Return To Profitability Driven By Significantly Improved Operational Performance STAMFORD, Conn.---July 25, 2002--Xerox Corporation announced today a return to profitability based on the company's strongest quarterly operational performance since beginning a significant transformation in October 2000. The company reported second-quarter earnings of 12 cents per share including restructuring charges of 4 cents per share and a 3-cent per share loss from unhedged foreign currency. "Xerox has its eye on one clear objective: building value for our customers and shareholders. We continue to improve all areas of our global operations, reducing costs, enhancing liquidity and generating cash from operations," said Anne M. Mulcahy, Xerox chairman and chief executive officer. "This management team has put difficult matters behind us while creating a new Xerox that is stronger, leaner, and faster. The result: a return to profitability that speaks to the resiliency of our people and the confidence of our customers who recognize the value and competitive advantages of Xerox's strengthened offerings." Operational improvements led to gross margins of 42.5 percent, a year-over-year increase of 3.4 percentage points. Selling, administrative and general costs decreased $110 million or 9 percent from second quarter 2001. In the second quarter, Xerox generated operating cash flow of $541 million, reflecting improved profitability and disciplined management of the balance sheet. While investing in growth, Xerox also continued its relentless focus on cost reductions. The company implemented initiatives in 2001 that will reduce its annualized cost base by more than $1.1 billion and has taken additional actions in the first half of this year that will further reduce costs by about $175 million. Worldwide employment declined 2,200 in the second quarter to 72,400. Research and development spending was 6 percent of revenue, reflecting the company's commitment to fostering innovation in its three key markets: the office, production and services. Xerox reported second-quarter revenue of $4 billion, a year-over-year decline of 8 percent. Approximately 30 percent of the second-quarter revenue decline was due to the company's exit last year from the retail small office/home office equipment business as well as reductions in its developing markets operations. The DMO revenue decline reflects the transition to a business structure that prioritizes cash flow and profitable revenue. This strategy along with operational efficiencies led to a profitable quarter for Xerox's developing markets business. Delivering on a commitment to strengthen its product portfolio, Xerox recently launched several breakthrough products including the next-generation Document Centre and DocuColor multifunction systems and an expanded line of Phaser color printers for the office. Mulcahy noted that these new products, along with the company's launch this year of the DocuColor iGen3 digital production press, place Xerox in a strong competitive position to capture market share. "Xerox's portfolio of offerings has never been stronger and, supported by a breadth of services and solutions, is strategically designed to exploit key opportunities in our core businesses. At the same time, we are significantly improving margins in the office and production markets where we're winning customers with our competitively priced and superior technology." Commenting on the company's financial health, Lawrence A. Zimmerman, Xerox senior vice president and chief financial officer, said, "In a short period of time, Xerox has taken the right steps to improve its liquidity, reducing debt by 14 percent in the past year while maintaining a strong worldwide cash position of about $1.9 billion at the end of June." Zimmerman also noted that Xerox recently completed the renegotiation of its bank facility, repaying $2.8 billion, agreeing to pay an additional $700 million by Sept. 15 and extending the maturity date for the remaining balance. "The flow through from operational improvements, a rich product portfolio and a fortified balance sheet are the key enablers to building value for customers and shareholders. We're making impressive progress in each area and will continue to deliver on a well-defined strategy that focuses on long-term financial health. And, we are doing so with a commitment to the highest integrity of financial reporting and strengthened internal controls," he said. Mulcahy added, "We will continue to build momentum in the marketplace through new product and service offerings as well as operational improvements that will strengthen bottom-line performance. These actions position us well for a return to full-year profitability."