Edgar Filing: XEROX CORP

Amendment No.1 to Form 10-K

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, 2002

[_] 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

PART IV

Item 15. Exhibits, Financial Statement Schedules, 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, 2002*

Consolidated Balance Sheets as of December 31, 2002 and 2001*

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002*

Consolidated Statements of Common Shareholders’ Equity for each of the years in the three-year period ended December 31, 2002*

Notes to Consolidated Financial Statements*

Financial Statement Schedules

I—Financial Statements of Fuji Xerox Co., Ltd. and Subsidiaries (financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b))

Report of Independent Auditors

Consolidated Balance Sheet as of March 31, 2003

Consolidated Statement of Income for the year ended March 31, 2003

Consolidated Statement of Stockholders’ Equity for the year ended March 31, 2003

Consolidated Statement of Cash Flows for the year ended March 31, 2003

Notes to Consolidated Financial Statements

II—Financial Statements of Fuji Xerox Co., Ltd. and Subsidiaries (financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b))

Consolidated Balance Sheet as of March 31, 2002 and 2001

Consolidated Statements of Income for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000

Consolidated Statements of Comprehensive Income for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000

Consolidated Statements of Stockholders’ Equity for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000

Consolidated Statements of Cash Flows for the year ended March 31, 2002, the three month period ended March 31, 2001 and the year ended December 31, 2000

Notes to Consolidated Financial Statements

Previously filed

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)

Exhibit 99.1 — Certification of CEO and CFO Pursuant to 18 U.S.C.§ 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

(d)

The financial statements required by Regulation S-X (17 CFR 210) which are excluded from the annual report to shareholders by Rule 14a-3(b), including (1) separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons, (2) separate financial statements of affiliates whose securities are pledged as collateral, and (3) schedules, are filed under Item 15(a) of this Report which are incorporated herein by reference.

Previously filed

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

		Vice President and Chief Accounting Officer

June 30, 2003

CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Anne M. Mulcahy, Chairman of the Board and Chief Executive Officer, certify that:

I have reviewed this Amendment No. 1 to Annual Report on Form 10-K (“Annual Report”) of Xerox Corporation;

Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

Presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions);

All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this Annual Report whether there which significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

June 30, 2003

/S/ ANNE M. MULCAHY

Anne M. Mulcahy

Principal Executive Officer

CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Lawrence A. Zimmerman, Senior Vice President and Chief Financial Officer, certify that:

I have reviewed this Amendment No. 1 to Annual Report on Form 10-K (“Annual Report”) of Xerox Corporation;

The registrant’s other certifying offices and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

Evaluated the effectiveness of the registrant’s discloure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

Presented in this Annual Report our Conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed , based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies in the design of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors and material weaknesses in internal controls; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and

The registrant’s other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

June 30, 2003

/S/ LAWRENCE A. ZIMMERMAN

Lawrence A. Zimmerman

Principal Financial Officer

SCHEDULE I

Financial Statements of Fuji Xerox Co., Limited

(Financial statements required by Regulation S-X which are excluded
from the annual report to shareholders by Rule 14a-3(b))

Consolidated Financial Statements

Fuji Xerox Co., Ltd. and Subsidiaries

March 31, 2003

Report of Independent Auditors

The Board of Directors and Stockholders

Fuji Xerox Co., Ltd.

We have audited the accompanying consolidated balance sheet of Fuji Xerox Co., Ltd. and subsidiaries as of March 31, 2003 and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fuji Xerox Co., Ltd. and subsidiaries at March 31, 2003 and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective April 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets.

/s/ Ernst & Young

Tokyo, Japan

April 21, 2003

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Balance Sheet

	March 31, 2003
	*(Millions of yen)*
Assets

Current assets:
Cash and cash equivalents	¥	53,969
Receivables (Note 3)		167,989
Due from stockholders (Note 15)		20,888
Finance receivables (Note 4)		24,144
Inventories (Note 5)		73,488
Deferred income taxes (Note 11)		24,544
Other current assets		6,671

Total current assets		371,693
Finance receivables (Note 4)		48,906
Investments (Note 6)		18,147
Net property, plant and equipment (Note 7)		168,715
Deferred income taxes (Note 11)		74,131
Goodwill, less accumulated amortization (Notes 8 and 18)		111,455
Other assets		81,653

Total assets	¥	874,700

Liabilities and stockholders’ equity

Current liabilities:
Short-term debt (Note 9)	¥	80,019
Payables		135,228
Accrued income taxes (Note 11)		11,625
Accrued expenses and other current liabilities		68,533

Total current liabilities		295,405
Long-term debt (Note 9)		98,448
Retirement and severance benefits (Note 12)		189,798
Deferred income taxes and other liabilities (Note 11)		5,575
Commitments and contingencies (Notes 10 and 17)
Minority interests		26,123
Stockholders’ equity (Note 13):
Common stock, with no par value:
Authorized - 80,000,000 shares
Issued - 40,000,000 shares		20,000
Retained earnings		314,094
Accumulated other comprehensive income (loss) (Note14)		(74,743	)

Total stockholders’ equity		259,351

Total liabilities and stockholders’ equity	¥	874,700

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statement of Income

	For the year ended March 31, 2003
	*(Millions of Yen)*
Operating revenue (Note 15):
Equipment sales	¥	312,104
Service and rentals		348,065
Consumables and other		301,833

		962,002
Costs and expenses (Note 15):
Cost of equipment sales		225,692
Cost of service and rentals		135,253
Consumables and other		180,737

		541,682
Research and development expenses		73,844
Selling, general and administrative expenses		292,912

		908,438

Operating income		53,564
Other income (expense):
Interest and dividend income		6,381
Interest expenses		(4,049	)
Exchange gains (losses), net		(841	)
Other, net		(1,881	)

		(390	)

Income before income taxes and minority interests		53,174
Income taxes (Note 11):
Current		26,697
Deferred		(1,584	)

		25,113

Income before minority interests		28,061
Minority interests		(4,675	)

Net income	¥	23,386

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

	Common stock		Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders’ equity
	*(Millions of yen)*
Balance at March 31, 2002	¥	20,000	¥	304,588		¥	(26,310	)	¥	298,278
Comprehensive income (loss):
Net income				23,386						23,386
Unrealized gains on securities							(138	)		(138	)
Unrealized derivative gains							(82	)		(82	)
Foreign currency translation							(8,863	)		(8,863	)
Minimum pension liability							(39,350	)		(39,350	))

Net comprehensive income (loss)										(25,047	)
Cash dividends				(13,880	)					(13,880	)

Balance at March 31, 2003	¥	20,000	¥	314,094			¥(74,743)		¥	259,351

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statement of Cash Flows

	For the year ended March 31, 2003
	*(Millions of Yen)*
Operating activities
Net income	¥	23,386
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		60,326
Gain on sales of securities		(245	)
Write down of securities		671
Increase in retirement and severance benefits		4,292
Deferred income taxes		(1,584	)
Loss on disposal of property, plant and equipment		8,059
Equity in earnings of affiliates, less dividends		(1,690	)
Minority interests in earnings of subsidiaries		4,675
Changes in operating assets and liabilities:
Receivables		2,367
Finance receivables		5,025
Inventories		7,517
Payables		4,930
Accrued income taxes		3,650
Accrued expenses and other current liabilities		1,755
Other, net		(2,061	)

Net cash provided by operating activities		121,073

Investing activities
Proceeds from sales of property, plant and equipment		1,761
Capital expenditures		(44,722	)
Payments for purchases of software		(24,981	)
Payments for purchase of securities		(45	)
Proceeds from sales of securities		323
Acquisition of businesses, net of cash acquired		(17,481	)
Other, net		1,423

Net cash used in investing activities		(83,722	)

Financing activities
Proceeds from long-term debt		5,340
Repayments of long-term debt		(11,988	)
Decrease in short-term debt, net		(22,306	)
Increase in commercial paper, net		11,000
Dividends paid		(13,880	)

Net cash used in financing activities		(31,834	)
Effect of exchange rate changes on cash and cash equivalents		(1,369	)

Net increase in cash and cash equivalents		4,148
Cash and cash equivalents at beginning of year		49,821

Cash and cash equivalents at end of year	¥	53,969

Cash paid during the year for:
Interest	¥	4,237
Income taxes		23,684

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2003

Description of Business

Fuji Xerox Co., Ltd. (the “Company”) was established as a joint venture owned equally by Fuji Photo Film Co., Ltd. and Xerox Limited, a wholly-owned subsidiary of Xerox Corporation. On March 30, 2001, Fuji Photo Film Co., Ltd. acquired an additional 25% interest through the acquisition of shares from Xerox Limited. After the acquisition, Fuji Photo Film Co., Ltd. became the controlling stockholder.

The Company operates primarily in Japan, the Asia Pacific and Oceania regions. The Company has five factories in Japan, two in China (Shenzhen and Shanghai) and one in Korea.

The Company’s principal business is the manufacture and sale of office automation equipment such as copiers and printers and providing related services, collectively referred to as the Document Services Business. Other businesses include logistics and educational services which are not significant.

Domestic revenues and overseas revenues from Southeast Asia, Oceania and other regions based on the location of customers were 76% and 24%, respectively, for the year ended March 31, 2003.

Summary of Significant Accounting Policies

The Company and its domestic subsidiaries maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan. The Company’s foreign subsidiaries maintain their records and prepare their financial statements in conformity with the conventions of their countries of domicile. Certain reclassifications and adjustments have been incorporated in the consolidated financial statements to conform them to accounting principles generally accepted in the United States of America. These adjustments have not been recorded in the Company’s statutory books of account.

Significant accounting policies, after reflecting the adjustments referred to above, are summarized as follows:

Consolidation Policy

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. For purpose of financial reporting, certain foreign subsidiaries have a February 28 fiscal year end. Therefore, the Company recognizes the results of operations and financial position of such subsidiaries on a basis of a one month lag. There have been no significant transactions with such subsidiaries during the period from March 1 to March 31.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Consolidation Policy (continued)

Investments in affiliates in which the Company’s ownership is 20% to 50% are accounted for by the equity method.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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 (expenses), and those resulting from translation of foreign currency financial statements are excluded from the statement of income and are accumulated in other comprehensive income (loss), a separate component of stockholders’ equity.

Cash Equivalents

The Company considers all highly liquid investments which are readily convertible into cash and have original maturities of three months or less on the date of purchase to be cash equivalents.

Concentration of Credit Risk

The majority of cash and cash equivalents are maintained with financial institutions. Deposits with these banks may exceed the amount of insurance provided on such deposits, however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.

The Company sells products to customers primarily in Japan and Southeast Asia. The Company has no customer whose revenues were more than 10% of consolidated revenue. The Company performs ongoing credit evaluations of customers, and generally does not require collateral. Allowances are maintained for potential credit losses and such losses have been within management’s expectations.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Allowance for Doubtful Receivables

The provisions for losses on uncollectible trade and finance receivables are determined principally on the basis of past collection experience applied to ongoing evaluations of receivables and evaluations of the risks of repayment. Allowances for doubtful accounts receivable balances were ¥2,096 million as of March 31, 2003. Allowances for doubtful finance receivables were ¥2,976 million as of March 31, 2003.

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 does not hold any trading securities or held-to-maturity securities. Realized gains and losses on the sale of available-for-sale securities are determined by the moving-average method. When a decline in value of a marketable security is deemed to be other-than-temporary, the Company recognizes an impairment loss to the extent of the decline. In determining if and when such a decline in value is other-than-temporary, the Company evaluates; market conditions, trends of earnings, and other key measures.

Inventories

Inventories are valued at the lower of cost or market with cost generally being determined by the weighted average method.

Depreciation

Depreciation of property, plant and equipment is computed principally by the declining balance method based on estimated useful lives, except for the rental machines and buildings that were acquired on or after April 1, 1998. Depreciation of the rental machines and buildings that were acquired on or after April 1, 1998 is computed by the straight-line method. The following summarizes the estimated useful lives of property, plant and equipment by major class:

Rental machines		2 – 3 years
Buildings and structures		3 – 50
Machinery and equipment		4 – 17
Vehicles		3 – 7
Tools, furniture and fixtures		2 – 20

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of the net assets acquired. Until March 31, 2002, it had been amortized on a straight-line basis over the periods of 20 to 40 years, except for that acquired in a business combination completed after June 30, 2001.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which requires that goodwill and certain other intangible assets having indefinite lives no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets determined to have definitive lives will continue to be amortized over their useful lives.

The Company adopted FAS 142 effective April 1, 2002, except for any goodwill and any other indefinite lived intangible assets that were acquired in a business combination completed after June 30, 2001 for which the new rules have been applied since July 1, 2001. As of the date of adoption, the Company had goodwill amounting to ¥98,839 million on which no impairment was recognized as a result of the initial transition impairment test. Indefinite lived intangible assets as of that date were not material.

Impairment of Long-Lived Assets

In August 2001, the FASB issued FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. As of April 1, 2002, the Company adopted FAS 144. Under the provisions of FAS 144, the Company reviews long-lived assets, excluding goodwill and other intangible assets not being amortized, for impairment whenever events or changes in business circumstances indicate the carrying amount of the assets may not be fully recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a writedown is required. If this evaluation indicates that the assets will not be recoverable, the carrying value of the Company’s assets would be reduced to their estimated fair value. The adoption of FAS 144 was not significant to the operating results and financial position of the Company.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the products or services have been provided to customers, the sales price is fixed or determinable, and collectibility is reasonably assured.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

The above conditions are generally met when products are delivered to customers for product sales, services are performed or at the inception of leases for revenue from sales-type leases. Associated interest income on sales-type leases is recognized using the effective interest method with the allocation based on the net investment in outstanding leases. Rental from operating leases are recognized as earned over the respective lease terms. Consumable and other includes revenue from toners, inks, papers and copy services which are recognized upon shipment of consumables or when services are rendered. Certain sales incentives are deducted from revenue.

Shipping and Handling Costs

The Company includes shipping and handling costs, which totaled ¥14,737 million for the year ended March 31, 2003, in selling, general and administrative expenses.

Advertising Costs

Included in selling, general and administrative expenses are advertising costs which are expensed as incurred. Advertising costs amounted to ¥10,394 million for the year ended March 31, 2003.

Income Taxes

Income taxes are accounted for under the 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 assets and liabilities and their respective tax basis. 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 rate is recognized in income in the period that includes the enactment date.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Derivative Financial Instruments

Effective January 1, 2001, the Company adopted FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. FAS 133 established accounting and reporting standards for derivative instruments and hedging activities. It requires 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.

New Accounting Standards

In June 2001, the FASB issued FAS 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will adopt this standard on April 1, 2003. The Company is currently assessing the impact on its financial position and results of operations.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the initial measurement and initial recognition provisions on a prospective basis for guarantees issued or modified after December 31, 2002 and the disclosure provisions of FIN 45 as of March 31, 2003. The Company does not expect this interpretation will have a material effect on the Company’s financial position or results of operations.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

New Accounting Standards (continued)

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” which addresses when business enterprises should consolidate variable interest entities (“VIEs”) as defined in the Interpretation. The Company does not use VIEs to finance its operations and, accordingly, this interpretation has no impact on the its financial position or results of operations.

Receivables

Receivables at March 31, 2003 are summarized as follows:

	*(Millions of* *yen)*
Trade:
Notes	¥	9,376
Accounts		152,935
Other		7,774

		170,085
Less allowance for doubtful receivables		(2,096	)

	¥	167,989

Finance Receivables

Finance receivables represent receivables recorded for sales-type leases resulting from the marketing of the Company’s equipment. The components of finance receivables at March 31, 2003 are as follows:

	*(Millions of* *yen)*
Gross receivables	¥	90,661
Unearned income		(14,635	)
Less allowance for doubtful receivables		(2,976	)

		73,050
Less current portion		(24,144	)

	¥	48,906

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Finance Receivables (continued)

The future minimum lease payments to be received under sales-type leases as of March 31, 2003 are summarized as follows:

	*(Millions of* *yen)*
Year ending March 31:
2004	¥	32,333
2005		24,869
2006		17,815
2007		10,799
2008		4,340
2009 and thereafter		505

Total future minimum lease payments	¥	90,661

Inventories

Inventories at March 31, 2003 are summarized as follows:

	*(Millions of* *yen)*
Finished goods	¥	46,339
Parts		6,209
Raw materials		7,516
Work in process		7,847
Supplies		5,577

	¥	73,488

Investments

Investments at March 31, 2003 are summarized as follows:

	*(Millions of* *yen)*
Investments in affiliates	¥	14,214
Investment securities		3,933

	¥	18,147

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Investments (continued)

Investment securities consist of available-for-sale securities. The cost, gross unrealized gains, gross unrealized losses, and fair value for such securities by major security type at March 31, 2003 are summarized as follows:

	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
	*(Millions of yen)*
Japanese and foreign government debt securities	¥	100	¥	7	¥	—	¥	107
Corporate debt securities		30		—		3		27
Equity securities		1,552		211		196		1,567
Other		2,232		—		—		2,232

	¥	3,914	¥	218	¥	199	¥	3,933

Investment securities – other consists of certain non-listed equity securities which are carried at cost but are reduced to net realizable value for other-than-temporary declines in value.

Gross realized losses on available-for-sale securities, which include the losses recognized on declines in value considered as other-than-temporary, were ¥671 million for the year ended March 31, 2003. Proceeds from the sales of available-for-sale securities for the years ended March 31, 2003 were ¥323 million. Of those sales, gross realized gains from the sales of available-for-sale securities for the year ended March 31, 2003 was ¥245 million. Realized gains and losses and declines in value considered as other-than-temporary are included in other income (expense).

Net unrealized gains on available-for-sale securities, net of the related income taxes, decreased by ¥138 million for the year ended March 31, 2003.

The cost and estimated fair value of debt securities at March 31, 2003, by contractual maturity, are shown below. The expected maturities based on contract terms may differ from the actual maturities because the issuers of the securities may have the right to prepay the obligations without penalties.

	Cost		Fair value
	*(Millions of yen)*
Due within one year	¥	30	¥	30
Due after one year through five years		100		107
Due after 10 years		30		27

	¥	160	¥	164

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Property, Plant and Equipment

Property, plant and equipment at March 31, 2003 are summarized as follows:

	*(Millions of* *yen)*
Rental machines	¥	84,283
Land		22,104
Buildings and structures		153,018
Machinery and equipment		54,847
Vehicles		3,586
Tools, furniture and fixtures		179,815
Construction in progress		4,020

		501,673
Accumulated depreciation		(332,958	)

	¥	168,715

Goodwill

The changes in goodwill during the year ended March 31, 2003 were as follows:

	*(Millions of* *yen)*
Balance at April 1, 2002	¥	98,839
Acquisition		15,693
Impairment		—
Other		(3,077	)

Balance at March 31, 2003	¥	111,455

Other primarily consists of foreign exchange translation adjustments.

Accumulated amortization of goodwill at March 31, 2002, prior to the adoption of FAS 142, amounted to ¥12,053 million.

Short-Term Debt and Long-Term Debt

Short-term debt at March 31, 2003 is summarized as follows:

	*(Millions of* *yen)*
Short-term debt, mainly to banks	¥	51,359
Commercial paper		14,000
Current installments of long-term debt		14,660

	¥	80,019

The weighted average interest rates on short-term debt was 3.2 %.

The weighted average interest rates on commercial paper outstanding at March 31, 2003 was 0.02%.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Short-Term Debt and Long-Term Debt (continued)

Long-term debt at March 31, 2003 consist of the following:

	*(Millions of* *yen)*
Unsecured loans from banks and insurance companies due 2004 to 2012, with weighted average interest rate of approximately 1.54%	¥	53,975
Unsecured yen medium term notes:
1.49% medium term notes, due 2004		5,000
0.94% medium term notes, due 2004		3,200
0.18% medium term notes, due 2005		3,000
0.20% medium term notes, due 2005		3,400
1.99% medium term notes, due 2006		5,000
Unsecured yen bonds:
0.62% bonds, due 2007		3,000
0.65% bonds, due 2007		7,500
1.63% bonds, due 2008		5,000
1.01% bonds, due 2009		6,100
1.01% bonds, due 2009		2,000
1.99% bonds, due 2011		10,000
1.52% bonds, due 2012		3,000
Other		2,933

		113,108
Less current installments		(14,660	)

Long-term debt, excluding current installments	¥	98,448

The aggregate annual maturities of long-term debt outstanding at March 31, 2003 are as follows:

	*(Millions of* *yen)*
Year ending March 31:
2004	¥	14,660
2005		12,367
2006		15,980
2007		16,962
2008		8,140
2009 and thereafter		44,999

	¥	113,108

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Short-Term Debt and Long-Term Debt (continued)

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.

10.

Lease Commitments

The Company and its subsidiaries occupy certain offices and other facilities and use certain equipment under operating lease arrangements. Lease deposits of ¥21,000 million as of March 31, 2003 are included in other assets. The future minimum lease payments required under operating leases which, at March 31, 2003, have initial or remaining noncancelable lease term in excess of one year are summarized as follows:

	*(Millions of* *yen)*
Year ending March 31:
2004	¥	1,643
2005		845
2006		513
2007		362
2008		185
2009 and thereafter		197

Total future minimum lease payments	¥	3,745

Rental expense under operating leases was ¥27,212 million for the year ended March 31, 2003.

11.

Income Taxes

Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, inhabitants’ and enterprise taxes which, in the aggregate, result in a statutory tax rate of approximately 42%. A change in the Japanese local tax regulations, enacted in March 2003 and effective on April 1, 2004, reduces the enterprise tax rate from 9.6% to 7.2%. When effective, the combined Japanese statutory tax rate will be reduced from approximately 42% to 40.5%. The lower combined statutory tax rate resulted in a reduction of the Company’s deferred tax assets of ¥2,612 million as of March 31, 2003.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

11.

Income Taxes (continued)

The effective tax rate reflected in the consolidated statement of income for the year ended March 31, 2003 differs from the statutory tax rate due to the following reasons:

Japanese statutory tax rate	42.0	%
Expenses not deductible for tax purposes	1.9
Reversal of prior years’ accruals	(0.6	)
Reduction in deferred tax assets from change in tax rate	4.9
Other	(1.0	)

Effective tax rates	47.2	%

Income before taxes for the year ended March 31, 2003 was taxed in the following jurisdictions:

	*(Millions of* *yen)*
Domestic	¥	40,147
Foreign		13,027

	¥	53,174

The provision (benefit) for income taxes for the year ended March 31, 2003 consisted of the following:

	*(Millions of* *yen)*
Current:
Domestic	¥	23,157
Foreign		3,540

		26,697
Deferred:
Domestic		(1,099	)
Foreign		(485	)

		(1,584	)

	¥	25,113

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

11.

Income Taxes (continued)

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at March 31, 2003 are presented below:

	*(Millions of* *yen)*
Deferred tax assets:
Inventory reserve	¥	4,949
Intercompany profits in inventory		2,967
Depreciation of property, plant and equipment		5,069
Investments and other assets		3,007
Accrued bonus		9,325
Compensated absences		2,628
Retirement and severance benefits		18,980
Minimum pension liability adjustments		49,018
Net operating loss carryforwards		443
Other		8,619

Total deferred tax assets		105,005
Deferred tax liabilities:
Reserve for tax purposes		(1,368	)
Lease accounting		(2,231	)
Accelerated depreciation		(637	)
Other		(5,788	)

Total deferred tax liabilities		(10,024	)

Net deferred tax assets	¥	94,981

The net change in the total valuation allowance was a decrease of ¥314 million for the year ended March 31, 2003.

At March 31, 2003, certain subsidiaries of the Company have net operating loss carryforwards for income tax purposes amounting to ¥1,170 million, which are available to offset future taxable income, if any. The amount will expire through 2005.

The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries amounting to approximately ¥40,707 million at March 31, 2003 as the Company considers such earnings to be permanently invested. Deferred income taxes have also not been provided on undistributed earnings of its domestic subsidiaries as such earnings, if distributed in the form of dividends, are not taxable under present tax laws.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

12.

Retirement and Severance Benefits

The Company and its domestic subsidiaries have funded and unfunded defined benefit severance plans. Under the plans, employees are entitled to lump-sum payments, or lump-sum and pension annuity payments, based on their current rate of pay and the length of service upon retirement or termination of employment for reasons other than dismissal for cause. The funding policy is to make actuarially determined contributions to provide the plans with sufficient assets to meet future benefit payment requirements.

The Company and certain of its domestic subsidiaries also have defined benefit pension plans covering substantially all of their employees. The plans consist of two portions: a governmental welfare contributory plan (which would otherwise be provided by the Japanese government) and an additional non-contributory defined benefit plan. The pension benefits are determined based on years of service and compensation as stipulated in the pension plan’s regulations. This plan is funded in conformity with the requirements of the Welfare Pension Insurance Law of Japan.

On January 30, 2003, the Company received the approval of the Japanese government to eliminate future benefit obligations related to the governmental welfare component, over which the Japanese government will take responsibility. After the Company receives the final approval from the Japanese government, the Company will be relieved of all past benefit obligations under the governmental welfare component of the plans, with the transfer to the Japanese government of certain specified amounts which will be provided from assets of the Company’s pension plans. The Company anticipates that it will receive final approval prior to its fiscal year ending March 31, 2004. The amount of assets to be transferred to the Japanese government will be computed by a government specified formula. The Company will account for the elimination of future benefit obligations and relief of past obligations with the transfer of assets as the culmination of a series of steps in a single settlement transaction. Based on current assumptions, the Company estimates that this transaction would result in a decrease of approximately ¥171,000 million, in benefit obligations.

Most foreign subsidiaries have various retirement plans, primarily defined contribution plans, covering substantially all of their employees. The funding policy for such defined contribution plans is to contribute annually an amount equal to a certain percentage of the participant’s annual salary.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

12.

Retirement and Severance Benefits (continued)

Reconciliation of beginning and ending balances of the benefit obligations and the fair value of the plan assets, the funded status and amounts recognized in the consolidated balance sheet are as follows:

	*(Millions of* *yen)*
Changes in benefit obligations:
Benefit obligations at beginning of year	¥	451,509
Service cost		18,160
Interest cost		11,237
Plan participants’ contributions		1,857
Actuarial loss		31,419
Benefits paid		(4,546	)
Foreign currency translation and other		(401	)

Benefit obligations at end of year		509,235
Changes in plan assets:
Fair value of plan assets at beginning of year		258,165
Actual loss on plan assets		(38,095	)
Employers’ contributions		21,320
Plan participants’ contributions		1,857
Benefits paid		(3,150	)
Foreign currency translation and other		186

Fair value of plan assets at end of year		240,283

Funded status		(268,952	)
Unrecognized net actuarial loss		223,546
Unrecognized prior service costs (credit)		(15,979	)
Unrecognized net transition obligation		2,060

Net amount recognized	¥	(59,325	)


	*(Millions of* *yen)*
Amounts recognized in the consolidated balance sheet consist of:
Retirement and severance benefits	¥	(184,820	)
Additional minimum liability adjustments:
Intangible asset		4,464
Accumulated other comprehensive loss, pre tax		121,031

Net amount recognized	¥	(59,325	)

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

12.

Retirement and Severance Benefits (continued)

The plan assets consist principally of corporate equity securities, government securities and corporate debt securities. Unrecognized prior service cost has been amortized on the straight-line method over the average remaining service period of employees expected to receive benefits under the plan.

Components of net periodic benefit cost for the year ended March 31, 2003 are as follows:

	*(Millions of* *yen)*
Components of net periodic benefit cost:
Service cost	¥	18,160
Interest cost		11,237
Expected return on plan assets		(7,712	)
Recognized net actuarial loss		7,228
Amortization of unrecognized prior service costs (credit)		(1,287	)
Amortization of unrecognized net transition obligation		304

Net periodic benefit cost	¥	27,930

The assumptions used in accounting for the plans are as follows:

Weighted-average discount rate	2.2	%
Rate of future compensation increase	2.0	%
Expected long-term rate of return on plan asset	3.0	%

An increase in benefit obligations resulting from the change in the discount rate is included in actuarial loss in the table of changes in benefit obligations presented above.

Payments to directors and statutory auditors, corporate officers and part-time employees are based on separate plans. As of March 31, 2003, ¥4,978 million has been accrued and is included in the liability for retirement and severance benefits in the accompanying consolidated balance sheet.

Total charges to income for these benefits for the year ended March 31, 2003 amounted to ¥28,548 million.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

13.

Stockholders’ Equity

The Japanese Commercial Code, amended effective on October 1, 2002, provides that an amount equal to at least 10% of appropriations paid in cash be appropriated as a legal reserve until an aggregated amount of additional paid-in-capital and the legal reserve equals 25% of common stock.

The accompanying consolidated financial statements do not include any provision for cash dividends in the amount of ¥3,880 million proposed by the Company for the year ended March 31, 2003.

The amount available for dividends under the Japanese Commercial Code is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with financial accounting standards of Japan. The adjustments included in the accompanying consolidated financial statements to have them conform with accounting principles generally accepted in the United States of America, but not recorded in the books of account, have no effect on the determination of retained earnings available for dividends under the Japanese Commercial Code. The amount available for dividends in the Company’s nonconsolidated books of account under the Japanese Commercial Code amounted to ¥222,065 million at March 31, 2003.

14.

Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, at March 31, 2003 are summarized as follows:

	*(Millions of* *yen)*
Net unrealized derivative gains(losses)	¥	(70	)
Foreign currency translation adjustments		(6,750	)
Minimum pension liability adjustments		(67,923	)

	¥	(74,743	)

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

14.

Other Comprehensive Income (Loss) (continued)

Related tax effects allocated to each component of other comprehensive income (loss) for the year ended March 31, 2003 are as follows:

	Before-tax amount			Tax (expense) or benefit			Net-of-tax amount
	*(Millions of yen)*
Unrealized gains on securities:
Decrease in unrealized gains	¥	(338	)	¥	142		¥	(196	)
Less reclassification adjustments		100			(42	)		58

		(238	)		100			(138	)
Unrealized derivative gains:
Increase in unrealized derivative gains		(1,552	)		651			(901	)
Less reclassification adjustments		1,413			(594	)		819

		(139	)		57			(82	)
Foreign currency translation adjustments		(8,863	)		—			(8,863	)
Minimum pension liability adjustments		(68,709	)		29,359			(39,350	)

	¥	(77,949	)	¥	29,516		¥	(48,433	)

15.

Accounts and Transactions with Stockholders

Accounts receivable from and payable to stockholders and their affiliates at March 31, 2003 are summarized as follows:

	Accounts
	Receivable		Payable
	*(Millions of yen)*
Fuji Photo Film Co., Ltd. and affiliates	¥	3,297	¥	2,566
Xerox Corporation and affiliates		17,591		5,294

Transactions with stockholders and their affiliates for the year ended March 31, 2003 are summarized as follows:

Transactions

Sales

Purchases

Royalties
and other
expenses

Expenses
recovered

(Millions of yen)

Fuji Photo Film Co., Ltd. and affiliates

12,023

8,551

876

—

Xerox Corporation and affiliates

92,935

14,418

14,590

4,435

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

15.

Accounts and Transactions with Stockholders (continued)

The Company pays a royalty to Xerox Corporation based on its revenue; as defined, for the use of certain trademarks and technology, through March 2009 under a Technology Agreement.

The Company has a long term supply agreement with Xerox Corporation, which was entered into in December 1990 and is effective through December 2005, with an extension right if both parties agree. Under the agreement, the Company made a prepayment of approximately US$ 70 million and was entitled to purchase specified products at cost, without mark-ups, from Xerox Corporation. As of March 31, 2003, the unamortized balance of the prepayment amounted to approximately US$ 22.3 million (¥2,680 million).

16.

Financial Instruments

The Company has various financial instruments, including derivative instruments, which are exposed to credit-related losses in the event of non-performance by the counterparties. The Company utilizes numerous counterparties to ensure that there are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. The Company’s policies prescribe monitoring of creditworthiness and exposure on a counterparty-by-counterparty basis.

The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. Certain derivative instruments have been entered into by the Company to manage those exposures. These instruments are held for hedging purposes and include forward foreign exchange contracts, currency swap agreements, interest rate swap agreements and cross currency interest rate swap agreements.

Forward foreign exchange contracts and currency swap agreements are agreements to exchange different currencies at specified exchange rates 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 Inter-Bank Offered Rate).

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

16.

Financial Instruments (continued)

Fair Values of Financial Instruments

The estimated fair values of financial instruments at March 31, 2003 are summarized as follows:

	Carrying amount			Estimated fair value
	*(Millions of yen)*
Marketable securities	¥	30		¥	30
Investment securities		3,933			3,933
Long-term debt, including current portion		(113,108	)		(117,347	)
Foreign exchange contracts		(429	)		(429	)
Currency swap agreements		(711	)		(711	)
Interest rate swap agreements		(818	)		(818	)
Cross currency interest rate swap agreements		(691	)		(691	)

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. The following methodologies and assumptions were used by the Company in estimating the fair value of its financial instruments.

Cash and Cash Equivalents, Receivables, Short-Term Debt, Payables and Accrued Expenses and Other Current Liabilities: The carrying amounts approximate fair value because of the short maturity of these instruments.

Marketable Securities and Investment securities: The fair values of the marketable securities and investment securities (exclusive of other securities) are based on quoted market prices.

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 forward foreign exchange contracts, currency swap agreements, interest rate swap agreements and cross currency interest rate swap agreements are estimated based on quotes form brokers and reflect the estimated amounts that the Company would receive (or pay) to terminate the contracts at the reporting date.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

16.

Financial Instruments (continued)

Accounting for and Reporting of Derivative Instruments and Hedging Activities

The Company is exposed to the risk of changes in foreign exchange rates and interest rates. To manage these risks, the Company enters into various hedging transactions that have been authorized pursuant to its policies and procedures as described below. The Company does not purchase or hold derivative financial instruments for trading purposes.

Foreign Currency Risk Management:

In the normal course of business, the Company is exposed to foreign exchange risk in the following areas:

•

Transaction exposures, such as both existing and forecasted sales and purchases and payables/receivables resulting from such transactions

•

Exposure of non-functional-currency-denominated debt

In order to mitigate the impact of currency exchange rate fluctuations, the Company continually assesses its exposure to currency risks and hedges a portion of those risks through the use of derivative instruments, principally forward foreign exchange contracts. The Company does not enter into the type of derivative instruments for purpose other than risk management. Responsibility for managing the Company’s currency exposures and use of currency derivatives is centralized within the finance department and in order to contract foreign currency derivative instruments, the authorization of the finance director is required.

Interest Rate Risk Management:

The Company uses variable-rate debt to finance its operations. As the debt obligations expose the Company to variability in interest payments due to changes in interest rates, management believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed-rate cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt.

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems within the finance department to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations. The risk management control systems involve the use of analytical techniques to estimate expected changes in interest rates on the Company’s future cash flows.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

16.

Financial Instruments (continued)

Accounting for and Reporting of Derivative Instruments and Hedging Activities (continued)

Information with Respect to Cash Flow Hedges:

The Company has entered into forward foreign exchange contracts to protect against the increase or decrease in value of forecasted intercompany purchases or export sales denominated in foreign currency over the next year (maximum length of time is through August 2003). When the yen weakens significantly against the foreign currencies (primarily the U.S. dollars), the increase in value of future foreign currency cost or revenue is offset by gains or losses in the value of the forward exchange contracts designated as hedges. Conversely, when the yen strengthens, the increase or decrease in the value of future foreign currency cash flow is offset by gains or losses in the value of the forward contracts.

In addition, the Company entered into a currency swap and cross currency interest rate swaps that effectively convert a portion of the underlying debt amounts to fixed interest rate and to functional currencies for the next three years (maximum length of time is through May 2006), thus reducing the impact of foreign currency exchange rate and interest rate changes on future income. The forecasted cash flows associated with approximately ¥11,289 million of the outstanding debt of the Company were designated as the hedged items to a currency swap and cross currency interest rate swaps at March 31, 2003.

Changes in fair value of those derivative instruments designated and qualifying as cash flow hedges of variability of cash flows are reported in other comprehensive income, net of applicable taxes. These amounts are reclassified into earnings in the same period and same line item as the hedged items affect earnings. The amounts which were reclassified from accumulated other comprehensive income to other income (expense), net of related tax effect, were net gains of ¥819 million for the year ended March 31, 2003. The amount of gains or losses on derivatives or portions thereof that were either ineffective as hedges or excluded from the assessment of hedge effectiveness were immaterial to the financial position or operating results of the Company.

At March 31, 2003, the Company expects to reclassify ¥32 million of net gains on derivatives from accumulated other comprehensive income to earnings during the next twelve months due to actual export sales and import purchases and the payment of the underlying debt.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

16.

Financial Instruments (continued)

Accounting for and Reporting of Derivative Instruments and Hedging Activities (continued)

Derivatives not designated as hedges:

Derivatives not designated as hedges include certain interest rate swaps and forward foreign exchange contracts which have been entered into by the Company and certain of its subsidiaries. Although these derivatives are effective as hedges from an economic perspective, the Company did not designate these contracts as hedges as required in order to apply hedge accounting. As a result, the Company reported the changes in the fair value of these derivatives in other income (expenses).

17.

Commitments and Contingencies

Guarantees

The Company guarantees certain indebtedness of others and other obligations. At March 31, 2003, the maximum potential amount of future payments (undiscounted) the Company as a guarantor could be required to make under the guarantee was ¥31,070 million, most of which are guarantees of their employees’ mortgage loans to financial institutions. In the event of insolvency of their employees, the Company will need to pay the default mortgage on behalf of the employees. These guarantees are secured by the mortgaged property. The term of the mortgage loan guarantees are from 5 to 30 years. As of March 31, 2003, the carrying amount of the liability for the Company’s obligations under the guarantee was insignificant.

Loss contingencies

In October 2002, the Company announced a recall in order to repair defects free of charge for printer engines sold to OEMs or used in the Company’s products. The provision charged to income during the year was ¥5,800 million, of which ¥3,491 million has been incurred. The balance of the accrual at March 31, 2003 amounted to ¥2,309 million. The Company’s management is of the opinion that the remaining accrual is sufficient to cover remaining costs and uncertainties and will be utilized during the year ending March 31, 2004.

Fuji Xerox Co., Ltd and Subsidiaries

Notes to Consolidated Financial Statements (continued)

18.

Acquisitions

In February 2003, the Company purchased certain printer business operations for ¥17,481 million, in cash, in order to strengthen its core business and increase its market share as a leading provider of laser printers. As a result of the acquisition, the Company recorded ¥15,693 million of goodwill, which is being amortized for tax purposes on a straight-line basis over 5 years but is not amortized for accounting purposes, and ¥565 million for patents, which is amortized on a straight-line basis over 8 years for both accounting and income tax purposes. The results of operation of the acquired printer business was included in the Company’s consolidated financial statements since the acquisition date.

The unaudited pro forma financial information assumes that the certain printer business acquired in the fiscal year ended March 31, 2003 had been acquired at the beginning of the fiscal year. This pro forma financial information is presented for information purpose only and is not necessarily indicative of the results of future operations. Pro forma unaudited net sales and net income for the year ended March 31, 2003 were ¥989,532 million and ¥25,188 million, respectively.

SCHEDULE II

Financial Statements of Fuji Xerox Co., Limited

(Financial statements required by Regulation S-X which are excluded
from the annual report to shareholders by Rule 14a-3(b))

Consolidated Financial Statements

Fuji Xerox Co., Ltd. and Subsidiaries

March 31, 2002
(unaudited)

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Balance Sheets
(unaudited)

				March 31

				2002			2001

				*(Millions of yen)*
Assets
Current assets:
		Cash and cash equivalents		¥	49,821		¥	37,026
		Marketable securities (Note 4)			30			33
		Receivables (Notes 5 and 20)			191,301			190,037
		Finance receivables (Note 6)			27,069			24,949
		Inventories (Note 7)			81,146			94,657
		Prepaid expenses and other current assets (Notes 8 and 15)			28,106			24,537

Total current assets					377,473			371,239
Finance receivables (Note 6)					53,694			50,401
Investments (Notes 4 and 9)					47,608			51,617
Net property, plant and equipment (Note 10)					182,343			185,480
Deferred income taxes (Note 15)					42,804			24,704
Goodwill, less accumulated amortization (Notes 11 and 24)					98,839			86,147
Other assets					43,429			42,410

Total assets				¥	846,190		¥	811,998

Liabilities and stockholders’ equity
Current liabilities:
		Short-term debt (Note 12)		¥	90,730		¥	171,357
		Payables (Notes 14 and 20)			130,985			131,817
		Accrued income taxes (Note 15)			7,996			8,525
		Accrued expenses and other current liabilities (Note 16)			68,517			60,261

Total current liabilities					298,228			371,960
Long-term debt (Note 12)					107,997			48,284
Retirement and severance benefits (Note 17)					116,370			79,706
Commitments and contingencies (Notes 13 and 23)
Minority interests					25,317			23,527
Stockholders’ equity (Note 18):
		Common stock, with no par value:
			Authorized - 80,000,000 shares Issued - 40,000,000 shares		20,000			20,000
		Retained earnings			304,588			284,236
	Accumulated other comprehensive income (loss) (Note 19)				(26,310	)		(15,715	)

Total stockholders’ equity					298,278			288,521

Total liabilities and stockholders’ equity				¥	846,190		¥	811,998

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Income
(unaudited)

		Year ended March 31, 2002			Three-month period ended March 31, 2001			Year ended December 31, 2000

		*(Millions of yen)*
Operating revenue (Note 20):
	Sales	¥	310,311		¥	69,833		¥	316,156
	Service and rentals		347,663			83,682			339,947
	Other		284,856			68,201			249,530

			942,830			221,716			905,633
Costs and expenses (Note 20):
	Cost of sales		228,024			50,291			229,476
	Cost of service and rentals		132,691			34,065			124,852
	Other		177,176			42,800			153,190

			537,891			127,156			507,518
	Research and development expenses		64,167			16,348			66,322
	Selling, general and administrative expenses		297,523			72,269			299,025

			899,581			215,773			872,865

Operating income			43,249			5,943			32,768
Other income (expenses):
	Interest and dividend income		6,745			1,726			6,590
	Interest expenses		(4,959	)		(1,479	)		(5,041	)
	Exchange gains (losses), net		2,971			22			(1,330	)
	Other, net		(6,854	)		(871	)		1,769

			(2,097	)		(602	)		1,988

Income before income taxes and minority interests			41,152			5,341			34,756
Income taxes (Note 15):
	Current		22,601			6,698			12,656
	Deferred		(6,751	)		(3,227	)		3,074

			15,850			3,471			15,730

Income before minority interests			25,302			1,870			19,026
Minority interests			4,424			752			3,903

Income before cumulative effect of change in accounting principle			20,878			1,118			15,123
Cumulative effect of change in accounting for derivative instruments and hedging activities, net (Note 2)			—			197			—

Net income		¥	20,878		¥	1,315		¥	15,123

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Income
(unaudited)

		Year ended March 31, 2002			Three-month period ended March 31, 2001			Year ended December 31, 2000

		*(Millions of yen)*
Net income		¥	20,878		¥	1,315		¥	15,123
Other comprehensive income (loss), net of taxes (Note 19):
	Change in net unrealized gains on securities		(104	)		(18	)		(3,075	)
	Change in net unrealized derivative gains		(493	)		505			—
	Foreign currency translation adjustments		9,299			4,214			5,354
	Minimum pension liability adjustments		(19,297	)		(3,107	)		(6,169	)

			(10,595	)		1,594			(3,890	)

Net comprehensive income		¥	10,283		¥	2,909		¥	11,233

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Stockholders’ Equity
(unaudited)

						Common stock		Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders’ equity

Balance at December 31, 1999						¥	20,000	¥	283,798		¥	(13,419	)	¥	290,379
Comprehensive income (loss):
					Net income		—		15,123			—			15,123
					Other (Note 19)		—		—			(3,890	)		(3,890	)
Cash dividends (Note 18)							—		(8,000	)		—			(8,000	)

Balance at December 31, 2000							20,000		290,921			(17,309	)		293,612
Comprehensive income (loss):
				Net income			—		1,315			—			1,315
			Other (Note 19)				—		—			1,594			1,594
Cash dividends (Note 18)							—		(8,000	)		—			(8,000	)

Balance at March 31, 2001							20,000		284,236			(15,715	)		288,521
Comprehensive income (loss):
		Net income					—		20,878			—			20,878
	Other (Note 19)						—		—			(10,595	)		(10,595	)
Cash dividends (Note 18)							—		(526	)		—			(526	)

Balance at March 31, 2002						¥	20,000	¥	304,588		¥	(26,310	)	¥	298,278

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Consolidated Statements of Cash Flows
(unaudited)

					Year ended March 31, 2002			Three-month period ended March 31, 2001			Year ended December 31, 2000

					*(Millions of yen)*
Operating activities
Net income					¥	20,878		¥	1,315		¥	15,123
Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				67,406			17,734			63,386
		Loss on disposal of inventories				4,537			582			2,534
		Gain on sales of marketable securities				(223	)		—			(3,182	)
		Write down of marketable securities				1,459			167			707
	Increase (decrease) in retirement and severance benefits					2,860			(1,205	)		(20,771	)
	Deferred income taxes					(6,751	)		(3,227	)		3,074
	Loss on disposal of property, plant and equipment					8,026			1,861			8,388
		Equity in earnings of affiliates, less dividends				(1,569	)		(338	)		(1,091	)
		Minority interests in earnings of subsidiaries				4,424			752			3,903
		Changes in operating assets and liabilities:
				Receivables		4,204			7,532			(11,639	)
				Finance receivables		2,656			2,732			(1,774	)
				Inventories		13,167			(10,996	)		(5,913	)
				Payables		(7,845	)		(7,466	)		2,869
			Accrued income taxes			(1,545	)		(308	)		2,022
			Accrued expenses and other current liabilities			9,026			8,056			(5,662	)
	Other, net					5,326			(1,264	)		10,160

Net cash provided by operating activities						126,036			15,927			62,134
Investing activities
Proceeds from sales of property, plant and equipment						603			140			2,143
Capital expenditures						(54,790	)		(10,802	)		(65,270	)
Payments for purchases of software						(13,960	)		(523	)		(18,758	)
Payments for purchases of marketable and investment securities						(984	)		(1,144	)		(1,029	)
Proceeds from sales of marketable and investment securities						376			131			3,954
Payments for acquisitions of businesses, net of cash acquired						(14,857	)		—			(66,189	)
Other, net						5,155			1,520			4,270

Net cash used in investing activities						(78,457	)		(10,678	)		(140,879	)
Financing activities
Proceeds from long-term debt						64,666			24,430			54,461
Repayments of long-term debt						(30,891	)		(38,281	)		(33,990	)
(Decrease) increase in short-term debt, net						(41,987	)		9,814			56,981
(Decrease) increase in commercial paper, net						(27,000	)		5,000			(25,000	)
Dividends paid						(526	)		(8,000	)		(8,000	)

Net cash (used in) provided by financing activities						(35,738	)		(7,037	)		44,452
Effect of exchange rate changes on cash and cash equivalents						954			248			273

Net increase (decrease) in cash and cash equivalents						12,795			(1,540	)		(34,020	)
Cash and cash equivalents at beginning of period						37,026			38,566			72,586

Cash and cash equivalents at end of period					¥	49,821		¥	37,026		¥	38,566

See notes to consolidated financial statements.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements
(unaudited)

March 31, 2002

1. Description of Business

Fuji Xerox Co., Ltd. (the “Company”) was established as a joint venture owned equally by Fuji Photo Film Co., Ltd. and Xerox Limited of the United Kingdom, a 100%-owned subsidiary of Xerox Corporation. On March 30, 2001, Fuji Photo Film Co., Ltd. acquired an additional 25% interest through the acquisition of shares from Xerox Limited. After the acquisition, Fuji Photo Film Co., Ltd. became the controlling stockholder.

The Company’s territory, as established by Xerox Corporation, extends to the Asia Pacific and Oceania regions and the Company has five factories in Japan, two in China (Shenzhen and Shanghai) and one in Korea.

The Company’s principal business is the manufacture and sale of office automation equipment such as copiers and low-end laser printers and providing related services, collectively referred to as the Document Services Business. Other businesses include logistics and educational services which are not significant.

Domestic revenues and overseas revenues from Southeast Asia, Oceania and other regions based on the location of customers represented 79% and 21% of total revenues, respectively, for the year ended March 31, 2002.

2. Summary of Significant Accounting Policies

Significant accounting policies, after reflecting the adjustments referred to above, are summarized as follows:

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.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

2. Summary of Significant Accounting Policies (continued)

Use of Estimates

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 (expenses), and those resulting from translation of foreign currency financial statements are excluded from the statements of income and are accumulated in other comprehensive income (loss), a separate component of stockholders’ equity.

Cash Equivalents

The Company considers all highly liquid investments which are readily convertible into cash and have original maturities of three months or less to be cash equivalents.

Marketable Securities and Investment Securities

Inventories

Inventories are valued at the lower of cost or market with cost generally being determined by the average method.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

2. Summary of Significant Accounting Policies (continued)

Depreciation

Depreciation of property, plant and equipment is computed principally by the declining balance method based on estimated useful lives, except for the rental machines acquired on or after January 1, 1999 and buildings acquired on or after April 1, 1998. Depreciation of the rental machines acquired on or after January 1, 1999 and buildings acquired on or after April 1, 1998 is computed by the straight-line method. The following summarizes the estimated useful lives of property, plant and equipment by major class:

Rental machines	2 – 3 years
Buildings and structures	3 – 50
Machinery and equipment	4 – 17
Vehicles	3 – 7
Tools, furniture and fixtures	2 – 20

Goodwill and Long-Lived Assets

Goodwill, which represents the excess of purchase price over the fair value of the net assets acquired, is being amortized on a straight-line basis over the periods of 20 to 40 years, except for that acquired in a business combination completed after June 30, 2001. Long-lived assets and goodwill are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount may not be fully recoverable. In reviewing for impairment, the Company compares the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. An impairment loss, equal to the difference between the assets’ fair value and their carrying value, is recognized when the estimated future cash flows are less than their carrying amount.

In July 2001, the Financial Accounting Standards Board issued Statement No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which requires that goodwill and certain other intangible assets having indefinite lives no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets determined to have definitive lives will continue to be amortized over their useful lives. The Company will adopt FAS 142 on April 1, 2002 and is currently assessing the financial impact of the impairment of goodwill and other intangible assets.

Revenue Recognition

Generally, revenue is recognized after services are rendered or products are shipped. Revenue from sales-type leases is recognized at the inception of the lease. Associated interest income is recognized using the interest method with the allocation based on the net investment in outstanding leases. Revenue from 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.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

2. Summary of Significant Accounting Policies (continued)

Shipping and Handling Costs

The Company includes shipping and handling costs, which totaled ¥13,456 million for the year ended March 31, 2002, ¥3,205 million for the three-month period ended March 31, 2001, and ¥12,870 million for the year ended December 31, 2000, in selling, general and administrative expenses.

Advertising Costs

Included in selling, general and administrative expenses are advertising costs which are expensed as incurred. Advertising costs amounted to ¥8,114 million for the year ended March 31, 2002, ¥2,094 million for the three-month period ended March 31, 2001, and ¥10,325 million for the year ended December 31, 2000.

Income Taxes

Income taxes are accounted for under the 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 assets and liabilities and their respective tax bases. 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.

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 forward foreign exchange contracts, currency swap agreements and interest rate swap agreements.

Effective January 1, 2001, the Company adopted FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by FAS 138. FAS 133 established accounting and reporting standards for derivative instruments and hedging activities. It requires 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. Upon adoption of FAS 133, the Company recorded a gain of ¥197 million, net of the related income tax effect, as the net transition adjustment in the consolidated statement of income and a net transition gain of ¥376 million, net of the related income tax effect, in accumulated other comprehensive income.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

2. Summary of Significant Accounting Policies (continued)

Derivative Financial Instruments (continued)

Prior to the adoption of FAS 133, the change in the value of forward foreign exchange contacts or currency swap contracts hedging existing assets and liabilities denominated in foreign currencies were offset by the foreign exchange gains or losses of the underlying assets or liabilities being hedged. The discounts or premiums on the instruments were amortized over the lives of the contracts using the straight-line method. For interest rate swaps, the net amounts paid or received and net amounts accrued through the end of the accounting period were included in interest expense.

Reclassifications

Certain reclassifications of prior periods’ financial statements and related footnote amounts have been made to conform with the current year presentation.

3. Change in Fiscal Year-End

The Company changed the date of its fiscal year-end from December 31 to March 31 effective the fiscal year ended March 31, 2001. Accordingly, the accompanying consolidated statements of income, comprehensive income, stockholders’ equity and cash flows are presented for the year ended March 31, 2002, the three-month period ended March 31, 2001 and the year ended December 31, 2000.

4. Marketable Securities and Investment Securities

Marketable securities and investment securities consist of available-for-sale securities. The cost, gross unrealized gains, gross unrealized losses, and fair value for such securities by major security type at March 31, 2002 and 2001 are summarized as follows:

				Cost		Gross unrealized gains		Gross unrealized losses		Fair value

				*(Millions of yen)*
March 31, 2002
	Marketable securities:
			Bank debt securities	¥	30	¥	—	¥	—	¥	30

	Investment securities:
			Japanese and foreign government debt securities	¥	100	¥	11	¥	—	¥	111
		Corporate debt securities			30		—		3		27
		Equity securities			1,841		460		205		2,096

				¥	1,971	¥	471	¥	208	¥	2,234

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

4. Marketable Securities and Investment Securities (continued)

			Cost		Gross unrealized gains		Gross unrealized losses		Fair value

			*(Millions of yen)*
March 31, 2001
	Marketable securities:
		Bank debt securities	¥	33	¥	—	¥	—	¥	33

	Investment securities:
		Japanese and foreign government debt securities	¥	100	¥	14	¥	—	¥	114
		Corporate debt securities		30		—		2		28
		Equity securities		2,308		740		334		2,714

			¥	2,438	¥	754	¥	336	¥	2,856

The difference between the amounts disclosed above for investment securities and the amounts shown at Note 9 are due to certain non-listed equity securities which are carried at cost but are reduced to net realizable value for other-than-temporary declines in market value.

Gross realized losses on available-for-sale securities, which include the gross unrealized losses considered as other-than-temporary, were ¥1,459 million for the year ended March 31, 2002, ¥167 million for the period ended March 31, 2001, and ¥707 million for the year ended December 31, 2000. Proceeds from the sales of available-for-sale securities for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 were ¥376 million, ¥131 million and ¥3,954 million, respectively. Of those sales, gross realized gains from the sales of available-for-sale securities for the years ended March 31, 2002 and December 31, 2000 were ¥223 million and ¥3,182 million, respectively. Such gains for the period ended March 31, 2001 were insignificant. Realized gains and losses and declines in value considered as other-than-temporary are included in other income (expenses).

Net unrealized gains on available-for-sale securities, net of the related taxes, decreased by ¥104 million, ¥18 million and ¥3,075 million for the year ended March 31, 2002, the period ended March 31, 2001, and the year ended December 31, 2000, respectively.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

4. Marketable Securities and Investment Securities (continued)

The cost and estimated fair value of debt securities at March 31, 2002, by contractual maturity, are shown below. The expected maturities based on contract terms may differ from the actual maturities because the issuers of the securities may have the right to prepay the obligations without penalties.

	Cost		Fair value

	*(Millions of yen)*
Due within one year	¥	30	¥	30
Due after one year through five years		130		138

	¥	160	¥	168

5. Receivables

Receivables at March 31, 2002 and 2001 are summarized as follows:

		March 31

		2002			2001

		*(Millions of yen)***
Trade:
	Notes	¥	12,766		¥	12,786
	Accounts		168,933			167,714
Other			12,341			11,390

			194,040			191,890
Less allowance for doubtful receivables			(2,739	)		(1,853	)

		¥	191,301		¥	190,037

6. Finance Receivables

Finance receivables represent receivables recorded on sales-type leases resulting from the marketing of the Company’s equipment. The components of finance receivables at March 31, 2002 and 2001 are as follows:

	March 31

	2002			2001

	*(Millions of yen)*
Gross receivables	¥	99,555		¥	91,601
Unearned income		(15,608	)		(14,487	)
Unguaranteed residual value		47			433
Less allowance for doubtful receivables		(3,231	)		(2,197	)

		80,763			75,350
Less current portion		(27,069	)		(24,949	)

	¥	53,694		¥	50,401

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

6. Finance Receivables (continued)

The future minimum lease payments to be received under sales-type leases as of March 31, 2002 are summarized as follows:

			(Millions of yen)

Year ending March 31:
		2003	¥	35,960
		2004		26,101
		2005		19,708
		2006		12,331
		2007		4,885
		2008 and thereafter		570

	Total future minimum lease payments		¥	99,555

7. Inventories

Inventories at March 31, 2002 and 2001 are summarized as follows:

	March 31

	2002		2001

	*(Millions of yen)*
Merchandise	¥	49,236	¥	62,104
Parts		5,349		6,637
Raw materials		10,409		9,955
Work in process		10,789		10,180
Supplies		5,363		5,781

	¥	81,146	¥	94,657

8. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at March 31, 2002 and 2001 comprise the following:

	March 31

	2002		2001

	*(Millions of yen)*
Advance payments	¥	1,072	¥	1,016
Deferred income taxes – current		20,245		14,990
Other		6,789		8,531

	¥	28,106	¥	24,537

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

9. Investments

Investments at March 31, 2002 and 2001 are summarized as follows:

	March 31

	2002		2001

	*(Millions of yen)*
Investments in affiliates	¥	15,164	¥	14,725
Investment securities		4,354		5,235
Lease deposits and other		28,090		31,657

	¥	47,608	¥	51,617

10. Property, Plant and Equipment

Property, plant and equipment at March 31, 2002 and 2001 are summarized as follows:

		Cost		Accumulated depreciation		Net book value

		*(Millions of yen)*
March 31, 2002
	Rental machines	¥	85,661	¥	58,157	¥	27,504
	Land		22,623		—		22,623
	Buildings and structures		155,333		89,358		65,975
	Machinery and equipment		59,081		40,799		18,282
	Vehicles		3,840		3,007		833
	Tools, furniture and fixtures		185,205		140,775		44,430
	Construction in progress		2,696		—		2,696

		¥	514,439	¥	332,096	¥	182,343

March 31, 2001
	Rental machines	¥	84,214	¥	50,778	¥	33,436
	Land		20,340		—		20,340
	Buildings and structures		146,159		80,189		65,970
	Machinery and equipment		53,560		36,422		17,138
	Vehicles		4,607		3,203		1,404
	Tools, furniture and fixtures		168,975		125,737		43,238
	Construction in progress		3,954		—		3,954

		¥	481,809	¥	296,329	¥	185,480

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

11. Goodwill

The cost, accumulated amortization and net book value of goodwill at March 31, 2002 and 2001 are summarized as follows:

	March 31

	2002		2001

	*(Millions of yen)*
Cost	¥	110,891	¥	93,864
Accumulated amortization		12,052		7,717

Net book value	¥	98,839	¥	86,147

12. Short-Term Debt and Long-Term Debt

Short-term debt at March 31, 2002 and 2001 are summarized as follows:

	March 31

	2002		2001

	*(Millions of yen)*
Short-term debt, mainly to banks	¥	74,690	¥	110,466
Commercial paper		3,000		30,000
Current installments of long-term debt		13,040		30,891

	¥	90,730	¥	171,357

The weighted average interest rates on short-term debt outstanding at March 31, 2002 and 2001 were 3.2% and 2.2%, respectively.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

12. Short-Term Debt and Long-Term Debt (continued)

Long-term debt at March 31, 2002 and 2001 consist of the following:

		March 31

		2002			2001

		*(Millions of yen)*
Unsecured loans from banks and insurance companies due 2003 to 2012, with interest rates ranging from 0.1% to 8.7% in 2002 and 0.7% to 12.8% in 2001		¥	60,208		¥	39,275
Unsecured yen medium term notes:
	0.77% medium term notes, due 2002		—			3,000
	Medium term notes, due 2003, with interest rates of 0.25% in 2002 and 0.28% in 2001		5,000			5,000
	1.49% medium term notes, due 2004		5,000			5,000
	0.94% medium term notes, due 2004		3,200			3,200
	0.20% medium term notes, due 2005		3,000			—
	1.99% medium term notes, due 2006		5,000			5,000
	0.33% medium term notes, due 2002		—			3,700
Unsecured yen bonds:
	0.62% bonds, due 2007		3,000			—
	0.65% bonds, due 2007		7,500			—
	1.63% bonds, due 2008		5,000			5,000
	1.01% bonds, due 2009		6,100			—
	1.01% bonds, due 2009		2,000			—
	1.99% bonds, due 2011		10,000			10,000
	1.52% bonds, due 2012		3,000			—
Other			3,029			—

			121,037			79,175
Less current installments			(13,040	)		(30,891	)

Long-term debt, excluding current installments		¥	107,997		¥	48,284

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

12. Short-Term Debt and Long-Term Debt (continued)

The aggregate annual maturities of long-term debt outstanding at March 31, 2002 are as follows:

		(Millions of yen)

Year ending March 31:
	2003	¥	13,040
	2004		14,599
	2005		6,427
	2006		6,102
	2007		22,805
	2008 and thereafter		58,064

		¥	121,037

13. Lease Commitments

The Company and its subsidiaries occupy certain offices and other facilities and use certain equipment under operating lease arrangements. The future minimum lease payments required under operating leases which, at March 31, 2002, have initial or remaining noncancelable lease term in excess of one year are summarized as follows:

			(Millions of yen)

Year ending March 31:
		2003	¥	2,600
		2004		1,900
		2005		1,017
		2006		446
		2007		246
		2008 and thereafter		72

	Total future minimum lease payments		¥	6,281

Rental expenses under operating leases for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 were ¥31,010 million, ¥7,862 million and ¥30,744 million, respectively.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

14. Payables

Payables at March 31, 2002 and 2001 are summarized as follows:

	March 31

	2002		2001

	*(Millions of yen)***
Notes	¥	14,834	¥	26,291
Accounts		116,151		105,526

	¥	130,985	¥	131,817

15. Income Taxes

Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, inhabitants’ and enterprise taxes which, in the aggregate, resulted in a statutory tax rate of approximately 42%.

The effective tax rates reflected in the consolidated statements of income for the year ended March 31, 2002, the three-month period ended March 31, 2001 and the year ended December 31, 2000 differ from the statutory tax rate due to the following reasons:

	Percent of pretax earnings

	Year ended March 31, 2002			Three-month period ended March 31, 2001			Year ended December 31, 2000

Japanese statutory tax rate		42.0	%		42.0	%		42.0	%
Expenses not deductible for tax purposes		2.7			12.3			4.1
Reversal of prior years’ accruals		(5.4	)		—			—
Other		(0.8	)		10.7			(0.8	)

Effective tax rates		38.5	%		65.0	%		45.3	%

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

15. Income Taxes (continued)

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at March 31, 2002 and 2001 are presented below:

		March 31

		2002			2001

		*(Millions of yen)*
Deferred tax assets:
	Inventory reserve	¥	4,987		¥	5,053
	Intercompany profit on inventory		2,791			2,839
	Depreciation of property, plant and equipment		5,547			3,833
	Investments and other assets		4,737			3,797
	Accrued bonus		7,120			4,301
	Compensated absences		2,047			1,664
	Retirement and severance benefits		14,977			13,022
	Minimum pension liability adjustments		21,474			6,717
	Net operating loss carryforwards		885			318
	Other		8,816			8,558

			73,381			50,102
	Less valuation allowance		(314	)		(666	)

Total deferred tax assets			73,067			49,436

Deferred tax liabilities:
	Net unrealized gains on marketable securities and investment securities		(110	)		(176	)
	Net unrealized derivative gains		(9	)		(366	)
	Reserve for tax purposes		(1,793	)		(2,406	)
	Lease accounting		(3,207	)		(269	)
	Accelerated depreciation		(1,657	)		(1,410	)
	Other		(3,242	)		(5,115	)

Total deferred tax liabilities			(10,018	)		(9,742	)

Net deferred tax assets		¥	63,049		¥	39,694

Net deferred tax assets at March 31, 2002 and 2001 are reflected in the accompanying consolidated balance sheets under the following captions:

	March 31

	2002		2001

	*(Millions of yen)*
Prepaid expenses and other current assets	¥	20,245	¥	14,990
Deferred income taxes		42,804		24,704

	¥	63,049	¥	39,694

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

15. Income Taxes (continued)

The net change in the total valuation allowance was a decrease of ¥352 million for the year ended March 31, 2002, an increase of ¥20 million for the three-month period ended March 31, 2001 and a decrease of ¥628 million for the year ended December 31, 2000.

At March 31, 2002, certain subsidiaries of the Company have net operating loss carryforwards for income tax purposes amounting to ¥3,403 million, which are available to offset against future taxable income, if any. Approximately ¥1,898 million of the operating losses will expire through 2007 while the remainder has an indefinite carryforward period.

The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries amounting to approximately ¥32,861 million at March 31, 2002 as the Company considers such earnings to be permanently invested. Deferred income taxes have also not been provided on undistributed earnings of its domestic subsidiaries as such earnings, if distributed in the form of dividends, are not taxable under present tax laws.

16. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities at March 31, 2002 and 2001 comprise the following:

	March 31

	2002		2001

	*(Millions of yen)*
Accrued expenses	¥	53,252	¥	41,764
Accrued royalty		3,119		3,001
Advances from customers		4,302		3,765
Other		7,844		11,731

	¥	68,517	¥	60,261

17. Retirement and Severance Benefits

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

17. Retirement and Severance Benefits (continued)

The Company and certain of its domestic subsidiaries also have defined benefit pension plans covering substantially all of their employees. The plan consists of two portions: a governmental welfare contributory plan (which would otherwise be provided by the Japanese government) and an additional non-contributory defined benefit plan. The pension benefits are determined based on years of service and compensation as stipulated in the pension plan’s regulations. This plan is funded in conformity with the requirements of the Welfare Pension Insurance Law of Japan. During the year ended March 31, 2002, the Company made certain amendments, which resulted in a decrease in the benefit obligation of ¥14,726 million.

Reconciliations of beginning and ending balances of the benefit obligations and the fair value of the plan assets, the funded status and amounts recognized in the consolidated balance sheets are as follows:

		March 31

		2002			2001

		*(Millions of yen)*
Changes in benefit obligations:
	Benefit obligations at beginning of year	¥	396,891		¥	361,553
	Service cost		18,795			4,716
	Interest cost		11,810			2,931
	Plan participants’ contributions		2,149			537
	Plan amendment		(14,726	)		—
	Actuarial loss		39,800			29,497
	Acquisition		1,135			—
	Benefits paid		(4,345	)		(2,343	)

	Benefit obligations at end of year		451,509			396,891
Changes in plan assets:
	Fair value of plan assets at beginning of year		246,295			232,992
	Actual (loss) return on plan assets		(8,718	)		9,860
	Acquisition		272			—
	Employers’ contributions		21,030			4,713
	Plan participants’ contributions		2,149			537
	Benefits paid		(2,863	)		(1,807	)

	Fair value of plan assets at end of year		258,165			246,295

Funded status			(193,344	)		(150,596	)
Unrecognized net actuarial loss			153,548			97,919
Unrecognized prior service costs (credit)			(17,266	)		(2,674	)
Unrecognized net transition obligation			2,364			5,166

Net amount recognized		¥	(54,698	)	¥	(50,185	)

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

17. Retirement and Severance Benefits (continued)

		March 31

		2002			2001

			*(Millions of yen)*
Amounts recognized in the consolidated balance sheets consist of:
Retirement and severance benefits		¥	(111,001	)	¥	(74,753	)
Prepaid pension and severance costs			925			—
Additional minimum liability adjustments:
	Intangible asset		4,249			8,575
	Deferred tax assets - noncurrent		21,474			6,717
	Minority interest		1,082			—
	Accumulated other comprehensive loss, net of tax		28,573			9,276

Net amount recognized		¥	(54,698	)	¥	(50,185	)

Components of net periodic benefit cost for the year ended March 31, 2002, the three-month period ended March 31, 2001 and the year ended December 31, 2000 are as follows:

		Year ended March 31, 2002			Three-month period ended March 31, 2001			Year ended December 31, 2000

			*(Millions of yen)*
Components of net periodic benefit cost:
	Service cost	¥	18,795		¥	4,716		¥	15,558
	Interest cost		11,810			2,931			11,016
	Expected return on plan assets		(10,047	)		(2,475	)		(10,308	)
	Recognized net actuarial loss		2,946			983			680
	Amortization of unrecognized prior service costs (credit)		(134	)		(33	)		(61	)
	Amortization of unrecognized net transition obligation		2,802			76			304

	Net periodic benefit cost	¥	26,172		¥	6,198		¥	17,189

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

17. Retirement and Severance Benefits (continued)

The assumptions used in accounting for the plans are as follows:

	Year ended March 31, 2002			Three-month period ended March 31, 2001			Year ended December 31, 2000

Weighted-average discount rate		2.5	%		3.0	%		3.0	%
Rate of future compensation increase		2.5	%		2.5	%		2.5	%
Expected long-term rate of return on plan asset		4.0	%		4.0	%		4.0	%

The increase in benefit obligations resulted from the change in the discount rate is included in actuarial loss in the table of changes in benefit obligations presented above.

Payments to directors and statutory auditors, corporate officers and part-time employees are based on separate plans. Amounts of ¥5,369 million and ¥4,953 million have been accrued as of March 31, 2002 and 2001, respectively, and are included in the liability for retirement and severance benefits in the accompanying consolidated balance sheets.

Total charges to income for these benefits for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 amounted to ¥27,127 million, ¥6,864 million and ¥18,543 million, respectively.

18. Stockholders’ Equity

On October 1, 2001, an amendment (the “Amendment”) to the Commercial Code of Japan (the “Code”) became effective. The Amendment eliminates the stated par value of the Company’s outstanding shares which results in all outstanding shares having no par value as of October 1, 2001. The Amendment also provides that share issuances after September 30, 2001 will be of shares with no par value. Before the Amendment, the Company’s shares had a par value of ¥500 per share.

The Code provides that an amount equal to at least 10% of the amount to be disbursed as a distribution of earnings be appropriated to the legal reserve until the total of such reserve and the additional paid-in capital account equals 25% of the common stock account. The Code also provides to the extent that the sum of additional paid-in capital account and the legal reserve account exceed 25% of the common stock account then the amount of the excess (if any) is available for appropriations by resolution of the stockholders. Legal reserve amounting to ¥5,988 million is included in retained earnings in the consolidated balance sheet at March 31, 2002.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

18. Stockholders’ Equity (continued)

Cash dividends charged to retained earnings during the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 represent dividends paid out during the period. The accompanying consolidated financial statements do not include any provision for cash dividends in the amount of ¥8,400 million proposed by the Company for the year ended March 31, 2002.

19. Other Comprehensive Income (Loss)

The accumulated other comprehensive income (loss) in the consolidated balance sheets at March 31, 2002 and 2001 are summarized as follows:

	March 31

	2002			2001

	*(Millions of yen)*
Net unrealized gains on securities	¥	138		¥	242
Net unrealized derivative gains		12			505
Foreign currency translation adjustments		2,113			(7,186	)
Minimum pension liability adjustments		(28,573	)		(9,276	)

	¥	(26,310	)	¥	(15,715	)

Related tax effects allocated to each component of other comprehensive income (loss) for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 are as follows:

					Before-tax amount			Tax (expense) or benefit			Net-of-tax amount

					*(Millions of yen)*
Year ended March 31, 2002
	Unrealized gains on securities:
				Decrease in unrealized gains	¥	(179	)	¥	76		¥	(103	)
				Less reclassification adjustments		(1	)		—			(1	)

						(180	)		76			(104	)
	Unrealized derivative gains:
			Increase in unrealized derivative gains			658			(276	)		382
		Less reclassification adjustments				(1,508	)		633			(875	)

						(850	)		357			(493	)
	Foreign currency translation adjustments					9,299			––			9,299
	Minimum pension liability adjustments					(34,055	)		14,758			(19,297	)

					¥	(25,786	)	¥	15,191		¥	(10,595	)

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

19. Other Comprehensive Income (Loss) (continued)

			Before-tax amount			Tax (expense) or benefit			Net-of-tax amount

			*(Millions of yen)*
Period ended March 31, 2001
	Unrealized gains on securities:
		Decrease in unrealized gains	¥	(14	)	¥	6		¥	(8	)
		Less reclassification adjustments		166			(176	)		(10	)

				152			(170	)		(18	)
	Unrealized derivative gains:
		Increase in unrealized derivative gains		1,093			(459	)		634
		Less reclassification adjustments		(222	)		93			(129	)

				871			(366	)		505
	Foreign currency translation adjustments			4,390			(176	)		4,214
	Minimum pension liability adjustments			(5,357	)		2,250			(3,107	)

			¥	56		¥	1,538		¥	1,594

Year ended December 31, 2000
	Unrealized gains on securities:
		Decrease in unrealized gains	¥	(2,827	)	¥	1,188		¥	(1,639	)
		Less reclassification adjustments		(2,475	)		1,039			(1,436	)

				(5,302	)		2,227			(3,075	)
	Foreign currency translation adjustments			5,473			(119	)		5,354
	Minimum pension liability adjustments			(10,636	)		4,467			(6,169	)

			¥	(10,465	)	¥	6,575		¥	(3,890	)

20. Accounts and Transactions with Stockholder Companies

Before March 30, 2001, the outstanding capital stock of the Company was owned in equal amounts by Fuji Photo Film Co., Ltd. and Xerox Limited, a 100%-owned subsidiary of Xerox Corporation. On March 30, 2001, Fuji Photo Film Co., Ltd. acquired an additional 25% interest through the acquisition of shares from Xerox Limited. After the acquisition, Fuji Photo Film Co., Ltd. became the controlling stockholder.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

20. Accounts and Transactions with Stockholder Companies (continued)

Accounts and transactions with stockholder companies and their affiliates for the year ended March 31, 2002, the period ended March 31, 2001 and the year ended December 31, 2000 are summarized as follows:

		Accounts

		Receivables		Payables

		*(Millions of yen)*
March 31, 2002
	Fuji Photo Film Co., Ltd. and affiliates	¥	3,152	¥	2,118
	Xerox Limited and affiliates		2,924		890
	Xerox Corporation and affiliates		10,426		5,206
March 31, 2001
	Fuji Photo Film Co., Ltd. and affiliates	¥	2,890	¥	2,374
	Xerox Limited and affiliates		4,364		801
	Xerox Corporation and affiliates		15,639		6,999
December 31, 2000
	Fuji Photo Film Co., Ltd. and affiliates	¥	2,673	¥	1,616
	Xerox Limited and affiliates		4,924		369
	Xerox Corporation and affiliates		16,919		6,545

		Transactions

		Sales		Purchases		Royalties and other expenses		Expenses recovered

		*(Millions of yen)*
March 31, 2002
	Fuji Photo Film Co., Ltd. and affiliates	¥	12,151	¥	7,552	¥	793	¥	—
	Xerox Limited and affiliates		10,184		8,889		164		153
	Xerox Corporation and affiliates		44,638		8,467		14,552		3,312
March 31, 2001
	Fuji Photo Film Co., Ltd. and affiliates	¥	2,946	¥	1,899	¥	3	¥	––
	Xerox Limited and affiliates		2,610		1,864		60		25
	Xerox Corporation and affiliates		10,181		5,005		3,288		277
December 31, 2000
	Fuji Photo Film Co., Ltd. and affiliates	¥	7,479	¥	5,463	¥	––	¥	––
	Xerox Limited and affiliates		12,033		5,549		154		164
	Xerox Corporation and affiliates		50,820		9,560		14,527		3,399

The Company pays a royalty to Xerox Corporation based on its revenue; as defined, for the use of certain trademarks and technology, through March 2009 under a Technology Agreement.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21. Financial Instruments

The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. Certain derivative instruments have been entered into by the Company to manage those exposures. These instruments are held for hedging purposes and include forward foreign exchange contracts, currency swap agreement, interest rate swap agreements and cross currency interest rate swap agreements.

Fair Values of Financial Instruments

The estimated fair values of financial instruments at March 31, 2002 and 2001 are summarized as follows:

	March 31

	2002						2001

	Carrying amount			Estimated fair value			Carrying amount			Estimated fair value

	*(Millions of yen)*
Marketable securities	¥	30		¥	30		¥	33		¥	33
Investment securities		4,354			4,354			5,235			5,235
Long-term debt		(121,037	)		(121,845	)		(79,175	)		(80,109	)
Foreign exchange contracts		336			336			1,186			1,186
Currency swap agreements		(382	)		(382	)		70			70
Interest rate swap agreements		(660	)		(660	)		435			435
Cross currency interest rate swap agreements		(776	)		(776	)		—			—

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21. Financial Instruments (continued)

Fair Values of Financial Instruments (continued)

Cash and Cash Equivalents, Receivables, Short-Term Debt, Payables and Accrued Expenses and Other Current Liabilities: The carrying amounts approximate fair values because of the short maturity of these instruments.

Marketable Securities and Investment securities: The fair values of the marketable securities and investment securities are based on quoted market prices.

Derivative Financial Instruments: The fair values of forward foreign exchange contracts, currency swap agreements, interest rate swap agreements and cross currency interest rate swap agreements are estimated based on quotes form brokers and reflect the estimated amounts that the Company would receive (or pay) to terminate the contracts at the reporting date.

Accounting for and Reporting of Derivative Instruments and Hedging Activities

Foreign Currency Risk Management:

In the normal course of business, the Company is exposed to foreign exchange risk in the following areas:

•	Transaction exposures, such as both existing and forecasted sales and purchases and payables/receivables resulting from such transactions

•	Exposure of non-functional-currency-denominated debt

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21. Financial Instruments (continued)

Accounting for and Reporting of Derivative Instruments and Hedging Activities (continued)

Interest Rate Risk Management:

Information with Respect to Cash Flow Hedges:

The Company has entered into forward foreign exchange contracts to protect against the increase or decrease in value of forecasted intercompany purchases or export sales denominated in foreign currency over the next year (maximum length of time is through September 2002). When the yen weakens significantly against the foreign currencies (primarily the U.S. dollars), the increase in value of future foreign currency cost or revenue is offset by gains or losses in the value of the forward exchange contracts designated as hedges. Conversely, when the yen strengthens, the increase or decrease in the value of future foreign currency cash flow is offset by gains or losses in the value of the forward contracts.

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

21. Financial Instruments (continued)

Accounting for and Reporting of Derivative Instruments and Hedging Activities (continued)

In addition, the Company entered into a currency swap and cross currency interest rate swaps that effectively convert a portion of the underlying debt amounts to fixed interest rate and to functional currencies for the next three years (maximum length of time is through April 2004), thus reducing the impact of foreign currency exchange rate and interest rate changes on future income. The forecasted cash flows associated with approximately ¥12,756 million of the outstanding debts of the Company were designated as the hedged items to a currency swap and cross currency interest rate swaps at March 31, 2002.

Changes in fair value of those derivative instruments designated and qualifying as cash flow hedges of variability of cash flows are reported in other comprehensive income, net of applicable taxes. These amounts are reclassified into earnings in the same period and same line item as the hedged items affect earnings. The amounts which were reclassified from accumulated other comprehensive income to other income (expenses), net of related tax effect, were net gains of ¥875 million for the year ended March 31, 2002. The amount of gains or losses on derivatives or portions thereof that were either ineffective as hedges or excluded from the assessment of hedge effectiveness were immaterial to the financial position or operating results of the Company.

At March 31, 2002, the Company expects to reclassify ¥107 million of net gains on derivatives from accumulated other comprehensive income to earnings during the next twelve months due to actual export sales and import purchases and the payment of the underlying debt.

Derivatives not designated as hedges:

Fuji Xerox Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
(unaudited)

22. Supplemental Disclosures of Cash Flow Information

		March 31				December 31,
						December 31,
		2002		2001		2000

		*(Millions of yen)*
Cash paid during the period for:
	Interest	¥	7,226	¥	1,297	¥	4,894
	Income taxes		23,317		7,148		10,634

23. Commitments and Contingencies

At March 31, 2002, commitments outstanding for the purchase of property, plant and equipment approximated ¥707 million. Contingent liabilities for loans guaranteed by the Company, mainly on behalf of employees, amounted to approximately ¥34,906 million.

24. Acquisitions

In September 2001, the Company acquired a laser printer business for ¥15,781 million in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of ¥12,345 million resulting from this acquisition is recorded as goodwill and is subject to periodic testing for impairment.

In January 2000, the Company acquired a color printer business in Asia Pacific area for ¥6,957 million in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of ¥6,257 million resulting from this acquisition is being amortized on a straight-line basis over 20 years.

In December 2000, the Company acquired 100% of the outstanding capital stock of Xerox (Hong Kong) Limited and Xerox China Investments (Bermuda) Limited for ¥61,586 million in cash. This acquisition was accounted for by the purchase method. The excess of costs over the fair value of net assets acquired of ¥50,244 million resulting from this acquisition is being amortized on a straight-line basis over 20 years.