Third-quarter Earnings of 5 Cents Per Share STAMFORD, Conn.--Oct. 23, 2002-- Xerox Corporation announced today another quarter of strong operating cash flow and earnings driven by improved margins and increased product demand in key growth markets. Xerox reported third-quarter earnings of 5 cents per share including restructuring charges of 6 cents per share. The third-quarter 2002 results are a 10-cent improvement from the third quarter of last year, reflecting the company's effective execution of its strategy to significantly strengthen its business. "Margins are up, costs are down and Xerox's streamlined business model is delivering sustainable profitability as well as strong operational cash generation," said Anne M. Mulcahy, Xerox chairman and chief executive officer. "Through our strengthened operations and superior offerings, we are winning customers' confidence, attacking competitors' share in our sweet spots of the market and building value for Xerox stakeholders." Operational improvements led to gross margins of 42 percent, a year-over-year increase of 4.4 percentage points. Selling, administrative and general costs decreased $152 million or 13 percent from third quarter 2001. The company continued to generate significant cash from operations, reporting $611 million in operating cash flow for the third quarter. As of the end of September, Xerox's worldwide cash balance was $2.3 billion. In related financial news, the company noted its announcement earlier this week with General Electric Vendor Financial Services for GE to finance Xerox's lease receivables in the U.S. through monthly securitizations based on new lease originations. The agreement, which is in effect, calls for GE to provide Xerox with funding in the U.S. of up to $5 billion outstanding during the eight-year term of the arrangement. Xerox reported third-quarter revenue of $3.8 billion, a year-over-year decline of 6 percent. Approximately 50 percent of the third-quarter revenue decline was due to the company's exit last year from the retail small office/home office equipment business as well as declines in its developing markets operations. Third-quarter results reflect quarter-by-quarter percentage improvements this year in the company's core office and production businesses, with new product launches delivering growth in target markets including office color, office monochrome multifunction and production color. "There is no doubt that Xerox's technology is the best in the industry. This advantage is further strengthened by our rich portfolio of services and solutions that give our customers the added value that all businesses need," said Mulcahy. "In the third quarter, we began to see the results of our technology investments with strong customer demand for products launched this year including the Document Centre 500 series, expanded line of Phaser color printers, and the DocuColor 1632, 2240 and 6060." Mulcahy added that Xerox continues to take the necessary actions to hit all key areas of the market with competitive technology offerings, noting its launch yesterday of the Xerox 1010, the company's latest entry into the "light production" segment of the high-end digital production publishing market. As a stand-alone digital copier that can be upgraded to a networked printer, the 101 page-per-minute system is the least expensive and most advanced product in its class. Evidence of the growing demand for Xerox technology, the company highlighted several recent customer contracts that represent new business, competitive knockouts and renewals: * Microsoft has engaged Xerox for continued managed services and document solutions valued at $38 million over 3 years. A premier supplier under Microsoft's new vendor program, Xerox will supply office equipment including Document Centres, Phaser printers and other products. Over $2 million in product sales are expected through year-end. * Latham & Watkins, a large global law firm, replaced 110 competitive products with Xerox's Document Centre digital multifunction systems. * Xerox completed new and expanded contracts with major print-for-pay and commercial printers, including agreements with Office Depot and Kinko's that combined call for the placement of more than 3,000 products over the next 18 months. * Dow Chemical Company called upon Xerox to develop a digital imaging solution that helps to eliminate multiple collections of materials. Since Xerox created a database that includes Dow's research materials dating back to 1937, access by Dow's scientists and strategic partners has quadrupled. Worldwide employment declined 1,600 in the third quarter to 69,900 as the company continued to make progress in capturing additional cost-reduction opportunities. Research and development spending was 6 percent of revenue, reflecting Xerox's commitment to fostering innovation in its three key markets: office, production and services. Commenting on the fourth quarter, Mulcahy said, "While we expect that economic uncertainty will continue to impact year-over-year revenue results, total revenue in the fourth quarter will continue to trend positively, largely driven by significant equipment sales improvement due to new product launches. Enhanced business model improvements will strengthen our bottom line, delivering strong full-year profitability."