches between the factory and the customers. We're working on our supplies to lower our costs and consolidate our manufacturing capacity, but we're also working to improve our supplies technology, increase the customer value and to improve our win rate in the aftermarket. In addition, the Consumer segment leadership team today is very different from the first half of 2007, with changes in eight of the top 10 leadership positions.

Now as part of this ongoing transition, we announced yesterday the introduction of three new members of our Home and Student Series and three new members of our Professional Series of inkjet products, with prices ranging from $99 to $199, the focus of these new announcements is to appeal to higher-usage customers. For example, all the new products feature our new industrial design and automatic document feeds, three of the new models feature twosided printing capability, and five of the new models include wireless connectivity. All the new Professional Series products feature high-yield ink cartridges and a five-year warranty with lifetime priority phone support. We expect these products to be coming onto retail shelves in September.

Already this year, three members of our Inkjet Professional Series have received editor's choice awards from Better Buys for Business, and in the second quarter the high-end of the Professional Series, the X9575, was recognized with awards from BERTL, a leading independent test laboratory, and from Computer Build Magazine.

Now in the Business market segment in the second quarter revenue was $763 million, up 4% year-to-year. Operating income excluding restructuring was $157 million, up 5% year-to-year, driven by strong growth and record revenue in laser supplies, however Hardware revenue was down as laser units in the quarter declined 12% year-to-year.

As was the case in the first quarter, this laser unit decline was due to declines in our low-end laser units as we hold the line on price and are not chasing entry level devices with low page usage and was due to workgroup unit decline in our North American Enterprise sales, particularly in the Government, Retail and Financial Services segments due to the current weak market conditions. However outside North America we had growth in branded workgroup laser units and every region other than North America grew their laser Hardware revenue year-to-year in the quarter.

Now despite this market weakness in the North American enterprise segments, we believe our laser product line and value propositions continue to be very strong. In fact, during the second quarter our Laser MFPs grew at a double-digit rate driven by strong growth in color laser multi-function devices and our managed print services revenue grew at a strong double-digit rate, including growth in North America as we continued to win enterprise services deals such as the win at Washington Mutual that we highlighted in our earnings release.

Let's talk about the third quarter of 2008. As we look forward, we will be continuing our inkjet strategy transition, significantly impacting our year-to-year inkjet units. We also expect some continued softness in overall market demand in both the Business and Consumer segments and continued aggressive pricing. As a result, we expect third quarter 2008 revenue to decline in the mid to high single-digit range year-to-year, and we expect earnings per share to be in the range of $0.53 to $0.63 excluding restructuring and related charges.

While our near term results are not where we would like them to be, we continue to focus on the long-term growth and success of the company and the creation of shareholder value. We are continuing our investments in our Business market segment in new products and technology. This is producing a steady stream of new product introductions as well as a steady stream of product awards and industry recognition for our laser products.

We are continuing our investment in the expansion of our managed print services and industry sales initiatives and are seeing success with some of the world's largest enterprises, such as Washington Mutual. We also made a significant investment in our enterprise sales force in 2007 to improve our coverage and expand the reach of our solutions and services propositions. The focus of all these Business market investments is to drive workgroup laser growth and page generation.

On the Consumer side, we're driving a significant change in our market strategy. Although we're seeing significant near-term impacts in our units, we believe that with these changes we will be much better positioned for the future. This strategy shift increases our focus on higher price points and higher usage devices and the investments to better meet the needs of these customers and product segments. This strategy is driving strong growth year-to-year in our wireless inkjet units, an improvement in our average unit revenue despite an aggressive pricing environment, the introduction of new products such as our Professional Series and our Home and Student Series, and an increasing amount of industry recognition and awards for our inkjet products. We are also continuing to implement a restructuring of our business to lower our costs and better allow us to fund these strategic initiatives.

Now in closing, we continue to have a strong financial position with net cash at the end of the second quarter of 2008 - and by this I mean our cash balance minus debt - of about $680 million, and we continue to produce a good cash flow from operations.

I'll now turn it over to John Gamble for his more detailed comments on our financials.

John W. Gamble Jr.

Thank you, Paul, and good morning. Consistent with previous calls, I'll first discuss our results of the second quarter of 2008 relative to the prior year, then relative to the first quarter of 2008. Next, I'll discuss selected changes on the balance sheet and certain items of cash flow. Finally, I'll finish with more detail regarding our guidance for the third quarter. I will call out the impact of restructuring related expense as we walk through the P&L. In the supplemental slide deck posted on our Investor Relations website we have included details on the income statement line items impacted by the restructuring related activities. Now let me begin with the P&L.

Total revenue for the quarter was $1.14 billion, down 6% compared to last year, down 3% sequentially from 1Q and in line with but at the lower end of the guidance range we provided in April.

Geographically for the second quarter, U.S. revenue of $432 million declined about 15% year-to-year. Revenue of $455 million in Europe grew about 2% year-to-year. The remaining geographies declined about 1% versus a year ago. The revenue decline in the U.S. was driven primarily by a decline in Consumer segment revenue as well as a decline in Business segment revenue reflecting weak U.S. demand.

Laser and inkjet Supplies revenue in the second quarter was flat year-to-year, with record results in laser supplies revenue being mostly offset by an ongoing decline in inkjet supplies. Supplies revenue in Q2 '08 was in line with our guidance.

Laser and inkjet Printer revenue in the second quarter declined 19% year-to-year. This Hardware revenue decline was primarily driven by lower inkjet Hardware revenue due to a 49% decline in inkjet units. Laser Hardware revenue also declined, reflecting the continued weakness in the North American market. Laser revenue in the quarter grew in all regions outside North America.

Laser Hardware unit shipments declined 12% in the second quarter versus the prior year. Despite the decline in overall unit sales, we saw strong growth in MFP unit shipments driven by our broader presence in the color MFP market.

Laser average unit revenue was up 4% year-to-year in the second quarter as the negative impact of pricing was offset by currency and favorable product mix.

Inkjet hardware unit shipments declined 49% year-to-year in the second quarter. A decline due to our previously announced strategy to aggressively shift focus to geographic regions, market segments and customers with higher page generation was expected. Inkjet unit sales in 2Q '08 were weaker than expected as the unit sales are being impacted by aggressive competitive pricing and promotion activity as well as overall weakness in the U.S. and European markets. U.S. inkjet sales also continued to be impacted by weaker U.S. shelf space versus last year.

Inkjet AURs increased 24% versus the prior year despite price declines primarily due to significantly improved mix reflecting a shift towards higher-end segments as well as currency benefits. The mix shift is consistent with our strategy. Please note the 24% increase in AUR is versus a 2Q '07 AUR which was the quarterly low point for 2007. And, as I mentioned earlier, the inkjet market is very aggressive in terms of both price and promotion, and this is putting downward pressure on our AURs.

Business segment revenue for the quarter of $763 million grew approximately 4% from the same quarter in 2007 and grew 3% sequentially from 1Q '08. The year-to-year growth in the second quarter was driven by Supplies revenue, partially offset by a decline in Hardware revenue. Hardware revenue decline was due to weakness in the North American market. All regions outside North America saw business segment revenue growth in the quarter. This sequential growth in Business segment revenue in 2Q '08 was driven by growth in both Hardware and Supplies revenue.

Consumer segment revenue for the quarter was $376 million, down 21% compared to a year ago and down 13% sequentially. The second quarter year-to-year decline was driven by both inkjet Hardware and Supplies revenue. The sequential decline was driven by both inkjet Supplies and Hardware revenue.

Gross profit margin for 2Q was 36.6%. Excluding restructuring related charges of approximately $4 million, gross profit margin would have been 37%, up 600 basis points versus the prior year and down 50 basis points sequentially. The 600 basis point second quarter increase versus last year was principally due to a 610 basis point increase in product mix, the largest factor of which were the impact from the decline in inkjet hardware shipments and the increased laser supplies. Sequentially, the 50 basis point decline is driven by a 70 basis point decrease in product margins, reflecting weaker Hardware margins partially offset primarily by a positive impact of APCLCM in the quarter.

Operating expense for the quarter was $316 million. Restructuring related expense of approximately $4 million impacted operating expense this quarter. Excluding this impact, operating expense was $312 million, an increase of $8 million year-to-year.

SG&A in the quarter was $209 million, an increase of $7 million, as increased marketing and sales spending was partially offset by lower G&A. The increase in marketing and sales expense in the quarter was demand generation investment, including media.

R&D in the quarter was $103 million, an increase of $1 million from 2007.

The impact of currency on operating expense versus 2007 was an increase of over $10 million.

Sequentially versus 1Q, operating expense excluding restructuring related expenses increased $6 million. SG&A increased $9 million, as increases in marketing and sales expense were partially offset by lower G&A. The increase in marketing and sales expense was higher demand generation, including media.

R&D expense decreased $3 million sequentially.

The operating expense to revenue ratio excluding restructuring related expenses was 27.4% in 2Q.

Operating income in 2Q was $101 million. Excluding total restructuring and related costs and expenses of $9 million, operating income was $110 million, up $39 million from 2Q '07 and down $25 million sequentially from 1Q '08.

Excluding restructuring related activities, Business segment operating income in 2Q '08 of $157 million was up $7 million versus last year and up $13 million sequentially. The increase versus 2Q '07 is due to higher gross profit, reflecting a more favorable product mix offset partially by increased marketing and sales and product development. The sequential increase was due to higher gross profit, reflecting Supplies growth partially offset by higher demand generation.

Again, excluding restructuring related expenses, Consumer segment operating income in 2Q '08 of $27 million was up $14 million versus last year and down $53 million sequentially. The $14 million increase in 2Q '08 versus last year reflects favorable product mix reflecting less hardware partially offset by less supplies. The $53 million sequential decline is driven by less supplies as well as increased demand generation.

Other expenses, consisting primarily of costs related to centralized supply chain, IT and other expenses, primarily G&A, were $74 million in 2Q '08 excluding restructuring related activities, a decline of $18 million from 2Q '07, reflecting lower operating expenses and no negative transaction effect of foreign exchange. Sequentially, the decline of $15 million reflects lower operating expenses and no negative transaction effect of foreign exchange.

Operating income margin in 2Q was 8.9%. Excluding the restructuring related expenses, operating income margin was 9.6%, an increase of 370 basis points from the second quarter of 2007 and a decrease of 190 basis points sequentially.

Concerning financing and non-operating costs, the net interest and other generated income of $2.7 million and was down approximately $8.5 million from 2007.

2Q '07 included an $8 million restructuring related foreign exchange pre-tax gain realized upon the liquidation of the company's Scotland entity. Adjusting for this one-time event, 2Q '08 was down approximately $0.4 million from the normalized year-to-year gain of $3.1 million in financing and other non-operating costs. Sequentially, net interest and other was down approximately $3.5 million.

During the quarter total debt increased by $500 million as we closed on $650 million in financing on May 22nd and repaid a maturing $150 million bond on May 15th.

In 2Q '08 we had an effective tax rate of 19.2% versus the 26% rate we had estimated. The lower effective tax rate reflects a $5.1 million nonrecurring tax benefit. We now anticipate our ongoing tax rate to be approximately 25% before any discrete events. This is slightly lower than our previous expectation of 26%. If the U.S. R&D tax credit is extended, we expect our effective tax rate in 2008 to reduce to about 23.5% before any discrete events.

Net earnings for the quarter were $84 million. Excluding the $7 million after-tax cost from restructuring related activities, net earnings in 2Q '08 were $90 million. 2Q '07 net earnings were $64 million or $62 million excluding after-tax restructuring related charges.

GAAP earnings per share for the quarter were $0.89. Excluding restructuring related activities, EPS would have been $0.96 per share. This compares to 2Q '07 GAAP earnings per share of $0.67 or $0.65 excluding restructuring related activities.

Earnings per share for 2Q '08 of $0.96 excluding restructuring related activities of $0.07 were significantly higher than the guidance of $0.65 to $0.75 per share we provided in April. Our revenue guidance for 2Q '08 was for mid single-digit decline, and we performed at the lower end of the range due to weaker inkjet hardware units and revenue. The significantly higher EPS was primarily driven by higher operating income reflecting lower losses on this lower than expected level of inkjet hardware units and revenue. In addition, there was a onetime nonrecurring tax benefit in the quarter of $0.05 per share.

Now moving to the balance sheet and cash flow items, cash flow from operations for the quarter was $135 million, up $12 million compared to 2Q '07 and down $42 million sequentially. Excluding restructuring related cash outflows, cash flow from operations was $143 million this quarter, an increase of $9 million from 2Q '07 and a decrease sequentially of $45 million from 1Q '08.

At the end of March accounts receivable decreased $40 million, inventory decreased $6 million, accounts payable decreased $5 million, and accrued liabilities decreased $48 million, primarily driven by a decline in taxes payable.

For the quarter, capital spending was $53 million. Depreciation in the quarter was $45 million and includes $2 million of restructuring related accelerated depreciation.

Currency of the Euro was accounted for at $1.56 compared to $1.35 in 2Q '07 and $1.49 in 1Q '08.

Cash and current marketable securities at the end of 2Q was $1.328 billion, up $448 million since March.

Total debt at the end of 2Q '08 was $650 million, an increase of $500 million since March.

In 2Q we repurchased 4.5 million Lexmark shares for $158 million at an average price of $34.85. At quarter end we had $887 million of share repurchase authority outstanding.

Now let me move to restructuring. As Paul discussed, we are announcing today the closure of an additional inkjet supplies manufacturing facility, our Chihuahua, Mexico supplies assembly facility. The focus of the plan is the further consolidation of our inkjet supplies manufacturing operations to reduce our fixed manufacturing costs and take advantage of lower cost manufacturing facilities. The closure referenced is expected to occur by year end.

The actions that we are taking are expected to transfer or eliminate approximately 650 positions by the end of 2008. We project the pre-tax cost of implementing these action to be approximately $24 million, of which $16 million is noncash, primarily accelerated depreciation, and $8 million is cash, primarily equipment relocation and employee severance. In 2Q 2008, $3 million of pre-tax expense was incurred. A total of $20 million of pre-tax restructuring and related expense is estimated to be incurred in 2008, of which $8 million will be incurred in 3Q '08. Annual savings for this program are expected to be $9 million beginning in 2009.

In 2Q '08, total restructuring and related costs and expenses, including the new facility closure in Chihuahua, were $9 million, of which $3 million was for the Chihuahua closure program announced today. During the quarter, we continued to make good progress on restructuring actions. Savings in 2Q '08 were about $9 million. Annualized full year savings for the 2007 and 2008 restructuring announcements are expected to be about $70 million in 2009.

Regarding the restructuring we announced in October 2007, we continue to expect the overall program parameters, costs and benefits to be the same as previously discussed. For brevity, let me refer you to the supplemental slide deck for the details of that plan.

As pointed out last quarter, movements in foreign exchange may result in changes in the cost and benefits of both the 2007 and 2008 restructuring actions.

From this point forward, restructuring comments and guidance will combine the existing 2007 and newly announced 2008 actions. In 3Q '08, restructuring and related costs and expenses due to restructuring actions are expected to be approximately $32 million. Savings in 3Q '08 are expected to be about $16 million.

Now for my forward-looking comments concerning 3Q '08. We expect third quarter revenue to be down in the mid to high single digit range year-over-year reflecting our continued implementation of our inkjet strategy, significantly reducing our inkjet hardware units and revenue versus 3Q '07.

Total Supplies revenue is expected to be down low single digit versus 3Q '07 as expected continued good growth in laser supplies is offset by a reduction in inkjet supplies revenue.

GAAP EPS is expected to be $0.25 to $0.35 in 3Q '08. GAAP EPS includes expected restructuring charges of $0.28 per share. Non-GAAP EPS, which excludes restructuring and related costs and expenses, is expect to be $0.53 to $0.63. GAAP EPS in the third quarter of 2007 were $0.48, which includes restructuring charges of $0.12. Non-GAAP EPS in 3Q '07 were $0.60. Please note, as we discussed in some detail at the time, 3Q '07 net income and EPS were positively impacted by the net tax benefit of $18 million recorded in 3Q '07 which included nonrecurring benefits and a reduction in the full year effective tax rate.

Our guidance for 3Q '08 EPS shows a significant sequential reduction from 2Q '08 driven by increased sales of inkjet hardware and a sequential seasonal reduction in laser supplies. Year-over-year, we continue to expect good growth in laser supplies.

In terms of our specific discussion of financial information, both the 2Q and 3Q data provided that I am comparing to are non-GAAP and exclude the impact of restructuring related charges.

In the third quarter we expect gross margin percentage to be down versus the 37% we achieved in 2Q '08. Operating expense is expected to be down compared to the $312 million incurred in 2Q '08.

As we look at operating expense for all of 2008, we expect 2008 operating expense to be somewhat higher than 2007. Overall, increases in Business segment R&D and marketing and sales and the impact of currency will more than offset reductions in operating expense in the Consumer segment and reductions in G&A and from restructuring. Currency impacts for the first half of 2008 alone have acted to increase operating expense by almost $20 million. Restructuring savings in 2008 in operating expense are expected to exceed $20 million or one-half of the total $40plus million of 2008 savings. In 2009, restructuring savings will increase to over $30plus million in operating expense.

Total R&D is expected to be up in 2008 as we increase R&D in the Business segment focused on color and MFP technology and products and solutions and services to allow us to continue to strengthen our ability to grow high page generating workgroup placements.

Total SG&A in 2008 is expected to be flat to up slightly with 2007. Marketing and sales will be up in 2008, again driven by the Business segment, where Lexmark invested in incremental direct sales resources and other demand generation again focused on expanding our workgroup coverage and placements. Consumer segment M&S will be down as we rationalize the Consumer business, focusing on high page generating customers and regions. Total G&A and other support costs will be down year-on-year as we continue to focus on reducing costs in support areas.

Operating income in the third quarter is expected to be below the 9.6% achieved in the second quarter of 2008.

For 3Q 2008 and the full year, we expect our ongoing effective tax rate to be about 25% before any discrete items. If the U.S. R&D tax credit is extended we expect our effective tax rate in 2008 to reduce to about 23.5% before any discrete events.

We project full year 2008 capital spending to be approximately $225 million, and we expect full year depreciation of approximately $200 million, which includes the accelerated depreciation from the 2008 restructuring program announced today. This includes approximately $30 million of total accelerated depreciation related to all restructuring activities.

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