LEXMARK INTERNATIONAL INC /KY/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(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

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO. 1-14050

LEXMARK INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 06-1308215
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

ONE LEXMARK CENTRE DRIVE
740 WEST NEW CIRCLE ROAD
LEXINGTON, KENTUCKY 40550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(859) 232-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No ___

As of March 7, 2003, there were outstanding 126,863,815 shares (excluding shares
held in treasury) of the registrant's Class A common stock, par value $.01,
which is the only class of voting common stock of the registrant, and there were
no shares outstanding of the registrant's Class B common stock, par value $.01.
As of that date, the aggregate market value of the shares of voting common stock
held by non-affiliates of the registrant (based on the closing price for the
Class A common stock on the New York Stock Exchange on March 7, 2003) was
approximately $8,038,669,838.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the company's definitive Proxy Statement for the 2003
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year, is incorporated by reference in Part III of this
Form 10-K.
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LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002

PART I

ITEM 1. BUSINESS

GENERAL

Lexmark International, Inc., ("International") is a Delaware corporation which
is the surviving company of a merger between itself and its former parent
holding company, Lexmark International Group, Inc., ("Group") consummated on
July 1, 2000. Group was formed in July 1990 in connection with the acquisition
of IBM Information Products Corporation from International Business Machines
Corporation ("IBM"). The acquisition was completed in March 1991. Prior to its
merger with International, Group had as its only significant asset all of the
outstanding common stock of International. On November 15, 1995, Group completed
its initial public offering of Class A common stock. International now trades on
the New York Stock Exchange under the symbol "LXK." Hereinafter, the "company"
and "Lexmark" will refer to Group (including its subsidiaries, as the context
requires) for all events prior to July 1, 2000 and will refer to International
(including its subsidiaries, as the context requires) for all events subsequent
to the merger.

Lexmark is a leading developer, manufacturer and supplier of printing
solutions -- including laser and inkjet printers, multifunction products,
associated supplies and services -- for offices and homes. Lexmark develops and
owns most of the technology for its mono and color laser and color inkjet
printers and associated supplies, and that differentiates the company from most
of its major competitors, including Hewlett-Packard, which purchases its laser
engines and cartridges from a third party. Lexmark also sells dot matrix
printers for printing single and multi-part forms by business users and
develops, manufactures and markets a broad line of other office imaging
products. The company operates in the office products industry segment.

Revenue derived from international sales, including exports from the United
States, make up about half of the company's consolidated revenue, with Europe
accounting for approximately two-thirds of international sales. Lexmark's
products are sold in over 150 countries in North and South America, Europe, the
Middle East, Africa, Asia, the Pacific Rim and the Caribbean. Currency
translation has significantly affected international revenue and cost of
revenue. Refer to Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Effect of Currency Exchange Rates and Exchange Rate
Risk Management for more information. As the company's international operations
continue to grow, additional management attention will be required to focus on
the operation and expansion of the company's global business and to manage the
cultural, language and legal differences inherent in international operations. A
summary of the company's revenue and long-lived assets by geographic area is
found in Note 16 of the Notes to Consolidated Financial Statements included in
this Annual Report on Form 10-K.

MARKET OVERVIEW

In 2002, estimated worldwide revenue for printing hardware and associated
supplies in the 1-50 pages per minute ("ppm") speed category, including
monochrome (black) and color laser, inkjet and dot matrix printers, exceeded $40
billion. Lexmark management believes that industry revenue grew slightly in 2002
and industry analysts estimate that the market will in the aggregate experience
modest growth through 2006.

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Certain information contained in the "Market Overview" section has been obtained
from industry sources. Data available from industry analysts varies widely among
sources. The company bases its analysis of market trends on the data available
from several different industry analysts.

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Management believes that the total printing output opportunity is expanding as
copiers and fax machines have begun to be integrated into multifunction
printers. With the integration of print/ copy/fax capabilities, traditional copy
and fax pages are now becoming part of the total printing opportunity and
management believes that this shift should favor companies like Lexmark based on
its experience in providing industry leading network printing solutions and
multifunction printers.

The Internet is positively impacting Lexmark's business in several ways.
Management believes that as more information is available over the Internet, and
new tools are being developed to access it, more of the information from the
Internet is being printed. This is especially beneficial for printer and
supplies manufacturers who benefit from the increase in pages printed, since so
much of the Internet content is rich in color and graphics. The Internet also
allows Lexmark to communicate with and provide support to customers in new and
more valuable ways in addition to reducing costs through achieving operational
efficiencies.

The laser printer market is primarily serving business customers and can be
divided into two major categories -- shared workgroup printers, which are
typically attached directly to networks, and lower priced desktop printers
attached to PCs or small workgroup networks. The shared workgroup printers
include color and monochrome laser printers that are easily upgraded to include
additional input and output capacity, additional memory and storage, and
typically include high performance internal network adapters. Most shared
workgroup printers also have sophisticated network management software tools.
Based on industry data, within the overall laser printer market, Lexmark has
gained market share over the past five years and it is currently second in the
market. At the end of 2002, the company estimated its installed base of laser
printers at 4.9 million units versus 4.4 million units at year-end 2001.

Laser printer unit growth in recent years has generally exceeded the growth rate
of laser printer revenue due to unit growth in lower priced desktop laser
printers and unit price reductions, and management believes this trend will
continue. This pricing pressure is partially offset by the tendency of customers
in the shared workgroup laser market to add higher profit margin optional
features including network adapters, document management software, additional
memory, paper handling and multifunction capabilities.

The inkjet printer market is predominantly a consumer market but may also
include business users who may choose inkjet printers as a lower priced
alternative or supplement to laser printers for personal desktop use. Based on
industry data, over the last four years the company's unit market share has
doubled to just under 20%. Growth in color inkjet printer revenue has been
slower than unit growth due to price reductions, which management expects to
continue. The greater affordability of color inkjet printers, as well as the
growth in the inkjet-based multifunction devices (all-in-one printers), have
been important factors in the growth of this market. At the end of 2002, the
company estimated its installed base of inkjet printers at 45 million units
versus 37 million units at year-end 2001.

The markets for dot matrix printers and most of the company's other office
imaging products, including supplies for select IBM branded printers,
aftermarket supplies for original equipment manufacturer ("OEM") products, and
typewriter supplies continue to decline as these markets mature, and underlying
printer installed bases are replaced.

STRATEGY

Lexmark's strategy is based on a business model of building an installed base of
printers and multifunction products that will then generate demand for Lexmark's
related supplies and services. Lexmark is executing a three-pronged strategy in
implementing its business model. First, the company is pursuing an increased
share of printing solutions in the corporate and consumer markets. Second,
Lexmark is using its technology strengths to maintain a competitive

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difference in its printing products, supplies, software and services. Third, the
company uses a differentiated marketing and sales approach.

Lexmark's business customer strategy is to target large corporations, small and
medium businesses and the public sector to increase market share by providing
high quality, technologically advanced products at competitive prices. Lexmark
will continue to identify and focus on customer segments where Lexmark can
differentiate itself by providing printing solutions that meet specific customer
needs.

For the business customer, Lexmark continues to offer an array of advanced laser
printing solutions at competitive prices. The company believes that it is
well-positioned to take advantage of the potential growth in demand for network
attached printers due to its development and ownership of all key hardware and
software technology components, including network connectivity, management tools
and work flow enhancement solutions. Lexmark continually focuses on enhancing
its laser printers to function efficiently in a networked environment as well as
provide significant flexibility and manageability to the network administrator.

The company's consumer market strategy is to generate demand for Lexmark color
inkjet products by offering high-quality, competitively-priced products to
consumers and businesses primarily through retail channels. Lexmark develops its
own technology to meet customer needs for increased functionality, faster
printing and better print quality. Lexmark believes that its core product
offerings in this market, including the "Z" and "X" families of color inkjet
printers and all-in-one printers, will also help it to build brand recognition
in the retail channels. Lexmark has aggressively reduced costs while pushing the
performance and features of higher-end color inkjets into the sub-$100 segment
and all-in-one printers into the sub-$200 segment.

Because of Lexmark's exclusive focus on printing solutions, the company has
successfully formed alliances and OEM arrangements with more than fifteen
companies, including Dell, IBM and Legend. The entrance of a competitor that is
also exclusively focused on printing solutions could have a material adverse
impact on the company's strategy and financial results.

The company's strategy for dot matrix printers and other office imaging products
is to continue to offer high-quality products while managing cost to maximize
cash flow and profit.

PRODUCTS

Business Products

Lexmark offers a wide range of monochrome and color business printers,
multifunction printers, and associated features, application solutions, and
software upgrades. The monochrome laser printers begin at the high end with the
wide format W820. At up to 45 ppm, the W820 is the fastest printer ever
introduced by Lexmark and is supported with an array of paper handling and
finishing options that make it well suited for departmental printing needs. The
T622 and T620 monochrome laser printers at up to 40 and 30 ppm, respectively,
are designed to support large and medium workgroups and have optional paper
input and output features, including a stapler and offset stacker. The T522 and
T520 monochrome laser printers at up to 25 and 20 ppm, respectively, are
designed to support medium and small workgroups. For the small workgroup and
personal segments, the company offers the E322, E320, and E210 monochrome laser
printers at up to 16, 16, and 12 ppm, respectively. In 2002, the company
introduced the W812, a small workgroup printer designed for wide format and
specialty printing applications with print speeds of up to 26 ppm. Early in
2003, Lexmark introduced the T420d monochrome laser printer designed for small
workgroups, with print speeds of up to 22 ppm.

The single pass technology color laser printers offered by Lexmark are the C750
and C910. The C750 is the first Lexmark color laser printer to feature the
company's internally developed color laser technology. The C750 prints both
monochrome and color pages at up to 20 ppm and is designed for large and medium
workgroups. The C910 prints both monochrome and color pages

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at up to 28 ppm and supports printing on tabloid size paper. The company also
offers the C720, a small workgroup color laser printer that prints at up to 24
ppm in monochrome and six ppm in color.

In 2002, the company introduced the X750e and X620e multifunction printers.
Along with the X820e, these products include an intuitive touch screen display
and the ability to integrate with corporate directories and leverage existing
network security to regulate access. These characteristics make it very easy for
users to scan paper documents and fax or e-mail them. Other multifunction
printers offered by the company include the X720, X520 and X522s, each of which
provides print/copy/fax/scan capability. The X750e and X720 have the added
capability of printing, scanning and copying in color.

In 2002, the company announced the Lexmark 802.11b Wireless Print Adapter to
support wireless networking, and the PrintCryption card which offers secure
printing capabilities. MarkVision Professional, Lexmark's print management
software that provides remote configuration, monitoring, and problem resolution
of network print devices is bundled with all business printers and multifunction
products. Application solution cards that support web, bar code, and Intelligent
Printer Data Stream ("IPDS") printing are also available for most of the
printers in the "T", "W", "C" and "X" families of business printers to support
specific customer environments.

In early 2003, the company introduced the Lexmark Document Solutions Suite which
is designed to minimize the expense and inefficiencies of manual, paper-based
processes that are costly and time-intensive. The Lexmark Document Solutions
Suite integrates three distinct document solutions which work separately or
together as an integrated solution. The Document Distributor package helps
improve information workflow by capturing and moving documents faster, more
efficiently and more accurately into a broader range of network systems. The
Document Producer is an e-forms solution that empowers customers to take control
of the presentation and delivery of output from almost any host system and thus
avoid the cost of preprinted forms. The Document Portal enables a Lexmark
multifunction printer to find, view and print network documents when and where
customers need them.

Inkjet Printers

In 2002, the company broadened its consumer product line with the introduction
of its next generation "Z" line of color inkjet printers, as well as its next
generation "X" line of all-in-one printers. Lexmark's inkjet introductions
included a wide range of innovative features applying cutting edge technology,
as well as proven technology, such as the Accu-Feed paper handling system.

The Lexmark Z65, the flagship of the "Z" line, was the first color inkjet
printer in the market to offer up to 4,800 X 1,200 dots per inch ("dpi"). It
also includes innovative features such as dual paper trays to eliminate the need
for changing media types between print jobs and PrecisionSense technology, which
automatically determines the paper type in the front tray and aligns print
cartridges. The Z65 was also introduced in specialized versions, which included
the Z65n with an integrated Ethernet adapter and the Z65p with digital memory
card slots capable of supporting virtually all digital cameras. Lexmark's 2002
introductions also included the N1 Ethernet adapter, which allows the entire
family of "Z" products to be easily connected to a network. The company has
expanded its line of "Z" color inkjet printers to seven models with maximum
print speeds ranging from nine to 21 ppm in black and six to 15 ppm in color.

The enhancements to Lexmark's "X" series of all-in-one color inkjet printers was
led by the company's new X75 PrinTrio, which offers print, scan and copy
capabilities in an innovative design. The X75 PrinTrio also helped establish new
industry standards in ease of use with integrated photo editing software and the
ability to reduce or enlarge images between 25 and 400 percent. The company also
introduced the X125, which offers standalone fax capability and print speeds of
up to 16 ppm in black. The Lexmark "X" series continues to define the

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multifunction category by offering up to 4,800 X 1,200 dpi printing and up to
9,600 dpi enhanced scanning resolution at consumer prices. Consumer acceptance
of these products has been strong. In early 2003, the company introduced its
latest sub-$200 inkjet all-in-one, the X5150, with print speeds of up to 19 ppm
in black and 14 ppm in color.

Dot Matrix Printers

The company continues to market several dot matrix printer models for customers
who print a large volume of multi-part forms.

Supplies

The company designs, manufactures, and distributes a variety of cartridges and
other supplies for use in its installed base of laser, inkjet, and dot matrix
printers. Lexmark is currently the exclusive source for new printer cartridges
for the printers it manufactures. The company's revenue and profit growth from
its supplies business is directly linked to the company's ability to increase
the installed base of its laser and inkjet printers and customer usage of those
printers. The company also offers a broad range of other office imaging supply
products, applying both impact and non-impact technology.

Service and Support

Lexmark offers a wide range of professional services to complement the company's
line of printing products including consulting, systems integration and print
management capabilities. The company works in collaboration with its customers
to develop and implement comprehensive, customized printing solutions. Print
management services allow organizations to outsource print management, technical
support, supply replenishment and maintenance activities to Lexmark.

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

MARKETING AND DISTRIBUTION

The company employs large account sales and marketing teams whose mission is to
generate demand for Lexmark printing solutions primarily among large
corporations as well as the public sector. Sales and marketing teams focus on
industry segments such as financial services, retail/ pharmacy, manufacturing,
government, education and health care. Those teams, in conjunction with the
company's development and manufacturing teams, are able to customize printing
solutions to meet customer specifications for printing electronic forms, media
handling, duplex printing and other document workflow solutions. The company
also distributes its products to business customers primarily through its
well-established distributor network, which includes such distributors as Ingram
Micro, Tech Data, Synnex, Computer 2000 and Northamber. The company's products
are also sold through solution providers, which offer custom solutions to
specific markets, and through direct response resellers.

The company's business printer supplies and other office imaging products are
generally available at the customer's preferred point of purchase through
multiple channels of distribution. Although channel mix varies somewhat
depending on the geography, substantially all of the company's supplies products
sold commercially in 2002 were sold through the company's network of
Lexmark-authorized supplies distributors and resellers who sell directly to end
users or to independent office supply dealers.

The company distributes its color inkjet printers and supplies primarily through
more than 15,000 retail outlets worldwide including office superstores such as
Staples and OfficeMax, computer superstores such as CompUSA, consumer
electronics stores such as Best Buy and Circuit City

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and wholesale clubs such as Costco and Sam's Club. The company also distributes
its color inkjet printers and supplies through other large discount store chains
such as Wal-Mart and Target, through television marketers such as QVC, and
through stores outside the U.S. such as Dixon's, Carrefour, Harvey Norman, Media
Markt and Vobis.

The company also sells its printers through alliances and OEM arrangements with
more than fifteen companies, including Dell, IBM and Legend.

Lexmark's Internet website enables customers to purchase the company's products
and services directly. It also provides important information regarding the
company's hardware and supplies products, services and technical support, as
well as reseller locations in various countries. Lexmark is using the power of
the Internet as it expands its business-to-business and business-to-consumer
markets.

The company's international sales are an important component of its operations.
The company's sales and marketing activities in its global markets are organized
to meet the needs of the local jurisdictions and the size of their markets. The
company's western European marketing operation is structured similarly to its
domestic marketing activity. The company's products are available from major
information technology resellers such as Northamber, and in large markets, from
key retailers such as Media Markt in Germany, Dixon's in the United Kingdom and
Carrefour in France. Australian, Canadian and Latin American marketing
activities, like those in the United States, focus on large account demand
generation, with orders filled through distributors and retailers. The company's
eastern European, Middle East, African and Asia Pacific markets, other than
Australia, are served through a combination of Lexmark sales offices, strategic
partnerships and distributors.

No single customer has accounted for more than 10% of the company's consolidated
annual revenue since 1996.

COMPETITION

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

In recent years, the company and its principal competitors, many of which have
significantly greater financial, marketing and/or technological resources than
the company, have regularly lowered prices on printers and are expected to
continue to do so. The company is vulnerable to these pricing pressures which,
if not mitigated by cost and expense reductions, may result in lower
profitability and could jeopardize the company's ability to grow or maintain
market share. The company expects that, as it competes more successfully with
its larger competitors, the company's increased market presence may attract more
frequent challenges, both legal and commercial, from its competitors, including
claims of possible intellectual property infringement.

The markets for printers and supplies are highly competitive. The laser printer
market is dominated by Hewlett-Packard, which has a widely recognized brand name
and has been estimated to hold approximately 50% market share. Several other
large vendors such as Canon, Xerox, Brother and Minolta also compete in the
laser printer market.

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As the output environment continues to evolve to include print/copy/scan and
fax, Lexmark is encountering new competitors as copier companies move into the
distributed print market space. This converging marketplace is highly
competitive and includes traditional laser competitors and large copier
companies such as Canon, Ricoh and Xerox.

The company's primary competitors in the color inkjet printer market are
Hewlett-Packard, Epson and Canon, who together account for approximately 80% of
worldwide color inkjet printer sales. As with laser printers, if pricing
pressures are not mitigated by cost and expense reductions, the company's
ability to maintain or build market share and its profitability could be
adversely affected. In addition, the company must compete with Hewlett-Packard,
Epson and Canon for retail shelf space for its low-end laser printers, inkjet
printers, all-in-one products and their associated supplies.

Although Lexmark is currently the exclusive supplier of new printer cartridges
for its laser and inkjet printers, there can be no assurance that other
companies will not develop new compatible cartridges for Lexmark printers. In
addition, refill and remanufactured alternatives for some of the company's
cartridges are available and, although generally offering inconsistent quality
and reliability, compete with the company's supplies business. As the installed
base of laser and inkjet printers grows and matures, the company expects
competitive refill and remanufacturing activity to increase.

The market for other office imaging products is extremely competitive and the
impact technology segment of the supplies market is declining. Although the
company has rights to market certain IBM branded supplies until December 2004,
and certain others until December 2007, there are many independent ribbon and
toner manufacturers competing to provide compatible supplies for IBM branded
printing products. The company is increasingly less dependent on revenue and
profitability from its other office imaging products than it has been
historically. Management believes that the operating income associated with its
other office imaging products will continue to decline rapidly.

MANUFACTURING

The company operates manufacturing control centers in Lexington, Kentucky and
Geneva, Switzerland, and has manufacturing sites in Lexington; Boulder,
Colorado; Orleans, France; Sydney, Australia; Rosyth, Scotland; Juarez, Mexico;
Chihuahua, Mexico and Lapu-Lapu City, Philippines. The company also has
customization centers in each of the major geographies it serves. Most of the
company's laser and inkjet technologies are developed in Lexington and Boulder.
The company's manufacturing strategy is to keep processes that are
technologically complex, proprietary in nature and higher value add, such as the
manufacture of inkjet cartridges, at the company's own facilities. The company
shares some of its technical expertise with certain manufacturing partners who
provide the company with significant printer production capability. Lexmark
oversees these manufacturing partners to ensure that products meet the company's
quality standards and specifications.

The company's development and manufacturing operations for laser printer
supplies, which include toners, photoconductor drums and charge rolls, are
located in Boulder. The company also manufactures toner in Orleans, France. Over
time, the company has made significant capital investments to expand toner and
photoconductor drum processes. Laser printer cartridges are typically assembled
by third party contract manufacturers in the major geographies served by the
company.

MATERIALS

The company procures a wide variety of components used in the manufacturing
process, including semiconductors, electro-mechanical components and assemblies,
as well as raw materials, such as plastic resins. Although many of these
components are standard off-the-shelf

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parts that are available from multiple sources, the company often utilizes
preferred supplier relationships to better ensure more consistent quality, cost
and delivery. Typically, these preferred suppliers maintain alternate processes
and/or facilities to ensure continuity of supply. The company generally must
place commitments for its projected component needs approximately three to six
months in advance. The company occasionally faces capacity constraints when
there has been more demand for its products than initially projected. From time
to time, the company may be required to use air shipment to expedite product
flow, which can adversely impact the company's operating results. Conversely, in
difficult economic times, the company's inventory can grow as market demand
declines.

Most components of the company's products are only available from one supplier,
including certain custom chemicals, microprocessors, electro-mechanical
components, application specific integrated circuits and other semiconductors.
In addition, the company sources some printer engines and finished products from
OEMs. Although the company plans in anticipation of its future requirements,
should these components not be available from any one of these suppliers, there
can be no assurance that production of certain of the company's products would
not be disrupted. Such a disruption could interfere with the company's ability
to manufacture and sell products and materially adversely affect the company's
business. Conversely, during economic slowdowns, the company may build inventory
of components as demand decreases.

RESEARCH AND DEVELOPMENT

The company's research and development activity for the past several years has
focused on laser and inkjet printers, supplies and associated features and
software. The company has been able to keep pace with product development and
improvement while spending less than its larger competitors by selectively
targeting its research and development efforts. It has also been able to achieve
significant productivity improvements and minimize research and development
costs. In the case of certain products, the company may elect to purchase
products and key components from third party suppliers.

The company is committed to being one of the technology leaders in its targeted
areas and is actively engaged in the design and development of additional
products and enhancements to its existing products. Its engineering effort
focuses on laser, inkjet, and connectivity technologies, as well as design
features that will increase efficiency and lower production costs. The process
of developing new technology products is complex and requires innovative designs
that anticipate customer needs and technological trends. Research and
development expenditures were $248 million in 2002, $246 million in 2001 and
$217 million in 2000. In addition, the company must make strategic decisions
from time to time as to which new technologies will produce products in market
segments that will experience the greatest future growth. There can be no
assurance that the company can continue to develop the more technologically
advanced products required to remain competitive.

BACKLOG

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

EMPLOYEES

As of December 31, 2002, the company had approximately 12,100 full-time
equivalent employees worldwide of which 4,600 are located in the U.S. and the
remaining 7,500 are located in Europe, Canada, Latin America, Asia, and the
Pacific Rim. None of the U.S. employees are represented by

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a union. Employees in France are represented by a Statutory Works Council.
Substantially all regular employees have been granted stock options.

The company has conducted a 2000 restructuring and a 2001 restructuring (as more
fully described in Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Restructuring and other charges), pursuant to which
restructurings there were intended to be approximately 2,500 employee
separations. Employee additions to support other initiatives have partially
offset these employee separations resulting in the number of company employees
worldwide going from approximately 13,000 at December 31, 2000 to approximately
12,100 at December 31, 2002.

AVAILABLE INFORMATION

The company makes available, free of charge, electronic access to all documents
filed with the Securities and Exchange Commission by the company on its website
at http://investor.lexmark.com as soon as reasonably practicable after such
documents are filed.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the company and their respective ages, positions and
years of service with the company are set forth below.

Dr. Curlander has been a Director of the company since February 1997. Since
April 1999, Dr. Curlander has been Chairman and Chief Executive Officer of the
company. From May 1998 to April 1999, Dr. Curlander was President and Chief
Executive Officer of the company. From February 1997 to May 1998, Dr. Curlander
was President and Chief Operating Officer of the company, and from January 1995
to February 1997, he was Executive Vice President, Operations of the company. In
1993, Dr. Curlander became a Vice President of the company, and from 1991 to
1993 he was General Manager of the company's printer business.

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Mr. Morin has been Executive Vice President and Chief Financial Officer of the
company since January 2000. From January 1996 to January 2000, Mr. Morin was
Vice President and Chief Financial Officer of the company. Prior to joining the
company, Mr. Morin held various executive and senior management positions with
Huffy Corporation, including most recently, the position of Executive Vice
President and Chief Operating Officer.

Mr. Rooke has been Executive Vice President and President of the company's
Printing Solutions and Services Division since October 2002. Prior to such time
and since May 2001, Mr. Rooke served as Vice President and President of the
Printing Solutions and Services Division. From December 1999 to May 2001, Mr.
Rooke was Vice President and President of the company's Business Printer
Division, and from June 1998 to December 1999, Mr. Rooke was Vice President and
President of the company's Imaging Solutions Division. Mr. Rooke served as Vice
President, Worldwide Marketing for the company's Consumer Printer Division from
September 1996 up to his appointment as a division president. Prior to such
time, he held various positions within the company's printer divisions and
became Vice President and General Manager of Dot Matrix/ Entry Laser Printers in
1994. Prior to joining the company, Mr. Rooke held various positions with IBM.

Mr. Bahous has been Vice President, Customer Services of the company since July
2001. From January 1999 to July 2001, Mr. Bahous served as Vice President and
General Manager, Customer Services Europe. From January 1997 to January 1999,
Mr. Bahous was a Vice President in the company's Imaging Solutions Division in
Europe. Prior to such time and since joining the company in 1991, Mr. Bahous
held various marketing, operations and financial management positions in Europe.
Mr. Bahous will succeed Mr. Craig as Vice President and President of the
company's Consumer Printer Division upon Mr. Craig's retirement in 2003.

Mr. Bork has been Vice President, Tax of the company since May 2001. From
October 1996 to May 2001, he was Director of Taxes of the company. Prior to
joining the company, Mr. Bork was Director of Taxes with Cray Research, Inc.
Prior to his tenure at Cray Research, Inc., Mr. Bork was with the accounting
firm of Coopers & Lybrand, most recently serving as Director of International
Tax in Coopers & Lybrand's Minneapolis office.

Mr. Braun has been Vice President and Treasurer of the company since November
2002. From August 1998 to November 2002, Mr. Braun was Treasurer of the company.
Mr. Braun served as Director, Investor Relations from October 1995 until his
appointment as Treasurer, and as Manager of Currency Exposure from the time he
joined the company in 1992 up to his appointment as Director, Investor
Relations. Prior to joining the company, Mr. Braun held various financial
positions with Cummins Engine Co.

Mr. Cole has been Vice President and General Counsel of the company since July
1996 and Corporate Secretary since February 1996. Prior to such time, commencing
in March 1991, Mr. Cole served as Corporate Counsel and then Assistant General
Counsel. Prior to joining the company, Mr. Cole was associated with the law firm
of Cahill Gordon & Reindel.

Mr. Craig has been Vice President and President of the company's Consumer
Printer Division since November 2000. From June 2000 to November 2000, Mr. Craig
served as a Vice President of the company, reporting to the Chairman and Chief
Executive Officer. From October 1997 to June 2000, Mr. Craig served as a Vice
President in the company's Business Printer Division, and prior to such time, he
served as a Director in the company's Business Printer Division. Mr. Craig has
announced that he will retire in 2003.

Mr. Goodnight has been Vice President, Asia Pacific and Latin America since June
2001. From May 1998 to June 2001, Mr. Goodnight served as Vice President and
Corporate Controller of the company. From February 1997 to May 1998, he served
as Controller of the company. Prior to such time and since January 1994, when he
joined the company, Mr. Goodnight served as CFO

10

for the company's Business Printer Division. Prior to joining the company, Mr.
Goodnight held various controller positions with Calcomp, a division of Lockheed
Martin Corporation.

Mr. Rydell has been Vice President of Corporate Communications since he joined
the company in January 1998. Prior to joining the company, Mr. Rydell was Vice
President of Corporate Communications for The Timberland Company from December
1994 to January 1998. Prior to that, Mr. Rydell served as Director of Worldwide
Communications for Dell Computer Corporation.

Mr. Stromquist has been Vice President and Corporate Controller of the company
since July 2001. From July 1999 to July 2001, Mr. Stromquist served as Vice
President of Alliances/ OEM in the company's Consumer Printer Division. From
November 1998 to July 1999, he served as Vice President of Finance of the
company's Consumer Printer Division. From March 1997 to November 1998, he served
as CFO of the company's Consumer Printer Division. Prior to such time and since
joining the company in 1991, Mr. Stromquist was Director of Corporate Planning.
Mr. Stromquist is the husband of Jeri I. Stromquist, Vice President of Human
Resources of the company.

Ms. Stromquist has been Vice President of Human Resources of the company since
February 2003. From January 2001 to February 2003, Ms. Stromquist served as Vice
President of Worldwide Compensation and Resource Programs in the company's Human
Resources department. From November 1998 to January 2001, she served as Vice
President of Finance of the company's Business Printer Division. From January
1997 to November 1998, she served as CFO of the company's Business Printer
Division. Prior to that time, Ms. Stromquist held various accounting and finance
positions within the company, including that of U.S. Controller. Ms. Stromquist
is the wife of Gary D. Stromquist, Vice President and Corporate Controller of
the company.

INTELLECTUAL PROPERTY

The company's intellectual property is one of its major assets and the ownership
of the technology used in its products is important to its competitive position.
Lexmark seeks to establish and maintain the proprietary rights in its technology
and products through the use of patents, copyrights, trademarks, trade secret
laws, and confidentiality agreements.

The company holds a significant number of U.S. and international patents and has
approximately 900 pending patent applications worldwide covering a range of
subject matter. The company's patent strategy is to obtain patents on key
features of the new hardware and software products it develops and to patent a
range of inventions included in new supplies products, such as toner and inkjet
cartridges. Where appropriate, the company seeks patents on inventions flowing
from its general research and development activities. While no single patent or
series of patents is material to the company, the company's management believes
that the company's patent portfolio in the aggregate serves to protect its
product lines and offers the possibility of entering into license agreements
with others.

The company currently has in excess of 100 patent cross-license agreements of
various types with a variety of third parties, including agreements with some of
its competitors, such as Canon and Hewlett-Packard. Most of these license
agreements provide cross-licenses to patents arising from patent applications
first filed by the parties to the agreements prior to certain dates in the early
1990s, with the date varying from agreement to agreement. Each of the IBM, Canon
and Hewlett-Packard cross-licenses that the company holds grants worldwide,
royalty-free, non-exclusive rights to the company to use the covered patents to
manufacture particular products. Certain of the company's material license
agreements, including those that permit the company to manufacture its current
designs of laser and inkjet printers and aftermarket laser cartridges for
particular OEM printers, terminate as to specific products upon certain "changes
of control" of

11

the company. The company also holds a number of specific patent licenses with
third parties that permit the production of particular features in its products.

The company has trademark registrations or pending trademark applications for
the name LEXMARK in approximately 70 countries for various categories of goods.
Lexmark also owns a number of trademark applications and registrations for
product names, such as the OPTRA laser printer name. The company holds worldwide
copyrights in computer code, software and publications of various types. Other
proprietary information is protected through formal procedures which include
confidentiality agreements with employees and other entities.

The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate without
infringing the proprietary rights of others. While Lexmark designs its products
to avoid infringing the intellectual property rights of others, current or
future claims of intellectual property infringement could materially adversely
affect its business, operating results and financial condition. Expenses
incurred by the company in obtaining licenses to use the intellectual property
rights of others and to enforce its intellectual property rights against others,
or defend against claims that the company's products infringe the intellectual
property rights of others, could also materially affect its business, operating
results, and financial condition. In addition, the laws of some foreign
countries may not protect Lexmark's proprietary rights to the same extent as the
laws of the United States.

ENVIRONMENTAL AND REGULATORY MATTERS

The company's operations, both domestically and internationally, are subject to
numerous laws and regulations, particularly relating to environmental matters
that impose limitations on the discharge of pollutants into the air, water and
soil and establish standards for the treatment, storage and disposal of solid
and hazardous wastes. Over time, the company has implemented numerous programs
to recover, remanufacture and recycle certain of its products and intends to
continue to expand on initiatives that have a positive effect on the
environment. The company is also required to have permits from a number of
governmental agencies in order to conduct various aspects of its business.
Compliance with these laws and regulations has not had, and in the future is not
expected to have, a material effect on the capital expenditures, earnings or
competitive position of the company. There can be no assurance, however, that
future changes in environmental laws or regulations, or in the criteria required
to obtain or maintain necessary permits, will not have an adverse effect on the
company's operations.

ITEM 2. PROPERTIES

The company's corporate headquarters and principal development facilities are
located on a 386 acre campus in Lexington, Kentucky. At December 31, 2002, the
company owned or leased 6.9 million square feet of administrative, sales,
service, research and development, warehouse and manufacturing facilities
worldwide.

Approximately 4.5 million square feet is located in the United States and the
remainder is located in various international locations. The company's principal
international manufacturing facilities are in Mexico, the Philippines, Scotland
and Australia. The principal domestic manufacturing facility is in Colorado. The
company also owns and leases customer technical support call centers worldwide,
the largest of which are in Kentucky, Florida and Ireland. The company owns
approximately 64% of the worldwide square footage and leases the remaining 36%.
The leased property has various lease expiration dates. The company believes
that it can readily obtain appropriate additional space as may be required at
competitive rates by extending expiring leases or finding alternative space.

None of the property owned by the company is held subject to any major
encumbrances and the company believes that its facilities are in good operating
condition.

12

ITEM 3. LEGAL PROCEEDINGS

On December 30, 2002, the company filed a lawsuit against Static Control
Components, Inc. ("SCC") in the U.S. District Court for the Eastern District of
Kentucky alleging that certain SCC products infringe the company's copyrights
and are in violation of the Digital Millennium Copyright Act. By Opinion and
Order dated February 27, 2003, the Court granted the company's motion requesting
a preliminary injunction ordering SCC to cease making, selling or otherwise
trafficking in the specified products. On February 28, 2003, SCC filed a lawsuit
against the company in the U.S. District Court for the Middle District of North
Carolina alleging that the company engaged in anti-competitive and monopolistic
conduct and unfair and deceptive trade practices in violation of the Sherman
Act, the Lanham Act and various North Carolina State laws. SCC is seeking
damages in excess of $100 million. The company believes that the claims by SCC
are without merit, and intends to vigorously defend them.

The company and Pitney Bowes, Inc. ("PBI") are involved in litigation in the
U.S. District Court for the Eastern District of Kentucky in which PBI alleges
that certain of the company's printers infringe the claims of PBI's patent
4,386,272, and that such infringement is willful. The company believes, based on
the opinion of outside counsel, that it does not infringe the patent. The
company believes the claims are without merit, and intends to vigorously defend
them.

In late 2001, the company and certain of its officers and directors were named
as defendants in four substantially identical securities class actions, which
were consolidated (the "Consolidated Complaint") in the U.S. District Court for
the Eastern District of Kentucky. The Consolidated Complaint sought unspecified
damages on behalf of a purported class consisting of purchasers of the company's
stock during the period March 20, 2001 through October 22, 2001. Plaintiffs
alleged that the defendants made false and misleading statements about the
company's business and financial performance in violation of Sections 10(b) and
20(a) (as well as Rule 10b-5) of the Securities Exchange Act of 1934. By Opinion
and Order dated November 8, 2002, the Court granted the defendants' Motion to
Dismiss the Consolidated Complaint with prejudice. The plaintiffs have failed to
timely appeal the Court's decision and therefore it is final.

The company is also party to various litigation and other legal matters,
including various purported consumer class action lawsuits alleging, among other
things, various product defects and false and deceptive advertising claims, that
are being handled in the ordinary course of business. Although it is not
reasonably possible to estimate whether a loss will occur in any of these
matters, or if a loss should occur, the amount of such loss, the company does
not believe that any legal proceedings to which it is a party is likely to have
a material adverse effect on the company's financial position or results of
operations.

As the company competes more successfully with its larger competitors, the
company's increased market presence may attract more frequent legal challenges
from its competitors, including claims of possible intellectual property
infringement. There can be no assurance that any pending litigation or any
litigation that may result from the current claims or any future claims by these
parties or others would not have a material adverse effect on the company's
financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Lexmark's Class A common stock is traded on the New York Stock Exchange under
the symbol LXK. As of March 7, 2003, there were 1,758 holders of record of the
Class A common stock and there were no holders of record of the Class B common
stock. Information regarding the market prices of the company's Class A common
stock appears in Part II, Item 8, Note 17 of the Notes to Consolidated Financial
Statements.

DIVIDEND POLICY

The company has never declared or paid any cash dividends on the Class A common
stock and has no current plans to pay cash dividends on the Class A common
stock. The payment of any future cash dividends will be determined by the
company's board of directors in light of conditions then existing, including the
company's earnings, financial condition and capital requirements, restrictions
in financing agreements, business conditions, tax laws, certain corporate law
requirements and various other factors.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the company's equity compensation
plans as of December 31, 2002.

(Number of securities in millions)
- --------------------------------------------------------------------------------

(1) The numbers in this column represent the weighted average exercise price of
stock options only.

(2) As of December 31, 2002, of the approximately 12.4 million awards
outstanding under the equity compensation plans approved by stockholders,
there were approximately 11.8 million stock options (of which 11,558,000 are
employee stock options and 253,000 are nonemployee director stock options),
258,000 restricted stock units and supplemental deferred stock units,
134,000 voluntarily deferred performance shares that were earned as of the
end of 2000, and 215,000 elective deferred stock units (of which 168,000 are
employee elective deferred stock units and 47,000 are nonemployee director
elective deferred stock units) that pertain to voluntary elections by
certain members of management to defer all or a portion of their annual
incentive compensation and by certain nonemployee directors to defer all or
a portion of their annual retainer, chair retainer and/or meeting fees, that
would have otherwise been paid in cash. Of the 6.7 million shares available,
4.0 million relate to employee plans (of which 0.2 million may be granted as
full-value awards), 0.2 million relate to the nonemployee director plan and
2.5 million relate to the employee stock purchase plan.

(3) The company has only one equity compensation plan which has not been
approved by its stockholders, the Lexmark International, Inc. Broad-Based
Employee Stock Incentive Plan (the "Broad-Based Plan"). The Broad-Based
Plan, which was established on December 19, 2000, provides for the issuance
of up to 1.6 million shares of the company's common stock pursuant to stock
incentive awards (including stock options, stock appreciation rights,
performance awards, restricted stock units and deferred stock units) granted
to the company's employees, other than its directors and executive officers.
The Broad-Based Plan expressly provides that the company's directors and
executive officers are not eligible to participate in the Plan. The
Broad-Based Plan limits the number of shares subject to full-value awards
(e.g., restricted stock units and performance awards) to 50,000 shares. The
company's board of directors may at any time terminate or suspend the
Broad-Based Plan, and from time to time, amend or modify the Broad Based-
Plan, but any amendment which would lower the minimum exercise price for
options and stock appreciation rights or materially modify the requirements
for eligibility to participate in the Broad-Based Plan, requires the
approval of the company's stockholders. In January 2001, all employees other
than the company's directors, executive officers and senior managers, were
awarded stock options under the Broad-Based Plan. All 1.4 million awards
outstanding under the equity compensation plan not approved by stockholders
are in the form of stock options.

14

ITEM 6. SELECTED FINANCIAL DATA

The table below summarizes recent financial information for the company. For
further information refer to the company's financial statements and notes
thereto presented under Part II, Item 8 of this Form 10-K.

(Dollars in Millions, Except per Share Data)
- --------------------------------------------------------------------------------

(1) All data prior to 2002 has been reclassified in accordance with EITF 00-25
and clarified by EITF 01-9, resulting in a reduction to both revenue and
selling, general and administrative expense in the amount of $38.5 million
in 2001, $39.7 million in 2000, $38.6 million in 1999 and $42.4 million in
1998.
(2) Amounts include the impact of restructuring and other charges in 2001 of
$87.7 million ($64.5 million, net of tax), which resulted in a $0.48
reduction in diluted net earnings per share. Inventory write-offs of $29.3
million associated with the restructuring actions were included in cost of
revenue.
(3) Amounts include the impact of restructuring and related charges in 2000 of
$41.3 million ($29.7 million, net of tax), which resulted in a $0.22
reduction in diluted net earnings per share.
(4) Amounts include the benefit of a ($5.9) million (($4.4) million, net of tax)
reversal of restructuring and other charges in 2002, which resulted in a
$0.03 increase in diluted net earnings per share.
(5) Provision for income taxes in 2001 includes a $40 million benefit from the
resolution of income tax matters, which resulted in a $0.30 increase in
diluted net earnings per share.
(6) All data prior to 1999 has been restated to reflect a two-for-one stock
split on June 10, 1999.
(7) Cash flows from investing and financing activities, which are not presented,
are integral components of total cash flow activity.
(8) The debt to total capital ratio is computed by dividing total debt (which
includes both short-term and long-term debt) by the sum of total debt and
stockholders' equity.
(9) Represents the number of full-time equivalent employees at December 31 of
each year.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto:

OVERVIEW

Lexmark International, Inc. ("International," and together with its
subsidiaries, the "company" or "Lexmark") is a leading developer, manufacturer
and supplier of printing solutions -- including laser and inkjet printers,
multifunction products, associated supplies and services -- for offices and
homes. The company also sells dot matrix printers for printing single and
multi-part forms for business users and develops, manufactures and markets a
broad line of other office imaging products.

In the past five years, the worldwide printer industry has seen growth in laser
and inkjet printers as a result of the increasing penetration of personal
computers and local area networks into home and office markets. During this
period, the company's own product mix has evolved, with its laser and inkjet
printers and associated supplies representing an increasing percentage of its
sales volume and revenue, particularly as the increasing base of installed
Lexmark printers generates additional revenue from recurring sales of supplies
for those printers (primarily laser and inkjet cartridges). Lexmark believes
that its total revenue will continue to grow due to projected overall market
growth for 2003 to 2006.

In recent years, the company's growth rate in sales of printer units has
generally exceeded the growth rate of its printer revenue due to sales price
reductions and the introduction of new lower priced products in both the laser
and inkjet printer markets. In the laser printer market, unit price reductions
are partially offset by the tendency of customers to add higher profit margin
optional features including network adapters, document management software,
additional memory, paper handling and multifunction capabilities. In the inkjet
printer market, advances in color inkjet technology have resulted in printers
with higher resolution and improved performance while increased competition has
led to lower prices. The greater affordability of color inkjet printers, as well
as the growth in the all-in-one category, have been important factors in the
growth of this market.

As the installed base of Lexmark laser and inkjet printers continues to grow,
management expects the market for supplies will grow as well, as such supplies
are routinely required for use throughout the life of the printers. While profit
margins on printer hardware have been negatively affected by competitive pricing
pressure, the supplies are a higher margin, recurring business, which the
company expects to contribute to the stability of its earnings over time.

The company's dot matrix printers and other office imaging products include many
mature products such as supplies for IBM printers, typewriter supplies and other
impact technology supplies that require little ongoing investment. The company
expects that the market for these products will continue to decline rapidly, and
has implemented a strategy to continue to offer high-quality products while
managing cost to maximize cash flow and profit.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Lexmark's discussion and analysis of its financial condition and results of
operations are based upon the company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of consolidated financial
statements requires the company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
company evaluates its estimates, including those related to customer programs
and incentives, product returns,

16

doubtful accounts, inventories, intangible assets, income taxes, warranty
obligations, restructurings, pension and other postretirement benefits, and
contingencies and litigation. The company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.

Revenue Recognition
- -------------------
The company records estimated reductions to revenue at the time of sale for
customer programs and incentive offerings including special pricing agreements,
promotions and other volume-based incentives. Estimated reductions in revenue
are based upon historical trends and other known factors at the time of sale. In
addition, the company provides price protection to reseller customers. The
company records reductions to revenue for the estimated impact of price
protection when price reductions are announced to resellers. If market
conditions were to decline, the company may take actions to increase customer
incentive offerings, possibly resulting in an incremental reduction of revenue
at the time the incentive is offered.

Allowances for Doubtful Accounts
- --------------------------------
The company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
company determines the estimate of the allowance for doubtful accounts based on
a variety of factors including the length of time receivables are past due, the
financial health of customers, unusual macroeconomic conditions, and historical
experience. If the financial condition of the company's customers were to
deteriorate or other circumstances occur that result in an impairment of
customers' ability to make payments, additional allowances may be required.

Warranty Reserves
- -----------------
The company provides for the estimated cost of product warranties at the time
revenue is recognized. The reserve for product warranties is based on the
quantity of units sold under warranty, estimated product failure rates, and
material usage and service delivery costs. The estimates for product failure
rates and material usage and service delivery costs are periodically adjusted
based on actual results. To minimize warranty costs, the company engages in
extensive product quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers. Should actual product
failure rates, material usage or service delivery costs differ from the
company's estimates, revisions to the estimated warranty liability may be
required.

Inventory Reserves
- ------------------
The company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value. The company estimates the difference between the cost of
obsolete or unmarketable inventory and its market value based upon product
demand requirements, product life cycle, product pricing, and quality issues.
Also, the company records an adverse purchase commitment liability when
anticipated market sales prices are lower than committed costs. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs and adverse purchase commitment liabilities may be
required.

17

Long-Lived Assets
- -----------------
Management considers the potential impairment of both tangible and intangible
assets when circumstances indicate that the carrying amount of an asset may not
be recoverable. An asset impairment review estimates the fair value of an asset
based upon the future cash flows that the asset is expected to generate. Such an
impairment review incorporates estimates of forecasted revenue and costs that
may be associated with an asset, expected periods that an asset may be utilized,
and appropriate discount rates.

Pension and Postretirement Benefits
- -----------------------------------
The company accounts for its defined benefit pension plans and its non-pension
postretirement benefit plans using actuarial models required by Statement of
Financial Accounting Standards ("SFAS") No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, respectively. These models use an attribution approach that
generally spreads the expected liability for projected benefits over the service
lives of the employees in the plan and require that explicit assumptions be used
to estimate future events. Examples of assumptions the company must make include
selecting the following: expected long-term rate of return on plan assets, a
discount rate that reflects the rate at which pension benefits could be settled,
and the anticipated rates of future compensation increases.

The assumed long-term rate of return on plan assets and the market-related value
of plan assets are used to calculate the expected return on plan assets. The
required use of an expected versus actual long-term rate of return on plan
assets may result in recognized pension income that is greater or less than the
actual returns of those plan assets in any given year. Over time, however, the
expected long-term returns are designed to approximate the actual long-term
returns and therefore result in a pattern of income and expense recognition that
more closely matches the pattern of the services provided by the employees. For
the market-related value of plan assets, the company uses a calculated value
that recognizes changes in asset fair values in a systematic and rational
manner. A five-year-moving-average value is used for equities and high-yield
bonds due to the volatility of these types of investments and fair value is used
for low-yield bonds. Differences between actual and expected returns are
recognized in the market-related value of plan assets over five years.

The company uses long-term historical actual return information, the mix of
investments that comprise plan assets and future estimates of long-term
investment returns by reference to external sources to develop its expected
return on plan assets.

The discount rate assumptions used for pension and non-pension postretirement
benefit plan accounting reflect the rates available on high-quality fixed-income
debt instruments at December 31 each year. The rate of future compensation
increases is determined by the company based upon its long-term plans for such
increases.

Changes in actual asset return experience and discount rate assumptions can
impact the company's stockholders' equity. Actual asset return experience
results in an increase or decrease in the asset base and this effect, in
conjunction with a decrease in the pension discount rate, may result in a plan's
assets being less than a plan's accumulated benefit obligation ("ABO"). The ABO
is the present value of benefits earned to date and is based on past
compensation levels. The company is required to show in its statements of
financial position a net liability that is at least equal to the ABO less the
market value of plan assets. This liability is referred to as an additional
minimum liability ("AML"). An AML, which is recorded and updated on December 31
each year, is reflected as a long-term pension liability with the offset in
other comprehensive earnings (loss) in the equity section of the statements of
financial position (on a net of tax basis) and/or as an intangible asset to the
degree a company has unrecognized prior service costs.

18

Income Taxes
- ------------
The company estimates its tax liability based on current tax laws in the
statutory jurisdictions in which it operates. These estimates include judgments
about deferred tax assets and liabilities resulting from temporary differences
between assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes, as well as about the realization of
deferred tax assets. If the provisions for current or deferred taxes are not
adequate, if the company is unable to realize certain deferred tax assets or if
the tax laws change unfavorably, the company could experience potential
significant losses in excess of the reserves established. Likewise, if the
provisions for current and deferred taxes are in excess of those eventually
needed, if the company is able to realize additional deferred tax assets or if
tax laws change favorably, the company could experience potential significant
gains.

RESTRUCTURING AND OTHER CHARGES

As of December 31, 2002, the company had substantially completed all
restructuring activities and, therefore, reversed approximately $5.9 million
($4.4 million, net of tax) during the fourth quarter of 2002. The reversal was
primarily due to lower severance costs (approximately $3.5 million) and lower
other exit costs (approximately $2.4 million) associated with the 2001 and 2000
restructuring plans. The severance payments were lower than originally estimated
due to higher than expected attrition which resulted in the company being able
to achieve headcount reductions at a lower cost. Although the restructuring
activities were substantially complete at year-end 2002 and the employees have
exited the business, approximately $4.7 million of severance payments are
projected to continue into the first half of 2003, and are accounted for
accordingly in the remaining reserve.

The following table presents a rollforward of the liabilities (in millions)
incurred in connection with the 2000 and 2001 restructuring plans. These
liabilities are reflected as accrued liabilities in the company's consolidated
statements of financial position.

During the fourth quarter of 2001, Lexmark's management and board of directors
approved a restructuring plan (the "2001 restructuring") that included a
reduction in the company's global workforce of up to 12 percent. This plan
provided for a reduction in infrastructure and overhead expenses, the
elimination of the company's business class inkjet printer, and the closure of
an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and
related charges of $58.4 million ($42.9 million, net of tax) were expensed
during the fourth quarter of 2001. These charges were comprised of $36.0 million
of accrued restructuring costs related to separation and other exit costs, $11.4
million associated with a pension curtailment related to the employee

19

separations and $11.0 million related to asset impairment charges. The company
also recorded $29.3 million ($21.6 million, net of tax) of associated
restructuring-related inventory write-offs resulting from the company's decision
to eliminate its business class inkjet printer, to limit the period over which
the company will provide replacement parts for products no longer in production,
and to exit the electronic card manufacturing facility. The inventory write-offs
were included on the cost of revenue line in the statements of earnings.

The accrued restructuring costs for employee separations of $26.3 million were
associated with approximately 1,600 employees worldwide from various business
functions and job classes. Employee separation benefits include severance,
medical and other benefits. As of December 31, 2002, approximately 1,225
employees have exited the business under the 2001 restructuring plan. This total
includes the employees discussed below who were transferred to another company.
In addition to employees exiting the business under the restructuring plan, the
company's headcount has further decreased due to higher than expected attrition.
The other exit costs of $9.7 million were primarily related to vendor and lease
cancellation charges.

The $11.0 million charge for asset impairment in 2001 was determined in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and resulted from the company's
decision to abandon certain assets consisting primarily of machinery and
equipment used to manufacture business class inkjet printers and electronic
cards. The charge for asset impairments was included on the restructuring and
related charges line in the statements of earnings.

In connection with the company's plans to exit the electronic card manufacturing
facility in Reynosa, Mexico, Lexmark sold the Reynosa operation to
Manufacturers' Services Limited ("MSL") in early July 2002. Approximately 250
Reynosa employees were transferred to MSL as part of the sale transaction and
those employees were expected to be retained by MSL. In accordance with the
sales agreement, the company prepaid eighteen months of the building lease and
agreed to provide support payments to MSL for approximately eighteen months,
subject to the terms of the agreement. MSL agreed to assume the building lease
payments for the remainder of the lease term. During the third quarter of 2002,
the company reversed excess reserves of approximately $5.4 million for lease
cancellation charges and employee separation costs, which were not incurred as a
result of the sale to MSL. The company recorded a charge for approximately the
same amount related to the support agreement with MSL.

Included in the table was approximately $30.3 million at December 31, 2001
associated with the 2001 restructuring liability. After the reversal of $2.9
million, which is an element of the total $5.9 million reversal as shown in the
restructuring liabilities table, the remaining restructuring liability for the
2001 plan was $4.7 million at December 31, 2002.

In October 2000, Lexmark's management and board of directors approved a plan to
restructure its worldwide manufacturing and related support operations (the
"2000 restructuring"). The 2000 restructuring plan involved relocating
manufacturing, primarily laser printers, to Mexico and China, and reductions in
associated support infrastructure. Restructuring and related charges of $41.3
million ($29.7 million, net of tax) were expensed during the fourth quarter of
2000. These charges were comprised of $24.3 million of accrued restructuring
costs related to separation and other exit costs, $10.0 million related to asset
impairment charges and $7.0 million associated with a pension curtailment loss
related to the employee separations.

The employee separation costs included severance, medical and other benefits
associated with approximately 900 employees worldwide, primarily in the
manufacturing and related support areas. The other exit costs were related to
vendor and lease cancellation charges and demolition and cleanup costs
associated with the company's manufacturing relocation. The asset impairment
charges resulted from the company's plans to abandon certain assets (primarily
buildings) associated with the relocation of manufacturing and related support
activities. As of December 31, 2001, substantially all of the employees
identified in the 2000 restructuring had

20

exited the business and received separation benefits. Included in the table was
approximately $4.0 million at December 31, 2001 associated with the 2000
restructuring liability, principally associated with anticipated demolition and
cleanup activities related to assets that were to be abandoned, and medical
coverage provided to employees who were bridged to retirement. The remaining
restructuring liability of $3.0 million related to 2000 was reversed and is an
element of the total $5.9 million reversal as shown in the restructuring
liabilities table.

HEADCOUNT

The 2000 and 2001 restructurings were intended to result in approximately 2,500
employee separations from the company. Employee additions to support other
initiatives have partially offset these employee separations resulting in the
number of company employees worldwide going from approximately 13,000 at
December 31, 2000 to approximately 12,100 at December 31, 2002.

BASIS OF PRESENTATION

In 2001, the Emerging Issues Task Force ("EITF") reached a consensus that
consideration from a vendor to a purchaser of the vendor's products should be
characterized as a reduction in revenue as stated in EITF 00-25, Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products, and clarified in EITF 01-9. This EITF
consensus was effective for annual or interim financial statements beginning
after December 5, 2001, with reclassification required for comparative prior
periods. The company adopted this EITF as required in 2002 and the adoption of
this statement had no impact on the company's net earnings, financial position
or cash flows, but did result in a reclassification of certain prior year
reported amounts to conform to the current year's presentation. Both revenue and
selling, general and administrative expense for the twelve months ended December
31, 2001 and 2000 were reduced by approximately $38.5 million and $39.7 million,
respectively, as a result of this reclassification.

RESULTS OF OPERATIONS

2002 COMPARED TO 2001

Consolidated revenue in 2002 was $4,356 million, an increase of 6% over 2001.
Total U.S. revenue increased $196 million or 11% and international revenue,
including exports from the U.S., increased $56 million or 3%. Revenue was
positively affected by foreign currency exchange rates primarily due to
strengthening of European currencies against the U.S. dollar. Revenue growth was
4% year-to-year on a constant currency basis. Revenue from sales to all OEM
customers accounted for less than 10% of consolidated revenue in 2002 with no
single OEM customer accounting for more than 5% of total revenue.

The revenue growth in 2002 was driven by increased sales of laser and inkjet
supplies whose revenue increased 19% over 2001. Laser and inkjet supplies
revenue was $2,335 million for 2002, versus $1,958 million a year earlier, and
represents 54% of total revenue versus 48% in 2001. Laser and inkjet printer
revenue was $1,631 million for 2002, a slight increase from 2001.

Consolidated gross profit was $1,371 million for 2002, an increase of 11% from
2001. Gross profit as a percentage of revenue for 2002 increased to 31.5% from
30.2% in 2001, an increase of 1.3 percentage points. The increase was
principally due to an increase to supplies in the product mix (2.3 percentage
points), higher supplies margins (1.1 percentage points) and the impact of a
restructuring related inventory charge of $29 million in 2001 (0.7 percentage
points), partially offset by lower printer margins (2.8 percentage points).

Total operating expense was $860 million in 2002, a decrease of 4% from 2001.
Operating expense in 2002 included a $6 million benefit in the fourth quarter of
2002 from the reversal of

21

previously accrued restructuring charges and operating expense in 2001 included
a restructuring charge of approximately $58 million. Operating expense as a
percentage of revenue decreased to 19.7% in 2002 compared to 21.9% in 2001. The
2.2 percentage point decrease was primarily due to the restructuring charge in
2001 and the reversal in 2002 as well as the company's continuing focus on
expense management and the benefits of the restructuring activities.

Consolidated operating income was $511 million in 2002 compared to $341 million
in 2001, a 50% increase. Included in the 2002 operating income was the $6
million restructuring reversal benefit noted previously and the 2001 operating
income included $88 million of restructuring and related charges. The increase
in the consolidated operating income was due to the impact of the restructuring
charges, the increased gross profit margin and the decrease in operating expense
as a percentage of revenue.

Non-operating expenses declined $8 million from 2002 to 2001, principally due to
reduced borrowings at lower interest rates partially offset by a $5 million
write-down of a private equity investment during 2002.

Net earnings were $367 million in 2002 compared to $274 million in 2001.
Included in the 2002 net earnings was a $4 million after-tax benefit of the
restructuring reversal and the 2001 net earnings included restructuring and
related charges of $65 million after-tax as well as a $40 million benefit from
the resolution of income tax matters. After adjusting for the above-noted items,
the increase in net earnings was primarily due to improved operating income.
After adjusting for the $40 million tax benefit in 2001, the income tax
provision was 26.0% of earnings before tax for 2002 as compared to 26.5% in
2001. The decrease in the effective tax rate was primarily due to lower income
tax rates on manufacturing activities in certain countries.

Basic net earnings per share were $2.85 for 2002 compared to $2.11 in 2001. The
2002 basic net earnings per share included a $0.03 benefit from the
restructuring reversal and the 2001 basic net earnings per share included a
$0.50 negative impact from restructuring and related charges and a $0.31
positive impact from the income tax benefit. Diluted net earnings per share were
$2.79 for 2002 compared to $2.05 in 2001. The 2002 diluted net earnings per
share included a $0.03 benefit from the restructuring reversal and the 2001
diluted net earnings per share included a $0.48 negative impact from
restructuring actions and a $0.30 income tax benefit. After adjusting for the
noted items, the increases in net earnings per share were primarily due to the
increase in net earnings.

The following table sets forth the percentage of total revenue represented by
certain items reflected in the company's statements of earnings:

2001 COMPARED TO 2000

Consolidated revenue in 2001 was $4,104 million, an increase of 9% over 2000.
Total U.S. revenue increased $213 million or 13% and international revenue,
including exports from the U.S., increased $124 million or 6%. Revenue was
adversely affected by foreign currency exchange rates primarily due to weakening
of European currencies against the U.S. dollar.

22

Revenue growth was 11% year-to-year on a constant currency basis. Revenue from
sales to all OEM customers accounted for less than 10% of consolidated revenue
in 2001 with no single OEM customer accounting for more than 5% of total
revenue.

The revenue growth was primarily driven by increased sales of laser and inkjet
supplies whose revenue increased 27% over 2000. Laser and inkjet supplies
revenue was $1,958 million for 2001, versus $1,544 million a year earlier, and
represents 48% of total revenue versus 41% in 2000. Laser and inkjet printer
revenue was $1,623 million for 2001, a 2% decline from 2000.

Consolidated gross profit was $1,239 million for 2001, an increase of 2% from
2000. The 2001 gross profit included $29 million restructuring-related inventory
write-offs. Gross profit as a percentage of revenue was 30.2% for 2001 compared
to 32.3% for 2000, a decrease of 2.1 percentage points. The decrease was
principally due to lower printer margins (4.6 percentage points) and the impact
of the restructuring charge (0.7 percentage points), partially offset by an
increased mix of supplies (3.3 percentage points).

Total operating expense was $898 million in 2001 and operating expense as a
percentage of revenue was 21.9% compared to 21.3% in 2000. Operating expense in
2001 included a restructuring charge of approximately $58 million and operating
expense in 2000 included a restructuring charge of approximately $41 million.
The 0.6 percentage point increase was due to the restructuring charges and
slightly higher research and development expense as a percentage of revenue.

Consolidated operating income was $341 million in 2001 compared to $416 in 2000.
Included in the 2001 operating income was $88 million of restructuring and
related charges and the 2000 operating income included $41 million of
restructuring and related charges. The decrease in the consolidated operating
income was due to the impacts of the restructuring charges and the lower gross
profit margins.

In 2001, the company reached resolution with the Internal Revenue Service on
certain adjustments related to the intercompany allocation of profits. As a
result of this resolution the company reversed previously accrued taxes,
reducing the income tax provision in the fourth quarter of 2001 by $40 million,
which reduced the effective income tax rate to 13.9% for 2001.

Net earnings were $274 million in 2001 compared to $285 million in 2000.
Included in the 2001 net earnings was a restructuring and related charge of $65
million after-tax as well as a $40 million benefit from the resolution of income
tax matters. Included in the 2000 net earnings was a restructuring and related
charge of $30 million after-tax. After adjusting for the items noted above, the
decrease in net earnings was primarily due to lower operating margins partially
offset by a reduction in the effective income tax rate. Excluding the impact of
the $40 million tax benefit, the income tax provision was 26.5% of earnings
before taxes in 2001 as compared to 28.0% in 2000. The decrease in the effective
income tax rate was primarily due to lower income tax rates on manufacturing
activities in certain countries.

Basic net earnings per share were $2.11 for 2001 compared to $2.22 in 2000. The
2001 basic net earnings per share included a $0.50 negative impact from
restructuring and related charges and a $0.31 positive impact from the income
tax benefit and the 2000 basic net earnings per share included a $0.24 negative
impact from restructuring actions. Diluted net earnings per share were $2.05 in
2001 compared to $2.13 in 2000. The 2001 diluted net earnings per share included
a $0.48 negative impact from restructuring actions and a $0.30 income tax
benefit and the 2000 diluted net earnings per share included a $0.22 negative
impact from restructuring actions. After adjusting for the noted items, the
decreases in net earnings per share were primarily due to the decline in net
earnings.

23

RETIREMENT-RELATED BENEFITS

The following table provides the total pre-tax cost/(income) related to
Lexmark's retirement plans for the years 2002, 2001 and 2000. Cost/(income)
amounts are included as an addition to/reduction from, respectively, the
company's cost and expense amounts in the consolidated statements of earnings.

The defined benefit plan net pension income for 2000 was primarily due to the
conversion to a new formula for determining pension benefits in the U.S. As of
December 31, 1999, benefits were frozen under the old formula with no further
benefits being accrued under that formula, resulting in an increase in pension
income of approximately $6 million for 2000.

The company uses long-term historical actual return experience, the expected
investment mix of the plans' assets, and future estimates of long-term
investment returns to develop its assumed rate of return on pension assets used
in the net periodic pension calculation. The assumption is reviewed and set
annually at the beginning of each year. At the beginning of 2003, the company
reduced its expected long-term asset return assumption on the U.S. plan from
10.0% to 8.5%. This change is expected to increase 2003 net pension plan expense
by approximately $8 million.

The company annually sets its discount rate assumption for retirement-related
benefits accounting to reflect the rates available on high-quality, fixed-income
debt instruments at the end of each year. Using this process, the company
reduced its discount rate assumption in the U.S. from 7.5% as of December 31,
2001 to 6.5% as of December 31, 2002. This change, combined with other
consistent changes in actuarial assumptions such as the assumed rate of
compensation increase, is not expected to have a material effect on 2003 net
pension plan expense. The change in the discount rate from 8.0% as of December
31, 2000 to 7.5% as of December 31, 2001, did not have a significant impact on
the company's results of operations for the year ended December 31, 2002.

Future effects of retirement-related benefits, including the changes noted
above, on the operating results of the company depend on economic conditions,
employee demographics, mortality rates and investment performance.

LIQUIDITY AND CAPITAL RESOURCES

Lexmark's primary source of liquidity has been cash generated by operations,
which totaled $816 million, $196 million and $476 million in 2002, 2001 and
2000, respectively. Cash from operations generally has been sufficient to allow
the company to fund its working capital needs and finance its capital
expenditures during these periods along with the repurchase of approximately
$331 million and $209 million of its Class A common stock during 2002 and 2000,
respectively. The company did not repurchase shares of its Class A common stock
during 2001. Management believes that cash provided by operations will continue
to be sufficient to meet operating and capital needs. However, in the event that
cash from operations is not sufficient, the company has other potential sources
of cash through utilization of its revolving credit facility, accounts
receivable financing program or other financing sources, such as the public or
private debt markets, which are discussed in greater detail on the following
pages.

24

Cash flows from operating activities in 2002 were $816 million, compared to $196
million in 2001. The increase in 2002 was primarily due to favorable cash flow
changes in working capital accounts, particularly trade receivables, accrued
liabilities and inventories. The favorable cash flow changes in working capital
accounts were principally due to the company's continued focus on cash cycle
management. As part of this focus, the company's days of sales outstanding has
declined to 40 days at December 31, 2002, from 51 days at December 31, 2001. The
days of sales outstanding is calculated on a 90 day moving average based on
gross accounts receivable and is adjusted for certain accounts receivable items
which have no corresponding revenue, such as value-added taxes. In 2001, cash
provided by operating activities decreased from 2000 due to unfavorable changes
in working capital accounts, principally related to current liabilities. Cash
used for investing activities in 2002 was $101 million less than in 2001,
principally due to lower capital spending for manufacturing expansion projects.
Cash used for financing activities during 2002 was $302 million compared to $42
million of cash provided by financing activities during 2001. In 2002, the
company purchased $331 million of treasury stock compared to no purchases during
2001.

The company experienced some significant changes in other balance sheet accounts
in 2002. The increase in prepaid expenses and other current assets was primarily
due to prepaid income taxes resulting from estimated tax payments. Other assets
increased $105 million during 2002, due to a $50 million funding of the U.S.
pension plan and a $58 million increase in a deferred tax asset related to the
additional minimum pension liability associated with the U.S. pension plan.
Accrued liabilities increased $173 million from 2001 to 2002, principally due to
increases in income taxes payable ($43 million), compensation ($42 million) and
derivative liabilities ($39 million). Other long-term liabilities increased $185
million from 2001 to 2002, primarily due to the additional minimum pension
liability.

The company has short-term non-cancelable purchase commitments with suppliers
which arise in the normal course of business and provide the company with
continuity of supply and lower product cost. If the company fails to anticipate
customer demand properly, a temporary oversupply of inventory could result in
excess or obsolete components which could adversely affect gross margins.

Effective May 29, 2002, the company entered into a new $500 million unsecured,
revolving credit facility with a group of banks, including a $200 million
364-day portion and a $300 million 3-year portion. Upon entering into the new
credit agreement, the company terminated the prior $300 million unsecured,
revolving credit facility that was due to expire on January 27, 2003. There were
no amounts outstanding under the prior facility upon its termination.

Under the new credit facility, the company may borrow in dollars, euros and
other optional currencies. The interest rate ranges from 0.35% to 1.25% above
the London Interbank Offered Rate (LIBOR) for borrowings denominated in U.S.
dollars, the Eurocurrency Interbank Offered Rate (EURIBOR) for borrowings
denominated in euros, or other relevant international interest rate for
borrowings denominated in another currency. The interest rate spread is based
upon the company's debt ratings. In addition, the company is required to pay a
facility fee on the $500 million line of credit of 0.075% to 0.25% based upon
the company's debt ratings. The interest and facility fees are payable
quarterly.

The new credit agreement contains customary default provisions, leverage and
interest coverage restrictions and certain restrictions on secured and
subsidiary debt, disposition of assets, liens and mergers and acquisitions. The
364-day portion of the new $500 million credit facility has a maturity date of
May 28, 2003, with an option to extend an additional 364 days. The company
expects to exercise its option to extend the 364-day portion of the credit
facility. The 3-year portion of the new credit facility has a maturity date of
May 29, 2005. Any amounts outstanding under the new credit facility are due
according to the applicable maturity dates noted above. As

25

of December 31, 2002 and 2001, there were no amounts outstanding under the new
and prior credit facilities, respectively.

The company has outstanding $150 million principal amount of 6.75% senior notes
due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to
maturity. The senior notes contain typical restrictions on liens, sale leaseback
transactions, mergers and sales of assets. There are no sinking fund
requirements on the senior notes and they may be redeemed at any time at the
option of the company, at a redemption price as described in the related
indenture agreement, as supplemented and amended, in whole or in part. A balance
of $149 million (net of unamortized discount of $1 million) was outstanding at
December 31, 2002.

The company is in compliance with all covenants and other requirements set forth
in its debt agreements. The company does not have any rating downgrade triggers
that would accelerate the maturity dates of its revolving credit facility and
public debt. However, a downgrade in the company's credit rating could adversely
affect the company's ability to renew existing, or obtain access to new, credit
facilities in the future and could increase the cost of such facilities.

In February 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission to register $200 million of debt securities.
Although the company does not expect to utilize the shelf registration in the
near term, if conditions warrant, the net proceeds from a sale of the securities
could be used for capital expenditures, reduction of short-term borrowings,
working capital, acquisitions and other general corporate purposes.

The following table summarizes the company's contractual obligations at December
31, 2002:
- --------------------------------------------------------------------------------

In October 2001, the company entered into a new agreement to sell its U.S. trade
receivables on a limited recourse basis. The new agreement increased the maximum
amount of financing available to $225 million. As collections reduce previously
sold receivables, the company may replenish these with new receivables. The
company bears a risk of bad debt losses on U.S. trade receivables sold, since
the company over-collateralizes the receivables sold with additional eligible
receivables. The company addresses this risk of loss in its allowance for
doubtful accounts. Receivables sold may not include amounts over 90 days past
due or concentrations over certain limits with any one customer. This facility
contains customary affirmative and negative covenants as well as specific
provisions related to the quality of the accounts receivables sold. The facility
also contains customary cash control triggering events which, if triggered,
could adversely affect the company's liquidity and/or its ability to sell trade
receivables. A downgrade in the company's credit rating could reduce the
company's ability to sell trade receivables. The facility expires in October
2004, but requires annual renewal of commitments in October 2002 and 2003. The
company renewed the annual commitment in 2002 and also expects to renew in 2003.
At December 31, 2002, the facility had no U.S. trade receivables sold and
outstanding. At December 31, 2001, U.S. trade receivables of $85 million had
been sold, and due to the revolving nature of the agreement, $85 million also
remained outstanding.

At December 31, 2002 and 2001, the company did not have any relationship with
unconsolidated entities or financial partnerships, which other companies have
established for the purpose of

26

facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Therefore, the company is not materially exposed to any
financing, liquidity, market or credit risk that could arise if the company had
engaged in such relationships.

At the company's Annual Meeting of Stockholders on April 27, 2000, the
stockholders approved an increase in the number of authorized shares of its
Class A common stock from 450 million to 900 million shares.

In July 2002, the company received authorization from the board of directors to
repurchase an additional $200 million of its Class A common stock for a total
repurchase authority of $1.4 billion. At December 31, 2002, there was
approximately $188 million of share repurchase authority remaining. This
repurchase authority allows the company, at management's discretion, to
selectively repurchase its stock from time to time in the open market or in
privately negotiated transactions depending upon market price and other factors.
During 2002, the company repurchased approximately 6.1 million shares in the
open market at prices ranging from $41.97 per share to $60.96 per share for a
cost of approximately $331 million. As of December 31, 2002, the company had
repurchased approximately 34.7 million shares at prices ranging from $10.63 per
share to $105.38 per share for an aggregate cost of approximately $1.2 billion.

CAPITAL EXPENDITURES

Capital expenditures totaled $112 million, $214 million and $297 million in
2002, 2001 and 2000, respectively. The capital expenditures during 2002 were
primarily attributable to infrastructure support and new product development. In
2001 and 2000, the capital expenditures were principally for capacity expansion,
the support of new products and research and development facilities. During
2003, the company expects capital expenditures to be approximately $125 million,
primarily attributable to infrastructure support and new product development.
The capital expenditures are expected to be funded primarily through cash from
operations.

EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT

Revenue derived from international sales, including exports from the United
States, make up about half of the company's consolidated revenue, with Europe
revenue accounting for approximately two-thirds of international sales.
Substantially all foreign subsidiaries maintain their accounting records in
their local currencies. Consequently, period-to-period comparability of results
of operations is affected by fluctuations in currency exchange rates. Certain of
the company's Latin American entities use the U.S. dollar as their functional
currency. Lexmark's operations in Argentina were adversely impacted by currency
devaluation in late 2001 and the first six months of 2002. This resulted in
translation losses of approximately $5 million in 2002 and approximately $2
million in 2001. During the last six months of 2002, the company did not
experience significant translation losses related to the Argentina operations.

Currency translation has significantly affected international revenue and cost
of revenue, and, although it did not have a material impact on operating income
for the years 2002 and 2001, the 2000 operating income was materially adversely
impacted by exchange rate fluctuations. The company acts to reduce its exposure
to exchange rate fluctuations through the use of operational hedges, such as
pricing actions and product sourcing decisions.

The company's exposure to exchange rate fluctuations generally cannot be
minimized solely through the use of operational hedges. Therefore, the company
utilizes financial instruments such as forward exchange contracts and currency
options to reduce the impact of exchange rate fluctuations on actual and
anticipated cash flow exposures and certain assets and liabilities which arise
from transactions denominated in currencies other than the functional currency.
The company does not purchase currency related financial instruments for
purposes other than exchange rate risk management.

27

TAX MATTERS

The company's effective income tax rate was approximately 26.0%, 13.9% and 28.0%
for 2002, 2001 and 2000, respectively. The 2001 effective income tax rate was
significantly impacted by the company's resolution with the Internal Revenue
Service on certain adjustments related to the allocation of intercompany
profits. As a result of this resolution, the company reversed previously accrued
taxes, reducing the tax provision in the fourth quarter of 2001 by $40 million.
Excluding the impact of this adjustment, the company's effective income tax rate
was 26.5% for 2001. The decrease in the effective income tax rate was primarily
due to the effect of lower tax rates on manufacturing activities in certain
countries.

The company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The company believes that adequate amounts of tax and
related interest have been provided for any adjustments that may result from
these examinations.

As of December 31, 2002, the company had non-U.S. tax loss carryforwards of $16
million, which have an indefinite carryforward period. As of December 31, 2002,
the research and development tax credit carryforward available to reduce
possible future U.S. income taxes amounted to approximately $13 million, all of
which expires in the years 2022-2023.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, Goodwill and Other Intangible Assets. SFAS 142 no longer permits the
amortization of goodwill and indefinite-lived intangible assets. Instead, these
assets must be reviewed at least annually for impairment. The company adopted
SFAS 142 as required on January 1, 2002. During the second quarter of 2002, the
company completed the initial transitional goodwill impairment test, which did
not indicate any goodwill impairment. Since previously reported goodwill
amortization was immaterial for the company in the prior periods presented, the
discontinuation of goodwill amortization will not have a material impact on the
company's financial position, results of operations or cash flows. Pro forma net
earnings and earnings per share are not presented because such amounts are not
materially different than amounts previously reported for the years ended
December 31, 2001 and 2000, respectively.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies the previous guidance of EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring), which recognized a
liability for an exit cost at the date of an entity's commitment to an exit
plan. SFAS 146 requires that the initial measurement of a liability be at fair
value. SFAS 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002. The impact of this statement on the company,
should it have any future restructuring activities, would be primarily related
to the timing of when charges are recorded.

In November 2002, the FASB issued EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, which addresses revenue recognition
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. The provisions of this statement are effective
for revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The company is evaluating the effect that this statement may have on its
financial position, results of operations and cash flows.

In November 2002, the FASB issued FIN 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 elaborates on required disclosures by a guarantor in its
financial statements about obligations under certain guarantees it has issued
and clarifies the need for a guarantor to recognize, at the

28

inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The interpretation is effective
for qualified guarantees entered into or modified after December 31, 2002. This
interpretation is not expected to have a material impact on the company's
financial position, results of operations or cash flows. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. Refer to Note 2 and Note 7 of the
Notes to Consolidated Financial Statements for the disclosures required by this
pronouncement.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure - an Amendment of SFAS 123, which
provides alternative methods for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002 and the interim
periods beginning after December 15, 2002. Refer to the Stock-Based Compensation
Accounting Policy found in Note 2 of the Notes to Consolidated Financial
Statements for the disclosures required by this statement.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The company is evaluating the effect that this statement may have on its
financial position, results of operations and cash flows.

INFLATION

The company is subject to the effects of changing prices and operates in an
industry where product prices are very competitive and subject to downward price
pressures. As a result, future increases in production costs or raw material
prices could have an adverse effect on the company's business. However, the
company actively manages its product costs and manufacturing processes in an
effort to minimize the impact on earnings of any such increases.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS

Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
company. There can be no assurance that future developments affecting the
company will be those anticipated by management, and there are a number of
factors that could adversely affect the company's future operating results or
cause the company's actual results to differ materially from the estimates or
expectations reflected in such forward-looking statements, including without
limitation, the factors set forth below:

- - Unfavorable global economic conditions may adversely impact the company's
future operating results. Since the second quarter of 2001, the company has
experienced weak markets for its products. Continued softness in these markets
and uncertainty about the timing and extent of the global economic downturn by
both corporate and consumer purchasers of the company's

29

products could result in lower demand for the company's products. Weakness in
demand may result in excessive inventory for the company and/or its reseller
channel which may adversely affect sales, pricing, risk of obsolescence and/or
other elements of the company's operating results.

- - Terrorist attacks and the potential for future terrorist attacks have created
many political and economic uncertainties, some of which may affect the
company's future operating results. Future terrorist attacks, the national and
international responses to such attacks, and other acts of war or hostility may
affect the company's facilities, employees, suppliers, customers, transportation
networks and supply chains, or may affect the company in ways that are not
capable of being predicted presently.

- - Revenue derived from international sales make up about half of the company's
revenue. Accordingly, the company's future results could be adversely affected
by a variety of factors, including changes in a specific country's or region's
political or economic conditions, foreign currency exchange rate fluctuations,
trade protection measures and unexpected changes in regulatory requirements.
Moreover, margins on international sales tend to be lower than those on domestic
sales, and the company believes that international operations in new geographic
markets will be less profitable than operations in the U.S. and European
markets, in part, because of the higher investment levels for marketing, selling
and distribution required to enter these markets.

- - The company relies more heavily on its international production facilities and
international manufacturing partners for the manufacture of its products and key
components of its products. Future operating results may be adversely affected
by several factors, including, without limitation, if the company's
international operations or manufacturing partners are unable to supply products
reliably, if there are disruptions in international trade, disruptions at
important geographic points of exit and entry, if there are difficulties in
transitioning such manufacturing activities among the company, its international
operations and/or its manufacturing partners, or if there arise production and
supply constraints which result in additional costs to the company. The
financial failure or loss of a key supplier could result in a material adverse
impact on the company's financial results.

- - The company depends on its information technology systems for the development,
manufacture, distribution, marketing, sales and support of its products and
services. Any failure in such systems, or the systems of a partner or supplier,
may adversely affect the company's operating results. Furthermore, because vast
quantities of the company's products flow through only a few distribution
centers to provide product to various geographic regions, the failure of
information technology systems affecting those product distribution centers
could have a material adverse impact on the company's ability to deliver product
and on the company's financial results

- - The company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that are
reliable, competitive, and meet customers' needs. The markets for laser and
inkjet products and associated supplies are increasingly competitive, especially
with respect to pricing and the introduction of new technologies and products
offering improved features and functionality. The company's inability to
effectively deal with these competitive issues could have a material adverse
effect on the company's financial results.

- - The company and its major competitors, many of which have significantly
greater financial, marketing and/or technological resources than the company,
have regularly lowered prices on their products and are expected to continue to
do so. In particular, both the inkjet and laser printer markets have experienced
and are expected to continue to experience significant price pressure. Price
reductions on inkjet or laser products or the inability to reduce costs,
including warranty costs, contain expenses or increase sales as currently
expected, as well as price

30

protection measures, could result in lower profitability and jeopardize the
company's ability to grow or maintain its market share.

- - The company believes that one of its competitive advantages is its exclusive
focus on printing solutions. The entrance of a competitor that is also
exclusively focused on printing solutions could offset this advantage and could
have a material adverse impact on the company's strategy and financial results.

- - The company's performance depends in part upon its ability to successfully
forecast the timing and extent of customer demand and manage worldwide
distribution and inventory levels to support the demand of its customers. The
company must also be able to address production and supply constraints,
particularly delays in the supply of key components necessary for production,
which may result in lost revenue or in the company incurring additional costs to
meet customer demand. The company's future operating results and its ability to
effectively grow or maintain its market share may be adversely affected if it is
unable to address these issues on a timely basis.

- - The introduction of products by the company or its competitors, or delays in
customer purchases of existing products in anticipation of new product
introductions by the company or its competitors and market acceptance of new
products and pricing programs, the reaction of competitors to any such new
products or programs, the life cycles of the company's products, as well as
delays in product development and manufacturing, and variations in the cost of
component parts, may impact sales, may cause a buildup in the company's
inventories, make the transition from current products to new products difficult
and could adversely affect the company's future operating results. The
competitive pressure to develop technology and products also could cause
significant changes in the level of the company's operating expenses.

- - Although the company is currently the exclusive supplier of new cartridges for
its laser and inkjet products, there can be no assurance that other companies
will not develop new compatible cartridges for the company's products. In
addition, refill and remanufactured alternatives for some of the company's
cartridges are available and compete with the company's supplies business. The
company expects competitive refill and remanufacturing activity to increase.
Various legal challenges and governmental activities may intensify competition
for the company's aftermarket supplies business.

- - The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate without
infringing the proprietary rights of others. Current or future claims of
intellectual property infringement could prevent the company from obtaining
technology of others and could otherwise adversely affect its operating results
or business, as could expenses incurred by the company in obtaining intellectual
property rights, enforcing its intellectual property rights against others or
defending against claims that the company's products infringe the intellectual
property rights of others.

- - The company markets and sells its products through several sales channels. The
company has also advanced a strategy of forming alliances and OEM arrangements
with many companies. The company's future operating results may be adversely
affected by any conflicts that might arise between or among its various sales
channels, the loss of any alliance or OEM arrangement or the loss of retail
shelf space. Aggressive pricing on laser and inkjet products and/or associated
supplies from customers and resellers, including, without limitation, OEM
customers, could result in a material adverse impact on the company's strategy
and financial results. In addition, the financial failure or loss of a key
customer or reseller could have a material adverse impact on the company's
financial results.

- - The company's inability to perform satisfactorily under service contracts for
managed print services and other customer services may result in the loss of
customers, loss of reputation and/or financial consequences that may have a
material adverse impact on the company's financial results and strategy.

31

- - Factors unrelated to the company's operating performance, including the
financial failure or loss of significant customers, resellers, manufacturing
partners or suppliers; the outcome of pending and future litigation or
governmental proceedings; and the ability to retain and attract key personnel,
could also adversely affect the company's operating results. In addition, the
company's stock price, like that of other technology companies, can be volatile.
Trading activity in the company's common stock, particularly the trading of
large blocks and intraday trading in the company's common stock, may affect the
company's common stock price.

While the company reassesses material trends and uncertainties affecting the
company's financial condition and results of operations in connection with the
preparation of its quarterly and annual reports, the company does not intend to
review or revise, in light of future events, any particular forward-looking
statement contained in this report.

The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of the
company's public filings or press releases or in any oral statements made by the
company or any of its officers or other persons acting on its behalf. The
important factors that could affect forward-looking statements are subject to
change, and the company does not intend to update the foregoing list of certain
important factors. By means of this cautionary note, the company intends to
avail itself of the safe harbor from liability with respect to forward-looking
statements that is provided by Section 27A and Section 21E referred to above.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK SENSITIVITY

The market risk inherent in the company's financial instruments and positions
represents the potential loss arising from adverse changes in interest rates and
foreign currency exchange rates.

Interest Rates
- --------------
At December 31, 2002, the fair value of the company's senior notes is estimated
at $163 million using quoted market prices and yields obtained through
independent pricing sources for the same or similar types of borrowing
arrangements, taking into consideration the underlying terms of the debt. The
fair value of the senior notes exceeded the carrying value as recorded in the
statements of financial position at December 31, 2002 by approximately $14
million. Market risk is estimated as the potential change in fair value
resulting from a hypothetical 10% adverse change in interest rates and amounts
to approximately $4 million at December 31, 2002.

Foreign Currency Exchange Rates
- -------------------------------
The company employs a foreign currency hedging strategy to limit potential
losses in earnings or cash flows from adverse foreign currency exchange rate
movements. Foreign currency exposures arise from transactions denominated in a
currency other than the company's functional currency and from foreign
denominated revenue and profit translated into U.S. dollars. The primary
currencies to which the company is exposed include the euro, the Canadian
dollar, the Japanese yen, the British pound and other Asian and South American
currencies. Exposures are hedged with foreign currency forward contracts, put
options, and call options with maturity dates of less than eighteen months. The
potential loss in fair value at December 31, 2002 for such contracts resulting
from a hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $39 million. This loss would be mitigated by corresponding gains
on the underlying exposures.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

34

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 2002 AND 2001
(In Millions, Except Par Value)
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

35

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Millions)
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

36

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Millions)
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

37

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

38

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions, Except per Share Amounts)

1. ORGANIZATION AND BUSINESS

Lexmark International Group, Inc. ("Group") merged with and into its
wholly-owned subsidiary, Lexmark International, Inc. ("International") effective
July 1, 2000, whereby International became the surviving corporation (the
"company"). Pursuant to the merger, Group's stockholders automatically received
one share of the company's Class A common stock for each share of Group Class A
common stock, along with the associated rights attaching pursuant to the
Stockholder Rights Plan, to which the company is a successor. The company's
Class A common stock and associated rights have the same rights and privileges
as Group's Class A common stock and associated rights. The company also assumed
all of Group's benefit plans for employees, retirees and directors and each
outstanding Group stock based award was converted into an identical stock based
award in the company. Hereinafter, the "company" and "Lexmark" will refer to
Group for all events prior to July 1, 2000 and will refer to International for
all events subsequent to the merger.

Lexmark is a leading developer, manufacturer and supplier of printing
solutions -- including laser and inkjet printers, multifunction products,
associated supplies and services -- for offices and homes. The company also
sells dot matrix printers for printing single and multi-part forms by business
users and develops, manufactures and markets a broad line of other office
imaging products. The principal customers for the company's products are
dealers, retailers and distributors worldwide. The company's products are sold
in over 150 countries in North and South America, Europe, the Middle East,
Africa, Asia, the Pacific Rim and the Caribbean.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the
company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Foreign Currency Translation:

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated into U.S. dollars at period-end exchange rates.
Income and expense accounts are translated at average exchange rates prevailing
during the period. Adjustments arising from the translation of assets and
liabilities are accumulated as a separate component of accumulated other
comprehensive earnings in stockholders' equity.

Use of Estimates:

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, the company evaluates
its estimates, including those related to customer programs and incentives,
product returns, doubtful accounts, inventories, intangible assets, income
taxes, warranty obligations, restructurings, pension and other postretirement
benefits, and contingencies and litigation. The company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

39

Cash Equivalents:

All highly liquid investments with an original maturity of three months or less
at the company's date of purchase are considered to be cash equivalents.

Fair Value of Financial Instruments:

The financial instruments of the company consist mainly of cash and cash
equivalents, trade receivables, short-term debt and long-term debt. The fair
value of cash and cash equivalents, trade receivables and short-term debt
approximates their carrying values due to the relatively short-term nature of
the instruments. The fair value of long-term debt is based on current rates
available to the company for debt with similar characteristics.

Inventories:

Inventories are stated at the lower of average cost or market. The company
considers all raw materials to be in production upon their receipt.

Property, Plant and Equipment:

Property, plant and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Property, plant and
equipment accounts are relieved of the cost and related accumulated depreciation
when assets are disposed of or otherwise retired.

Internal Use Software Costs:

The company capitalizes direct costs incurred during the application development
and implementation stages for developing, purchasing, or otherwise acquiring
software for internal use. These software costs are included in property, plant
and equipment on the statements of financial position and are depreciated over
the estimated useful life of the software, generally three years. All costs
incurred during the preliminary project stage are expensed as incurred.

Long-Lived Assets:

The company performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. If future expected
undiscounted cash flows are insufficient to recover the carrying value of the
assets, then an impairment loss is recognized based upon the excess of the
carrying value of the asset over the anticipated cash flows on a discounted
basis.

Warranty Reserves:

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The disclosure requirements of FIN 45, which are effective for financial
statements of interim or annual periods ending after December 15, 2002, are
included below and in Note 7 of the Notes to Consolidated Financial Statements.

The company provides for the estimated cost of product warranties at the time
revenue is recognized. The reserve for product warranties is based on the
quantity of units sold under warranty, estimated product failure rates, and
material usage and service delivery costs. The estimates for product failure
rates and material usage and service delivery costs are periodically adjusted
based on actual results. For extended warranty programs, the company defers
revenue in short-term and long-term liability accounts (based on the extended
warranty contractual

40

period) for amounts invoiced to customers for these programs and recognizes the
revenue ratably over the contractual period. Costs associated with extended
warranty programs are expensed as incurred.

Revenue Recognition:

Accounting Changes
- ------------------
The company adopted Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition in Financial Statements, as required by December 31, 2000 and the
adoption did not have a material impact on the company's financial position,
results of operations or cash flows. SAB 101 provides guidance on applying
generally accepted accounting principles to revenue recognition issues in
financial statements.

In 2001, the Emerging Issues Task Force ("EITF") reached a consensus that
consideration from a vendor to a purchaser of the vendor's products should be
characterized as a reduction in revenue as stated in EITF 00-25, Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products, and clarified in EITF 01-9. This EITF
consensus was effective for annual or interim financial statements beginning
after December 5, 2001, with reclassification required for comparative prior
periods. The company adopted this EITF as required in 2002 and the adoption of
this statement had no impact on the company's net earnings, financial position
or cash flows, but did result in a reclassification of certain prior year
reported amounts to conform to the current year's presentation. Both revenue and
selling, general and administrative expense for the twelve months ended December
31, 2001 and 2000 were reduced by approximately $38.5 million and $39.7 million,
respectively, as a result of this reclassification.

General
- -------
The company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. The following are the policies applicable to
Lexmark's major categories of revenue transactions:

Products
- --------
Revenue from product sales, including sales to distributors and resellers, is
recognized when title and risk of loss transfer to the customer, generally when
the product is shipped to the customer. When other significant obligations
remain after products are delivered, revenue is recognized only after such
obligations are fulfilled. At the time revenue is recognized, the company
provides for the estimated cost of post-sales support, principally product
warranty, and reduces revenue for estimated product returns. Additionally, the
company records estimated reductions to revenue at the time of sale for customer
programs and incentive offerings including special pricing agreements,
promotions and other volume-based incentives. Estimated reductions in revenue
are based upon historical trends and other known factors at the time of sale. In
addition, the company provides price protection to reseller customers. The
company records reductions to revenue for the estimated impact of price
protection when price reductions are announced.

Services
- --------
Revenue from support or maintenance contracts, including extended warranty
programs, is recognized ratably over the contractual period. Amounts invoiced to
customers in excess of revenue recognized on support or maintenance contracts
are recorded as deferred revenue until the appropriate revenue recognition
criteria are met. Revenue for time and material contracts is recognized as the
services are performed.

41

Revenue Arrangements that Include Multiple Elements
- ---------------------------------------------------
The company enters into transactions that include multiple elements, such as a
combination of products and services. Revenue for these arrangements is
allocated to each element based on its relative fair value and is recognized
when the revenue recognition criteria for each element have been met. Relative
fair value may be determined by the price of an element if it were sold on a
stand-alone basis (referred to as vendor-specific objective evidence ("VSOE")).
In the absence of VSOE, third party evidence (competitors' prices of comparable
products or services) is used to determine relative fair value.

Advertising Costs:

The company expenses advertising costs when incurred. Advertising expense was
approximately $76.2 million, $78.1 million and $88.6 million in 2002, 2001 and
2000, respectively. Certain items previously classified as advertising expense
have been reclassified as reductions of revenue in accordance with EITF 00-25
and clarified in EITF 01-9, and therefore amounts reported as advertising
expense in 2001 and 2000 have been reduced.

Pension and Postretirement Benefits:

The company accounts for its defined benefit pension plans and its non-pension
postretirement benefit plans using actuarial models required by Statement of
Financial Accounting Standards ("SFAS") No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, respectively. Liabilities are computed using the projected
unit credit method. The objective under this method is to expense each
participant's benefits under the plan as they accrue, taking into consideration
future salary increases and the plan's benefit allocation formula. Thus, the
total pension to which each participant is expected to become entitled is broken
down into units, each associated with a year of past or future credited service.

The discount rate assumption for the pension and postretirement benefit plans
reflects the rates available on high -quality fixed-income investments at
December 31 each year. The company's assumed long-term rate of return on plan
assets is based on long-term historical actual return information, the mix of
investments that comprise plan assets and future estimates of long-term
investment returns by reference to external sources. Differences between actual
and expected asset returns are recognized in the market-related value of plan
assets over five years. The rate of compensation increase is determined by the
company based upon its long-term plans for such increases.

The company's funding policy for its pension plans is to fund minimum amounts
according to the regulatory requirements under which the plans operate. From
time to time, the company may choose to fund amounts in excess of the minimum
for various reasons.

The company accrues for the cost of providing postretirement benefits such as
medical and life insurance coverage over the active service period of the
employee. These benefits are funded by the company when paid.

Stock-Based Compensation:

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure -- an Amendment of SFAS 123, which
provides alternative methods for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The company has elected to continue to account for its
stock-based employee compensation plans under APB Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations. The following
disclosures are provided in accordance with SFAS 148.

42

The company has various stock-based employee compensation plans, which are
described in Note 12 of the Notes to Consolidated Financial Statements. No
stock-based employee compensation cost is reflected in net earnings as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share if the company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.

Income Taxes:

The provision for income taxes is computed based on pre-tax income included in
the statements of earnings. The company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.

Derivatives:

Effective January 1, 1999, the company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all
derivatives, including foreign currency exchange contracts, be recognized in the
statement of financial position at their fair value. Derivatives that are not
hedges must be recorded at fair value through earnings. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of underlying
assets or liabilities through earnings or recognized in other comprehensive
earnings until the underlying hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is to be immediately
recognized in earnings. In June 2000, SFAS No. 138 was issued as an amendment to
SFAS No. 133. This statement amended the treatment of certain transactions
discussed in SFAS No. 133. This new amendment did not have a material impact on
the company's results of operations or financial position.

Net Earnings Per Share:

Basic net earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the reported period. The
calculation of diluted net earnings per share is similar to basic, except that
the weighted average number of shares outstanding includes the additional
dilution from potential common stock such as stock options and stock under
long-term incentive plans.

43

Other Comprehensive Earnings (Loss):

Other comprehensive earnings (loss) refers to revenues, expenses, gains and
losses that under accounting principles generally accepted in the United States
of America are included in comprehensive earnings (loss) but are excluded from
net income as these amounts are recorded directly as an adjustment to
stockholders' equity, net of tax. The company's other comprehensive earnings
(loss) is composed of deferred gains and losses on cash flow hedges, foreign
currency translation adjustments and adjustments made to recognize additional
minimum liabilities associated with the company's defined benefit pension plans.

Segment Data:

The company manufactures and sells a variety of printing products and related
supplies and services that have similar economic characteristics as well as
similar customers, production processes and distribution methods and, therefore,
has aggregated similar divisions and continues to report one segment.

Recent Accounting Pronouncements:

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed at
least annually for impairment. The company adopted SFAS 142 as required on
January 1, 2002. During the second quarter of 2002, the company completed the
initial transitional goodwill impairment test, which did not indicate any
goodwill impairment. Since previously reported goodwill amortization was
immaterial for the company in the prior periods presented, the discontinuation
of goodwill amortization will not have a material impact on the company's
financial position, results of operations or cash flows. Pro forma net earnings
and earnings per share are not presented because such amounts are not materially
different than amounts previously reported for the years ended December 31, 2001
and 2000, respectively.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies the previous guidance of EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring), which recognized a
liability for an exit cost at the date of an entity's commitment to an exit
plan. SFAS 146 requires that the initial measurement of a liability be at fair
value. SFAS 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002. The impact of this statement on the company,
should it have any future restructuring activities, would be primarily related
to the timing of when charges are recorded.

In November 2002, the FASB issued EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, which addresses revenue recognition
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. The provisions of this statement are effective
for revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The company is evaluating the effect that this statement may have on its
financial position, results of operations and cash flows.

In November 2002, the FASB issued FIN 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 elaborates on required disclosures by a guarantor in its
financial statements about obligations under certain guarantees it has issued
and clarifies the need for a guarantor to recognize, at the inception of certain
guarantees, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The interpretation is effective for qualified guarantees
entered into or modified after December 31, 2002. This interpretation is not
expected to have a material impact on the company's financial position, results
of operations or cash flows. The disclosure

44

requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. Refer to the Warranty Reserves
Accounting Policy and Note 7 of the Notes to Consolidated Financial Statements
for the disclosures required by this pronouncement.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an Amendment of SFAS 123, which
provides alternative methods for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002 and the interim
periods beginning after December 15, 2002. Refer to the Stock-Based Compensation
Accounting Policy for the disclosures required by this statement.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The company is evaluating the effect that this statement may have on its
financial position, results of operations and cash flows.

Reclassifications:

Certain prior year amounts have been reclassified to conform to the 2002
presentation.

3. RESTRUCTURING AND OTHER CHARGES

As of December 31, 2002, the company had substantially completed all
restructuring activities and, therefore, reversed approximately $5.9 million
($4.4 million, net of tax) during the fourth quarter of 2002. The reversal was
primarily due to lower severance costs (approximately $3.5 million) and lower
other exit costs (approximately $2.4 million) associated with the 2001 and 2000
restructuring plans. The severance payments were lower than originally estimated
due to higher than expected attrition which resulted in the company being able
to achieve headcount reductions at a lower cost. Although the restructuring
activities were substantially complete at year-end 2002 and the employees have
exited the business, approximately $4.7 million of severance payments are
projected to continue into the first half of 2003, and are accounted for
accordingly in the remaining reserve.

45

The following table presents a rollforward of the liabilities (in millions)
incurred in connection with the 2000 and 2001 restructuring plans. These
liabilities are reflected as accrued liabilities in the company's consolidated
statements of financial position.

During the fourth quarter of 2001, Lexmark's management and board of directors
approved a restructuring plan (the "2001 restructuring") that included a
reduction in the company's global workforce of up to 12 percent. This plan
provided for a reduction in infrastructure and overhead expenses, the
elimination of the company's business class inkjet printer, and the closure of
an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and
related charges of $58.4 million ($42.9 million, net of tax) were expensed
during the fourth quarter of 2001. These charges were comprised of $36.0 million
of accrued restructuring costs related to separation and other exit costs, $11.4
million associated with a pension curtailment related to the employee
separations and $11.0 million related to asset impairment charges. The company
also recorded $29.3 million ($21.6 million, net of tax) of associated
restructuring-related inventory write-offs resulting from the company's decision
to eliminate its business class inkjet printer, to limit the period over which
the company will provide replacement parts for products no longer in production,
and to exit the electronic card manufacturing facility. The inventory write-offs
were included on the cost of revenue line in the statements of earnings.

The accrued restructuring costs for employee separations of $26.3 million were
associated with approximately 1,600 employees worldwide from various business
functions and job classes. Employee separation benefits include severance,
medical and other benefits. As of December 31, 2002, approximately 1,225
employees have exited the business under the 2001 restructuring plan. This total
includes the employees discussed below who were transferred to another company.
In addition to employees exiting the business under the restructuring plan, the
company's headcount has further decreased due to higher than expected attrition.
The other exit costs of $9.7 million were primarily related to vendor and lease
cancellation charges.

The $11.0 million charge for asset impairment in 2001 was determined in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and resulted from the company's
decision to abandon certain assets consisting primarily of machinery and
equipment used to manufacture business class inkjet printers and electronic
cards. The charge for asset impairments was included on the restructuring and
related charges line in the statements of earnings.

In connection with the company's plans to exit the electronic card manufacturing
facility in Reynosa, Mexico, Lexmark sold the Reynosa operation to
Manufacturers' Services Limited ("MSL") in early July 2002. Approximately 250
Reynosa employees were transferred to MSL as

46

part of the sale transaction and those employees were expected to be retained by
MSL. In accordance with the sales agreement, the company prepaid eighteen months
of the building lease and agreed to provide support payments to MSL for
approximately eighteen months, subject to the terms of the agreement. MSL agreed
to assume the building lease payments for the remainder of the lease term.
During the third quarter of 2002, the company reversed excess reserves of
approximately $5.4 million for lease cancellation charges and employee
separation costs, which were not incurred as a result of the sale to MSL. The
company recorded a charge for approximately the same amount related to the
support agreement with MSL.

Included in the table above was approximately $30.3 million at December 31, 2001
associated with the 2001 restructuring liability. After the reversal of $2.9
million, which is an element of the total $5.9 million reversal as shown in the
restructuring liabilities table, the remaining restructuring liability for the
2001 plan was $4.7 million at December 31, 2002.

In October 2000, Lexmark's management and board of directors approved a plan to
restructure its worldwide manufacturing and related support operations (the
"2000 restructuring"). The 2000 restructuring plan involved relocating
manufacturing, primarily laser printers, to Mexico and China, and reductions in
associated support infrastructure. Restructuring and related charges of $41.3
million ($29.7 million, net of tax) were expensed during the fourth quarter of
2000. These charges were comprised of $24.3 million of accrued restructuring
costs related to separation and other exit costs, $10.0 million related to asset
impairment charges and $7.0 million associated with a pension curtailment loss
related to the employee separations.

The employee separation costs included severance, medical and other benefits
associated with approximately 900 employees worldwide, primarily in the
manufacturing and related support areas. The other exit costs were related to
vendor and lease cancellation charges and demolition and cleanup costs
associated with the company's manufacturing relocation. The asset impairment
charges resulted from the company's plans to abandon certain assets (primarily
buildings) associated with the relocation of manufacturing and related support
activities. As of December 31, 2001, substantially all of the employees
identified in the 2000 restructuring had exited the business and received
separation benefits. Included in the table above was approximately $4.0 million
at December 31, 2001 associated with the 2000 restructuring liability,
principally associated with anticipated demolition and cleanup activities
related to assets that were to be abandoned, and medical coverage provided to
employees who were bridged to retirement. The remaining restructuring liability
of $3.0 million related to 2000 was reversed and is an element of the total $5.9
million reversal as shown in the restructuring liabilities table.

4. RECEIVABLES

The company's trade receivables are reported in the consolidated statements of
financial position net of allowances for doubtful accounts and product returns.

In the U.S., the company sells its receivables to its wholly-owned subsidiary,
Lexmark Receivables Corporation ("LRC"), which then sells the receivables to an
unrelated third party. LRC is a separate legal entity with its own separate
creditors who, in a liquidation of LRC, would be entitled to be satisfied out of
LRC's assets prior to any value in LRC becoming available for equity claims of
the company. The company accounts for the transfers of receivables as sales
transactions.

In October 2001, the company entered into a new agreement to sell its U.S. trade
receivables on a limited recourse basis. The new agreement increased the maximum
amount of financing available to $225.0 million. As collections reduce
previously sold receivables, the company may replenish these with new
receivables. The company bears a risk of bad debt losses on U.S. trade
receivables sold, since the company over-collateralizes the receivables sold
with additional eligible receivables. The company addresses this risk of loss in
its allowance for doubtful accounts. Receivables sold may not include amounts
over 90 days past due or concentrations

47

over certain limits with any one customer. This facility contains customary
affirmative and negative covenants as well as specific provisions related to the
quality of the accounts receivables sold. The facility expires in October 2004,
but requires annual renewal of commitments in October 2002 and 2003. The company
renewed the annual commitment in 2002 and also expects to renew in 2003. At
December 31, 2002, the facility had no U.S. trade receivables sold and
outstanding. At December 31, 2001, U.S. trade receivables of $85.0 million had
been sold and, due to the revolving nature of the agreement, $85.0 million also
remained outstanding.

Expenses incurred under this program totaling $1.3 million, $7.1 million, and
$8.5 million for 2002, 2001 and 2000, respectively, are included in other
expense in the statements of earnings.

In 1997, the company entered into three-year interest rate swaps with a total
notional amount of $60.0 million, whereby the company paid interest at a fixed
rate of approximately 6.5% and received interest at a floating rate equal to the
three-month LIBOR. Since May 1998, the swaps served as a hedge of the
receivables financings which were based on floating interest rates. These
interest rate swaps expired during 2000. Expense of $0.1 million for 2000,
related to these swaps is included in other expense in the statements of
earnings.

5. INVENTORIES

Inventories consisted of the following at December 31:

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at December 31:

Depreciation expense was $137.5 million, $125.3 million and $91.1 million for
2002, 2001 and 2000, respectively.

During the third quarter of 2002, the company recorded an asset impairment
write-off of approximately $15.8 million related to the abandonment of a
customer relationship management software project which had encountered software
implementation and integration issues. The project was never implemented and,
after it was determined that it would not meet the company's needs, it was
abandoned and the in-process capital was written off. The third quarter asset
impairment write-off was determined in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, and was included on the
cost of revenue line in the consolidated statements of earnings. The fair value
of the asset was determined to be zero, since it was customized for the company
and therefore, had no commercial value.

48

7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

In accordance with the disclosure requirements of FIN 45, changes in the
company's aggregate warranty liability, which includes both warranty and
extended warranty (deferred revenue), during the year ended December 31, 2002
are presented below.

- ---------------------------------------------------------------------
Balance as of December 31, 2001............................. $122.0
Accruals for warranties issued during 2002.................. 216.8
Accruals related to pre-existing warranties (including
amortization of deferred revenue for extended warranties
and changes in estimates)................................. (36.2)
Settlements made (in cash or in kind) during 2002........... (155.6)
- ---------------------------------------------------------------------
Balance as of December 31, 2002............................. $147.0
- ---------------------------------------------------------------------

Both warranty and the short-term portion of extended warranty are included in
the accrued liabilities line in the consolidated statements of financial
position. The long-term portion of extended warranty is included in the other
liabilities line in the consolidated statements of financial position.

8. DEBT

The company has outstanding $150.0 million principal amount of 6.75% senior
notes due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to
maturity. A balance of $149.2 million (net of unamortized discount of $0.8
million) was outstanding at December 31, 2002. At December 31, 2001, the balance
was $149.1 million (net of unamortized discount of $0.9 million). The senior
notes contain typical restrictions on liens, sale leaseback transactions,
mergers and sales of assets. There are no sinking fund requirements on the
senior notes and they may be redeemed at any time at the option of the company,
at a redemption price as described in the related indenture agreement, as
supplemented and amended, in whole or in part.

Effective May 29, 2002, the company entered into a new $500 million unsecured,
revolving credit facility with a group of banks, including a $200 million
364-day portion and a $300 million 3-year portion. Upon entering into the new
credit agreement, the company terminated the prior $300 million unsecured,
revolving credit facility that was due to expire on January 27, 2003. There were
no amounts outstanding under the prior facility upon its termination.

Under the new credit facility, the company may borrow in dollars, euros and
other optional currencies. The interest rate ranges from 0.35% to 1.25% above
the London Interbank Offered Rate (LIBOR) for borrowings denominated in U.S.
dollars, the Eurocurrency Interbank Offered Rate (EURIBOR) for borrowings
denominated in euros, or other relevant international interest

49

rate for borrowings denominated in another currency. The interest rate spread is
based upon the company's debt ratings. In addition, the company is required to
pay a facility fee on the $500 million line of credit of 0.075% to 0.25% based
upon the company's debt ratings. The interest and facility fees are payable
quarterly.

The new credit agreement contains customary default provisions, leverage and
interest coverage restrictions and certain restrictions on secured and
subsidiary debt, disposition of assets, liens and mergers and acquisitions. The
364-day portion of the new $500 million credit facility has a maturity date of
May 28, 2003, with an option to extend an additional 364 days. The company
expects to exercise its option to extend the 364-day portion of the credit
facility. The 3-year portion of the new credit facility has a maturity date of
May 29, 2005. Any amounts outstanding under the new credit facility are due
according to the applicable maturity dates noted above. As of December 31, 2002
and 2001, there were no amounts outstanding under the new and prior credit
facilities, respectively.

The company's Brazilian operation has a short-term, uncommitted line of credit
with an outstanding balance of $9.3 million and $11.0 million at December 31,
2002 and 2001, respectively. The interest rate on this line of credit varies
based upon the local prevailing interest rates at the time of borrowing, and
averaged approximately 19% and 18%, during 2002 and 2001, respectively.

During 2002, the company's operation in the People's Republic of China entered
into a short-term, uncommitted revolving loan facility. As of December 31, 2002,
there was an outstanding balance of $3.0 million. The interest rate on this
facility varies based upon the local prevailing interest rates at the time of
borrowing, and averaged approximately 5% during 2002.

In February 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission to register $200 million of debt securities.
Although the company does not expect to utilize the shelf registration in the
near term, if conditions warrant, the net proceeds from a sale of the securities
could be used for capital expenditures, reduction of short-term borrowings,
working capital, acquisitions and other general corporate purposes.

Total cash paid for interest amounted to $12.6 million, $14.3 million and $15.9
million in 2002, 2001 and 2000, respectively.

9. INCOME TAXES

The provision for income taxes consisted of the following:

50

Earnings before income taxes were as follows:

The company realized an income tax benefit from the exercise of certain stock
options in 2002, 2001 and 2000 of $31.3 million, $54.7 million and $61.2
million, respectively. This benefit resulted in a decrease in current income
taxes payable and an increase in capital in excess of par.

In 2001, the company reached resolution with the Internal Revenue Service on
certain adjustments related to the intercompany allocation of profits. As a
result of this resolution, the company has reversed previously accrued taxes,
reducing the tax provision in the fourth quarter of 2001 by $40.0 million or
$0.30 per share.

The company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The company believes that adequate amounts of taxes
and related interest have been provided for any adjustments that may result from
these examinations.

Significant components of deferred income taxes at December 31 were as follows:

The balance of the company's valuation allowance has been zero since December
31, 2000. The company has non-U.S. tax loss carryforwards of $15.6 million,
which have an indefinite carryforward period. At December 31, 2002, the research
and development tax credit carryforward available to reduce possible future U.S.
income taxes amounted to approximately $12.5 million, all of which expires in
the years 2022 -- 2023.

Deferred income taxes have not been provided on the undistributed earnings of
foreign subsidiaries. Undistributed earnings of non-U.S. subsidiaries included
in the consolidated retained earnings were approximately $683.9 million. The
company does not plan to initiate any action that would precipitate the payment
of income taxes. It is not practicable to estimate the amount of additional tax
that may be payable on the foreign earnings.

51

A reconciliation of the provision for income taxes using the U.S. statutory rate
and the company's effective tax rate was as follows:

Cash paid for income taxes was $94.5 million, $32.1 million and $35.1 million in
2002, 2001 and 2000, respectively.

10. STOCKHOLDERS' EQUITY

The Class A common stock is voting and exchangeable for Class B common stock in
very limited circumstances. The Class B common stock is non-voting and is
convertible, subject to certain limitations, into Class A common stock.

At the company's Annual Meeting of Stockholders on April 27, 2000, the
stockholders approved an increase in the number of authorized shares of its
Class A common stock from 450 million to 900 million shares.

At December 31, 2002, approximately 718.5 million and 1.8 million shares of
Class A and Class B common stock were unissued and unreserved. These shares are
available for a variety of general corporate purposes, including future public
offerings to raise additional capital and for facilitating acquisitions.

In July 2002, the company received authorization from the board of directors to
repurchase an additional $200 million of its Class A common stock for a total
repurchase authority of $1.4 billion. At December 31, 2002, there was
approximately $188 million of share repurchase authority remaining. This
repurchase authority allows the company, at management's discretion, to
selectively repurchase its stock from time to time in the open market or in
privately negotiated transactions depending upon market price and other factors.
During 2002, the company repurchased approximately 6.1 million shares in the
open market at prices ranging from $41.97 per share to $60.96 per share for a
cost of approximately $331 million. As of December 31, 2002, the company had
repurchased approximately 34.7 million shares at prices ranging from $10.63 per
share to $105.38 per share for an aggregate cost of approximately $1.2 billion.
As of December 31, 2002, the company had reissued 0.2 million shares of
previously repurchased shares in connection with certain of its employee benefit
programs. As a result of these issuances, the net treasury shares outstanding at
December 31, 2002 were 34.5 million.

In 1998, the company's board of directors adopted a stockholder rights plan (the
"Rights Plan") which now provides existing stockholders with the right to
purchase one one-thousandth (0.001) of a share of Series A Junior Participating
preferred stock for each share of common stock held in

52

the event of certain changes in the company's ownership. The rights will expire
on January 31, 2009, unless earlier redeemed by the company.

11. EARNINGS PER SHARE

The following table presents a reconciliation of the numerators and denominators
of the basic and diluted earnings per share calculations for the years ended
December 31:

Stock options to purchase 2.1 million common shares in 2002, 1.9 million common
shares in 2001, and 1.6 million common shares in 2000 were outstanding, but were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would have been antidilutive.

12. STOCK INCENTIVE PLANS

The company has various stock incentive plans to encourage employees and
nonemployee directors to remain with the company and to more closely align their
interests with those of the company's stockholders. Under the employee plans, as
of December 31, 2002 approximately 4.2 million shares of Class A common stock
are reserved for future grants in the form of stock options, stock appreciation
rights, restricted stock, performance shares or deferred stock units (of which
up to 0.2 million shares can be used for restricted stock, performance shares
and deferred stock units). Under the nonemployee director plan, as of December
31, 2002 approximately 0.2 million shares of Class A common stock are reserved
for future grants in the form of stock options and deferred stock units. As of
December 31, 2002, awards under the programs have been limited to stock options,
restricted stock, performance shares and deferred stock units.

The exercise price of options awarded under stock option plans is equal to the
fair market value of the underlying common stock on the date of grant. Generally
options expire ten years from the date of grant and generally become fully
vested at the end of five years based upon continued employment or the
completion of three years of service on the board of directors. In some cases,
option vesting and exercisability may be accelerated due to the achievement of
performance objectives.

The company applies APB Opinion 25, Accounting for Stock Issued to Employees,and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans
other than for restricted stock, performance-based awards and deferred stock
units. Refer to Significant Accounting Policies -- Stock-Based Compensation in
Note 2 of the Notes to Consolidated Financial Statements for the effects on net
earnings and earnings per share had the company applied the fair value
methodology prescribed under SFAS 123.

53

The weighted average fair value of options granted during 2002, 2001 and 2000
was $24.14, $23.02 and $47.05 per share, respectively.

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

A summary of the status of the company's stock option plans as of December 31,
2002, 2001 and 2000 and changes during the years then ended is presented below:

As of December 31, 2002, 2001 and 2000 there were 5.4 million, 5.0 million and
6.5 million options exercisable, respectively.

The following table summarizes information about stock options outstanding and
exercisable at December 31, 2002:

As of December 31, 2002, the company had granted approximately 450,000
restricted stock units and supplemental deferred stock units with various
vesting periods. During 2002, 2001, and 2000, respectively, the company granted
29,000, 140,000 and 86,000 restricted stock units and supplemental deferred
stock units with weighted average grant prices of $52.02, $49.98 and $51.16. As
of December 31, 2002, there were approximately 258,000 restricted stock units
and

54

supplemental deferred stock units outstanding. The cost of the awards,
determined to be the fair market value of the shares at the date of grant, is
charged to compensation expense ratably over the vesting periods.

The company has also issued approximately 315,000 deferred stock units to
certain members of management who have elected to defer all or a portion of
their annual bonus into such units and to certain nonemployee directors who
elected to defer all or a portion of their annual retainer, chair retainer
and/or meeting fees into such units. These deferred stock units are 100% vested
at all times. As of December 31, 2002, there were approximately 215,000 such
deferred stock units outstanding.

In addition, the company awarded approximately 134,000 performance shares, the
vesting of which was based on the attainment of certain performance goals by the
end of the four year period 1997 through 2000. Based on the certification in
early 2001 that such performance goals were satisfied, the shares were fully
vested but receipt of these shares was deferred by the grantees. In January
2003, 113,000 of these shares were issued and 21, 000 shares were further
deferred by a grantee until February 2005. The compensation expense in
connection with the performance shares was estimated over the four year period
based on the fair market value of the shares during that period. In order to
mitigate the impact of stock price changes on compensation expense, the company
entered into a forward equity contract on its common stock during 2000 which was
settled in cash in 2001.

The company has recorded compensation expense of $3.0 million, $4.4 million and
$3.2 million in 2002, 2001 and 2000, respectively, related to these stock
incentive plans.

During 1999, stockholders approved the Lexmark International Group, Inc. 1999
Employee Stock Purchase Plan ("ESPP") which became effective January 1, 2000.
The ESPP enables substantially all regular employees to purchase full or
fractional shares of Lexmark Class A common stock through payroll deductions of
up to 10% of eligible compensation. Effective July 1, 2002, the ESPP was amended
whereby the share price paid by an employee changed from 85% of the closing
market price on the last business day of each month, to 85% of the lesser of the
closing market price on (i) the last business day immediately preceding the
first day of the respective offering period and (ii) the last business day of
the respective offering period. The current plan provides semi-annual offering
periods beginning each January 1 and July 1. During 2002, 2001 and 2000,
employees paid the company $4.5 million, $8.2 million and $8.7 million,
respectively, to purchase approximately 0.1 million shares, 0.2 million shares
and 0.2 million shares, respectively. As of December 31, 2002, there were
approximately 2.5 million shares of Class A common stock reserved for future
purchase under the ESPP.

55

13. EMPLOYEE PENSION AND POSTRETIREMENT PLANS

The company and its subsidiaries have defined benefit and defined contribution
pension plans that cover substantially all regular employees, and a supplemental
plan that covers certain executives. Medical, dental and life insurance plans
for retirees are provided by the company and certain of its non-U.S.
subsidiaries. Plan assets are invested in equity securities, government and
agency securities, corporate debt and annuity contracts.

The non-U.S. pension plans are not significant and use economic assumptions
similar to the U.S. pension plan and therefore are not shown separately in the
following disclosures. The changes in the defined benefit plan obligations and
plan assets for 2002 and 2001 were as follows:

The weighted-average discount rate and rate of compensation increase assumptions
are calculated based on the end of year benefit obligation of the U.S. and
non-U.S. plans. The discount rate for the U.S. was 6.5% as of December 31, 2002,
7.5% as of December 31, 2001 and 8.0% as of December 31, 2000. The
weighted-average expected return on plan assets is based on the end of year fair
value of plan assets of the U.S. and non-U.S. plans. The expected return on plan
assets for the U.S. was 10.0% as of December 31, 2002, 2001, and 2000.

The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $621.3 million, $607.2 million and $395.7 million,
respectively, as of December 31, 2002, and $523.4 million, $520.5 million and
$413.2 million, respectively, as of December 31, 2001.

For measurement purposes, a 10.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2003. The rate is assumed to
decrease gradually to 5.25% in 2009 and remain at that level thereafter. Since
the net employer costs for postretirement medical benefits reach the preset caps
within the next four to six years, a 1% increase or decrease in trend has a de
minimis effect on costs.

Related to the company's acquisition of the Information Products Corporation
from IBM in 1991, IBM agreed to pay for its pro rata share (currently estimated
at $76.2 million) of future postretirement benefits for all the company's U.S.
employees based on pro rated years of service with IBM and the company.

The company also sponsors defined contribution plans for employees in certain
countries. Company contributions are based upon a percentage of employees'
contributions. The company's expense under these plans was $11.4 million, $10.0
million, and $8.5 million in 2002, 2001 and 2000, respectively.

14. DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

In 1999, the company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The company recorded a net-of-tax cumulative-effect-type
loss adjustment of $0.4 million in accumulated other comprehensive earnings to
recognize at fair value all derivatives that were designated as cash-flow
hedging instruments upon adoption of SFAS No. 133 on January 1, 1999. This loss
adjustment, which the company reclassified to earnings by March 31, 2000,
consisted of a $0.6 million loss related to interest rate swaps and a $0.2
million gain related to foreign currency options.

57

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The company's activities expose it to a variety of market risks, including the
effects of changes in foreign currency exchange rates and interest rates. The
financial exposures are monitored and managed by the company as an integral part
of its overall risk management program. The company's risk management program
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on its operating results.

The company maintains a foreign currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates. The
company does not hold or issue financial instruments for trading purposes nor
does it hold or issue leveraged derivative instruments.

The company maintains an interest rate risk management strategy that may, from
time to time use derivative instruments to minimize significant, unanticipated
earnings fluctuations caused by interest rate volatility. The company's goal is
to maintain a balance between fixed and floating interest rates on its financing
activities.

By using derivative financial instruments to hedge exposures to changes in
exchange rates and interest rates, the company exposes itself to credit risk and
market risk. The company manages exposure to counterparty credit risk by
entering into derivative financial instruments with highly rated institutions
that can be expected to fully perform under the terms of the agreement. Market
risk is the adverse effect on the value of a financial instrument that results
from a change in currency exchange rates or interest rates. The company manages
exposure to market risk associated with interest rate and foreign exchange
contracts by establishing and monitoring parameters that limit the types and
degree of market risk that may be undertaken.

The company uses the following hedging strategies to reduce the potentially
adverse effects that market volatility may have on its operating results:

Fair Value Hedges: Fair value hedges are hedges of recognized assets or
liabilities. The company enters into forward exchange contracts to hedge actual
purchases and sales of inventories. The forward contracts used in this program
mature in three months or less, consistent with the related purchase and sale
commitments. Foreign exchange option contracts, as well as forward contracts,
may be used as fair value hedges in situations where derivative instruments, for
which hedge accounting has been discontinued, expose earnings to further change
in exchange rates.

Cash Flow Hedges: Cash flow hedges are hedges of forecasted transactions or of
the variability of cash flows to be received or paid related to a recognized
asset or liability. The company enters into foreign exchange options and forward
exchange contracts expiring within eighteen months as hedges of anticipated
purchases and sales that are denominated in foreign currencies. These contracts
are entered into to protect against the risk that the eventual cash flows
resulting from such transactions will be adversely affected by changes in
exchange rates. The company also enters into currency swap contracts to hedge
foreign currency risks that result from the transfer of various currencies
within the company. The currency swap contracts entered into generally expire
with one month. The company also may use interest rate swaps to convert a
portion of its variable rate financing activities to fixed rates.

ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES

All derivatives are recognized in the statement of financial position at their
fair value. Fair values for the company's derivative financial instruments are
based on quoted market prices of comparable instruments or, if none are
available, on pricing models or formulas using current assumptions. On the date
the derivative contract is entered into, the company designates the derivative
as either a fair value or cash flow hedge. Changes in the fair value of a
derivative that is highly effective as -- and that is designated and qualifies
as -- a fair value hedge, along with

58

the loss or gain on the hedged asset or liability are recorded in current period
earnings in cost of revenues. Changes in the fair value of a derivative that is
highly effective as -- and that is designated and qualifies as -- a cash flow
hedge are recorded in other comprehensive earnings, until the underlying
transactions occur.

At December 31, 2002, the company had derivative assets of $40.9 million
classified as prepaid expenses and other current assets as well as derivative
liabilities of $57.4 million classified as accrued liabilities. At December 31,
2001, the company had derivative assets of $26.6 million classified as prepaid
expenses and other current assets as well as derivative liabilities of $18.8
million classified as accrued liabilities. As of December 31, 2002, a total of
$20.9 million of deferred net losses on derivative instruments were accumulated
in other comprehensive earnings (loss), of which $19.9 million is expected to be
reclassified to earnings during the next twelve months. As of December 31, 2001,
a total of $14.9 million of deferred net losses on derivative instruments were
accumulated in other comprehensive earnings (loss), of which $13.9 million was
reclassified to earnings during 2002.

The company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge items. This process includes linking all derivatives
that are designated as fair value and cash flow to specific assets and
liabilities on the balance sheet or to forecasted transactions. The company also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair value or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, the company discontinues
hedge accounting prospectively, as discussed below.

The company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes in the
fair value or cash flows of a hedged item; (2) the derivative expires or is
sold, terminated, or exercised or (3) the derivative is discontinued as a hedge
instrument, because it is unlikely that a forecasted transaction will occur.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried in the statement of financial position at its fair
value. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried in the statement of financial position at its fair value, and gains and
losses that were accumulated in other comprehensive earnings are recognized
immediately in earnings. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value in the statement
of financial position, with changes in its fair value recognized in current
period earnings. A fair value hedge is entered into when the derivative
instrument, for which hedge accounting has been discontinued, exposes earnings
to further change in exchange rates. As of December 31, 2002, an immaterial
portion of the company's cash flow hedges was determined to be ineffective
because it was unlikely that the forecasted transaction would occur and an
immaterial gain was reclassified to current period earnings.

The company recorded $13.0 million and $7.0 million of aggregate foreign
currency transaction losses in 2002 and 2001, respectively, and a $0.7 million
gain in 2000. The aggregate foreign currency transaction amounts include the
effect of the company's foreign currency fair value hedges for all periods
presented.

FINANCIAL INSTRUMENTS

At December 31, 2002, the carrying value of the company's long-term debt was
$149.2 million and the fair value was $163.0 million. At December 31, 2001, the
carrying value of the company's long-term debt was $149.1 million and the fair
value was $146.2 million. The fair value of the long-term debt was estimated
based on current rates available to the company for debt with

59

similar characteristics. At December 31, 2002 and 2001, the carrying value of
the company's short term debt was $12.3 and $11.0 million, respectively, which
approximated the fair value.

CONCENTRATIONS OF CREDIT RISK

The company's main concentrations of credit risk consist primarily of temporary
cash investments and trade receivables. Cash investments are made in a variety
of high quality securities with prudent diversification requirements. Credit
risk related to trade receivables is dispersed across a large number of
customers located in various geographic areas. The company sells a large portion
of its products through third-party distributors and resellers and if the
financial condition or operations of these distributors and resellers were to
deteriorate substantially, the company's operating results could be adversely
affected. However, the company performs ongoing credit evaluations of the
financial position of its third-party distributors, resellers and other
customers to determine appropriate credit limits. Collateral such as letters of
credit and bank guarantees is required in certain circumstances. No individual
distributor or reseller accounted for more than 10% of the company's trade
receivables at December 31, 2002.

The company generally has experienced longer accounts receivable cycles in its
emerging markets, in particular, Asia Pacific and Latin America, when compared
to its U.S. and European markets. In the event that accounts receivable cycles
in these developing markets lengthen further, the company could be adversely
affected.

15. COMMITMENTS AND CONTINGENCIES

The company is committed under operating leases (containing various renewal
options) for rental of office and manufacturing space and equipment. Rent
expense (net of rental income of $2.0 million, $2.0 million and $2.9 million)
was $41.4 million, $42.2 million, and $39.6 million in 2002, 2001 and 2000,
respectively. Future minimum rentals under terms of non-cancelable operating
leases at December 31 are: 2003-$30.3 million; 2004-$21.2 million; 2005-$17.6
million; 2006-$13.0 million; 2007-$10.3 million and thereafter-$28.6 million.

The company is subject to legal proceedings and claims that arise in the
ordinary course of business. The company does not believe that the outcome of
any of those matters will have a material adverse effect on the company's
financial position, results of operations or cash flows.

60

16. SEGMENT DATA

The company manufactures and sells a variety of printing products and related
supplies and services that have similar economic characteristics as well as
similar customers, production processes and distribution methods and, therefore,
has aggregated similar divisions and continues to report one segment.

The following are revenue and long-lived asset information by geographic area
for and as of December 31:

Revenue reported above is based on the countries to which the products are
shipped.

Revenue information is categorized by product among laser and inkjet printers,
laser and inkjet supplies, and other. This revenue information is provided in
order to give additional insight into Lexmark's strategic model by quantifying
the company's printers and supplies revenue growth.

The following is revenue by product category as of December 31:

61

17. QUARTERLY FINANCIAL DATA (UNAUDITED)

*The sum of the quarterly earnings per share amounts do not necessarily equal
the year-to-date earnings per share due to changes in average share
calculations. This is in accordance with prescribed reporting requirements.

(1) Amounts include the benefit of the ($5.9) million (($4.4) million, net of
tax) reversal of restructuring and other charges recorded during the fourth
quarter of 2002. Diluted EPS was increased by $0.03 during the fourth quarter of
2002 as a result of the restructuring reversal.

(2) Amounts include the impact of the $87.7 million ($64.5 million, net of tax)
restructuring and other charges recorded during the fourth quarter of 2001.
Inventory write-offs of $29.3 million associated with the restructuring actions
were included in gross profit, and operating income included the inventory
write-offs and the restructuring and related charges of $58.4 million. Diluted
EPS was reduced by $0.48 during the fourth quarter of 2001 as a result of the
restructuring and other charges.

(3) Net earnings also included a $40 million benefit from the resolution of
income tax matters. Diluted EPS was increased by $0.30 during the fourth quarter
of 2001 as a result of the resolution of income tax matters.

62

MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS

The consolidated financial statements and related information included in this
Financial Report are the responsibility of management and have been reported in
conformity with accounting principles generally accepted in the United States of
America. All other financial data in this Annual Report have been presented on a
basis consistent with the information included in the consolidated financial
statements. Lexmark International, Inc. maintains a system of financial controls
and procedures, which includes the work of corporate auditors, which we believe
provides reasonable assurance that the financial records are reliable in all
material respects for preparing the consolidated financial statements and
maintaining accountability for assets. The concept of reasonable assurance is
based on the recognition that the cost of a system of financial controls must be
related to the benefits derived and that the balancing of those factors requires
estimates and judgment. This system of financial controls is reviewed, modified
and improved as changes occur in business conditions and operations, and as a
result of suggestions from the corporate auditors and PricewaterhouseCoopers
LLP.

The Finance and Audit Committee, composed of outside members of the Board of
Directors, meets periodically with management, the independent accountants and
the corporate auditors, for the purpose of monitoring their activities to ensure
that each is properly discharging its responsibilities. The Finance and Audit
Committee, independent accountants, and corporate auditors have free access to
one another to discuss their findings.

/s/ Paul J. Curlander

Paul J. Curlander
Chairman and chief executive officer

/s/ Gary E. Morin

Gary E. Morin
Executive vice president and chief financial officer

63

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Lexmark International, Inc.

In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of earnings, cash flows, and
stockholders' equity and comprehensive earnings appearing on pages 34 through 61
of this annual report on Form 10-K present fairly, in all material respects, the
consolidated financial position of Lexmark International, Inc. and subsidiaries
at December 31, 2002 and 2001, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. These consolidated financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Lexington, Kentucky
February 11, 2003

64

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Except with respect to information regarding the executive officers of the
Registrant, the information required by Part III, Item 10 of this Form 10-K is
incorporated by reference herein, and made part of this Form 10-K, from the
company's definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission,
pursuant to Regulation 14A, not later than 120 days after the end of the fiscal
year. The information with respect to the executive officers of the Registrant
is included under the heading "Executive Officers of the Registrant" in Item 1
above.

ITEM 11. EXECUTIVE COMPENSATION

Information required by Part III, Item 11 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by Part III, Item 12 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by Part III, Item 13 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures: The company's principal
executive officer and principal financial officer have evaluated the
effectiveness of the company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days
prior to the filing date of this report, and have concluded that, as of such
date the company's disclosure controls and procedures were adequate and
effective.

Changes in internal controls: There were no significant changes in the
company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses in the company's internal
controls identified as part of the evaluation, and, as a result, no corrective
actions were required or undertaken.

65

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1 FINANCIAL STATEMENTS:

Financial statements filed as part of this Form 10-K are included under
Part II, Item 8.

(a)2 FINANCIAL STATEMENT SCHEDULE:

All other schedules are omitted as the required information is inapplicable or
the information is presented in the Consolidated Financial Statements or related
notes.

66

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of Lexmark International, Inc.

Our audits of the consolidated financial statements referred to in our report
dated February 11, 2003 appearing on page 64 of this annual report on Form 10-K
also included an audit of the financial statement schedule listed in item
14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule on
page 68 of this Form 10-K presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Lexington, Kentucky
February 11, 2003

67

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(DOLLARS IN MILLIONS)

68

ITEM 15(a)(3). EXHIBITS

Exhibits for the company are listed in the Index to Exhibits beginning on page
E-1.

(b) REPORTS ON FORM 8-K

Current Reports on Form 8-K dated October 10, 2002 and November 13, 2002 were
filed by the company with the Securities and Exchange Commission to provide
Regulation FD disclosure information.

69

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Lexington,
Commonwealth of Kentucky, on March 14, 2003.

LEXMARK INTERNATIONAL, INC.

By /s/ Paul J. Curlander
------------------------------------
Name: Paul J. Curlander
Title: Chairman and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the following capacities and on the dates indicated.

70

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CERTIFICATION

I, Paul J. Curlander, certify that:

1. I have reviewed this annual report on Form 10-K of Lexmark International,
Inc.;

2. 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;

3. 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;

4. 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:

a) 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;

b) 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

c) 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;

5. 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
function):

a) 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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not 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.

Date: March 14, 2003 /s/ Paul J. Curlander
--------------------------------------
Paul J. Curlander
Chairman and Chief Executive Officer

71

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CERTIFICATION

I, Gary E. Morin, certify that:

1. I have reviewed this annual report on Form 10-K of Lexmark International,
Inc.;

2. 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;

3. 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;

4. 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:

a) 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;

b) 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

c) 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;

5. 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
function):

a) 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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not 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.

Date: March 14, 2003 /s/ Gary E. Morin
--------------------------------------
Gary E. Morin
Executive Vice President and
Chief Financial Officer

72

INDEX TO EXHIBITS

E-1

E-2

- ---------------

* Confidential treatment previously granted by the Securities
and Exchange Commission.
+ Indicates management contract or compensatory plan, contract
or arrangement.
(1) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000
(Commission File No. 1-14050).
(2) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 (Commission
File No. 1-14050).
(3) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001
(Commission File No. 1-14050).
(4) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (Commission
File No. 1-14050).
(5) Incorporated by reference to the company's Amended
Registration Statement on Form 8-A filed with the Commission
on March 12, 1999 (Commission File No. 1-14050).
(6) Incorporated by reference to the company's Form S-1
Registration Statement, Amendment No. 2 (Registration No.
33-97218) filed with the Commission on November 13, 1995.
(7) Incorporated by reference to the company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1996
(Commission File No. 1-14050).
(8) Incorporated by reference to the company's Form S-1
Registration Statement (Registration No. 33-97218) filed
with the Commission on September 22, 1995.
(9) Incorporated by reference to the company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001
(Commission File No. 1-14050).
(10) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002 (Commission
File No. 1-14050).
(11) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002
(Commission File No. 1-14050).
(12) Incorporated by reference to the company's Form S-1
Registration Statement, Amendment No. 1 (Registration No.
33-97218), filed with the Commission on October 27, 1995.

E-3

(13) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999 (Commission
File No. 1-14050).
(14) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998
(Commission File No. 1-14050).
(15) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (Commission
File No. 1-14050).
(16) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999
(Commission File No. 1-14050).
(17) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998
(Commission File No. 1-14050).

E-4