SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 2001 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from: to 1-4471 (Commission File Number) - ------------------------------- XEROX CORPORATION (Exact name of registrant as specified in its charter) New York 16-0468020 (State of incorporation) (I.R.S. Employer Identification No.) P.O. Box 1600, Stamford, Connecticut (Address of principal executive offices) 06904 (Zip Code) Registrant's telephone number, including area code: (203) 968-3000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of each Class Which Registered ------------------- ---------------- Common Stock, $1 par value New York Stock Exchange Chicago Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes:(X) No: ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )

The aggregate market value of the voting stock of the registrant held by non-affiliates as of May 31, 2002 was: $6,525,261,445 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Class Outstanding at May 31, 2002 ----- --------------------------- Common Stock, $1 par value................ 727,048,629 Shares Documents Incorporated By Reference Portions of the following documents are incorporated herein by reference: Document Part of 10-K in Which - -------- --------------------- Incorporated - ------------ Xerox Corporation 2001 Annual Report to Shareholders I & II PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8 K (a) (1) Index to Financial Statements and financial statement schedules, filed as part of this report: Financial Statements Report of Independent Accountants Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2001. Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001. Consolidated Statements of Common Shareholders' Equity for each of the years in the three-year period ended December 31, 2001. Notes to Consolidated Financial Statements. Financial Statement Schedules I -- Financial Statements of Fuji Xerox Co., Ltd, (financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b)) Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Income for each of the years in the two-year period ended December 31, 2000 and 1999 Consolidated Statements of Comprehensive Income for each of the years in the two-year period ended December 31, 2000 and 1999 Consolidated Statements of Stockholders' Equity for each of the years in the two-year period ended December 31, 2000 and 1999 Consolidated Statements of Cash Flows for each of the years in the two-year period ended December 31, 2000 and 1999 Notes to Consolidated Financial Statements

II--Valuation and qualifying accounts. All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto. (2) Supplementary Data: Quarterly Results of Operations. Five Years in Review Commercial and Industrial (Article 5) Schedule (3) The exhibits filed herewith or incorporated herein by reference are set forth in the Index of Exhibits included herein. (b) Current Reports on Form 8-K dated October 2, 2001, October 3, 2001, October 12, 2001, November 16, 2001, November 19, 2001, November 20, 2001, November 27, 2001, December 20, 2001 and December 27, 2001 reporting Item 5 "Other Events" and a Current Report on Form 8-K dated September 28, 2001 (filed October 5, 2001) reporting Item 4 "Changes in Registrant's Certifying Accountant" and Item 5 "Other Events" were filed during the last quarter of the period covered by this Report. (c) The management contracts or compensatory plans or arrangements listed in the Index of Exhibits that are applicable to the executive officers named in the Summary Compensation Table which appears in Registrant's 2002 Proxy Statement are preceded by an asterisk (*).

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. XEROX CORPORATION By: /S/ Gary R. Kabureck -------------------- Assistant Controller and Chief Accounting Officer July 1, 2002 SCHEDULE I Financial Statements of Fuji Xerox Co., Ltd. (Financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b))

FUJI XEROX CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2000 and 1999 (With Independent Auditors' Report Thereon)

[LETTERHEAD OF KPMG] Independent Auditors' Report ---------------------------- The Board of Directors Fuji Xerox Co., Ltd.: We have audited the accompanying consolidated balance sheets of Fuji Xerox Co., Ltd. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fuji Xerox Co., Ltd. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with United States generally accepted accounting principles. /s/ KPMG February 27, 200l

FUJI XEROX CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2000 and 1999 (Yen in millions, except share data) 2000 1999 ---- ---- Assets - ------ Current assets: Cash and cash equivalents (Yen) 38,566 72,586 Marketable securities (note 3) 73 82 Receivables (notes 4 and 17) 196,176 177,661 Finance receivables (note 5) 23,791 16,117 Inventories (notes 6 and 17) 83,275 75,102 Prepaid expenses and other current assets (notes 7 and 12) 19,843 17,984 ------- ------- Total current assets 361,724 359,532 ------- ------- Finance receivables (note 5) 49,722 32,602 Investments (notes 3 and 8) 49,818 57,640 Net property, plant and equipment (note 9) 190,550 184,335 Deferred income tax charges (note 12) 23,652 22,075 Goodwill, less accumulated amortization (note 21) 85,204 27,018 Other assets, at cost, less applicable amortization (note 14) 41,730 35,909 ------- ------- (Yen) 802,400 719,111 ======= ======= Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Short-term debt (note 10) (Yen) 162,512 111,287 Payables (notes 11 and 17) 138,140 132,277 Income taxes (note 12) 8,728 6,526 Accrued expenses and other current liabilities (note 13) 50,981 51,227 ------- ------- Total current liabilities 360,361 301,317 ------- ------- Long-term debt, excluding current installments (note 10) 50,911 30,304 Retirement and severance benefits (note 14) 74,264 77,699 ------- ------- Total liabilities 485,536 409,320 ------- ------- Minority interests 23,252 19,412 Stockholders' equity: Common stock, (Yen)500 par value. Authorized 80,000,000 shares; issued 40,000,000 shares 20,000 20,000 Legal reserve (note 15) 5,773 5,610 Retained earnings (note 15) 285,148 278,188 Accumulated other comprehensive loss (note 16) (17,309) (13,419) ------- ------- Total stockholders' equity 293,612 290,379 Commitments and contingencies (note 20) ------- ------- (Yen) 802,400 719,111 ======= ======= See accompanying notes to consolidated financial statements.

FUJI XEROX CO., LTD. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2000 and 1999 (Yen in millions) 2000 1999 ---- ---- Operating revenues (note 17): Sales (Yen) 316,156 308,095 Service and rentals 339,947 338,483 Other 249,530 230,144 ------- ------- Total operating revenues 905,633 876,722 ------- ------- Costs and expenses (note 17): Cost of sales 229,476 233,760 Cost of service and rentals 124,852 118,025 Other 160,366 153,267 ------- ------- 514,694 505,052 Research and development expenses 66,322 66,470 Selling, general and administrative expenses 291,849 267,953 ------- ------- Total costs and expenses 872,865 839,475 ------- ------- Operating income 32,768 37,247 Other income (deductions): Interest income 6,590 6,579 Interest expenses (5,041) (5,223) Exchange gains (losses) (1,330) 189 Other, net 1,769 (182) ------- ------- 1,988 1,363 ------- ------- Income before income taxes and minority interests 34,756 38,610 Income taxes (note 12): Current 12,656 15,180 Deferred 3,074 7,623 ------- ------- 15,730 22,803 ------- ------- Income before minority interests 19,026 15,807 Minority interests 3,903 3,377 ------- ------- Net income (Yen) 15,123 12,430 ======= ======= See accompanying notes to consolidated financial statements.

FUJI XEROX CO., LTD. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2000 and 1999 (Yen in millions) 2000 1999 ---- ---- Net income (Yen) 15,123 12,430 Other comprehensive income (loss), net of tax (note 16): Change in net unrealized gains (losses) on securities (3,075) 4,112 Foreign currency translation adjustments 5,354 (7,857) Minimum pension liability adjustment (6,169) 5,066 ------ ----- Other comprehensive income (loss) (3,890) 1,321 ------ ----- Comprehensive income (Yen) 11,233 13,751 ====== ====== See accompanying notes to consolidated financial statements.

FUJI XEROX CO., LTD. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 2000 and 1999 (Yen in millions) Accumulated other Total Legal Retained comprehensive stockholders' Common stock reserve earnings income (loss) equity ------------ ------- -------- ------------- ------ Balance at December 31, 1998 20,000 5,475 275,393 (14,740) 286,128 ------- Comprehensive income: Net income -- -- 12,430 -- 12,430 Other comprehensive income -- -- -- 1,321 1,321 ------- Comprehensive income 13,751 ------- Cash dividends (note 15) -- 135 (9,635) -- (9,500) ------ ----- ------- ------- ------- Balance at December 31, 1999 20,000 5,610 278,188 (13,419) 290,379 ------- Comprehensive income (loss): Net income -- -- 15,123 -- 15,123 Other comprehensive loss -- -- -- (3,890) (3,890) ------- Comprehensive income 11,233 ------- Cash dividends (note 15) -- 163 (8,163) -- (8,000) ------ ----- ------- ------- ------- Balance at December 31, 2000 (Yen) 20,000 5,773 285,148 (17,309) 293,612 ====== ===== ======= ======= ======= See accompanying notes to consolidated financial statements.

FUJI XEROX CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2000 and 1999 (Yen in millions) 2000 1999 ---- ---- Cash flows from operating activities: Net income (Yen) 15,123 12,430 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 63,386 62,039 Loss on disposal of inventories 2,534 2,441 Deferred income taxes 3,074 7,623 Loss on disposal of property, plant and equipment 8,388 6,980 Equity in earnings of affiliates (1,091) (2,209) Minority interests in earnings of subsidiaries 3,903 3,377 Increase in receivables (11,639) (22,409) Increase in finance receivables (1,774) (7,204) Increase in inventories (5,913) (4,610) Increase (decrease) in payables 2,869 (1,497) Decrease in retirement and severance benefits (20,771) (5,594) Increase (decrease) in income taxes 2,022 (14,353) Increase (decrease) in accrued expenses (5,662) 1,433 Other, net (11,073) (11,485) -------- ------- Net cash provided by operating activities 43,376 26,962 -------- ------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 2,143 2,083 Capital expenditures (65,270) (58,132) Decrease in marketable securities and investments 3,241 18,667 Payment for acquisition of Xerox (Hong Kong) Limited and Xerox China Investments (Bermuda) Limited, net of cash acquired (59,232) - Payment for acquisition of printer business (6,957) - Other, net 3,954 2,098 -------- ------- Net cash used in investing activities (122,121) (35,284) -------- ------- Cash flows from financing activities: Proceeds from long-term debt 54,461 59,587 Repayment of long-term debt (33,990) (40,164) Increase in short-term debt, net 31,981 27,436 Dividends paid (8,000) (9,500) -------- ------- Net cash provided by financing activities 44,452 37,359 -------- ------- Effect of exchange rate changes on cash and cash equivalents 273 (499) -------- ------- Net increase (decrease) in cash and cash equivalents (34,020) 28,538 Cash and cash equivalents at beginning of period 72,586 44,048 -------- ------- Cash and cash equivalents at end of period (Yen) 38,566 72,586 ======== ======= See accompanying notes to consolidated financial statements.

FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 200O and 1999 (All amounts in millions) (1) Summary of Significant Accounting Policies ------------------------------------------ (a) Description of Business ----------------------- Fuji Xerox Co., Ltd. (Fuji Xerox Group or the Company) is a joint venture owned by Fuji Photo Film Co., Ltd. and Xerox Limited of the United Kingdom. The Fuji Xerox Group's territory, as established by Xerox Corporation extends to the Asia Pacific and Oceania regions and the Company has four factories in Japan, one in Shenzhen, China, and one in Korea. The Company's principal business as a member of the worldwide Xerox Group is the manufacturing and selling of office automation equipment such as copiers and low-end laser printers, collectively referred to as the Document Services Business. Other businesses include logistics and educational services. The consolidated revenues of (Yen)905,633 for the year ended December 31, 2000 include the Document Service Business (96%) and other businesses (4%). Domestic revenues and overseas revenues from Southeast Asia, Oceania and other regions represented 90% and 10% of total revenues, respectively. (b) Consolidation Policy -------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. Investments in affiliates in which the Company's ownership is 20% to 50% are accounted for by the equity method. (c) Cash and Cash Equivalents ------------------------- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. (d) Marketable Securities and Investment Securities ----------------------------------------------- The Company has classified its marketable and investment securities as available-for-sale which are reported at fair value with unrealized gains and losses, net of related taxes, excluded from the statement of income and included in other comprehensive income (loss) to be reported as a separate component of stockholders' equity. The Company did not hold any trading securities or held-to-maturity securities at December 31, 2000 and 1999. Realized gains and losses on the sale of available-for-sale securities are determined by the moving-average method. (e) Inventories ----------- Inventories are stated at the lower of cost or market value, cost generally being determined by the average method. (Continued)

2 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) (f) Revenue Recognition ------------------- Revenues from sales-type leases of xerographic machines to customers are recognized at the inception of the lease. Associated interest income is recognized using the actuarial method with the allocation based on the net investment in outstanding leases. Revenue from xerographic machines under other leases is accounted for as operating leases; the rentals under such leases are included in revenue as earned over the terms of the respective leases. (g) Depreciation ------------ Depreciation of property, plant and equipment other than the rental machines acquired after January 1, 1999 is computed principally by the declining balance method based on estimated useful lives. The rental machines acquired after January 1, 1999 are depreciated using the straight-line method over the estimated useful lives. (h) Goodwill -------- Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is being amortized on a straight-line basis over periods of between 20 to 40 years. The Company reviews the carrying value for impairment whenever events in circumstances indicate that the carrying amount may not be recoverable. (i) Income Taxes ------------ Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the period in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) Foreign Currency Translation ---------------------------- Foreign currency financial statements have been translated into Japanese yen at the rates of exchange in effect at the balance sheet date for assets and liabilities and the average exchange rates prevailing during the period for revenue and expense items. Gains and losses resulting from foreign currency transactions are included in other income (deductions), and those resulting from translation of financial statements are excluded from the statements of income and are included in other comprehensive income (loss) to be accumulated in the balance sheet. (Continued)

3 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) (k) Derivative Financial Instruments -------------------------------- The Company and certain of its subsidiaries have entered into foreign exchange contracts and interest rate agreements for hedging currency and interest rate exposures. These instruments include foreign currency forward contracts, currency swap agreements and interest rate swap agreements. Gains and losses on foreign exchange instruments are recognized in the same period in which gains and losses from the transaction being hedged are recognized. The difference in amounts to be paid or received on interest rate swap agreements is recognized over the life of the agreement as an adjustment to interest expense. In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. In June 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133", was also issued. Both standards establish accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. Both standards require an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. SFAS No. 133, as amended, and No. 138 are effective for fiscal years beginning after June l5, 2000. The Company will adopt SFAS No. 133 and No. 138 as of January 1, 200l. The cumulative effect of adjustments upon the adoption of SFAS No. 133 and No. 138, net of the related income tax effect, resulted in an increase in net income of approximately (Yen)197 and an increase in other comprehensive income of approximately (Yen)376. Management does not believe that adoption of SFAS No. 133 and No. 138 will significantly alter the Company's hedging strategies. (1) Use of Estimates ---------------- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) Basis of Financial Statement Presentation ----------------------------------------- The Company and its domestic subsidiaries maintain their books of account in conformity with financial accounting standards of Japan, and its foreign subsidiaries in conformity with those of the countries of their domicile. However, the consolidated financial statements presented herein have been prepared in a manner and reflect the adjustments which are necessary in order for them to conform with United States generally accepted accounting principles. (Continued)

4 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) (3) Marketable Securities and Investment Securities ----------------------------------------------- Marketable securities and investment securities consist of available-for-sale securities. The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for such securities by major security type at December 31, 2000 and 1999 are summarized as follows: Gross Gross unrealized unrealized Amortized holding holding Fair cost gains losses value ---- ----- ------ ----- 2000 ---- Current: Bank debt securities 73 -- -- 73 ------- ------- ------ ------ (Yen) 73 -- -- 73 ======= ======= ====== ====== Non-current: Japanese and foreign government bond securities (Yen) 100 14 -- 114 Corporate debt securities 191 1 1 191 Bank debt securities 5 -- -- 5 Equity securities 2,432 697 445 2,684 ------- ------- ------ ------ (Yen) 2,278 712 446 2,994 ======= ======= ====== ====== Gross Gross unrealized unrealized Amortized holding holding Fair Cost gains losses Value ---- ----- ------ ----- 1999 ---- Current: Japanese and foreign government bond securities (Yen) 28 -- -- 28 Bank debt securities 53 -- -- 53 Equity securities 1 -- -- 1 ------- ------- ------ ------ (Yen) 82 -- -- 82 ======= ======= ====== ====== Non-current: Japanese and foreign government bond securities (Yen) 101 16 -- 117 Corporate debt securities 186 4 1 189 Bank debt securities 5 -- -- 5 Equity securities 4,517 8,026 2,477 10,066 ------- ------- ------ ------ (Yen) 4,809 8,046 2,478 10,377 ======= ======= ====== ====== (Continued)

5 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) Maturities of marketable securities and investment securities classified as available-for-sale at December 31, 2000 are summarized as follows: Amortized Fair Cost Value ---- ----- Due within one year (Yen) 73 13 Due after one year through five years 295 309 Due after five years 1 1 Equity securities 2,432 2,684 ------- ------- (Yen) 2,801 3,067 ======= ======= Proceeds from the sale of available-for-sale securities for the years ended December 31, 2000 and 1999 were (Yen)3,954 and (Yen)2,098, respectively. On those sales, gross realized gains from the sale of available-for-sale securities for the years ended December 31, 2000 and 1999 were (Yen)2,475 and (Yen)1,297, respectively. (4) Receivables ----------- Receivables at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Trade: Notes (Yen) 15,251 16,583 Accounts 168,905 147,296 Other 13,776 15,170 ------- ------- 197,932 179,049 Less allowance for doubtful receivables (1,756) (1,388) ------- ------- (Yen) 196,176 177,661 ======= ======= (5) Finance Receivables ------------------- Finance receivables represent sales-type leases resulting from the marketing of the Company's business machines. The components of finance receivables at December 31, 2000 and 1999 are as follows: 2000 1999 ---- ---- Gross receivables (Yen) 89,884 60,133 Unearned income (14,306) (10,139) Less allowance for doubtful receivables (2,065) (1,275) ------- ------- 73,513 48,719 Less current portion (23,791) (16,117) ------- ------- (Yen) 49,722 32,602 ======= ======= (Continued)

6 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) (6) Inventories ----------- Inventories at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Merchandise (Yen) 51,602 48,892 Parts 5,826 5,766 Raw materials 10,049 7,585 Work in process 11,021 8,410 Supplies 4,777 4,449 ------ ------ (Yen) 83,275 75,102 ====== ====== (7) Prepaid Expenses and Other Current Assets ----------------------------------------- Prepaid expenses and other current assets at December 31, 2000 and 1999 comprise the following: 2000 1999 ---- ---- Advance payments (Yen) 873 939 Deferred income tax charges-current 11,172 11,089 Other 7,798 5,956 ------ ------ (Yen) 19,843 17,984 ====== ====== (8) Investments ----------- Investments at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Investments in affiliates (Yen) 13,567 12,087 Investment securities 5,244 12,550 Lease and other deposits 31,007 33,003 ------ ------ (Yen) 49,818 57,640 ====== ====== (Continued)

7 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) (9) Property, Plant and Equipment ----------------------------- Property, plant and equipment at December 31, 2000 and 1999 are summarized as follows: Accumulated Net book Cost depreciation Value ---- ------------ ----- 2000 ---- Rental machines (Yen) 85,945 49,308 36,637 Land 20,369 - 20,369 Buildings and structures 144,296 78,806 65,490 Machinery and equipment 52,294 35,689 16,605 Vehicles 4,596 3,128 1,468 Tools, furniture and fixtures 167,103 120,823 46,280 Construction in progress 3,701 - 3,701 --------- --------- -------- (Yen) 478,304 287,754 190,550 ========= ========= ======== Accumulated Net book Cost depreciation Value ---- ------------ ----- 1999 ---- Rental machines (Yen) 74,083 43,915 30,168 Land 20,114 - 20,114 Buildings and structures 143,331 75,298 68,033 Machinery and equipment 53,406 37,223 16,183 Vehicles 4,287 2,870 1,417 Tools, furniture and fixtures 157,076 114,297 42,779 Construction in progress 5,641 - 5,641 --------- --------- -------- (Yen) 457,938 273,603 184,335 ========= ========= ======== (10) Short-term Debt and Long-term Debt ---------------------------------- Short-term debt at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Short-term debt, mainly to banks (Yen) 99,231 27,297 Commercial paper 25,000 50,000 Current installments of long-term debt 38,281 33,990 --------- -------- (Yen) 162,512 111,287 ========= ======== The weighted average interest rate on short-term debt, mainly to banks, at December 31, 2000 was 2.6%. (Continued)

8 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) Long-term debt at December 31, 2000 and 1999 consists of the following: 2000 1999 ---- ---- Unsecured yen medium term notes maturing from 2002 through 2006 bearing interest from 0.8% to 2.0% (Yen) 13,000 13,000 Unsecured yen medium term notes maturing from 2001 through 2003 bearing interest from 5.5% to 7.1% 10,863 7,901 Unsecured yen bonds maturing from 2007 through 2010 bearing interest from 1.6% to 2.0% 15,000 - Unsecured loans from banks and insurance companies, interest ranging from 0.7% to 12.8% per annum 50,329 43,393 ------- ------- 89,192 64,294 Less current installments (38,281)(33,990) ------- ------- Long-term debt, excluding current installments (Yen) 50,911 30,304 ======= ======= The aggregate annual maturities of long-term debt outstanding at December 31, 2000 are as follows: 2001 (Yen) 38,281 2002 11,879 2003 6,574 2004 6,814 2005 1,462 2006 and thereafter 24,182 ------- (Yen) 89,192 ======= As is customary in Japan, both short-term and long-term bank loans are made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations due to the bank. (11) Payables -------- Payables at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Notes (Yen) 25,130 26,383 Accounts 113,010 105,894 ------- ------- (Yen)138,140 132,277 ======= ======= (Continued)

9 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) (12) Income Taxes ------------ Total income tax expenses for the years ended December 31, 2000 and 1999 are allocated as follows: 2000 1999 ---- ---- Income (Yen) 15,730 22,803 Stockholders' equity-accumulated other comprehensive loss (6,575) 7,489 ------ ------ (Yen) 9,155 30,292 ====== ====== Due to a change in Japanese income tax regulations, the normal statutory tax rate in Japan was reduced to approximately 42% effective for the business year beginning from April 1, 1999. Current income taxes were calculated at the rate of 47% in effect for the year ended December 31, 1999. Deferred tax assets and liabilities were principally calculated at the rate of 42%. Reconciliation from the Japanese tax rate to the actual income tax rate for the years ended December 31, 2000 and 1999 is as follows: Percent of ---------- pretax earnings --------------- 2000 1999 ---- ---- Japanese statutory tax rate 42.0 47.0 Expenses not deductible for tax purposes 4.1 3.5 Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates in Japan 0.8 8.7 Other (1.6) (0.1) ---- ---- Actual income tax rate 45.3 59.1 ==== ==== (Continued)

10 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below. 2000 1999 ---- ---- Deferred tax assets: Retirement and severance benefits (Yen) 13,562 20,526 Minimum pension liability adjustment 4,467 -- Property, plant and equipment due to difference in depreciation rates 2,681 2,409 Inventories due mainly to accrual for obsolescence 4,776 4,175 Compensated absences 1,985 2,375 Net operating loss carry forwards 306 619 Investments and other assets 1,839 1,639 Other 13,873 10,144 ------ ------- Total gross deferred tax assets 43,489 41,887 Less valuation allowance (646) (1,274) ------ ------- Deferred tax assets 42,843 40,613 ------ ------- Deferred tax liabilities: Net unrealized gains on marketable securities and investment securities (112) (2,339) Reserve for tax purposes (1,802) (932) Other (6,105) (4,178) ------ ------ Total gross deferred tax liabilities (8,019) (7,449) ------ ------ Net deferred tax assets (Yen) 34,824 33,164 ====== ====== Net deferred income tax assets at December 31, 2000 and 1999 are reflected in the accompanying consolidated balance sheets under the following captions: 2000 1999 ---- ---- Prepaid expenses and other current assets (Yen) 11,172 11,089 Deferred income tax charges 23,652 22,075 ------ ------ (Yen) 34,824 33,164 ====== ====== The net change in the total valuation allowance for the years ended December 31, 2000 and 1999 was a decrease of (Yen)628 and (Yen)258, respectively. At December 31, 2000, certain of the Company and it's subsidiaries have net operating loss carryforwards for income tax purposes of (Yen)1,317, which are available to offset against future taxable income, if any. Of the above, (Yen)83 will expire within 5 years. (Continued)

11 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) The Company has not recognized a deferred tax liability of approximately (Yen)4,469 for the undistributed earnings of its foreign subsidiaries that arose in December 31, 2000 and prior years because the Company currently does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. As of December 31, 2000 the undistributed earnings of these subsidiaries were approximately (Yen)24,927. Deferred income taxes have also not been provided on undistributed earnings of domestic companies as such earnings, if distributed in the form of dividends, are not taxable under present tax laws. The Company's tax returns have been examined by the tax authorities through the year ended December 31, 1999. (13) Accrued Expenses and Other Current Liabilities ---------------------------------------------- Accrued expenses and other current liabilities at December 31, 2000 and 1999 comprise the following: 2000 1999 ---- ---- Accrued expenses (Yen) 32,777 34,810 Accrued royalty 3,281 3,448 Advances from customers 4,534 3,593 Other 10,389 9,376 ------- ------- (Yen) 50,981 51,227 ======= ======= (14) Retirement and Severance Benefits --------------------------------- Upon retirement or termination of employment for reasons other than dismissal for cause, employees of the Company and its domestic subsidiaries are entitled to lump-sum payments, or lump-sum and pension annuity payments, based on their current rate of pay and length of service. The Company and domestic subsidiaries have adopted a policy of partially funding the liability through payments to a trusted pension fund. Such payments constitute the funding of the current costs of a portion of the liability under the plan and the funding of the related past service costs over an approximately 7-year period. In addition to the aforementioned retirement plans, the Company also has an employee welfare pension plan, under which contributions based on salaries and wages are made equally by the employees and the Company to a trust pension fund. (Continued)

12 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) Certain information required under Statement of Financial Accounting Standards No. 132 has been provided primarily by the trust company as follows: 2000 1999 ---- ---- Benefit obligation at balance sheet dates (Yen) 361,553 331,610 Fair value of plan assets at balance sheet dates (232,992) (218,302) ------- ------- Funded status (Yen) 128,561 113,308 ======= ======= Amounts recognized under defined benefit pension plans (Yen) 49,932 69,333 ======= ======= Net periodic benefit cost, employer contribution, plan participants' contributions and benefits paid for the years ended December 31, 2000 and 1999 are as follows: 2000 1999 ---- ---- Net periodic benefit cost (Yen) 18,687 21,604 Employer contribution 31,506 16,981 Plan participants' contributions 1,498 1,511 Benefits paid 8,640 4,963 The main assumptions used in computing the information above are as follows: 2000 1999 ---- ---- Weighted-average discount rate 3.0% 3.5% Rate of future compensation increase 2.5% 3.0% Expected long-term rate of return 4.00% 4.35% At December 31, 2000, the Company recognized an additional minimum pension liability of (Yen)17,282 and intangible assets of (Yen)6,646 in accordance with Statement Financial Accounting Standards No. 87. The net effect of such recognition resulted in a (Yen)6,169 charge to other comprehensive loss and reduction to stockholders' equity, net of applicable deferred income taxes, during the year ended December 31, 2000. Payments to directors and statutory auditors, corporate officers and part-time employees are based on separate plans. Amounts of (Yen)4,628 and (Yen)4,263 have been accrued as of December 31, 2000 and 1999, respectively, and are included in the liability for retirement and severance benefits in the accompanying consolidated balance sheets. (Continued)

13 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) The Company introduced a "New Flex Retirement Program"(NFR Program) in 1994 and another flex retirement program ("Third Flex Retirement Program"(FR3 Program)) in 1998 which give older employees the opportunity to attain early retirement. Amounts of (Yen)l,583 representing the unpaid retirement benefits for applicants to the NFR Program as of December 31, 1999, respectively, are included in the liability for retirement and severance benefits. The amount of (Yen)2,422 and (Yen)2,520 representing the unpaid retirement benefits for applicants to the FR3 Program as of December 31, 2000 and 1999, respectively, are included in the liability for retirement and severance benefits. Total charges to income for these benefits for the years ended December 31, 2000 and 1999 amounted to (Yen)18,543 and (Yen)22,113, respectively. (15) Legal Reserve and Cash Dividends -------------------------------- The Japanese Commercial Code provides that an amount equal to at least 10% of appropriations paid in cash be appropriated as a legal reserve until such reserve equals 25% of stated capital. This reserve is not available for dividends but may be used to reduce a deficit or may be transferred to stated capital. Cash dividends and appropriations to the legal reserve charged to retained earnings during the years ended December 31, 2000 and 1999 represent dividends paid out during the period and the related appropriations to the legal reserve. The accompanying consolidated financial statements do not include any provision for cash dividends in the amount of (Yen)8,000 proposed by the Company for the year ended December 31, 2000. (16) Other Comprehensive Income (Loss) --------------------------------- The accumulated other comprehensive loss on the consolidated balance sheets at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Net unrealized gains on securities (Yen) 260 3,335 Foreign currency translation adjustments (11,400) (16,754) Minimum pension liability adjustment (6,169) - -------- -------- (Yen) (17,309) (13,419) ======== ======== (Continued)

14 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) Related tax effects allocated to each component of other comprehensive income (loss) for the years ended December 31, 2000 and 1999 are as follows: Before-tax Tax (expense) Net-of-tax amount or benefit amount ------ ---------- ------ 2000 ---- Unrealized losses on securities: Unrealized losses during the year (Yen) (2,827) 1,188 (1,639) Less: Reclassification adjustment (2,475) 1,039 (1,436) ------ -------- ------ Net unrealized losses on securities (5,302) 2,227 (3,075) ------ -------- ------ Foreign currency translation adjustments 5,473 (119) 5,354 Minimum pension liability adjustment (10,636) 4,467 (6,169) ------ -------- ------ Other comprehensive loss (Yen) (10,465) 6,575 (3,890) ====== ======== ====== Before-tax Tax (expense) Net-of-tax amount or benefit amount ------ ---------- ------ 1999 ---- Unrealized gains on securities: Unrealized gains during the year (Yen) 8,450 (3,971) 4,479 Less: Reclassification adjustment (1,297) 930 (367) ------ -------- ------ Net unrealized gains on securities 7,153 (3,041) 4,112 ------ -------- ------ Foreign currency translation adjustments (7,901) 44 (7,857) Minimum pension liability adjustment 9,558 (4,492) 5,066 ------- -------- ------ Other comprehensive income (Yen) 8,810 (7,489) 1,321 ====== ======== ====== (17) Accounts and Transactions with Stockholder Companies ---------------------------------------------------- The outstanding capital stock of the Company is owned in equal amounts by Fuji Photo Film Co., Ltd. and Xerox Limited. (Continued)

15 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) Accounts and transactions with stockholder companies and their affiliates for the years ended December 31, 2000 and 1999 and inventories purchased from such companies and on hand at December 31, 2000 and 1999 are summarized as follows: Accounts Receivables Payables - -------- ----------- -------- 2000 ---- Fuji Photo Film Co., Ltd. and affiliates (Yen) 2,673 1,616 Xerox Limited and affiliates 4,924 369 Xerox Corporation and affiliates 16,919 6,545 1999 ---- Fuji Photo Film Co., Ltd. and affiliates (Yen) 1,261 1,544 Xerox Limited and affiliates 3,328 424 Xerox Corporation and affiliates 9,563 5,716 Royalties and other Inven- expenses Expenses tories Transactions Sales Purchases paid recovered on hand - ------------ ----- --------- ---- --------- ------- 2000 ----- Fuji Photo Film Co., Ltd. and affiliates (Yen) 7,479 5,463 - - 423 Xerox Limited and affiliates 12,083 5,897 159 164 1,994 Xerox Corporation and affiliates 50,820 9,626 14,527 3,399 1,471 1999 ---- Fuji Photo Film Co., Ltd. and affiliates (Yen) 5,849 5,169 - - 92 Xerox Limited and affiliates 11,907 4,683 1,760 501 3,110 Xerox Corporation and affiliates 41,847 8,762 12,575 1,013 1,680 (18) Financial Instruments --------------------- The Company and its subsidiaries have various financial instruments, including derivative financial instruments, which are exposed to credit-related losses in the event of non-performance by the counterparties. The companies utilize numerous counterparties to ensure that there are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. The companies' policies prescribe monitoring of creditworthiness and exposure on a counterparty by counterparty basis. The Company and certain subsidiaries operate internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. Certain derivative financial instruments have been entered into by the companies to manage those exposures. These instruments are held for hedging purposes and include foreign exchange contracts, currency swap agreement, interest rate swap agreements and interest rate and currency swap agreements. (Continued)

16 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) Foreign exchange contracts and currency swap agreements are agreements to exchange different currencies at a specified exchange rate on a specific future date. Interest rate swap agreements have the effect of changing floating rate debt into fixed rate or fixed rate debt into floating rate. Certain agreements are combinations of interest rate and foreign currency swap transactions. The floating rates are mainly based on the three-month or six-month LIBOR (London Interbank Offered Rate). The Contracts/Notional Principal Amounts of Derivative Financial Instruments - ---------------------------------------------------------------------------- The contracts or notional principal amounts of derivative financial instruments held for purposes other than trading at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Foreign exchange contracts: To sell foreign currencies (Yen) 14,413 12,753 To buy foreign currencies 18,312 16,018 Currency swap agreement 3,195 - Interest rate swap agreements 49,090 16,015 The Fair Values of Financial Instruments - ---------------------------------------- The estimated fair values of financial instruments at December 31, 2000 and 1999 are summarized as follows: 2000 1999 ---- ---- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- Marketable securities (Yen) 73 73 82 82 Investments 5,244 5,244 12,550 12,550 Long-term debt (89,192) (89,276) (64,294) (64,649) Foreign currency contracts - 211 - 260 Currency swap agreement - (123) - - Interest rate swap agreements - 610 - (4) Cash and cash equivalents, receivables, short-term debt, payables and accrued expenses and other current liabilities: The carrying amounts at December 31, 2000 and 1999 approximated fair values because of the short maturity of these instruments. (Continued)

17 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) Marketable securities and investments: The fair values of the marketable securities and investments are based on quoted market prices. The fair values of other securities are based on the present value of future cash flows discounted using current market rates. Long-term debt: The fair values of long-term debt instruments are based on the present value of future cash flows associated with each instrument discounted using the current borrowing rate for similar debt instruments of comparable maturity. Derivative financial instruments: The fair values of foreign currency forward contracts and interest rate swap agreements are estimated based on quotes from brokers and reflect the estimated amounts that the Company would receive or (pay) to terminate the contracts at the reporting date. Fair value estimates are made at a specific point in time, based on relevant market information and appropriate valuation methodologies. However, these estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The effect of using different assumptions and/or estimation methodologies may be material to the estimated fair value amounts. (19) Supplemental Disclosures of Cash Flow Information ------------------------------------------------- Cash paid during the period for: 2000 1999 ---- ---- Interest (Yen) 4,894 5,070 ====== ====== Income taxes (Yen) 10,634 29,533 ====== ====== (20) Commitments and Contingencies ----------------------------- At December 31, 2000, commitments outstanding for the purchase of property, plant and equipment approximated (Yen)2,773. Contingent liabilities for loans guaranteed by the Company, mainly on behalf of employees, amounted to approximately (Yen)39,812. The Company and its subsidiaries occupy certain offices and other facilities and use certain equipment under cancelable lease arrangements. Rental expenses for the years ended December 31, 2000 and 1999 totaled (Yen)30,744 and (Yen)30,980, respectively. (Continued)

18 FUJI XEROX CO., LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All amounts in millions) (21) Acquisitions ------------ In January 2000, the Company acquired the color printer business in Asia Pacific area for (Yen)6,957 in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of (Yen)6,257 resulting from this acquisition is being amortized on a straight-line basis over 20 years. In December 2000, the Company acquired 100 percent of the outstanding capital stock of Xerox (Hong Kong) Limited and Xerox China Investments (Bermuda) Limited for (Yen)61,586 in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of (Yen)50,244 resulting from this acquisition is being amortized on a straight-line basis over 20 years. The effect of the acquisitions on the consolidated operating results of the Company for the year ended December 31, 2000 was not material. (22) Reclassifications ----------------- Where appropriate, certain items relating to the prior periods have been reclassified to conform to the presentation in the current year.