FORM 10-K
                      SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549
(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, 1999 

( )  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934   For the transition period from: ______ to ______
 
                              XEROX CORPORATION
            (Exact name of registrant as specified in its charter)
 
                                    1-4471
                           (Commission file number)
 
New York                                                            16-0468020
(State of incorporation)                  (I.R.S. Employer Identification No.)

P.O. Box 1600, Stamford, Connecticut                                     06904
(Address of principal executive offices)                            (Zip Code)

       Registrant's telephone number, including area code: (203) 968-3000
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                                       Name of Each Exchange
Title of Each Class                                    on Which Registered

Common Stock, $1 par value                             New York Stock Exchange
                                                       Chicago Stock Exchange


       Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to such 
filing requirements for the past 90 days.
                                                       Yes: (X)  No: (  )
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 
of Regulation S-K is not contained herein, and will not be contained, to the 
best of registrant's knowledge, in definitive proxy or information statements 
incorporated by reference in Part III of this Form 10-K or any amendment to 
this Form 10-K.
                                                                     (  )

The aggregate market value of the voting stock of the registrant held by non-
affiliates as of February 29, 2000 was:                $15,841,867,246.

                            (Cover Page Continued)


Indicate the number of shares outstanding of each of the registrant's classes 
of common stock, as of the latest practicable date:
 
Class                                         Outstanding at February 29, 2000

Common Stock, $1 Par Value                                  665,869,596 Shares


                      Documents Incorporated By Reference
 
Portions of the following documents are incorporated herein by reference:
 
                                                       Part of 10-K in
Document                                               Which Incorporated

Xerox Corporation 1999 Annual Report to Shareholders          I & II

Xerox Corporation Notice of 2000 Annual Meeting of               III
Shareholders and Proxy Statement (to be filed not 
later than 120 days after the close of the fiscal 
year covered by this report on Form 10-K).


Forward-Looking Statements

From time to time Xerox Corporation (the Registrant or the Company) and its 
representatives may provide information, whether orally or in writing, 
including certain statements in this Form 10-K under "Management's Discussion 
and Analysis of Results of Operations and Financial Condition," which are 
deemed to be "forward-looking" within the meaning of the Private Securities 
Litigation Reform Act of 1995 ("Litigation Reform Act").  These forward-looking 
statements and other information relating to the Company are based on the 
beliefs of management as well as assumptions made by and information currently 
available to management.

The words "anticipate," "believe," "estimate," "expect," "intend," "will," and 
similar expressions, as they relate to the Company or the Company's management, 
are intended to identify forward-looking statements.  Such statements reflect 
the current views of the Registrant with respect to future events and are 
subject to certain risks, uncertainties and assumptions.  Should one or more of 
these risks or uncertainties materialize, or should underlying assumptions 
prove incorrect, actual results may vary materially from those described herein 
as anticipated, believed, estimated or expected.  The Registrant does not 
intend to update these forward-looking statements.

In accordance with the provisions of the Litigation Reform Act we are making 
investors aware that such "forward-looking" statements, because they relate to 
future events, are by their very nature subject to many important factors which 
could cause actual results to differ materially from those contained in the 
"forward-looking" statements.  Such factors include but are not limited to the 
following:

Competition - the Registrant operates in an environment of significant 
competition, driven by rapid technological advances and the demands of 
customers to become more efficient.  There are a number of companies worldwide 
with significant financial resources which compete with the Registrant to 
provide document processing products and services in each of the markets served 
by the Registrant, some of whom operate on a global basis.  The Registrant's 
success in its future performance is largely dependent upon its ability to 
compete successfully in its currently-served markets and to expand into 
additional market segments.  

Transition to Digital - presently black and white light-lens copiers represent 
approximately 30% of the Registrant's revenues.  This segment of the general 
office market is mature with anticipated declining industry revenues as the 
market transitions to digital technology.  Some of the Registrant's new digital 
products replace or compete with the Registrant's current light-lens equipment. 
Changes in the mix of products from light-lens to digital, and the pace of that 
change as well as competitive developments could cause actual results to vary 
from those expected.

Pricing - the Registrant's ability to succeed is dependent upon its ability to 
obtain adequate pricing for its products and services which provide a 
reasonable return to shareholders.  Depending on competitive market factors, 
future prices the Registrant can obtain for its products and services may vary 
from historical levels. In addition, pricing actions to offset currency 
devaluations may not prove sufficient to offset further devaluations or may not 
hold in the face of customer resistance and/or competition.

Financing Business - a significant portion of the Registrant's profits arise 
from the financing of its customers' purchases of the Registrant's equipment.  
On average, 75 to 80 percent of equipment sales are financed through the 
Registrant. The Registrant's ability to provide such financing at competitive 
rates and realize profitable spreads is highly dependent upon its own costs of 
borrowing which, in turn, depend upon its credit ratings. The Registrant's 
present credit ratings permit ready access to the credit markets.  There is no 
assurance that these credit ratings can be maintained and/or ready access to 
the credit markets can be assured. In December 1999, Moody's Investors Service, 
Inc. announced that the long and short term credit ratings of the Company and 
its financially supported subsidiaries are under review for possible downgrade, 
Standard & Poor's announced a negative outlook for the Company's and Xerox 
Credit Corporation's ratings and Fitch IBCA, Inc. placed the Company's and its 
subsidiaries' debt ratings on "RatingAlert-Negative". A downgrade or lowering 
in such ratings could reduce the profitability of such financing business 
and/or make the Registrant's financing less attractive to customers thus 
reducing the volume of financing business done.

Productivity - the Registrant's ability to sustain and improve its profit 
margins is largely dependent on its ability to maintain an efficient, cost-
effective operation.  Productivity improvements through process reengineering, 
design efficiency and supplier cost improvements are required to offset labor 
cost inflation and potential materials cost changes and competitive price 
pressures.

International Operations - the Registrant derives approximately half its 
revenue from operations outside of the United States.  In addition, the 
Registrant manufactures many of its products and/or their components outside 
the United States.  The Registrant's future revenue, cost and profit results 
could be affected by a number of factors, including changes in foreign currency 
exchange rates, changes in economic conditions from country to country, changes 
in a country's political conditions, trade protection measures, licensing 
requirements and local tax issues.

New Products/Research and Development - the process of developing new high 
technology products and solutions is inherently complex and uncertain.  It 
requires accurate anticipation of customers' changing needs and emerging 
technological trends.  The Registrant must then make long-term investments and 
commit significant resources before knowing whether these investments will 
eventually result in products that achieve customer acceptance and generate 
the revenues required to provide anticipated returns from these investments.

Restructuring - the Registrant's ability to ultimately reduce pre-tax annual 
expenditures by approximately $1 billion is dependent upon its ability to 
successfully implement the 1998 restructuring program including the elimination 
of 9,000 net jobs worldwide, the closing and consolidation of facilities, and 
the successful implementation of process and systems changes. Furthermore, the 
Registrant's ability to realize additional cost savings and productivity 
improvements above those identified in the 1998 restructuring program are 
dependant on successful identification and implementation of initiatives for 
the 2000 restructuring program, which is expected to be announced in the first 
quarter of 2000.


Revenue Growth - the Registrant's ability to attain a consistent trend of 
revenue growth over the intermediate to longer term is largely dependent upon 
expansion of its equipment sales worldwide.  The ability to achieve equipment 
sales growth is subject to the successful implementation of our initiatives to 
provide industry-oriented global solutions for major customers and expansion of 
our distribution channels in the face of global competition and pricing 
pressures.  Our inability to attain a consistent trend of revenue growth could 
materially affect the trend of our actual results.
  



PART I


Item 1. Business

Overview

Xerox Corporation (Xerox or the Company) is The Document Company and a leader 
in the global document market, providing document solutions that enhance 
business productivity.  References herein to "us" or "our" refer to Xerox and 
consolidated subsidiaries unless the context specifically requires otherwise.  
We distribute our products in the Western Hemisphere through divisions and 
wholly-owned subsidiaries. In Europe, Africa, the Middle East and parts of Asia 
including Hong Kong, India and China, we distribute through Xerox Limited and 
related companies (collectively Xerox Limited). Fuji Xerox Co., Limited, an 
unconsolidated entity jointly owned by Xerox Limited and Fuji Photo Film 
Company Limited, develops, manufactures and distributes document processing 
products in Japan and other areas of the Pacific Rim, Australia and New 
Zealand, except for China.  Japan represents approximately 90 percent of Fuji 
Xerox revenues, and Australia, New Zealand, Singapore, Malaysia, Korea, 
Thailand and Philippines represent the remaining 10 percent.  Fuji Xerox 
conducts business in other Pacific Rim countries through joint ventures and 
distributors.

Our Document Processing activities encompass developing, manufacturing, 
marketing, servicing and financing a complete range of document processing 
products and solutions designed to make organizations around the world more 
productive. We believe that the document is a tool for productivity, and that 
documents - both electronic and paper - are at the heart of most business 
processes.  Documents are the means for storing, managing, and sharing business 
knowledge.  Document technology is key to improving productivity through 
information sharing and knowledge management and we believe no one knows the 
document - paper to digital, digital to paper - better than we do.  The 
financing of Xerox equipment is generally carried out by Xerox Credit 
Corporation (XCC) in the United States and internationally by foreign financing 
subsidiaries and divisions in most countries. Xerox had 94,600 employees at 
year-end 1999.

Document Processing revenues of $19.2 billion in 1999 were flat on a pre-
currency basis with 1998. Excluding Brazil, where revenues declined very 
substantially due to the currency devaluation and subsequent economic weakness, 
pre-currency revenues grew by 4 percent. Revenues increased 8 percent on a pre-
currency basis to $19.4 billion in 1998 and 7 percent on a pre-currency basis 
to $18.1 billion in 1997.

The Document Processing Strategy

We believe that documents represent the knowledge base of an organization and 
play a dynamic and central role in business, government, education and other 
organizations.

Increasingly, documents are being created and stored in digital electronic 
form. In addition, the Internet is increasing the amount of information that 
can be accessed in the form of electronic documents. Accordingly, the total 
number of electronic and paper documents is expected to grow very 
significantly. While the percentage of documents which are printed or copied 
will decline, we expect that the total number of documents which are printed or 
copied will grow significantly.

As The Document Company, we believe that by helping our customers navigate and 
manage the world of documents, we can help them improve their productivity and 
grow their businesses.  We help customers make documents better, make better 
documents, and work better with documents.

We create customer value by providing innovative document technologies, 
products, systems, services and solutions that allow our customers to:

-  Move easily within and between the electronic and paper forms of documents.

-  Scan, store, retrieve, view, revise and distribute documents electronically 
anywhere in the world.

-  Print or publish documents on demand, at the point closest to the need, 
including those locations of our customers' customers.

-  Integrate the currently separate modes of producing documents, such as the 
data center, production publishing and office environments into a seamless, 
user-friendly enterprise-wide document systems network - with technology acting 
as an enabler.

We have formed alliances to bring together the diverse infrastructures that 
currently exist and to nurture the development of an open document services and 
solutions environment to support complementary products from our partners and 
customers.  We are working with more than 100 companies and industry 
organizations to make office and production electronic printing an integrated, 
seamless part of today's digital work place.

During 1999, we formed the Internet Business Group to accelerate a number of 
the company's Web-based business activities and maximize the value of our 
portfolio of Internet-related technologies.  The new organization will also 
pull together a suite of Xerox knowledge tools and technologies and make those 
tools available to partner companies, and raise outside capital with the intent 
of creating greater shareholder value.

Market Overview

We estimate that the global document market that we serve, excluding Japan and 
the Pacific Rim countries served by Fuji Xerox, was approximately $161 billion 
in 1998 and is estimated to grow to about $255 billion in 2002. With our many 
new product introductions during this decade and in particular, the transition 
from light-lens to digital technology, our participation in the global document 
market has been considerably broadened from the slower growing segments of the 
market to the faster growing segments of the market.  Our revenue mix has 
traditionally been concentrated in the slower growing market segments with a 
lower proportion of our revenue in the faster growing segments like office and 
production color, professional services, document outsourcing and desktop 
color.  Our focus on solutions and expanding indirect sales channels as well as 
a large portion of our R&D effort are aimed at these faster growing segments. 

We are leading the transition in our industry from light-lens to digital 
technology, from standalone devices to network-connected systems, from black 
and white to color capable devices, and from box sales to services and 
solutions that enhance customer productivity and solve customer problems. Xerox 
growth will be driven by the transition to digital copying and printing in the 
office, the transfer of document production from offset printing to digital 
publishing, the increase in customer requirements for network and distributed 
printing, the accelerating demand for color documents, and increasingly, our 
participation in the small office/home office/personal document processing 
market.

We have traditionally had a strong position in the general office document 
market, the largest segment, which is projected to reach $77 billion in 2002. 
Growth in this market is driven by the transition to the use of digital and 
color documents.  The production market, which includes production publishing 
and production printing, is expected to reach $41 billion in 2002.  The small 
office/home office/personal document processing market is expected to grow to 
$47 billion by 2002 due to increases in the number of home offices and small 
businesses.  This market segment acquires product primarily through indirect 
distribution channels. We expect that our growth prospects in the networked 
office and small businesses will be enhanced by the January 2000 acquisition of 
the Color Printing and Imaging Division of Tektronix, which manufactures and 
sells color printers, ink and related products, and supplies. The acquisition 
moves us into a strong number two market share position in office color 
printers and provides us with the industry's broadest portfolio of color laser 
and solid ink printers with advantaged color technology. The Document 
Outsourcing market is projected to grow approximately 35 percent annually, 
reaching $19 billion by 2002, as customers increasingly focus on their core 
competencies and outsource their document processing requirements.  Finally, 
the portion of the professional and internet services market in which we 
participate is also growing very rapidly, to an estimated $48 billion by 2002.

Xerox Focus

During 1999, we realigned our operations to capitalize on new growth 
opportunities in the digital marketplace and better align the company to serve 
its diverse customers, increase the effectiveness, efficiency and breadth of 
our distribution channels and provide an industry-oriented focus for global 
document services and solutions.  The Industry Solutions Operations (ISO) are 
organized around key industries and focused on providing our largest customers 
with document solutions consisting of hardware, software and services, 
including document outsourcing, systems integration and document consulting. 
ISO has responsibility for the direct sales and service organizations in the 
U.S., Europe and Canada.  The General Markets Operations (GMO) are responsible 
for increasing penetration of the general market space, including small office 
solutions, products for networked work group environments and personal/home 
office products.  In addition to indirect distribution channel responsibilities 
such as retail and resellers, GMO has responsibility for sales agents and 
concessionaires, and our expanding Internet sales and telebusiness.  In 
addition, it has responsibility for product development and acquisition for its 
markets, providing customer- and channel-ready products and solutions.  The 
Developing Markets Operations (DMO) takes advantage of growth opportunities in 
emerging markets/countries around the world, building on the leadership Xerox 
has already established in a number of those markets, most notably Brazil.  DMO 
covers Latin America, the Middle East, Africa, the Eurasian countries, China, 
Hong Kong, India and Russia.


The realignment of the organization as described above, including the 
realignment of the direct sales force to an industry solutions basis, was not 
fully completed until 2000.  Accordingly, our Segment Reporting as disclosed in 
footnote 9 on pages 50 and 51 of the 1999 Annual Report to Shareholders 
reflected the organization as it existed in the 1999 reporting period. As we 
are entering 2000, we have attempted to analytically estimate how the new 
organization would have been portrayed if fully implemented in 1999. This basis 
of Segment Reporting will be used in our first quarter 2000 Form 10-Q.

1999 Pro Forma Segment Data:

                            Industry  General  Developing  Corporate           
                           Solutions  Markets     Markets  and Other      Total
===============================================================================

Total segment revenues       $10,196   $4,663      $2,721     $1,648    $19,228

Segment profit (loss)          1,755      172         285       (176)     2,036
===============================================================================

We believe that our competitive advantages lie in our ability to continually 
develop technologically innovative document processing products, services and 
solutions based on demonstrated customer needs; the unparalleled breadth and 
depth of our product offerings, from the small office/home office/personal 
market segment to the production market; competitive pricing; our excellent 
reputation for performance and global sales and service; our substantial on-
going investment in research and development; expanded sales coverage through 
our global direct sales force, agents and concessionaires; our leadership 
position in the rapidly growing document outsourcing business; our strong 
market position in emerging markets; and, building on the strength of the Xerox 
brand, our expanded presence in the burgeoning small office/home 
office/personal document processing market through expansion of retail 
channels, value added resellers and systems integrators, and increasingly 
telesales and e-commerce.  As a result, we believe we are well positioned to 
participate in the anticipated growth in the market segments in which we 
compete.

Digital Products

Our digital products consist of five categories: black-and-white digital 
multifunction products (Document Centre products), black-and-white production 
publishing (DocuTech products), black-and-white production printing, color 
copying and printing, and black-and-white laser printers/other.  On a pre-
currency basis, digital product revenues grew 18 percent in 1999 (22 percent 
excluding Brazil), 36 percent in 1998 and 25 percent in 1997. The combination 
of excellent digital product revenue growth on a larger proportion of our 
revenues partially offset by declines on an ever-smaller percentage of light-
lens revenues has resulted in 1999 digital revenues representing more than half 
of our total revenues for the first time. Revenues from digital products were 
53 percent of total revenues in 1999, 45 percent in 1998 and 35 percent in 
1997.  

In 2000 we will be introducing important new products in each of these digital 
product categories.

Black and White Digital Multifunction Products

Revenue from the Document Centre family grew 60 percent pre-currency in 1999, 
reaching $2.6 billion.  

The volume of paper documents used in the office continues to grow.  Pages per 
worker per day in the U.S. have doubled in the last decade and productivity has 
been impaired by the need to manage documents on computer monitors and as hard-
copy originals.

We intend to help customers improve productivity by controlling their documents 
from a common interface; managing from the desktop; eliminating gaps, steps and 
devices in the work process; and moving smoothly from digital to paper and 
back.

In April 1997, we introduced the Document Centre family of black and white 
digital multifunction products at speeds ranging from 20 to 65 pages per 
minute, that are better quality, more reliable, and more feature rich than 
light-lens copiers and are priced at a modest premium over comparable light-
lens copiers.  This family is truly multifunctional and is modular in design, 
offering the capability of upgrading the standalone copier to full network 
connectivity when the customer is ready.  Xerox CentreWare software, which 
provides full control over the operation of a network printer, allows Document 
Centre users the ability to manage network print and fax functions from their 
personal computers, without leaving their offices or workstations.

Beginning in 1998, we began connecting the digital multifunction products to 
customers' networks so that their digital copiers can also be used as robust, 
high-speed network printers to gain incremental volume from printing and 
ultimately to replace desktop printers and single-purpose copiers and faxes.  
The fax option and network upgrades have compelling economics versus the 
alternative of purchasing comparable printers and faxes since the print engine, 
output mechanics and most of the software required are part of the base digital 
copier.  All of our Document Centre products have IP (Internet Protocol) 
addresses, which permits them to be accessed via the Internet from anywhere in 
the world.  

During 1999, we introduced our new, third generation Document Centre models, at 
32 and 40 pages per minute, which bring a higher level of price-performance 
value and offer best in class productivity, and advanced network scanning and 
fax capabilities. Paper documents can be captured and converted directly into 
the popular PDF (Portable Document Format) file format for universal viewing, 
as well as posting to the Web using Adobe Capture software. They also support 
the multi-page TIFF (Tagged Image File Format) format for efficient scanning 
and handling of multi-page documents in a single image file. The new models 
also include a Super G3 modem that can send and receive documents at 33.6 kbps, 
as well as two phone lines for simultaneous transmission and/or reception.

The proportion of digital copiers installed with network connectivity continued 
to grow to over 50 percent installed with network connectivity during 1999. As 
a result, almost 40 percent of the total installed population of Document 
Centre products have network capability.  We believe that enabling network 
connectivity and training our customers to optimize the power of these products 
will lead ultimately to the page incrementality we expect.

Production Publishing

The era of production publishing was launched in 1990 when we announced the 
DocuTech Production Publishing family which was a major step beyond our 
traditional reprographics market into the publishing industry.  Having 
installed to date approximately 25,000 DocuTech systems around the world, our 
production publishing revenues grew 5 percent pre-currency in 1999 to $2.3 
billion. Excluding Brazil, the 1999 growth of 9 percent was impacted by the 
preparations for the January 2000 final phase of the realignment of the sales 
organization to an industry focus and customer Y2K mitigation efforts and 
network lockdowns during the latter part of the year.  

Digital production publishing technology is increasingly replacing traditional 
short-run offset printing as customers seek improved productivity and cost 
savings, faster turnaround of document preparation, and the ability to print 
documents "on demand." The market is substantial, as digital production 
publishing has only achieved an 18% market share of the available page volume 
that could be converted to this technology. We offer the widest range of 
solutions available in the marketplace - from dial-up lines through the 
Internet to state-of-the-art networks - and we are committed to expanding these 
print-on-demand solutions as new technology and applications are developed. 

The DocuTech family of digital production publishers scans hard copy and 
converts it into digital documents, or accepts digital documents directly from 
networked personal computers or workstations.  A user-friendly electronic cut-
and-paste workstation allows the manipulation of images or the creation of new 
documents.  For example, in only a few minutes, a page of word-processed text, 
received over a network, can be combined with a photograph scanned from hard 
copy and enhanced electronically: cropped, positioned precisely, rotated, 
brightened or sharpened.  Digital masters can be prepared in a fraction of the 
time necessary to prepare offset printing plates, thereby allowing fast 
turnaround time.   Additional time can be saved, and significant inventory and 
shipping costs can be reduced, by transmitting electronically and printing 
where and when the documents are required.  In 1998, we introduced DigiPath 
Production Software, a major productivity tool, which allows a printer's 
customers to use the World Wide Web to streamline print job submission and 
subsequent archiving, preparation, proofing, and reprinting.

DocuTech prints high-resolution (600 dots per inch) pages at up to 180 
impressions per minute.  The in-line finisher staples completed sets or 
finishes booklets with covers and thermal-adhesive bindings.  Because the 
finished document can be stored as a digital document, hard copy documents can 
be printed on demand, or only as required, thus avoiding the long production 
runs and high storage and obsolescence costs associated with offset printing.  
The concept of print-on-demand took another major step in 1995 when we 
introduced the DocuTech 6135.  It makes print-for-one publishing practical; 
personalized publishing runs can be as short as one or two prints. Further 
steps forward were taken in 1997 when the DocuTech 6180 was introduced, 
increasing output speed to 180 cut-sheet pages per minute and again in 1998 
with the introduction of DocuTech 65 (65 pages per minute) and DocuTech 6100, 
(96 pages per minute) making the technology affordable for much smaller 
customers.  In February 2000, we introduced the DocuTech 6155 (155 pages per 
minute) as well as a new, significantly improved version of DigiPath Production 
Software, including enhanced Internet connectivity. 

In 1999, we formed a partnership with Bertelsmann AG, the world's largest 
publisher, to deploy books-on-demand digital publishing technology worldwide.  
The technology makes possible the cost-effective production of high quality 
books in runs as small as a single copy.  A new title arrives either 
electronically over the Internet or as a hard copy.  If hard copy, the pages 
are digitized using the Xerox DocuImage 620 scanner.  The electronic book is 
indexed and stored using DigiPath Production Software.  The interior pages are 
printed using a DocuTech digital publishing system.  Color covers are printed 
on a Xerox DocuColor printer, and then bound with the book pages. 

Production Printing

Revenue from monochrome production printing was $2.1 billion in 1999, a decline 
of 2 percent. Excluding Brazil the 1999 growth of 1 percent was impacted by the 
preparations for the January 2000 final phase of the realignment of the sales 
organization to an industry focus and customer Y2K mitigation efforts and 
network lockdowns during the latter part of the year.    

This market has largely consisted of high-end host-connected printers. We 
expect future growth for robust, fully featured printers serving multiple users 
on networks.  This growth will be driven by the increase in personal computers 
and workstations on networks, client-server processing, accelerating growth in 
the demand for enterprise-wide distributed printing, and declining electronics 
costs.  These faster, more reliable printers print collated multiple sets on 
both sides of the paper, insert covers and tabs, and staple or bind, but 
without the labor-intensive steps of printing an original and manually 
preparing the documents on copiers.  In addition, documents can be printed on 
these printers from remote data center computers, enabling the efficiencies of 
distributing electronically and then printing, rather than printing paper 
documents and then distributing them.

We have had the leading position in the production, high-volume computer 
printing market segment since 1977.  We are well positioned to capitalize on 
the growth in the computer printing market because of our innovative 
technologies and our understanding of customer requirements for distributed 
printing from desktop and host computers.  Our goal is to integrate office, 
production and data-center computer printing into a single, seamless, user-
friendly network. 

Xerox pioneered and continues to be a worldwide leader in computer laser 
printing, which combines computer, laser, communications and xerographic 
technologies.  We market a broad line of robust printers with speeds up to the 
industry's fastest cut-sheet printer at 180 pages per minute, and continuous-
feed production printers at speeds up to 1300 images per minute.  Many of these 
printers have simultaneous interfaces that can be connected to multiple host 
computers as well as local area networks.

Breakthrough technology in our highlight color printers allows printing, in a 
single pass, black-and-white plus one customer-changeable color (as well as 
shades, tints, textures and mixtures of each) at production speeds up to 184 
pages per minute.  Other manufacturers' highlight color printers require 
additional passes to add variable color, which increase cost, reduce speed and 
reliability and introduce the possibility of color misalignment.

Productivity-enhancing features include printing collated multiple sets on both 
sides of the paper, inserting covers and tabs, printing checks with magnetic 
ink character recognition (MICR), and stapling or finishing with a thermal 
adhesive binding; all on cut sheet plain paper, with sizes up to 11 by 17 
inches. Optional finishing equipment that can be integrated with the DocuTech 
system includes a signature booklet maker and a perfect binder.

In 1995, we significantly expanded our opportunities with the introduction of 
two major new printer series that redefine our role in the electronic 
production printing industry.  With the DocuPrint CF Series family, we entered 
the market for very high-volume, continuous-feed printers at speeds up to 420 
pages per minute.  The DocuPrint IPS Series makes the IBM Advanced Function 
Presentation (AFP) architecture directly available to our production printing 
customers.

In 1997, we introduced the DocuPrint 180 which prints on one or both sides of a 
page, on a wide variety of paper sizes and weights, and at 180 pages per 
minute.  We also introduced the DocuPrint 184 hc (highlight color) which pairs 
two 92 page-per-minute Xerox highlight color laser printers with one print 
server for cut-sheet, highlight color production speeds up to 184 pages per 
minute.

In 1998, we demonstrated the DocuPrint 900 and the DocuPrint 1300 models, the 
first in a new class of ultra high-speed continuous feed production printing 
systems.  Printing at up to 900 and 1300 duplex impressions per minute (200 and 
300 feet per minute, respectively), the DocuPrint 900 and 1300 combine the high 
reliability and throughput of web printing with the flexibility of electronic 
printing for unsurpassed productivity.  The Xerox DocuPrint 900 and 1300 offer 
a number of in-line finishing options, including cut-sheet, fanfold, or roll 
and are compatible with many third party post processing devices.

Color Copying and Printing

Our revenues from color copying and printing grew 8 percent pre-currency (14 
percent excluding Brazil) in 1999 to $2.0 billion.

The use of color originals in the office is accelerating. Independent studies 
have concluded that color documents are more effective at communicating 
information and that decision-making performance improves with the use of color 
documents. 

The color market has largely consisted of ink-jet and laser copiers and 
printers.  Laser copiers and printers offer near-offset image quality, 
excellent printing speeds, and the accessories necessary to produce finished 
sets.

We entered the color laser market in 1991 with the introduction of a color 
laser copier/printer and a color laser printer, each of which printed at 7.5 
pages per minute.  More recent product introductions include the DocuColor 40, 
introduced in early 1996, which copies and prints at 40 full-color pages per 
minute and has been the industry's fastest and most affordable digital color 
document production system. In 1997, we introduced the DocuColor 70, a 
continuous feed full-color digital press, based on a print engine from Xeikon 
with Xerox-exclusive digital front-ends, that produces 70 high-quality, full-
color impressions per minute and in 1998, we introduced the DocuColor 100 
Digital Color Press, also based on a Xeikon print engine with Xerox-exclusive 
digital front-ends, that produces 100 high-quality full-color impressions per 
minute.  

In February 2000, we introduced the DocuColor 2060 Digital Color Press and the 
DocuColor 2045 Digital Color Press.  The DocuColor 2060, which produces 60 
full-color prints per minute, is the industry's fastest cut-sheet color 
reproduction machine, and both products establish an industry standard by 
producing near-offset quality, full-color prints at an unprecedented operating 
cost of less than 10 cents per page, depending on monthly volumes.

We've had numerous recent color product introductions for the general office. 
In 1998, we introduced the DocuColor Office 6, a networked color copier/printer 
for the office that operates at twice the speed of most desktop color laser 
printers at the price of a mid-volume black and white copier. Also in 1998, we 
expanded the DocuColor 40 line, adding the DocuColor 40 CP, a network-connected 
color copier/printer equipped with a newly designed digital controller, 
designed to provide digital walk up copying as well as network printing for 
lower-volume environments. In 1999, we introduced the DocuColor 30 Pro and the 
DocuColor 30 CP, which are 30 page-per-minute digital color copier/printers 
intended for entry-level production environments such as print-for-pay and 
quick-print shops, corporate reproduction departments, and high-end color 
intensive offices.

In 1999, we introduced the DocuColor 12, which produces 12.5 full-color pages 
and 50 black-and-white pages per minute, designed for professionals in graphic 
arts environments such as quick printers, commercial printers and in-plant 
corporate reprographics departments.  We also introduced the Document Centre 
Series 50, the first color-enabled Document Centre that produces 12.5 full-
color pages and 50 black-and-white pages per minute, that includes a Xerox 
network controller built into every machine. The Document Centre Color Series 
50 combines the advantages of a relatively low equipment price, the production 
of color pages at operating costs significantly lower than other color 
copier/printers in this class, and, unlike other color products, the operating 
cost of producing black and white prints is similar to that of monochrome 
digital products.

In January 2000, we completed the acquisition of the Color Printing and Imaging 
Division of Tektronix (CPID), which results in our having a very strong number 
two market share position in the office color market.  This division, whose 
operations have now been consolidated with our office printing operations, 
manufactures and markets Phaser workgroup color printers that use either color 
laser or solid ink printing technology and markets a complete line of ink and 
related products and supplies.  In January 2000, we introduced the Phaser 850 
solid ink color printer, which prints truer colors and livelier images than any 
color laser printer in its class, and, at 14 pages per minute, is more than 
three times faster than similarly-priced competitive models.  

In March 2000, we announced a major inkjet printing initiative in an alliance 
with Sharp Corporation and Fuji Xerox.  The alliance leverages our strong brand 
and inkjet patent portfolio with Sharp's product development and manufacturing 
expertise and Fuji Xerox' technological know-how.  Over the next five years, 
Xerox, Sharp and Fuji Xerox together will invest more than $2 billion in inkjet 
research, development, manufacturing, advertising and marketing.  Later this 
year we will launch low-cost inkjet printers, copiers and multifunction 
machines in North America, Europe and developing markets which will be sold 
primarily through retail stores and e-commerce web-sites.  We expect these new 
products will be at least 50 percent faster than comparable products from other 
vendors with up to 20 percent in ink savings. 

Black and White Laser Printers and Other Products

Revenues in this category totaled $1.2 billion in 1999, growing 44 percent pre-
currency and reflecting primarily network black and white laser printers sold 
through indirect sales channels.  

Significant market growth in the small office/home office and networked office 
is represented by customers who typically acquire product through indirect 
sales channels such as value added resellers, dealers and retail.  We launched 
in September, 1997 the DocuPrint family of monochrome network laser printers 
which initially included 24 and 32 page per minute laser printers and which 
were faster, more advanced and less expensive than competitive models, offering 
"copier-like" features such as multiple-set printing, stapling and collating.  
In 1998, we expanded the DocuPrint line to include monochrome laser printers at 
speeds ranging from 8 to 40 pages per minute.

In February 2000, we introduced the new DocuPrint N Series printers, a family 
of five network laser printers ranging from 20 to 40 pages per minute that 
offer faster speeds, better paper-handling and productivity, and more value 
than printers available from other vendors. The Tektronix CPID acquisition 
accelerated our objective of increasing the number of resellers who market our 
black and white laser printers. The acquisition more than doubled the number of 
channel partners and nearly doubled the distribution capacity and channel 
coverage to more than 16,000 resellers and dealers worldwide. 
 
Light-lens Copying

Our revenues from black and white light-lens copiers declined 21 percent (18 
percent excluding Brazil) pre-currency in 1999 to $5.8 billion.  The decline in 
light-lens copier revenues reflects customer transition to our new digital 
black-and-white products and increasing price pressures.  We believe that the 
trend over the past few years will continue and that digital product revenues 
will represent an increasing share of total revenues. Revenues from light-lens 
copiers represented 30 percent of total revenues in 1999, 38 percent in 1998 
and 47 percent in 1997.

We market the broadest line of light-lens copiers and duplicators in the 
industry, ranging from a three copies-per-minute personal copier to a 135 
copies-per-minute fully-featured duplicator. Many of our state-of-the-art 
products have improved ease of use, reliability, copy quality, job recovery and 
ergonomics as well as productivity-enhancing features, including zoom 
enlargement and reduction, highlight color, copying on both sides of the paper, 
and collating and stapling which allow the preparation of completed document 
sets.

We have a strong position with major accounts who demand a consistently high 
level of service worldwide.  Our competitive advantages include a focus on 
customer call response times, diagnostic equipment that is state-of-the-art and 
availability of 24-hour-a-day, seven-day-a-week service.

We expect that light-lens copiers will increasingly be replaced by digital 
copiers.  However, some portions of the market will continue to use light-lens 
copiers for many years, such as customers who care principally about price or 
whose work processes do not require digital products. 

Other Products

We also sell cut-sheet paper to our customers for use in their document 
processing products. Revenues from our Print and Media segment, which includes 
the sale of paper, declined 1% in 1999 to $1.1 billion from $1.2 billion in 
1998. The market for cut-sheet paper is highly competitive and revenue growth 
is significantly affected by pricing.  Our strategy is to charge a spread over 
mill wholesale prices to cover our costs and value added as a distributor.

We also offer a wide range of other document processing products including 
devices designed to reproduce large engineering and architectural drawings up 
to 3 feet by 4 feet in size, facsimile products, scanners, and personal 
computer and workstation software.

Summary of Revenues by Product Category

The following table summarizes our revenues by major product category.  The 
revenues for digital products and light-lens copiers include equipment and 
supplies sales, service, rental and document outsourcing revenues, and finance 
income.  These revenues exclude the impact of foreign currency exchange rate 
fluctuations which are shown combined with the revenues from paper and other 
products.

     Year ended December 31 (in billions)      1999       1998       1997
     Digital products                         $10.2      $ 8.6      $ 6.3
     Light-lens copiers                         5.8        7.4        8.3
     Paper, other products, currency            3.2        3.4        3.5
       Total revenues                        $ 19.2      $19.4      $18.1

Xerox Competitive Advantages

Customer Satisfaction

Our most important priority is customer satisfaction.  Our research shows that 
satisfied customers are far more likely to repurchase products and that the 
cost of selling a replacement product to a satisfied customer is far less than 
selling to a "new" customer.  We regularly survey customers on their 
satisfaction, measure the results, analyze the root causes of dissatisfaction, 
and take steps to correct any problems.

Because of our emphasis on customer satisfaction, we offer a Total Satisfaction 
Guarantee, one of the simplest and most comprehensive offered in any industry:  
"If you are not satisfied with our equipment, we will replace it without charge 
with an identical model or a machine with comparable features and 
capabilities."  This guarantee applies for at least three years to equipment 
acquired from and continuously maintained by Xerox or its authorized agents.

Quality

We were an early pioneer in total quality management and are the only company 
to have won all three of the following prestigious quality awards: the Malcolm 
Baldrige National Quality Award in the United States in 1989 and Xerox Business 
Services, our document outsourcing division, won the award in the services 
category in 1997; the European Quality Award in 1992; and the Deming Prize in 
Japan, won by Fuji Xerox in 1980.  Since 1980 Xerox and Fuji Xerox have won 25 
national quality awards in 20 countries, including Argentina, Australia, 
Belgium, Brazil, Canada, China (Shanghai), Colombia, France, Germany, Hong 
Kong, India, Ireland, Mexico, the Netherlands, Norway, Portugal, the United 
Kingdom, and Uruguay.  Our "Leadership Through Quality" program has enabled us 
to improve productivity, accelerate the introduction of new products, improve 
customer satisfaction and increase market share.  Xerox products have been 
consistently rated among the world's best by independent testing organizations. 
In 1997, Xerox reinforced its position as an environmental leader among Fortune 
500 companies by receiving ISO 14001 certification for all its major 
manufacturing sites worldwide, as set by the International Standards 
Organization.

Research and Development

Xerox research and development (R&D) is directed toward the development of new 
products and capabilities in support of our document processing strategy.  Our 
research scientists are deeply involved in the formulation of corporate 
strategy and key business decisions.  They regularly meet with customers and 
have dialogues with our business divisions to ensure they understand customer 
requirements and are focused on products and solutions that can be 
commercialized.

In 1999, R&D expense was $979 million compared with $1,040 million in 1998 and 
$1,065 million in 1997.  The 1999 reduction is largely due to substantially 
lower management and employee bonuses and profit sharing and lower overhead.  
We continue to invest in technological development to maintain our premier 
position in the rapidly changing document processing market with a heightened 
focus on increasing the effectiveness of our R&D investment as well as time to 
market.  Xerox R&D is strategically coordinated with Fuji Xerox, which invested 
$555 million in R&D in 1999 for a combined total of $1.5 billion.  We expect 
that 2000 R&D spending will be higher than 1999. 

Marketing

Xerox document processing products are principally sold directly to customers 
by our worldwide sales force, a source of competitive advantage, totaling 
approximately 15,000 employees, and through a network of independent agents, 
dealers, retail chains, value-added resellers and systems integrators.  Our 
worldwide sales force is organized around key industries on a global basis and 
is focused on providing our largest customers with replicable document 
solutions consisting of hardware, software services, including document 
outsourcing, systems integration and document consulting.  We expect that this 
shift from a traditional equipment sale involving the placement of the 
equipment and the recurring revenue stream that follows, reflecting service, 
supplies and financing, will result in higher revenue per transaction.  A 
typical solution sale includes the consulting services to define and design the 
solution, systems integration to implement the solution within the customer's 
infrastructure, and finally in many cases, the management of the solution for 
the customer. This produces more revenue for Xerox and typically results in a 
more loyal customer. The key industry segments our sales force is focused on 
are as follows: Public Sector/Education, Industrial, Financial 
Services/Healthcare, Graphic Arts, Retail/Wholesale and Professional Services. 

To market laser and inkjet printers, multi-function devices and low-end 
copiers, we are significantly expanding our indirect distribution channels.  We 
currently have arrangements with U.S. retail marketing channels including 
Office Depot, OfficeMax, Staples and Best Buy, and non-U.S. retail marketing 
channels including Carrefour, Media Markt and Merisel.  We also have 
arrangements with office channels that include distributors and value-added 
resellers like Ingram Micro, Tech Data, CHS and Computer 2000. Our products are 
now available in seven of the ten largest computer equipment retailers and in 
more than 7,000 storefronts worldwide.  In addition to web sites of several of 
our retail marketing partners, we have arrangements with several e-commerce web 
sites, including Amazon.com, Value America and CompUSA.com, for the sale of our 
equipment and supplies. Furthermore, as a result of the acquisition of the 
Tektronix Computer Printing and Imaging Division, completed in January 2000, we 
have more than doubled the number of channel partners and nearly doubled the 
distribution capacity and channel coverage to more than 16,000 resellers and 
dealers worldwide. 

Our strategy is to target high-growth markets through high-volume distribution 
of laser, solid ink and ink-jet printers, multi-function products, personal 
copiers, fax machines, and supplies for both Xerox and competitive equipment, 
with a goal to be the fastest growing source of personal and networked document 
solutions in retail and reseller channels worldwide. In 1999, we completed a 
major redesign of our Internet site to make it a more powerful tool for 
electronic commerce to sell Xerox equipment and supplies over the Internet. We 
have also significantly expanded our telebusiness capacity, including the 
opening of new telebusiness centers in North America and Europe, and we have 
increased our advertising spending.

In 1991, Xerox International Partners (XIP), a 51 percent-owned partnership, 
was formed between Xerox and Fuji Xerox to supply printer engines to original 
equipment manufacturers.  XIP has also contracted to supply printer engines to 
resellers.

Service

We have a worldwide service force of approximately 23,000 employees and a 
network of independent service agents.  In our opinion, this service force 
represents a significant competitive advantage: the service force is 
continually trained on our new products and its diagnostic equipment is state-
of-the-art.  24-hour-a-day, seven-day-a-week service is available in most 
metropolitan areas in the United States.  As a result, we are able to guarantee 
a consistent level of service nationwide and worldwide.

Revenues

Our total document processing revenues were $19.2 billion in 1999, of which 54 
percent were generated in the United States, 28 percent in Europe, and 18 
percent in the remainder of the world, principally Brazil, the rest of Latin 
America, Canada, and China (excluding the unconsolidated $7.8 billion of Fuji 
Xerox revenues in Japan and much of the Pacific Rim).

Revenues from supplies, paper, service, rentals, document outsourcing and other 
revenues, and income from customer financing represented 63 percent of total 
revenues in 1999, 62 percent in 1998 and 63 percent in 1997. Because these 
revenues are derived from the installed base of equipment and are therefore 
less volatile than equipment sales revenues, they provide significant stability 
to overall revenues.  Growth in these revenues is primarily a function of our 
installed population of equipment, usage levels, pricing and interest rates.  
The balance of our revenues is derived from equipment sales.  These sales, 
which drive the non-equipment revenues, depend on the flow of new products and 
are more affected by economic cycles.

Most of our customers have their equipment serviced by and use supplies sold by 
us.  The market for cut-sheet paper is highly competitive and revenue growth is 
significantly affected by pricing.  Our strategy is to charge a spread over 
mill wholesale prices. 

Our document outsourcing business provides printing, publishing, duplicating 
and related services to more than 5,000 client companies in more than 50 
countries, including legal and accounting firms, financial institutions, 
insurance agencies and manufacturing companies.  Revenues from our document 
outsourcing business increased 26 percent pre-currency to $3.4 billion in 1999.
Document outsourcing revenues are split between equipment sales and document 
outsourcing.  Where document outsourcing contracts include revenue accounted 
for as equipment sales, this revenue is included in equipment sales on the 
income statement. At the end of 1999, the estimated future minimum value of 
document outsourcing revenue under contract is over $8 billion, representing an 
approximate 25 percent increase from 1998.

We offer our document processing customers financing of their purchases of 
Xerox equipment primarily through Xerox Credit Corporation (XCC) in the United 
States, largely by wholly-owned financing subsidiaries in Europe, and through 
divisions in Canada and Latin America.  While competition for this business 
from banks and other finance companies remains extensive, we actively market 
our equipment financing services on the basis of customer service, convenience 
and competitive rates.  On average, 75 to 80 percent of equipment sales are 
financed by Xerox, primarily through sales-type leases.

Additional disclosure regarding revenues by stream are presented on pages 31 
and 32 of the Company's 1999 Annual Report to Shareholders and is hereby 
incorporated by reference in this document.

International Operations

Our international operations account for 46 percent of Document Processing 
revenues.  Our largest interest outside the United States is Xerox Limited, 
which operates predominantly in Europe. Marketing and manufacturing in Latin 
America are conducted through subsidiaries or distributors in over 35 
countries.  Fuji Xerox develops, manufactures and distributes document 
processing products in Japan and other areas of the Pacific Rim, Australia and 
New Zealand.

Our financial results by geographical area for 1999, 1998 and 1997, which are 
presented on pages 30, 31, and 52 of the Company's 1999 Annual Report to 
Shareholders, are hereby incorporated by reference in this document in partial 
answer to this item.

1998 Restructuring Charge

In April 1998, we announced a worldwide restructuring program intended to 
enhance our competitive position and lower our overall cost structure.  In 
connection with this program, in the second quarter of 1998 we recorded a pre-
tax provision of $1,644 million ($1,107 million after taxes and including our 
$18 million share of a restructuring charge recorded by Fuji Xerox).  The 
program includes the elimination of approximately 9,000 jobs, net, worldwide, 
the closing and consolidation of facilities, and the write-down of certain 
assets.

 As of December 31, 1999, approximately 10,000 employees have left the Company 
under the 1998 restructuring program. Pre-tax savings from the implementation 
through the end of 1999 are approximately $0.6 billion annually, resulting 
primarily in lower selling, administrative and general expenses. The majority 
of the annual savings to date have been reinvested to implement process and 
systems changes in order to enable the restructuring, and to sustain ongoing 
efforts to broaden and strengthen marketing programs and distribution channels 
to enhance revenue growth.  When the 1998 restructuring program initiatives are 
fully implemented, the ongoing pre-tax savings before reinvestments will be 
approximately $1.0 billion annually.

Our restructuring disclosure, presented on pages 34, 35, 47 and 48 of the 
Company's 1999 Annual Report to Shareholders, is hereby incorporated by 
reference in this document.

2000 Restructuring Charge

Management is currently performing a comprehensive review to identify 
additional operational productivity and cost-saving opportunities above those 
previously taken in connection with the 1998 restructuring program. We 
anticipate that a substantial restructuring charge, although less than the 1998 
restructuring charge, will be recorded most likely in the first quarter of 
2000. The ultimate restructuring charge is expected to include employee 
termination expenses and closure costs related to the initiatives identified as 
part of the comprehensive review. 

Acquisition of the Color Printing and Imaging Division of Tektronix
 
In January 2000, we acquired the Color Printing and Imaging Division of 
Tektronix (CPID) for $925 million in cash including $75 million paid by Fuji 
Xerox for the Asia/Pacific operations of CPID.   CPID manufactures and sells 
color printers, ink and related products and supplies. This transaction will 
result in goodwill and other identifiable intangible assets of approximately 
$575 million, which will be amortized over their useful lives, predominantly 20 
years.  In addition, we will also recognize a charge in the first quarter of 
2000 for acquired in-process research and development of approximately $25 
million associated with this acquisition.

Discontinued Operations - Insurance and Other

The discussion under the caption "Discontinued Operations - Insurance and 
Other" on pages 40 and 41 set forth under the caption "Results of Operations 
and Financial Condition" and the information set forth under Note 10 
"Discontinued Operations" on pages 52 and 53 in the Company's 1999 Annual 
Report to Shareholders are hereby incorporated by reference in this document in 
partial answer to this item.

As discussed in the incorporated sections referenced in the preceding 
paragraph, in 1998, the last remaining Talegen Holdings, Inc. insurance 
companies were sold and an additional after-tax charge of $190 million was 
recorded. At the end of 1999, our sole remaining Insurance operation is the 
Ridge Reinsurance Limited reinsurance business.  Our other discontinued 
businesses, consisting of Other Financial Services and Third Party Financing 
and Real Estate, are primarily in asset and liability run-off.



I
tem 2. Properties

The Company owns a total of fourteen principal manufacturing and engineering 
facilities and leases an additional such facility.  The domestic facilities are 
located in California, New York and Oklahoma, while the international 
facilities are located in Brazil, Canada, England, France, Holland, Mexico, 
India and China.  The Company also has four principal research facilities; two 
are owned facilities in New York and Canada, and two are leased facilities in 
California and France.

In addition, within the Company, there are numerous facilities, which encompass 
general offices, sales offices, service locations and distribution centers.  
The principal owned facilities are located in the United States, England, and 
Mexico.  The principal leased facilities are located in the United States, 
Brazil, Canada, England, Mexico, France, Germany and Italy.

The Company's Corporate Headquarters facility, located in Connecticut, is 
leased. The Company also owns a training facility, located in Virginia.

In connection with our purchase of CPID, the Company acquired a number of 
facilities that encompass administration, manufacturing, distribution centers, 
general offices, sales offices and service locations. The principal 
administration and manufacturing facilities, which are owned, are located in 
the United States (Wilsonville, OR) and Malaysia (Penang). The principal 
distribution facilities are located in Wilsonville and the Netherlands 
(Heerenveen). The facility in the Netherlands is leased. The remaining 
facilities acquired are leased and are located primarily in the United States, 
England and Canada. The leased CPID properties are currently being reviewed for 
opportunities for consolidation and integration with existing Company 
properties. 

In the opinion of Xerox management, its properties have been well maintained, 
are in sound operating condition and contain all the necessary equipment and 
facilities to perform the Company's functions.



Item 3. Legal Proceedings

The information set forth under Note 15 "Litigation" on pages 61 and 62 of the 
Company's 1999 Annual Report to Shareholders is incorporated by reference in 
this document in answer to this item. 

In the Accuscan Corp. case against the Company referred to in the second 
paragraph of such Note, the Company's motion to set aside the verdict or, in 
the alternative, to grant a new trial was denied by the Court.


Item 4. Submission of Matters to a Vote of Security Holders

None.



PART II


Item 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters

Market Information, Holders and Dividends

The information set forth under the following captions on the indicated pages 
of the Company's 1999 Annual Report to Shareholders is hereby incorporated by 
reference in this document in answer to this Item:

              Caption                                           Page No.

      Stock Listed and Traded                                      72
      Xerox Common Stock Prices and Dividends                      72
      Eleven Years in Review - Common Shareholders
        of Record at Year-End                                  68 and 69

Recent Sales of Unregistered Securities

During the quarter ended December 31, 1999, Registrant issued the following 
securities in transactions which were not registered under the Securities Act 
of 1933, as amended (the Act):

(a)  Securities Sold:  On October 1, 1999, Registrant issued 4,465 shares of 
Common stock, par value $1 per share.

(b)  No underwriters participated.  The shares were issued to each of the non-
employee Directors of Registrant: B.R. Inman, A.A. Johnson, V.E. Jordan, Jr., 
Y. Kobayashi, H. Kopper, R.S. Larsen, G.J. Mitchell, N.J. Nicholas, Jr., J.E. 
Pepper, P. F. Russo, M.R. Seger and T.C.Theobald.

(c)  The shares were issued at a deemed purchase price of $22.6875 per share 
(aggregate price $101,125), based upon the market value on the date of 
issuance, in payment of the quarterly Directors' fees pursuant to Registrant's 
Restricted Stock Plan for Directors.

(d)  Exemption from registration under the Act was claimed based upon Section 
4(2) as a sale by an issuer not involving a public offering.


Item 6. Selected Financial Data

The following information, as of and for the five years ended December 31, 
1999, as set forth and included under the caption "Eleven Years in Review" on 
pages 68 and 69 of the Company's 1999 Annual Report to Shareholders, is hereby 
incorporated by reference in this document in answer to this Item:

        Revenues
        Income (loss) from continuing operations
        Per-Share Data - Earnings (loss) from continuing operations
        Total assets
        Long-term debt
        Preferred stock
        Per-Share Data - Dividends declared



Item 7. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations

The information set forth under the caption "Results of Operations and 
Financial Condition" on pages 28 through 41 of the Company's 1999 Annual Report 
to Shareholders is hereby incorporated by reference in this document in answer 
to this Item.

The following is being added to the disclosures as set forth under the caption 
"Capital Resources and Liquidity" on pages 36 through 40 of the Company's 1999 
Annual Report to Shareholders:

The Company's present credit ratings permit ready access to the credit markets.
There is no assurance that these credit ratings can be maintained and/or ready 
access to the credit markets can be assured. In December 1999, Moody's 
Investors Service, Inc. announced that the long and short term credit ratings 
of the Company and its financially supported subsidiaries are under review for 
possible downgrade, Standard & Poor's announced a negative outlook for the 
Company's and Xerox Credit Corporation's ratings and Fitch IBCA, Inc. placed 
the Company's and its subsidiaries' debt ratings on "RatingAlert-Negative". A 
downgrade or lowering in such ratings could result in higher borrowing costs in 
future periods.


I
tem 7A. Quantitative and Qualitative Disclosures About Market Risk

The information set forth under the caption  "Risk Management" on pages 39 
through 40 of the Company's 1999 Annual Report to Shareholders is hereby 
incorporated by reference in this document in answer to this Item.



Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of Xerox Corporation and subsidiaries and 
the notes thereto and the report thereon of KPMG LLP, independent auditors, 
which appear on pages 42 through 65 and page 67 of the Company's 1999 Annual 
Report to Shareholders, are hereby incorporated by reference in this document 
in answer to this Item. In addition, also included is the quarterly financial 
data included under the caption "Quarterly Results of Operations (Unaudited)" 
on page 66 of the Company's 1999 Annual Report to Shareholders.

The financial statement schedule required herein is filed as "Financial 
Statement Schedules" pursuant to Item 14 of this Report on Form 10-K.


Item 9. Changes in and Disagreements with Accountants on Accounting and 
        Financial Disclosure

Not applicable.



PART III

The information set forth in "Proposal 1--Election of Directors" in the 
Company's Notice of the 2000 Annual Meeting of Shareholders and Proxy 
Statement, to be filed pursuant to Regulation 14A not later than 120 days after 
the close of the fiscal year covered by this report on Form 10-K, is hereby 
incorporated by reference in this document in answer to this Part III.

Executive Officers of Xerox

The following is a list of the executive officers of Xerox, their current ages, 
their present positions and the year appointed to their present positions.  
There are no family relationships between any of the executive officers named.

Each officer is elected to hold office until the meeting of the Board of 
Directors held on the day of the next annual meeting of shareholders, subject 
to the provisions of the By-Laws.
                                                             Year
                                                           Appointed
                                                          to Present   Officer
     Name           Age         Present Position           Position     Since_

Paul A. Allaire*     61    Chairman of the Board and          1991       1983
                           Chairman of the Executive
                           Committee

G. Richard Thoman*   55    President and                      1999       1997
                           Chief Executive Officer

William F. Buehler*  60    Vice Chairman and President,       1999       1991
                           Industry Solutions Operations

Barry D. Romeril*    56    Vice Chairman and                  1999       1993
                           Chief Financial Officer

Allan E. Dugan       59    Executive Vice President           2000       1990
                           President, Worldwide Business 
                           Services 

Anne M. Mulcahy      47    Executive Vice President           1999       1992
                           President, General Markets 
                           Operations

Carlos Pascual       54    Executive Vice President           2000       1994
                           President, Developing Markets
                           Operations

Herve J. Gallaire    55    Senior Vice President              2000       1997
                           Xerox Research and Technology

Patrick J. Martin    59    Senior Vice President              2000       1992
                           President, North American
                           Solutions Group

Michael Miron        44    Senior Vice President              2000       1998
                           President, Internet Business 
                           Group


* Member of Xerox Board of Directors.

Executive Officers of Xerox, Continued

                                                             Year
                                                           Appointed
                                                          to Present   Officer
     Name           Age         Present Position           Position     Since_

Hector J. Motroni    56    Senior Vice President and          1999       1994
                           Chief Staff Officer

Mark B. Myers        61    Senior Vice President              1992       1989

Richard S. Paul      58    Senior Vice President and          1992       1989
                           General Counsel

Eunice M. Filter     59    Vice President, Treasurer          1990       1984
                           and Secretary

Philip D. Fishbach   58    Vice President and Controller(1)   1995       1990

Rafik O. Loutfy      57    Vice President                     2000       1997
                           Corporate Business Strategy

Gregory B. Tayler    42    Vice President and  Controller(1)  2000       2000

(1) Mr. Fishbach is retiring in April 2000 and Mr. Tayler will become 
Controller effective April 1, 2000.


Each officer named above, with the exception of G. Richard Thoman and Michael 
Miron, has been an officer or an executive of Xerox or its subsidiaries for at 
least the past five years.

Prior to joining Xerox in 1997, Mr. Thoman had been with International Business 
Machines Corporation (IBM) where he was Senior Vice President and Chief 
Financial Officer from 1995 to 1997, and Group Executive for the Personal 
Systems Group from 1994 to 1995.  He was President and CEO of Nabisco 
International from 1992 to 1994.  He was Chairman and Co-CEO of Travel Related 
Services for American Express from 1989 to 1992.  

Prior to joining Xerox in 1998, Mr. Miron had been with Airtouch Communications 
where he was Vice President, Corporate Strategy and Development from 1996 to 
1998.  Prior to this he was with Salomon Brothers Inc. where he was Managing 
Director, Strategic Planning and Analysis from 1994 to 1996, and Director, 
Strategy and Consulting Group from 1990 to 1993.



PART IV


Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)   (1) and (2)  The financial statements, independent auditors' reports 
      and Item 8 financial statement schedules being filed herewith or 
      incorporated herein by reference are set forth in the Index to Financial 
      Statements and Schedule included herein.

     (3)  The exhibits filed herewith or incorporated herein by reference are 
      set forth in the Index of Exhibits included herein.

(b)   Current Reports on Form 8-K dated December 9, 1999 and December 10, 1999 
      reporting Item 5 "Other Events" were filed during the last quarter of the
      period covered by this Report. 

(c)   The management contracts or compensatory plans or arrangements listed
      in the Index of Exhibits that are applicable to the executive officers
      named in the Summary Compensation Table which appears in Registrant's
      2000 Proxy Statement are preceded by an asterisk (*).


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.

                                                 XEROX CORPORATION


                                            By:  /s/ Barry D. Romeril_________
                                                 Vice Chairman and 
                                                 Chief Financial Officer
March 27, 2000

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 capacities and on the date indicated.

March 27, 2000



    Signature                                 Title

Principal Executive Officer:

G. Richard Thoman                            /s/ G. Richard Thoman____________

                                             Chief Executive Officer and 
Director


Principal Financial Officer:

Barry D. Romeril                             /s/ Barry D. Romeril_____________

                                             Vice Chairman and
                                             Chief Financial Officer and 
Director


Principal Accounting Officer:

Philip D. Fishbach                           /s/ Philip D. Fishbach___________

                                             Vice President and Controller

Directors:


/s/ Paul A. Allaire                                 Director


/s/ William F. Buehler                              Director


/s/ B. R. Inman                                     Director


/s/ Vernon E. Jordan, Jr.                           Director


/s/ Yotaro Kobayashi                                Director


/s/ Hilmar Kopper                                   Director


/s/ Ralph S. Larsen                                 Director


/s/ N. J. Nicholas, Jr.                             Director


/s/ John E. Pepper                                  Director


/s/ Patricia F. Russo                               Director


/s/ Martha R. Seger                                 Director


/s/ Thomas C. Theobald                              Director




Report of Independent Auditors



To the Board of Directors and Shareholders of Xerox Corporation


Under date of January 25, 2000, we reported on the consolidated balance sheets 
of Xerox Corporation and subsidiaries as of December 31, 1999 and 1998, and the 
related consolidated statements of income, cash flows and shareholders' equity 
for each of the years in the three-year period ended December 31, 1999, as 
contained in the Xerox Corporation 1999 Annual Report to Shareholders on pages 
42 through 65.  These consolidated financial statements and our report thereon 
are incorporated by reference in the 1999 Annual Report on Form 10-K.  In 
connection with our audits of the aforementioned consolidated financial 
statements, we also have audited the related financial statement schedule 
listed in the accompanying index.  This financial statement schedule is the 
responsibility of the Company's management.  Our responsibility is to express 
an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation 
to the basic consolidated financial statements taken as a whole, presents 
fairly, in all material respects, the information set forth therein.



                                                /s/ KPMG LLP
                                                

Stamford, Connecticut
January 25, 2000



Index to Financial Statements and Schedule

Financial Statements:

   Consolidated statements of income of Xerox Corporation and subsidiaries for
     each of the years in the three-year period ended December 31, 1999

   Consolidated balance sheets of Xerox Corporation and subsidiaries as of 
     December 31, 1999 and 1998

   Consolidated statements of cash flows of Xerox Corporation and subsidiaries 
     for each of the years in the three-year period ended December 31, 1999

   Consolidated statements of shareholders' equity of Xerox Corporation and 
     subsidiaries for each of the years in the three-year period ended December
31, 1999


   Notes to consolidated financial statements


   Report of Independent Auditors

   Quarterly Results of Operations (unaudited)

      The above consolidated financial statements, related notes, report 
      thereon and the quarterly results of operations which appear on pages 
      42 through 65, 67, and 66 of the Company's 1999 Annual Report to 
      Shareholders are hereby incorporated by reference in this document.

Commercial and Industrial (Article 5) Schedule:

II - Valuation and qualifying accounts


All other schedules are omitted as they are not applicable, or the information 
required is included in the financial statements or notes thereto.


 
                                                                SCHEDULE II

Valuation and Qualifying Accounts
Year ended December 31, 1999, 1998 and 1997

                                           Additions
                             Balance at    charged to   Deductions,  Balance
                              beginning     costs and     net of      at end
(in millions)                 of period     expenses    recoveries of period

1999
Allowance for Losses on:
   Accounts Receivable          $102          $168         $133         $137
   Finance Receivables           441           191          209          423
                                                                            
                                $543          $359         $342         $560

1998
Allowance for Losses on:
   Accounts Receivable          $ 92          $ 78         $ 68         $102
   Finance Receivables           389           223          171          441
                                                                            
                                $481          $301         $239         $543

1997
Allowance for Losses on:
   Accounts Receivable          $ 92          $ 84         $ 84         $ 92
   Finance Receivables           347           181          139          389
                                                                            
                                $439          $265         $223         $481


Index of Exhibits

Document and Location
  
(3) (a)     Restated Certificate of Incorporation of Registrant filed by
            the Department of State of New York on October 29, 1996, as 
            amended by Certificate of Amendment of the Certificate of 
            Incorporation of Registrant filed by the Department of State 
            of New York on May 21, 1999.

            Incorporated by reference to Exhibit 3(a) to Amendment No. 5 
            to Registrant's Form 8-A Registration Statement dated
            February 8, 2000.


    (b)     By-Laws of Registrant, as amended through April 6, 1999.

            Incorporated by reference to Exhibit 3(b) to Registrant's 
            Quarterly Report on Form 10-Q for the quarter ended March 31, 
            1999.

(4) (a)     Indenture dated as of January 15, 1990 between Registrant and 
            U.S. Bank Trust National Association (as successor in interest 
            to BankAmerica National Trust Company, which is a successor in 
            interest to Security Pacific National Trust Company (New York)) 
            relating to unlimited amounts of debt securities which may be 
            issued from time to time by Registrant when and as authorized by 
            or pursuant to a resolution of Registrant's Board of Directors.

            Incorporated by reference to Exhibit 4(a) to Registration No. 
            33-33150.

    (b)     Indenture dated as of December 1, 1991 between Registrant and 
            Citibank, N.A. relating to unlimited amounts of debt securities 
            which may be issued from time to time by Registrant when and 
            as authorized by or pursuant to a resolution of Registrant's 
            Board of Directors.
  
            Incorporated by reference to Exhibit 4(a) to Registration Nos. 
            33-44597, 33-49177 and 33-54629.
 
    (c)     Indenture dated as of September 20, 1996 between Registrant and 
            Citibank, N.A. relating to unlimited amounts of debt securities 
            which may be issued from time to time by Registrant when and as 
            authorized by or pursuant to a resolution of Registrant's Board 
            of Directors.

            Incorporated by reference to Exhibit 4(a) to Registration 
            Statement No. 333-13179.

    (d)     Indenture dated as of October 1, 1997 among Registrant, Xerox 
            Overseas Holding Limited (formerly Xerox Overseas Holding PLC), 
            Xerox Capital (Europe) plc (formerly Xerox Capital (Europe) plc) 
            and Citibank, N.A. relating to unlimited amounts of debt 
            securities which may be issued from time to time by Registrant and 
            unlimited amounts of guaranteed debt securities which may be 
            issued from time to time by the other issuers when and as 
            authorized by or pursuant to a resolution or resolutions of the 
            Board of Directors of Registrant or the other issuers, as 
            applicable.


            Incorporated by reference to Exhibit 4(b) to Registration 
            Statement Nos. 333-34333, 333-34333-01 and 333-34333-02.

    (e)     Indenture dated as of April 21, 1998 between Registrant and The 
            First National Bank of Chicago relating to $1,012,198,000 
            principal amount at maturity of Registrant's Convertible 
            Subordinated Debentures due 2018.

            Incorporated by reference to Exhibit 4(b) to Registration 
            Statement No. 333-59355. 

    (f)     Indenture dated as of March 1, 1988, as supplemented by the First 
            Supplemental Indenture dated as of July 1, 1988, between Xerox 
            Credit Corporation (XCC) and The First National Bank of Chicago 
            relating to unlimited amounts of debt securities which may be 
            issued from time to time by XCC when and as authorized by XCC's 
            Board of Directors or the Executive Committee of the Board of 
            Directors.

            Incorporated by reference to Exhibit 4(a) to XCC's Registration 
            Statement No. 33-20640 and to Exhibit 4(a)(2) to XCC's Current 
            Report on Form 8-K dated July 13, 1988.

    (g)     Indenture dated as of October 2, 1995, between XCC and State 
            Street Bank and Trust Company relating to unlimited amounts of 
            debt securities which may be issued from time to time by XCC when 
            and as authorized by XCC's Board of Directors or Executive 
            Committee of the Board of Directors.

            Incorporated by reference to Exhibit 4(a) to XCC's Registration
            Statement Nos. 33-61481 and 333-29677.

    (h)     Indenture dated as of April 1, 1999, between XCC and Citibank, 
            N.A. relating to unlimited amounts of debt securities which may 
            be issued from time to time by XCC when and as authorized by 
            XCC's Board of Directors or Executive Committee of the Board of 
            Directors.

            Incorporated by reference to Exhibit 4(a) to XCC's Registration
            Statement No. 33-61481.
 
    (i)     Instruments with respect to long-term debt where the total amount 
            of securities authorized thereunder does not exceed 10% of the 
            total assets of the Registrant and its subsidiaries on a 
            consolidated basis have not been filed.  The Registrant agrees to 
            furnish to the Commission a copy of each such instrument upon 
            request. 
  
(10)        The management contracts or compensatory plans or arrangements 
            listed below that are applicable to the executive officers named 
            in the Summary Compensation Table which appears in Registrant's 
            2000 Proxy Statement are preceded by an asterisk (*).
 
   *(a)     Registrant's 1976 Executive Long-Term Incentive Plan, as amended 
            through February 4, 1991.
 
            Incorporated by reference to Exhibit (10)(a) to the Registrant's 
            Annual Report on Form 10-K for the Year Ended December 31, 1991.

   *(b)     Registrant's 1991 Long-Term Incentive Plan, as amended through 
            May 20, 1999.

            Incorporated by reference to Registrant's Notice of the 1999 
            Annual Meeting of Shareholders and Proxy Statement pursuant to
            Regulation 14A.
  
    (c)     Registrant's 1996 Non-Employee Director Stock Option Plan, as 
            amended through May 20, 1999.

            Incorporated by reference to Registrant's Notice of the 1999 
            Annual Meeting of Shareholders and Proxy Statement pursuant to
            Regulation 14A.
  
   *(d)     Description of Registrant's Annual Performance Incentive Plan.

   *(e)(1)  1997 Restatement of Registrant's Unfunded Retirement Income 
            Guarantee Plan.

            Incorporated by reference to Exhibit 10(e) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended September 30, 
            1997.

   *(e)(2)  Amendment No. 1 to Restatement of Registrant's Unfunded 
            Retirement Income Guarantee Plan.

   *(f)(1)  1997 Restatement of Registrant's Unfunded Supplemental Retirement 
            Plan.

            Incorporated by reference to Exhibit 10(f) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended September 30, 
            1997.

   *(f)(2)  Amendment No. 1 to 1997 Restatement of Registrant's Unfunded 
            Supplemental Retirement Plan.

    (g)     Registrant's 1981 Deferred Compensation Plan, 1985 Restatement, 
            as amended through April 2, 1990.

            Incorporated by reference to Exhibit 10(h) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended March 31, 
            1990.

    (h)     1996 Amendment and Restatement of Registrant's Restricted Stock 
            Plan for Directors.

            Incorporated by reference to Registrant's Notice of the 1996 
            Annual Meeting of Shareholders and Proxy Statement pursuant to
            Regulation 14A.

   *(i)     Form of severance agreement entered into with various executive
            officers.

            Incorporated by reference to Exhibit 10(j) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter ended June 30, 1989.

   *(j)     Registrant's Contributory Life Insurance Program, as amended as of 
            January 1, 1999.

    (k)(1)  Registrant's Deferred Compensation Plan for Directors, 1997 
            Amendment and Restatement.


            Incorporated by reference to Exhibit 10(k) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended September 30, 
            1997.

    (k)(2)  Amendment No. 1 to Registrant's Deferred Compensation Plan for 
            Directors, 1997 Amendment and Restatement, dated as of January 1, 
            1998.

   *(l)     Registrant's Deferred Compensation Plan for Executives, 1997 
            Amendment and Restatement.

            Incorporated by reference to Exhibit 10(l) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended September 30, 
            1997.

   *(m)     Executive Performance Incentive Plan.

            Incorporated by reference to Registrant's Notice of the 1995 
            Annual Meeting of Shareholders and Proxy Statement pursuant to
            Regulation 14A.

   *(n)     Registrant's 1998 Employee Stock Option Plan.

            Incorporated by reference to Registrant's Notice of the 1998 
            Annual Meeting of Shareholders and Proxy Statement pursuant to
            Regulation 14A.

   *(o)     Letter Agreement dated June 4, 1997 between the Registrant and G. 
            Richard Thoman, President and Chief Executive Officer of 
            Registrant.

            Incorporated by reference to Exhibit 10(m) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997.


(11)        Statement re computation of per share earnings.
 
(12)        Computation of Ratio of Earnings to Fixed charges.

(13)        Pages 28 through 69 and 72 of Registrant's 1999 Annual Report
            to Shareholders.**

(21)        Subsidiaries of the Registrant.

(23)        Consent of KPMG LLP.

(27)        Financial Data Schedule (in electronic form only).

**This document has been filed with the Securities and Exchange Commission and 
is available upon request from Xerox Corporation.







EXHIBIT 10(d)

Annual Performance Incentive Plan 

Under the Annual Performance Incentive Plan, executive officers of the 
Company may be entitled to receive performance related cash payments 
provided that annual, Executive Compensation and Benefits Committee-
established performance objectives are met. At the beginning of the year, 
the Committee approves for each officer not participating in the Executive 
Performance Incentive Plan, an annual incentive target and maximum 
opportunity expressed as a percentage of annual base salary.  The Committee 
also establishes overall Document Processing threshold, target and maximum 
measures of performance and associated payment schedules.  For 1999, the 
performance measures were earnings per share (35%), revenue growth (25%), 
cash conversion cycle (20%) and customer satisfaction (20%).  Additional 
goals are also established for each officer that include business unit 
specific and/or individual performance goals and objectives.  The weights 
associated with each business unit specific or individual performance goal 
and objective used vary and range from 20 percent to 50 percent of the 
total.  Actual performance payments are subject to approval by the Committee
 
following the end of the year.  As a result of the Company's performance 
during 1999, no cash bonuses were paid to officers with respect to 1999 
performance.





EXHIBIT 10(e)(2)

                                AMENDMENT NO 1
                                      TO
                               1997 RESTATEMENT
                                      OF
                               XEROX CORPORATION
                  UNFUNDED RETIREMENT INCOME GUARANTEE PLAN



                             W I T N E S S E T H:
                             - - - - - - - - - -

WHEREAS, Xerox Corporation (the "Company") has adopted the Unfunded Retirement 
Income Guarantee Plan, which is presently set forth in the "1997 Restatement of 
Xerox Corporation Unfunded Retirement Income Guarantee Plan," (the "Plan")

WHEREAS, the Company desires to amend the Plan,

NOW THEREFORE, the Plan is hereby amended as follows:

1.  Section 1.2 is hereby amended to read in its entirety as follows:

    "SECTION 1.2.  AVERAGE MONTHLY COMPENSATION.  Shall be determined 
    under Article 1 of the Funded Plan, without regard to the dollar 
    limitation contained therein; and, notwithstanding the above, shall 
    also include any compensation provided under the Xerox Corporation 
    CEO Challenge Bonus Program."

The effective date of this amendment is as of the date hereof.  In all other 
respects the Plan shall remain unchanged.

IN WITNESS WHEREOFF, the Company has caused this Amendment to be executed and 
its corporate seal duly affixed this 17th day of March, 2000.

                                         XEROX CORPORATION



                                         BY: /s/ Patricia M. Nazemetz
                                             ---------------------------
                                                    Vice President
ATTEST:



/s/ Martin S. Wagner
-------------------------
   Assistant Secretary







EXHIBIT 10(f)(2)

                                AMENDMENT NO 1
                                      TO
                               1997 RESTATEMENT
                                      OF
                               XEROX CORPORATION
                    UNFUNDED SUPPLEMENTAL RETIREMENT PLAN


                             W I T N E S S E T H:
                             - - - - - - - - - -

WHEREAS, Xerox Corporation (the "Company") has adopted the Unfunded 
Supplemental Retirement Plan, which is presently set forth in the "1997 
Restatement of Xerox Corporation Unfunded Supplemental Retirement Plan," (the 
"Plan")

WHEREAS, the Company desires to amend the Plan,

NOW, THEREFORE, the Plan is hereby amended as follows:

The first full paragraph in Section 6. A. following subsection (b) is hereby 
amended to read in its entirety as follows:

1.  "'Average Monthly Compensation' shall be determined under RIGP without 
    regard to the dollar limitation contained in the Plan as required by 
    Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, 
    or any successor thereto; and, notwithstanding the above, shall also 
    include any compensation provided under the Xerox Corporation CEO 
    Challenge Bonus Program."

The effective date of this amendment is as of the date hereof.  In all other 
respects the Plan shall remain unchanged.

IN WITNESS WHEREOF, the Company has caused this Amendment to be executed and 
its corporate seal affixed this 17th day of March, 2000.

                                         XEROX CORPORATION



                                         BY: /s/ Patricia M. Nazemetz

                                             ---------------------------
                                                    Vice President
ATTEST:

/s/ Martin S. Wagner
-------------------------
   Assistant Secretary





EXHIBIT 10(J)

                               XEROX CORPORATION

                     CONTRIBUTORY LIFE INSURANCE PROGRAM

                                  AS AMENDED
                             AS OF JANUARY 1, 1999


The purpose of the Contributory Life Insurance Program is to provide life 
insurance benefits to a select group of management employees who contribute 
materially to the continued growth, development, and future business of Xerox 
Corporation.

                                  Article I

                                 Definitions

For the purposes hereof, unless otherwise required by the context, the 
following phrases or terms shall have the following meanings:

1.0   "Administrator" shall mean the Vice President of the Company having 
responsibility for human resource matters or his or her designee. The 
Administrator will manage and administer the Plan in accordance with the 
provisions of Article IX of this Plan.

1.1   "Beneficiary" shall mean the person(s), trust(s), or the estate of a 
Participant, entitled to receive any benefits under this Plan upon the death of 
a Participant.

1.2   "Beneficiary Designation" shall mean the form approved by the Insurer 
which shall be utilized by a Participant to designate a Beneficiary under the 
Insurance Policy.

1.3   "Change of Beneficiary" shall mean the form adopted from time to time by 
the Administrator for use under this Plan, acceptable to
 the Insurer, which 
shall be utilized by a Participant to change his or her Beneficiary.

1.4   "Company" shall mean Xerox Corporation.

1.5  "Employee" shall mean any person who is in the regular full time 
employment of the Company as determined by the personnel policies of the 
Company.

1.6   "Insurer" shall mean the insurance company selected by the Administrator 
to which both the Participant and the Company will apply for insurance on the 
Participant's life.

1.7   "Insurance Policy" shall mean a life insurance contract issued by the 
Insurer on the life of the Participant.

1.8   "Participant" shall mean an Employee who is eligible to participate and 
elects to participate in this Plan as provided in Article II hereof.

1 9  "Plan" shall mean the Contributory Life Insurance Program of Xerox 
Corporation, which shall be evidenced by this instrument and by each Plan 
Agreement.

                                       1


1.10  "Plan Agreement" shall mean the form of written agreement, adopted from 
time to time by the Administrator for use under this Plan, which is entered 
into by and between the Company and a Participant.

1.11  "Termination Date" shall mean the later of (i) the date a Participant 
attains age 65, or (ii) the date a Participant has participated in the Plan for 
fifteen (15) years except as otherwise provided in Section 5.

                                  Article II

                          Eligibility and Membership

2.0   The following Employees in executive pay groups of the Company shall be 
eligible to participate in the Plan if:

      (a)   they are actively employed by the Company on or after July 1, 
            1989; or

      (b)   they were actively employed by the Company on January 1, 1989 
            and retired on or before July 1, 1989; or

      (c)   they were actively employed by the Company on January 1, 1989, 
            are receiving salary continuance as of July 1, 1989, and became 
            eligible for retirement under the terms of the Company's 
            Retirement Income Guarantee Plan between January 1, 1989 and 
            July 1, 1989.

Eligible individuals may elect to participate in this Plan but are not required 
to do so.

2.1   Inpatriates and foreign nationals are not eligible for participation in 
the Plan.

2.2   Participants who met the requirements for eligibility at the time they 
elected to participate and who subsequently remain as active employees but do 
not remain in executive pay groups are still eligible to participate in the 
Plan.

2.3   As a condition of participation, each eligible individual shall complete, 
execute, and return to the Administrator a Plan Agreement in the form approved 
by the Administrator and will comply with such further conditions as may be 
established by and in the sole discretion of the Administrator.

2.4   Once a Participant has terminated participation in the Plan, he or she 
may not again become eligible to participate in the Plan.

                                 Article Ill

                       Procurement of Insurance Policy

3.0   The Company and the Participant shall apply to the Insurer for an 
Insurance Policy on such Participant's life in the amount approved by the 
Administrator and specified in the Participant's Plan Agreement. The 
Participant shall:

      (A)   furnish such information as the Insurer may require,

      (B)   take such physical examinations as may be requested, and

                                      2


      (C)   do any other act to comply with the underwriting and policy 
            issuance requirements which may reasonably be requested by the 
            Insurer.

3.1   If a Participant does not cooperate in the securing of such insurance, or 
if he or she is for any reason unable to obtain insurance in the specified 
amount on his or her life, the Company shall have no further obligation to 
Participant under the Plan and such Participant's Plan Agreement shall 
terminate.

3.2   The Company and the Participant shall be the owners of any Insurance 
Policy acquired on Participant's life. Their respective interests in the 
Insurance Policy shall be as they are set forth in this Plan, the Participant's 
Plan Agreement and the Insurance Policy.

3.3   The Company shall have no obligation of any nature whatsoever to a 
Participant under this Plan or Plan Agreement, if the circumstances of the 
Participant's death preclude payment of death proceeds under the Insurance 
Policy.

3.4   The amount of premium due annually from the Participant hereunder shall 
be an amount equal to the Insurer's current published premium rate for annually 
renewable term insurance for standard risks based on the Participant's age 
multiplied by the Participant's amount of coverage. Participants then currently 
actively employed by the Company shall pay such required premium to the Company 
through equal after-tax payroll deductions withheld from each Participant's 
compensation during the applicable tax year. A Participant not actively 
employed by the Company at the date a premium payment is due but who have 
elected under Section 5.0 hereof to continue participation in the Plan shall 
pay his or her premium directly to the Company. On or before the due date of 
each Insurance Policy premium, or within the grace period provided therein, the 
Company shall forward to the Insurer the Participant's premium as well as the 
balance of the premium then due.

                                  Article IV

                                 Beneficiary

4.0   The Participant shall designate his or her Beneficiary to receive 
benefits under the Plan in a separate Beneficiary Designation form approved by 
the Insurer. If more than one Beneficiary is named, the shares and the 
preference of each shall be indicated.

4.1   The Company and the Participant shall execute a Beneficiary Designation 
on forms approved by the Administrator. It shall limit the rights of the 
Participant's designated Beneficiary to the amount of the death benefit 
proceeds specified in Schedule B of his or her Plan Agreement with the balance 
payable to the Company. Such Beneficiary Designation shall not be terminated, 
altered or amended by the Company, without the express written consent of the 
Participant. The Company and the Participant shall take all action necessary to 
cause such Beneficiary Designation to conform to the provisions of this Plan 
and Plan Agreement.

4.2   Participants shall have the right to change their Beneficiary(s) at any 
time by submitting a new Beneficiary Designation form to the Company. In order 
to become effective such new form shall be executed by both the Participant and 
the Company.

                                       3


   No change in Beneficiary shall be effective until acknowledged in writing by 
the Insurer.

4.4   Any payment made by the Insurer in accordance with the most recent 
Beneficiary Designation form filed with the Company and the Insurer shall fully 
discharge the Insurer from all further obligations with respect to such 
payment.

4.5   The Beneficiary may elect any settlement option under the Insurance 
Policy of his or her portion of the death benefit proceeds and the Company 
agrees to coexecute and deliver to the Insurer the necessary forms to elect the 
requested settlement options.

                                  Article V

        Interest of Company and the Participant in the Insurance Policy
                      During the Participant's Lifetime

5.0   Unless otherwise extended by mutual consent of the Company and the 
Participant, a Participant's Plan Agreement shall terminate at the Termination 
Date. In the event the Participant's employment with the Company terminates 
prior to the Termination Date, Participants who are eligible to retire under 
the Company's Retirement Income Guarantee Plan shall have the right to continue 
the Plan Agreement until the Termination Date, provided that the Participant 
continues to make his or her required premiums under Section 3.4. In the event 
that the Participant's employment with the Company terminates prior to the 
Termination Date and the Participant is not eligible to retire under the 
Company's Retirement Income Guarantee Plan, the Participant's Plan Agreement 
shall terminate.

5.1   At the termination of the Plan Agreement, the Company shall have the 
unqualified right to the cash surrender value of an Insurance Policy in an 
amount equal to the amount of cumulative premiums paid by the Company with 
respect to such Insurance Policy. The Company shall also be entitled to an 
amount equal to one-half of the cash surrender value of the Insurance Policy in 
excess of the cumulative premiums paid as of December 31, 1998 (the "Excess 
Amount"). The Excess Amount shall not exceed the amount specified in accordance 
with Schedule A hereto.

5.2   At the termination of the Plan Agreement, the Participant shall be 
entitled to the cash surrender value of the Insurance Policy in excess of the 
amount payable to the Company in accordance with Section 5.1 above, and all 
other policy rights not otherwise ceded to the Company. The Participant agrees 
that he or she will not deal with the Insurance Policy other than in a manner 
expressly provided for in this Plan and the Participant's Plan Agreement until 
after the Participant's Plan Agreement is terminated.

5.3   While the Plan Agreement is in force, the Company may borrow either 
directly or indirectly against each Insurance Policy or repledge its collateral 
security interest in it for an amount not exceeding its interest. While the 
Plan Agreement is in force, the Participant may not borrow either directly or 
indirectly against his or her Insurance Policy or pledge his or her interest in 
the Insurance Policy.

                                      4


                                  Article VI

                            Retention of Services

6.0   Nothing contained in this Plan or the Plan Agreement shall be construed 
as a contract of employment between the Company and a Participant, or as a 
right of any Participant to be continued in the employment of the Company, or 
as a limitation of the right of the Company to discharge any of its employees, 
with or without cause.

                                  Article VII

           Termination. Amendment. Modification or Supplement of Plan

7.0   The Company reserves the right to terminate this Plan.

7.1   The Company reserves the right to totally or partially amend, modify or 
supplement this Plan at any time. Any amendment, modification or supplement 
shall be in writing signed by the Vice President of the Company having 
responsibility for human resources.

7.2   The Company reserves the right to terminate the Plan and the Plan 
Agreements thereunder, provided, however, no such termination shall adversely 
impact a Participant's right to continue insurance coverage at the 
Participant's own expense in accordance with the terms of the Insurance Policy.

7.3   No action to amend, modify or supplement the Plan, which would adversely 
impact participant's rights, or terminate the Plan or any Plan Agreement shall 
be taken except upon 30 days' prior written notice to each affected 
Participant.

7.4   If a termination of the Plan occurs, the obligation of the Company to 
make any premium payments shall cease and the rights of the Company and the 
Participant shall be controlled by Article VIII.

7.5   In the event of a Participant's disability as defined under the Xerox 
Long-Term Disability Income Plan, premium payments will be waived.

                                 Article VIII

                   Release of Company's Ownership Interest

8.0   If the Participant's Plan Agreement is terminated prior to the 
Participant's death, the Company shall be entitled to withdraw funds from the 
Insurance Policy equal to the amount provided for in Article V reduced by all 
indebtedness and interest incurred by it that is owed to the Insurer as a lien 
against such policy or in its discretion it may apply said net funds to 
exercise any other option provided by the Insurance Policy, but said 
application of funds shall not impact the death benefit interest of the 
Participant's Beneficiary.

8.1   After the Company has exercised its election under Subsection 8.0, it 
will no longer have any interest in the remaining Insurance Policy which 
thereafter shall be solely owned by the Participant or his or her assignee. The 
Company and the Participant shall execute whatever documents that are required 
by the Insurer to cause this change to occur.


                                      5


                                  Article IX

                          Administration of the Plan

9.0   The sole right of construction, interpretation and general administration 
of the Plan shall be vested in the Administrator. The Administrator shall be 
deemed the Named Administrator of this Plan.

9.1   The Administrator shall establish rules, forms and procedures for the 
administration of the Plan from time to time, including a claims procedure. The 
Administrator shall have the exclusive right to interpret the Plan, determine 
eligibility hereunder, and to decide any and all matters arising thereunder or 
in connection with the administration of the Plan.

                                  Article X

                           Participant's Assignment

10.0   Approval of the Administrator is required for any assignment by a 
Participant of his or her interest in the Insurance Policy at any time to any 
person or persons. Approved assignments shall be implemented by use of a form 
or forms approved from time to time by the Insurer and the Administrator. 
Assignments will be irrevocable. Upon delivery of a signed copy of the 
assignment to the Company, all of the rights, obligations and duties of the 
Participant under this Plan and under the Participant's Plan Agreement shall 
inure to and be binding upon such assignee (including the right to make further 
assignments) and the Participant shall have no further interest in this Plan or 
the Insurance Policy.

                                  Article XI

                             Insurer's Liability

11.0   If this Plan is still in existence at the death of a Participant, the 
Insurer shall be discharged from all liability under the Insurance Policy upon 
payment of the proceeds in the manner following:

      (A)   The amount provided for in Article IV, Section 4.1 shall be paid 
            in accordance with both the Participant's final Beneficiary 
            Designation and any optional method of settlement election filed 
            with it.

      (B)   The balance of the proceeds shall be paid to the Company.


                                 Article XII

                                Miscellaneous

12.0   Any notice which shall or may be given under this Plan or an assignment 
shall be in writing and shall be mailed by United States Mail, postage prepaid. 
If notice is to be given to the Company, such notice shall be addressed to the 
Company at its general offices:

       Xerox Corporation
       800 Long Ridge Road
       Stamford CT 06904-1600


                                       6


marked for the attention of the Administrator, Contributory Life Insurance 
Program; or if notice to a Participant, addressed to the most recent address 
shown on the Company's personnel records.

12.1   Any party may change the address to which notices shall be mailed from 
time to time by giving written notice of such new address.

12.2   The Plan shall be binding upon the Company and its successors and 
assigns, and upon a Participant, his or her beneficiary, heirs, executors and 
administrators.

12.3   This Plan shall be construed and governed in all respects under and by 
the laws of the State of New York. If any provision of this Plan shall be held 
by a court of competent jurisdiction to be invalid or unenforceable, the 
remaining provisions hereof shall continue to be fully effective.

12.4   Headings and subheadings in this Plan are inserted for convenience and 
reference only and to not constitute any part of this Plan.

                                 Article XIII

                                Effective Date

The original effective date of the Plan was July 1, 1989. The effective date of 
this amended Plan shall be as of January 1, 1999.

IN WITNESS WHEREOF, Xerox Corporation has caused this Amended Plan to be 
executed this 23rd day of June 1999 effective as of January 1, 1999.

                                       XEROX CORPORATION



                                      BY: /s/ Patricia M. Nazemetz
                                          ---------------------------
                                           Vice President

















                                       7



                                  Schedule A
                                       To
                  Xerox Contributory Life Insurance Program


Age at Birthday
Nearest to      Officer     Non-Officer
July 1, 1989  Participant*  Participant*

       30       568,105       284,052
       31       516,459       258,230
       32       469,508       234,754
       33       426,826       213,413
       34       388,023       194,012
       35       352,748       176,374
       36       320,680       160,340
       37       291,528       145,764
       38       265,025       132,513
       39       240,932       120,466
       40       219,029       109,515
       41       199,117        99,559
       42       181,016        90,508
       43       164,560        82,280
       44       149,600        74,800
       45       136,000        68,000
       46       123,636        61,818
       47       112,397        56,198
       48       102,179        51,089
       49        92,890        46,445
       50        84,445        42,223
       51        76,768        38,384
       52        69,789        34,895
       53        63,445        31,722
       54        57,677        28,839
       55        52,434        26,217
       56        47,667        23,834
       57        43,841        21,921
       58        40,085        20,043
       59        36,398        18,199
       60        32,777        16,388
       61        29,222        14,611
       62        25,732        12,866
       63        22,305        11,153
       64        18,941         9,470
       65        15,637         7,819
       66        12,394         6,197
       67         9,210         4,605
       68         6,083         3,042
       69         3,014         1,507

*      Status as of date participation in the Plan commenced.

                                       8





EXHIBIT 10(K)(2)

                                AMENDMENT NO. 1 
                                      TO
                               XEROX CORPORATION 
                   DEFERRED COMPENSATION PLAN FOR DIRECTORS
                        1997 AMENDMENT AND RESTATEMENT

                                  WITNESSETH:
                                  ----------

WHEREAS, Xerox Corporation (the "Company") has adopted the Xerox Corporation 
Deferred Compensation Plan For Directors, 1997 Amendment and Restatement (the 
"Plan");

WHEREAS, the Company has determined to amend the Plan to allow Participants to 
select beneficiary(s) in the event of their death either during service on the 
Board of Directors or following retirement from the Board and to permit the 
selection of any beneficiary(ies) selected by the Participant without 
limitation; and

WHEREAS, pursuant to Section 18 of the Plan the Vice President responsible for 
human resources of the Company is authorized to amend the Plan;

NOW, THEREFORE, subsections (d), (e) and (f) of Section 9 of the Plan be and 
hereby are amended to read in their entirety as follows:

     "(d)  Upon termination of service on the Board of Directors, other than 
termination resulting from death, prior to retirement, the total value of the 
Participant's Accounts under the Plan shall be paid to the Participant as soon 
as administratively possible after his or her date of termination.

     (e)  Upon the death of a Participant either before
 or after retirement the 
total value of the Participant's Accounts under the Plan shall be paid in 
accordance with an election made by such Participant in a lump sum or in 
installments, as appropriate, from the Accounts established under Section 8 to 
the beneficiary(ies) designated by the Participant.

     (f)  If a Participant dies either before or after retirement without 
having made such an election, the total value of his or her Accounts under the 
Plan shall be paid in a single payment to the Participant's estate as soon as 
administratively possible after notice of his or her date of death has been 
received by the Administrator."

This amendment is effective as of the date hereof.  In all other respects the 
Plan shall remain unchanged.

IN WITNESS WHEREOF, the Company has caused this Amendment to be signed as of 
the 1st day of January 1998.

                                          XEROX CORPORATION

                                          By:   /s/ Hector Motroni
                                              -----------------------
                                                   Vice President

Attest:

By:   Martin S. Wagner
      --------------------
      Assistant Secretary





EXHIBIT 10(L)

                                                (As amended through 11/16/98)


                               XEROX CORPORATION
  
                   DEFERRED COMPENSATION PLAN FOR EXECUTIVES
           (Formerly 1989 Deferred Compensation Plan For Executives)
  
                        1997 AMENDMENT AND RESTATEMENT 
  
     PREAMBLE. This Deferred Compensation Plan For Executives, 1997 Amendment 
and Restatement (the "Plan") is a private unfunded nonqualified deferred 
compensation arrangement for executives and all rights shall be governed by and 
construed in accordance with the laws of New York, except where preempted by 
federal law.  It is intended to provide a  vehicle for setting aside funds for 
retirement.
  
     SECTION 1.  EFFECTIVE DATE.  The original effective date of the Plan is 
January 1, 1989.  The effective date of this amendment and restatement is 
October 13, 1997.

     SECTION 2.  ELIGIBILITY.  Any employee of Xerox Corporation (the 
"Company"), and any employee of a wholly owned subsidiary of the Company which 
has adopted this Plan with the approval of the Company's Board of Directors or 
the Committee (as hereinafter defined) ("Participating Subsidiary"), who is in 
Corporate B and A (or its equivalent) or above, and such additional group or 
groups of employees of the Company or of a Participating Subsidiary as  
designated from time to time by the
 Administrator, are eligible to participate 
in the Plan (an individual who has so elected to participate is hereinafter 
referred to as a "Participant").  A Participant who terminates an election to  
defer receipt of compensation is not eligible to make deferrals again in the 
Plan until twelve months after the effective date of such  termination. 
  
     SECTION 3.  DEFERRED COMPENSATION ACCOUNT.  There shall be established for 
each Participant one or more deferred compensation Accounts (as hereinafter 
defined). 
  
     SECTION 4.  AMOUNT OF DEFERRAL.  A Participant may elect to defer receipt 
of compensation for services (up to 50% in the case of base salary and up to 
100% in the case of any other long or short term compensation that is eligible 
for deferral) as an employee of the Company or a Participating Subsidiary 
otherwise payable to the Participant in the form of cash.  Any amount deferred 
is credited to the Participant's  Accounts on the date such amount is otherwise 
payable. 

     To adjust for the reduced contribution otherwise payable in cash, if 
applicable, to a Participant's account under the Xerox Corporation Profit 
Sharing and Savings Plan (the 'Profit Sharing Plan') because of the deferral of 
compensation under the Plan at the time of each annual employer contribution to 
the Participant's account under the Profit Sharing Plan, the deferred 
compensation account of each active Participant shall be credited with an 
additional hypothetical amount equal to the product of (a) the amount of 
deferred compensation under the Plan which would have been included in the 
calculation of such profit sharing contribution if such compensation had not 
been deferred (b) by the contribution percentage payable in cash under the 
Profit Sharing Plan for the relevant calendar year.  
  
     SECTION 5. TIME OF ELECTION OF DEFERRAL.  An election to defer 
compensation must be made by a Participant prior to the year in which the 
Participant would otherwise have an unrestricted right to such compensation.  
When an employee first becomes eligible to participate in the Plan, he or she 
may elect to defer any compensation to which he or she has yet to have an 
unrestricted right to payment.  An election to totally terminate future 
deferrals may be made at any time prior to the relevant payment date.
  
     SECTION 6. HYPOTHETICAL INVESTMENT.  Deferred compensation is assumed to 
be invested, without charge, in (a) the Balanced Fund, Income Fund, U. S. Stock 
Fund, International Stock Fund, Small Company Stock Fund or Xerox Stock Fund 
(or the successors thereto) established from time to time under the Profit 
Sharing Plan, (b) a fund with a variable fixed rate of return based upon the 
prime or base rate charged by one or more banks ("Prime Rate Investment")  and 
(c) such other fixed income return investments ("Fixed Return Investment"), all 
as shall be made available from time by the Administrator in his or her 
administrative discretion ("Investments"), as elected by the Participant. 
  
     It is anticipated that the Administrator will substitute the Prime Rate 
Investment for the Income Fund effective January 1, 1998.  Amounts deferred 
prior to January 1, 1998 shall  have a rate of return at the Income Fund or the 
Prime Rate Investment as elected by Participants on forms provided by the 
Administrator in connection with the implementation of the Prime Investment 
Rate.

     Elections to make hypothetical investments in any one or more of the 
Investments shall be subject to administrative rules adopted by the 
Administrator from time to time.
  
     No shares of Xerox stock will ever actually be issued to a Participant 
under the Plan. 
  
     SECTION 7. VALUE OF DEFERRED COMPENSATION ACCOUNTS AND INSTALLMENT  
PAYMENTS.  The value of each Participant's Accounts shall reflect all amounts 
deferred, gains, losses and rates of return from the Investments, and shall be 
determined at the close of business on each day on which securities are traded 
on the New York Stock Exchange. Hypothetical investments in  the Profit Sharing 
Plan shall be valued on each business day based upon the value of such 
hypothetical investment as determined under such Plan on the valuation date 
under such Plan coincident with or last preceding such business day.  The value 
of Investments not made under the  Profit Sharing Plan shall be determined from 
such available source or sources as the Administrator in his or her sole 
discretion shall from time to time determine. The date as of which investments 
are valued pursuant to the foregoing sentences are referred to herein as a 
Valuation Date.

     SECTION 8. MANNER OF ELECTING DEFERRAL.  A Participant may elect to defer 
compensation by giving written notice to the Administrator on a  form provided 
by the Company, which notice shall include (1) the percentage to be deferred; 
(2) if more than one is  offered under the Plan, the Investment applicable to 
the  amount deferred; and (3) the payment  method that will apply to the  
deferred compensation. A Participant may elect up to a maximum of four separate 
payment methods during his or her participation in the Plan ("Accounts"). Such 
payment methods once made may never be changed. Each election to defer 
compensation under the Plan shall specify an Account from which payment will be 
made. The Accounts available under the Plan shall be:

     ACCOUNT 1 which shall be payable beginning the July 15 of a calendar year 
that follows the calendar year of retirement by the number of years elected by 
the Participant (0, 1, 2, 3, 4, or 5 years). The last payment shall be on the 
July 15 of the year in which the Participant attains a certain age elected by 
the Participant.

     ACCOUNT 2 which shall be payable beginning the July 15 of a calendar year 
that follows the calendar year of retirement by the number of years elected by 
the Participant (0, 1, 2, 3, 4, or 5 years) and is payable on each subsequent 
July 15 until the number of payments elected by the Participant have been made.

     ACCOUNT 3  which shall be payable on the July 15 of a calendar year that 
follows the calendar year of retirement by the number of years elected by the 
Participant (0, 1, 2, 3, 4, or 5 years) and is payable as a single sum.

     ACCOUNT 4 shall be available with respect to amounts deferred during 1998 
and later years. This account is payable beginning on the July 15 of a 
specified year whether before or after retirement. In addition to this payment 
date, the Participant must elect the number of payments that are to commence on 
this date. The payment(s) from this account can be as a single sum or payable 
in up to four annual installments. Once Account 4 is established (an election 
is made to defer and the payment date is defined), deferrals to Account 4 shall 
cease for any calendar year in which a payment is scheduled to be made from 
this Account. The full account balance shall be distributed by the end of the 
installment period. Once the final payment is made from this Account, the 
Participant may elect to create a new Account 4. The initial election or any 
subsequent election to use this Account must be made by December 31 of the year 
preceding the calendar year in which deferrals will be allocated to this 
Account. The first payment date that can be elected is the July 15 of the 
calendar year that follows the calendar year of election (calendar year 
containing the December 31 due date for election) by three years.

     Not later than December 31, 1997, participants who are currently employed 
by the Company may change their payment elections previously made under the 
Plan which specified payment dates relating to termination, retirement, death, 
or disability, by selecting payments pursuant to the methods described in 
Accounts 1 through 3 above.  Such change shall be effected by the Participant 
filing with the Administrator a change of election on a form or forms 
established by the Administrator for such purpose.  Such change shall be 
effective only with respect to payments in 1999 or later for participants who 
are employed by Xerox as of December 31, 1998.

     The Administrator may adopt rules of general applicability for 
administration of payments under the Plan which may be elected by participants, 
including without limitation, fixing the maximum age selected for payments to 
terminate and the maximum number of payments. 

      SECTION 9. PAYMENT OF DEFERRED COMPENSATION.  

      (a) No withdrawal may be  made from the Participant's Account, except as  
provided under this Section and Sections 10 and 11. 
  
     (b) Payments from a Participant's Account are made in cash in accordance 
with the elections made under Section 8 of the Plan based on the value of the 
Participant's deferred compensation Accounts as of the Valuation Date 
immediately preceding the date of payment. 
  
     (c)  Unless otherwise elected by a Participant with the written approval 
of the Administrator, payments of deferred compensation shall be made pursuant 
to the following formula:  the amount of the first payment shall be a fraction 
of the value of the Participant's deferred compensation account on the 
preceding Valuation Date, the numerator of which is one and the denominator of 
which is the total number of installments elected, and the amount of each 
subsequent payment shall be a fraction of the value on the Valuation Date 
preceding each subsequent payment date, the numerator of which is one and the 
denominator of which is the total number of installments elected minus the 
number of installments previously paid. Any other payment method selected with 
the written approval of the Administrator must in all events provide for 
payments in substantially equal installments. 

    (d)  Upon termination of employment, including termination resulting from 
death, prior to retirement, the total value of the participants Accounts under 
the Plan shall be paid to the Participant, or his or her estate, as the case 
may be, as soon as administratively possible after his or her date of 
termination.

    (e)  Upon the death of a Participant following retirement the total value 
of the Participant's Accounts under the Plan shall be paid in accordance with a 
one-time, irrevocable election made by such Participant as follows:

         1.  The total value shall be paid to the Participant's estate as soon 
as administratively possible after the death of a Participant, or

         2.  Payments shall continue under the election made by the Participant 
to the Participant's surviving spouse until the surviving spouse's death. Any 
remaining payments shall be paid as a single sum to the surviving spouse's 
estate.

     (f) If a Participant dies after retirement without having made such 
irrevocable election, the total value of his or her Accounts under the Plan 
shall be paid in a single payment to the participant's estate as soon as 
administratively possible after notice of his or her date of death has been 
received by the Administrator.

     SECTION 10.  ACCELERATION OF PAYMENT.

     (a) FOR HARDSHIP.  Upon written approval from the Company's Chief 
Executive Officer (the Company's Board of Directors, in the case of a request 
from the Chief Executive Officer), a Participant may be permitted to receive 
all or part of his accumulated benefits if, in the discretion of the Chief 
Executive Officer (or the Board, if applicable),  it is determined that an 
emergency event beyond the Participant's control exists and which would cause 
such Participant severe financial hardship if the payment of his benefits were 
not approved.  Any such distribution for hardship shall be limited to the 
amount needed to meet such emergency. A Participant who makes a hardship 
withdrawal cannot reenter the Plan for twelve months after the date of 
withdrawal.
 
     (b)  UPON A CHANGE IN CONTROL.  Within 5 days following the occurrence of 
a change in control of the Company (as hereinafter defined), each Participant 
shall receive a lump sum payment equal to the value of his Account.
  
      For purposes hereof, a "change in control of the Company" shall be deemed 
to have occurred if (A) any "person", as such term is used in Sections 13(d) 
and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange 
Act"), other than the Company, any trustee or other fiduciary holding 
securities under an employee benefit plan of the Company, or any company owned, 
directly or indirectly, by the shareholders of the Company in substantially the 
same proportions as their ownership of stock of the Company, is or becomes the 
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly 
or indirectly, of securities of the Company representing 20 percent or more of 
the combined voting power of the Company's then outstanding securities; or (B) 
during any period of two consecutive years, individuals who at the beginning of 
such period constitute the Board, including for this purpose any new director 
(other than a director designated by a person who has entered into an agreement 
with the Company to effect a transaction described in this Section) whose 
election or nomination for election by the Company's shareholders was approved 
by a vote of at least two-thirds of the directors then still in office who were 
directors at the beginning of the period or whose election or nomination for 
election was previously so approved, cease for any reason to constitute a 
majority thereof.
   
     SECTION 11. OTHER PENALIZED WITHDRAWALS.  Notwithstanding the provisions 
of Sections 9 and 10, a Participant may be permitted to receive all or part of 
his accumulated benefits at any time provided that (A) the Administrator 
approves such distribution in his or her sole discretion, and (B) the 
Participant forfeits a portion of his account balance equal to a percentage of 
the amount distributed.  The percentage reduction shall be the greater of (A) 
six percent, or (B) a percentage equal to one-half of the prime interest rate, 
as determined by the Administrator. 
  
     SECTION 12. TIME OF INVESTMENT. Amounts deferred under the Plan shall 
begin to be credited with gains, losses and rates of return from Investments 
commencing on the date credited to the Participant's Accounts.

     SECTION 13. PARTICIPANT'S RIGHTS UNSECURED.  The benefits payable under 
this Plan shall be unfunded.  Consequently, no assets shall be segregated for 
purposes of this Plan and placed beyond the reach of the Company's general 
creditors.  The right of any Participant to receive future installments under 
the provisions of the Plan shall be an unsecured claim against the general 
assets of the Company. 
  
     SECTION 14. STATEMENT OF ACCOUNT.  Statements will be sent to each 
Participant by  February and August and more frequently if the Administrator so 
determines as to the value of their deferred compensation accounts as of the 
end of December and June, respectively. 
  
     SECTION 15. ASSIGNABILITY.  No right to receive payments hereunder  shall 
be transferable or assignable by a Participant, except by will or by the laws 
of descent and distribution or except as provided under Section 9.  
  
     SECTION 16. BUSINESS DAYS.  In the event any date specified herein falls 
on a Saturday, Sunday or legal holiday, such date shall be deemed to refer to 
the next business day thereafter. 
  
     SECTION 17. ADMINISTRATION.  The Plan shall be administered by the Vice 
President of the Company having responsibility for human resources (the 
"Administrator").  The Administrator shall have the authority to adopt rules 
and regulations for carrying out the plan, and interpret, construe and 
implement the provisions of the Plan. 
  
     SECTION 18. AMENDMENT.  The Company expressly reserves the right to amend 
the Plan at any time and in any particular manner.  Such amendments, other than 
amendments relating to termination of the Plan or relating to Investments under 
Section 6 of the Plan, may be effected by (i) the Board of Directors, (ii) a 
duly constituted committee of the Board of Directors ("Committee"), or (iii) 
the Vice President of the Company responsible for human resources or a 
representative thereof.  In the event such office is vacant at the time the 
amendment is to be made, the Chief Executive Officer of the Company shall 
approve such amendment or appoint a representative. Amendments relating to 
termination of the Plan or relating to Investments under Section 6 of the Plan 
shall be effected pursuant to a resolution duly adopted by the Board of 
Directors of the Company, or a duly constituted committee of the Board of 
Directors of the Company, in accordance with the Business Corporation Law of 
the State of New York.  

     Any amendment, alteration, modification or suspension under subsection 
(iii) of the preceding paragraph shall be set forth in a written instrument 
executed by any Vice President of the Company and by the Secretary or an 
Assistant Secretary of the Company.

     Upon  termination the Administrator in his or her sole discretion may pay 
out account balances to participants.  No amendment, modification or 
termination shall, without the consent of a Participant, adversely affect such 
Participant's accruals in his/her Accounts.




Computation of Net Income Per Common Share

(Dollars in millions, except per-share data; shares in thousands)
I. Basic Net Income (Loss) Per Common Share
     Income from continuing operations
     Accrued dividends on ESOP preferred stock, net
     Accrued dividends on redeemable preferred stock   
     Adjusted income from continuing operations
     Discontinued operations
     Adjusted net income (loss)

     Average common shares outstanding during the period
     Common shares issuable with respect to 
       exchangeable shares
     Adjusted average shares outstanding for the period

     Basic earnings (loss) per share:
       Continuing operations
       Discontinued operations
     Basic earnings (loss) per share


II. Diluted Net Income (Loss) Per Common Share
     Income from continuing operations
     Accrued dividends on ESOP preferred stock, net
     Accrued dividends on redeemable preferred stock 
     ESOP expense adjustment, net of tax
     Interest on convertible debt, net of tax
     Adjusted income from continuing operations
     Discontinued operations
     Adjusted net income (loss)

     Average common shares outstanding during the period
     Common shares issuable with respect to:
       Stock options, incentive and exchangeable shares
       Convertible debt
       ESOP preferred stock
     Adjusted average
 shares outstanding for the period

     Diluted earnings (loss) per share:
       Continuing operations
       Discontinued operations
     Diluted earnings (loss) per share

                                                                  EXHIBIT 11

         1999            1998            1997            1996          1995

     $  1,424        $    585        $  1,452        $  1,206      $  1,174
          (38)            (46)            (44)            (43)          (42)
            -               -               -              (1)           (3)
        1,386             539           1,408           1,162         1,129
            -            (190)              -               -        (1,646)
     $  1,386        $    349        $  1,408        $  1,162      $   (517)

      661,917         655,676         649,608         648,924       644,174

        1,576           3,280           3,763           5,464         7,854
      663,493         658,956         653,371         654,388       652,028


     $   2.09        $    .82        $   2.16        $   1.78      $   1.73
            -            (.29)              -               -         (2.53)
     $   2.09        $    .53        $   2.16        $   1.78      $  ( .80)



     $  1,424        $    585        $  1,452        $  1,206      $  1,174
            -             (46)              -               -             -
            -               -               -              (1)           (3)
            5               -               -              (3)           (9)
           17               3               3               3             4
        1,446             542           1,455           1,205         1,166
            -            (190)              -               -        (1,646)
     $  1,446        $    352        $  1,455        $  1,205      $   (480)

      661,917         655,676         649,608         648,924       644,174

       10,303          13,091          11,691          16,106        19,206
       13,191           5,287           5,287           5,288         5,287
       51,989               -          54,687          55,962        57,325
      737,400         674,054         721,273         726,280       725,992


     $   1.96        $    .80        $   2.02        $   1.66      $   1.61
            -            (.28)              -               -         (2.27)
     $   1.96        $    .52        $   2.02        $   1.66      $  ( .66)






                                                                   EXHIBIT 12

                             
Computation of Ratio of Earnings to Fixed Charges
                               
Year ended December 31  (in millions)    1999    1998*   1997    1996    1995

Fixed Charges:
  Interest expense                     $  803  $  749  $  617  $  592  $  603
  Rental expense                          132     145     140     140     142
    Total fixed charges before
     capitalized interest and
     preferred stock dividend
     of subsidiary                        935     894     757     732     745
  Capitalized interest                      8       -       -       -       -
  Preferred stock dividend of
   subsidiary                              55      55      50       -       -
    Total fixed charges                $  998  $  949  $  807  $  732  $  745

Earnings available for fixed charges:
  Earnings**                           $2,104  $  837  $2,268  $2,067  $1,980
  Less undistributed income in
   minority owned companies               (68)    (27)    (84)    (84)    (90)
  Add fixed charges before capitalized
   interest and preferred stock
   dividend of subsidiary                 935     894     757     732     745
    Total earnings available for
     fixed charges                     $2,971  $1,704  $2,941  $2,715  $2,635

Ratio of earnings to fixed
 charges (1)(2)                          2.98    1.80    3.64    3.71    3.54


(1) The ratio of earnings to fixed charges has been computed based on the 
    Company's continuing operations by dividing total earnings available for 
fixed charges, excluding capitalized interest, by total fixed charges.  
Fixed charges consist of interest, including capitalized interest and 
preferred stock dividend requirements of subsidiaries, and one-third of rent 
expense as representative of the
 interest portion of rentals.  Debt has been 
assigned to discontinued operations based on historical levels assigned to 
the businesses when they were continuing operations, adjusted for subsequent 
paydowns.  Discontinued operations consist of the Company's Insurance, Other 
Financial Services, and Third Party Financing and Real Estate businesses. 

(2) The Company's ratio of earnings to fixed charges includes the effect of the 
Company's finance subsidiaries, which primarily finance Xerox equipment.  
Financing businesses are more highly leveraged and, therefore, tend to 
operate at lower earnings to fixed charges ratio levels than do non-
financial businesses.

 * Excluding the effects of the charges recorded in connection with the 1998 
restructuring plan, the ratio of earnings to fixed charges would be 3.55. 

** Sum of "Income before Income Taxes, Equity Income and Minorities' Interests" 
and "Equity in Net Income of Unconsolidated Affiliates."





<PAGE>
 
Results of Operations and Financial Condition

Summary of Total Company Results

Document Processing revenues of $19.2 billion in 1999 were flat on a pre-
currency basis with 1998. Excluding Brazil, where revenues declined very
substantially due to the currency devaluation and subsequent economic weakness,
pre-currency revenues grew 4 percent driven by 5 percent growth in equipment
sales and 3 percent growth in recurring revenues. Revenues increased 8 percent
on a pre-currency basis to $19.4 billion in 1998 and 7 percent on a pre-currency
basis to $18.1 billion in 1997.

   The following table summarizes net income and diluted earnings per share
(EPS):


<TABLE> 
<CAPTION> 
----------------------------------------------------------------- 
(In millions, except per-share data)     1999     1998     1997
----------------------------------------------------------------- 
<S>                                     <C>     <C>       <C> 
Document Processing before          
  restructuring charge                 $1,424  $ 1,692   $1,452
Restructuring Charge                        -   (1,107)       -
----------------------------------------------------------------- 
Continuing operations                   1,424      585    1,452
Discontinued operations                     -     (190)       -
----------------------------------------------------------------- 
Net income                             $1,424   $  395   $1,452
EPS                                 
Document Processing before          
  restructuring charge                 $ 1.96   $ 2.33   $ 2.02
Restructuring charge                        -    (1.53)       -
----------------------------------------------------------------- 
Continuing operations                  $ 1.96   $ 0.80   $ 2.02
Discontinued operations                     -    (0.28)       -
----------------------------------------------------------------- 
Diluted EPS                            $ 1.96   $ 0.52   $ 2.02
----------------------------------------------------------------- 
</TABLE>
 

   Excluding the 1998 restructuring charge, income from continuing operations
decreased 16 percent in 1999 and increased
 17 percent in 1998.

   Excluding the 1998 restructuring charge, diluted earnings per share from
 continuing operations decreased 16 percent in 1999 and increased 16 percent in
 1998.

   Since 1995, the results of our Insurance operations have been accounted for
 as discontinued operations. Discontinued operations results for 1997 through
 1999 were charged to previously established reserves and did not affect
 reported net income. For 1998, results include a $190 million after-tax charge
 in connection with the final disposition of the insurance businesses.

                [The following data was represented by a chart]

Diluted EPS from Continuing Operations            

 1999      1998      1997
------    -----     ----- 
$1.96     $2.33*    $2.02 

* Before 1998 Restructuring

Document Processing

Pre-Currency Growth

To understand the trends in the business, we believe that it is helpful to
adjust revenue and expense growth (except for ratios) to exclude the impact of
changes in the translation of foreign currencies into U.S. dollars. We refer to
this adjusted growth as "pre-currency growth." Latin American currencies are
shown at actual exchange rates for both pre-currency and post-currency
reporting, since these countries generally have volatile currency and
inflationary environments, and our operations in these countries have
historically implemented pricing actions to recover the impact of inflation and
devaluation.

   A substantial portion of our consolidated revenues is derived from operations
outside of the United States where the U.S. dollar is not the functional
currency. When compared with the average of the major European currencies on a

28


<PAGE>
 
revenue-weighted basis, the U.S. dollar was approximately 4 percent stronger in
1999, 1 percent stronger in 1998 and 8 percent stronger in 1997. As a result,
foreign currency translation unfavorably impacted revenue growth by
approximately 1 percentage point in 1999, 1 percentage point in 1998 and 3
percentage points in 1997.

   In the early part of 1999, the Brazilian real devalued substantially against
the U.S.dollar. For the full year, the average real exchange rate declined 36
per cent to 1.80 in 1999 from 1.16 in 1998. The unfavorable impact of our
Brazilian operation on our total revenue growth was approximately 4 percentage
points in 1999. This included the impact of the currency devaluation and the
subsequent weak economic environment.

   We do not hedge the translation effect of revenues denominated in currencies
where the local currency is the functional currency.

Revenues by Product Category

   For the major product categories, the pre-currency revenue growth rates were:

-------------------------------------------------------------------
Pre-Currency Growth             1999          1998    1997
-------------------------------------------------------------------
                       Excluding
                          Brazil    Total
-------------------------------------------------------------------
Total Revenues                 4%       -%       8%      7%
-------------------------------------------------------------------
Digital Products              22       18       36      25
Light-lens copiers           (18)     (21)     (11)     (2)
Paper and other
 products                      2        1        1       3
-------------------------------------------------------------------

   The digital product portfolio includes production publishing, production
printing, color copying and printing, our expanding family of black-and-white
Document Centre digital multi-function products and network laser printers sold
through indirect channels. Excluding Brazil, digital product revenues grew 22
percent in 1999, driven by outstanding revenue growth from our expanding
Document Centre family of products, excellent laser printer revenue growth,
strong color copying and printing growth, good production publishing growth and
relatively flat production printing revenue.

   Our expanding family of black-and-white Document Centre digital multifunction
products now includes models at speeds ranging from 20 to 65 pages per minute,
all available with optional network connectivity. During 1999, the proportion
of devices installed with network capability was over 50 percent. As result,
almost 40 percent of the total installed population of Document Centre products
have network capability. We believe that enabling network connectivity and
training our customers to optimize the power of the product will lead ultimately
to the page volume incrementality we expect. Document Centre revenues were $2.6
billion in 1999, $1.7 billion in 1998 and $0.4 billion in 1997.

   Revenues from the DocuTech family of production publishing products grew 5
percent to $2.3 billion in 1999 and 15 percent in 1998. Growth slowed in 1999,
reflecting the currency devaluation and subsequent economic weakness in Brazil,
preparations for the January 2000 final phase of the realignment of the sales
organization to an industry focus, and customer Y2K mitigation efforts and
network lockdowns during the latter part of the year. 

In 1999, color product revenues grew 8 percent. Excluding Brazil, revenues from
color products grew 14 percent in 1999. Office color revenues grew modestly as
unit volume increases were more than offset by pricing pressure and a continued
shift to lower speed, lower

                [The following data was represented by a chart]

Color Copying & Printing Revenue

(constant currency, in billions)

   1999       1998       1997       
   ----       ----       ----
   $2.0       $1.8       $1.5       


                                                                              29

<PAGE>
 
priced models including our recently introduced DocuColor 12 and Document Centre
ColorSeries 50, the first color-enabled digital multifunction product. While
indirect channels color laser and inkjet placements grew significantly, inkjet
revenue growth was moderated by equipment price declines. Production color unit
and equipment sales growth was excellent, reflecting the success of the
DocuColor 100 Digital Color Press, the fastest, most productive digital color
device now on the market.

   Production printing revenues declined modestly in 1999, reflecting
significant declines in Brazil due to the currency weakness and subsequent weak
economic environment. Customer Y2K mitigation efforts and network lockdowns in
the latter part of the year also impacted results. Total production printing
revenues were $2.1 billion in 1999, $2.2 billion in 1998 and $2.2 billion in
1997.

   Revenue growth from our DocuPrint N Series of monochrome network laser
printers and expanding line of monochrome digital copiers sold through indirect
sales channels was excellent, including digital copiers from 6 to 16 pages per
minute and laser printers at speeds of 8 to 40 pages per minute. 

   The light-lens copier revenue decline reflects customer transition to our new
digital black-and-white products and increasing price pressures. We believe that
the trend over the past few years will continue and that digital product
revenues will represent an increasing share of total revenues.

   Fluctuations in paper and other products revenue growth were principally due
to swings in paper prices a nd OEM sales.

   The proportion of our revenues for the major product categories was:

-------------------------------------------------------------
                                   1999        1998    1997
-------------------------------------------------------------
Digital products                     53%         45%     35%
Light-lens copiers                   30          38      47
Paper and other products             17          17      18
-------------------------------------------------------------

   The combination of excellent digital product revenue growth on a larger
proportion of our revenues partially offset by declines on an ever-smaller
percentage of light-lens revenues has resulted in 1999 digital revenues
representing more than half of the Company's revenues for the first time.

Revenues by Geography

Geographically, the pre-currency revenue growth rates were:

-------------------------------------------------------------
Pre-Currency Growth              1999          1998    1997
-------------------------------------------------------------
Total Revenues                      -%            8%      7%
-------------------------------------------------------------
United States                       3            10       7
Europe                              4             9       7
Other Areas                       (11)            1       8
Memo: Fuji Xerox                    1            (3)      3
-------------------------------------------------------------

   Revenues in the United States were 54 percent of total revenues in 1999
compared with 52 percent of revenues in 1998 and 51 percent in 1997. European
revenues represented 28 percent of total revenues in 1999, compared with 27
percent in 1998 and 1997. Other Areas, which includes operations in Latin
America, Canada, China, Russia, India, the Middle East and Africa, contributed
18 percent of total revenues in 1999 compared with 21 percent in 1998 and 22
percent in 1997.

   U.S. revenue growth in 1999 and 1998 was driven primarily by digital products
and document outsourcing. 1999 U.S. revenue growth was significantly affected by
the ongoing disruptive impacts of the customer administration reorganization,
preparations for the January 2000 final phase of the realignment of the sales
organization to an industry approach and increased competition. In addition,
customer Y2K mitigation efforts and network lockdowns significantly impacted
production publishing and printing equipment sales in the latter part of the
year.

   1999 and 1998 revenue growth in Europe was driven primarily by digital
products and document outsourcing. Competitive and pricing pressures were
evident in 1999, particularly in large bid and tender transactions. Customer Y2K
mitigation efforts in Europe were less pronounced than in the U.S. 1999 revenues
in Other Areas include a 40 percent decline in Brazil due to the very
significant currency devaluation and subsequent economic weakness. Revenues in
Brazil were $1.0 billion in 1999, $1.6 billion in 1998 and $1.8 billion in 1997.
Brazil represented 5 percent

30

<PAGE>

of Xerox revenues in 1999, 8 percent in 1998 and 10 percent in 1997.

   Excluding Brazil, revenue in Other Areas grew 8 percent in 1999, reflecting
excellent growth in Mexico and Central America and modest growth in Canada. In
1998, revenues in Brazil declined 7 percent due to the difficult economic
environment, and although our operations in Russia are relatively small, with
revenue of less than $100 million, revenues declined very significantly due to
the weak economy in that country. Growth in Canada and Mexico was strong in
1998. 1997 revenue growth reflects good growth in Brazil and China, modest
growth in Canada and excellent growth in Mexico.

   Fuji Xerox Co., Ltd. (Fuji Xerox), an unconsolidated entity jointly owned by
Xerox Limited and Fuji Photo Film Co., Ltd., develops, manufactures and
distributes document processing products in Japan and the Pacific Rim.
Approximately 90 percent of Fuji Xerox revenues are generated in Japan, with
Australia, New Zealand, Singapore, Malaysia, Korea, Thailand and the Philippines
representing the remaining 10 percent. Fuji Xerox conducts business in other
Pacific Rim countries through joint ventures and distributors. Xerox' exposure
to economic turmoil in Asia is mitigated by our joint ownership of Fuji Xerox.
Fuji Xerox revenues grew 1 percent in 1999, reflecting flat revenues in Japan
and modest growth in Fuji Xerox' other Asia Pacific territories as economic
conditions in the region improved. Revenues declined by 3 percent in 1998,
reflecting a modest decline in Japan and a double-digit decline in the Asia
Pacific countries due to difficult economic conditions. Conversely, modest
revenue growth in 1997 reflected good growth in the Asia Pacific countries and
only modest growth in Japan due to difficult economic conditions.

[The following data was represented by a pie chart]
 
Worldwide Revenues
(billions)

US              $10.4   

Europe          $ 5.3      

Other           $ 3.5      

   Total        $19.2    

Fuji Xerox      $ 7.8

Revenues by Stream

The pre-currency growth rates by type of revenue were:

----------------------------------------------------------------
Pre-Currency Growth           1999            1998    1997
----------------------------------------------------------------
                    Excluding
                       Brazil       Total
----------------------------------------------------------------
Equipment Sales             5%         (2)%     12%     14%
Recurring Revenues          3           1        5       3
----------------------------------------------------------------
Total Revenues              4           -        8       7
----------------------------------------------------------------
Memo: Document
Outsourcing*               28%         26%      38%     58%
----------------------------------------------------------------

* Includes equipment accounted for as equipment sales.

Equipment Sales: Equipment Sales declined 2 percent in 1999, impacted very
significantly by the currency devaluation and weak economic environment in
Brazil. Excluding Brazil, Equipment Sales growth slowed to 5 percent, reflecting
the unfavorable impacts of the U.S. customer administration reorganization and
sales organization realignment in Europe and the U.S., increased competition,
and the impact of customer Y2K mitigation and network lockdowns on production
publishing and production printing equipment sales in the U.S. in the latter
part of the year. Equipment Sales in 1998 grew 12 percent despite declines in
Brazil and Russia due to their weak economies. Excluding Brazil and Russia,
Equipment Sales grew 17 percent. We have introduced a continuing stream of 
state-of-the-art digital products since 1997. Approximately half of 1999
Equipment Sales were attributable to products introduced since 1997, including
our expanding family of Document Centre digital multifunction products, the
DocuColor 12, 30, 70 and 100, the Document Centre ColorSeries 50, the

                                                                              31

<PAGE>
 
DocuTech 6180 Production Publisher, and the network monochrome laser printers
and digital copiers sold through indirect channels. Digital product equipment
sales grew 16 percent in 1999, 46 percent in 1998 and 40 percent in 1997, and
represented 71 percent of 1999 Equipment Sales, 62 percent in 1998 and 47
percent in 1997.

Recurring Revenues: Recurring Revenues include revenues from service, Document
Outsourcing, rentals, supplies, paper and income from customer financing.
Recurring Revenues represented 63 percent of total revenues in 1999, 62 percent
in 1998 and 63 percent in 1997. These revenues are primarily a function of our
installed population of equipment, usage levels, pricing and interest rates.
Slowing overall recurring revenue growth reflects lower equipment sales growth.
1999 recurring revenue growth was strong in production publishing and color,
reflecting primarily the favorable impacts of earlier equipment sales growth.
Lower overall service revenues reflect lower equipment sales and lower page
volume growth, as pages diverted from light-lens copiers to printers have not
yet been fully offset by page volume increases on network-connected Document
Centre multi-function products. During 1999, the Company securitized $1,495
million of finance receivables. This resulted in a net increase in finance
income of approximately $17 million in 1999, which includes the unfavorable flow
through impacts. The unfavorable flow through of these securitizations will
continue to impact finance income in 2000 and 2001. Proceeds from the
securitizations were used to repay debt, which has resulted in lower equipment
financing interest expense.

Document Outsourcing: Document Outsourcing revenues are split between Equipment
Sales and Document Outsourcing. Where document out-sourcing contracts include
revenues accounted for as equipment sales, this revenue is included in Equipment
Sales on the income statement. All other document outsourcing revenues,
including service, equipment rental, supplies, paper and labor are included in
Document Outsourcing.

This has the effect of diverting some revenues from supplies, paper, service and
rental. The excellent overall Document Outsourcing growth reflects the trend of
customers focusing on their core businesses and outsourcing their document
processing requirements to Xerox. Slowing total document outsourcing growth in
1999 was due primarily to reduced fourth quarter production publishing and
printing equipment sales associated with U.S. customer Y2K mitigation efforts
and network lockdowns. At the end of 1999, the estimated future minimum value of
document outsourcing revenue under contract is over $8 billion, representing an
approximate 25 percent increase from 1998.

                [The following data was represented by a chart]

Document Outsourcing Revenues
(billions)

  1999      1998       1997      
  ----      ----       ----
  $3.4      $2.7       $2.0     


Cost and Expenses

The trend in key ratios was as follows:

--------------------------------------------------------------
                               1999             1998    1997
--------------------------------------------------------------
Gross Margin                   44.0%            46.3%   46.9%
SAG % Revenue                  26.8             27.3    28.7
--------------------------------------------------------------

   The 2.3 percentage point 1999 gross margin decline was due primarily to
higher revenue growth in the lower margin document outsourcing and channels
businesses and the significant 

32

<PAGE>
 
revenue decline in the higher margin Brazilian operation together with a lower
gross margin in Brazil compared with the prior year. In addition, the gross
margin was adversely impacted by unfavorable product mix, unfavorable currency
and a decline in service gross margins as service revenue declines have not been
accompanied by corresponding cost reductions. Substantial competitive price
pressures were offset by manufacturing and other productivity improvements. The
modest 1998 gross margin decline was due to the increasing proportion of lower
margin channel product sales, the growing Document Outsourcing business, and
continued competitive price pressure partially offset by manufacturing and
service productivity. Including the inventory charges resulting from the
restructuring, the 1998 gross margin was 45.8 percent.

[The following data was represented by a chart]

Manufacturing Productivity

(percentage decline in per unit equipment manufacturing cost)

  1999    1998    1997
  ----    ----    ----
  12.0%   10.4%   8.6%

[The following data was represented by a chart]

SAG as a Percentage Of Revenue

  1999    1998    1997
  ----    ----    ----
  26.8%   27.3%   28.7%     

   The improved ratio of selling, administrative and general expenses (SAG) to
revenue in 1999 reflected significant declines in general and administrative
expenses due to restructuring, expense controls, substantially lower management
and employee bonuses and profit sharing, and the beneficial currency translation
impact, including the devaluation of the Brazilian currency partially offset by
the unfavorable impact of U.S. customer administration issues. The improvement
in 1998 reflected declines in general and administrative expenses due to
continuing productivity initiatives, restructuring and expense control,
partially offset by increased sales coverage and advertising investments. SAG,
on a pre-currency basis, declined 2 percent in 1999 and increased 3 percent in
1998 and 5 percent in 1997.

   Research and development (R&D) expense declined 6 percent in 1999 and 2
percent in 1998 and increased 3 percent in 1997. The 1999 reduction is largely
due to substantially lower management and employee bonuses and profit sharing
and lower overhead. The modest reduction in 1998 reflected a reprioritization of
our spending to focus on areas intended to produce significant growth, such as
digital, color and solutions. We continue to invest in technological development
to maintain our position in the rapidly changing document processing market with
an added focus on increasing the effectiveness and value of our R&D investment.
Xerox R&D is strategically coordinated with Fuji Xerox, which invested $555
million in R&D in 1999 for a combined total of $1.5 billion. We expect R&D
spending in 2000 will be higher than 1999.

                                                                              33

<PAGE>
 
   Worldwide employment increased by 1,900 in 1999 to 94,600 primarily as a
result of hiring 2,000 employees to support our fast-growing Document
Outsourcing business, 2,000 associated with our acquisition of majority
ownership in India, 600 associated with acquisition of the Omnifax business and
the net hiring of 2,000 employees for the centralized European customer care and
shared services operations in Ireland, direct sales and R&D skills enhancement.
These increases were partially offset by 4,700 employees leaving the Company
under the worldwide restructuring program.

   Other expenses, net, were $297 million in 1999, $242 million in 1998 and $98
million in 1997. The increase of $55 million for 1999 primarily reflected
increased non-financing interest expense and goodwill amortization associated
with our $45 million 1999 acquisition of Omnifax, our $62 million 1999
acquisition of majority ownership in India and our May 1998 acquisition of
XLConnect Solutions; higher non-financing interest expense related to an
increase in working capital; and increased environmental expense provisions
following an updated review of our environmental liabilities. These increases
were partially offset by lower Year 2000 remediation spending and net gains from
several small asset sales. The increase of $144 million for 1998 reflected
increased non-financing interest expense and goodwill amortization associated
with our June 1997 acquisition of The Rank Group's remaining interest in Xerox
Limited and our May 1998 acquisition of XLConnect Solutions; non-financing
interest expense related to an increase in working capital; and increased Year
2000 remediation spending, partially offset by reduced currency losses from
balance sheet translation.

Income Taxes and Equity in Net Income of Unconsolidated Affiliates 

Income before income taxes and the 1998 restructuring charge was $2,036 million
in 1999, $2,407 million in 1998 and $2,141 million in 1997.

   The effective tax rates were 31.0 percent in 1999, 31.6 percent in 1998
before the restructuring charge, and 34.0 percent in 1997. The 1999 and 1998
rate benefited from increases in foreign tax credits and refunds of foreign
taxes, as well as shifts in the mix of our worldwide profits.

   Equity in Net Income of Unconsolidated Affiliates is principally Xerox
Limited's share of Fuji Xerox income. Total equity in income declined to $68
million in 1999, reflecting difficult economic conditions in Japan and other
Asia Pacific countries and reductions in income from several smaller investments
partially offset by favorable currency translation due to the strengthening of
the yen compared with the U.S. dollar. The 1998 decline in total equity income
to $74 million was due principally to our share, $18 million, of a restructuring
charge recorded by Fuji Xerox; a reduction in Fuji Xerox income, reflecting
difficult economic conditions in Japan and other Asia Pacific countries; adverse
currency translation due to the weakening of the Japanese yen compared with the
U.S. dollar for most of the year; and reductions in income from several smaller
investments. The Xerox Limited 50 percent share of Fuji Xerox income was $55
million in 1999, $72 million (before our $18 million share of a restructuring
charge recorded by Fuji Xerox) in 1998 and $119 million in 1997.

1998 Restructuring Charge

In April 1998, we announced a worldwide restructuring program intended to
enhance our competitive position and lower our overall cost structure. In
connection with this program, in the second quarter of 1998 we recorded a pre-
tax provision of $1,644 million ($1,107 million after taxes and including our
$18 million share of a restructuring charge recorded by Fuji Xerox). The program
includes the elimination of approximately 9,000 jobs, net, worldwide, the
closing and consolidation of facilities, and the write-down of certain assets.

34

<PAGE>
 
The following table summarizes the status of the restructuring reserve:


<TABLE> 
<CAPTION> 
--------------------------------------------------------------
                                           Charges   Dec. 31
                               Total       Against   1999
                               Reserve     Reserve   Balance
--------------------------------------------------------------
<S>                             <C>        <C>          <C>   
Severance and related                                 
  costs                         $1,017     $   717      $300
Asset impairment                   316         316         -
Lease cancellation and                                
  other costs                      198         104        94
Inventory charges                  113         113         -
--------------------------------------------------------------
Total                           $1,644     $ 1,250      $394
--------------------------------------------------------------
</TABLE>
 

   As of December 31, 1999, approximately 10,000 employees have left the Company
under the 1998 restructuring program. Pre-tax savings from the implementation
through the end of 1999 are approximately $0.6 billion annually, resulting
primarily in lower selling, administrative and general expenses. The majority of
the annual savings to date have been reinvested to implement process and systems
changes in order to enable the restructuring, and to sustain ongoing efforts to
broaden and strengthen marketing programs and distribution channels to enhance
revenue growth. When the 1998 restructuring program initiatives are fully
implemented, the ongoing pre-tax savings before reinvestments will be
approximately $1.0 billion annually.

   The restructuring reserve is reviewed quarterly and there have been no
material changes to the program since its announcement in April 1998. The
remaining reserve will be primarily utilized during 2000 for certain European
initiatives that extended beyond 1999 due to local regulatory issues as they
relate to the workforce.

2000 Restructuring Charge

Management is currently performing a comprehensive review to identify additional
operational productivity and cost-saving opportunities above those previously
taken in connection with the 1998 restructuring program. We anticipate that a
substantial restructuring charge, although less than the 1998 restructuring
charge, will be recorded most likely in the first quarter of 2000. The ultimate
restructuring charge is expected to include employee termination expenses and
closure costs related to the initiatives identified as part of the comprehensive
review.

Share Repurchase

In April 1998, we announced that we were reactivating our $1 billion stock
repurchase program, which was suspended in April 1997 when we acquired the
remaining financial interest in Xerox Limited. Although we did not repurchase
any shares during 1999, since inception of the program we have repurchased 20.6
million shares for $594 million. We have no current plans to activate the
program in 2000.

Year 2000

The Year 2000 (Y2K) problem is the result of computer programs written in two
digits, rather than four, to define the applicable year. As a result, many
information systems and related interfaces are unable to properly recognize and
process date-sensitive information beyond December 31, 1999. As with all major
companies, certain of our information systems, products and other technology
interfaces required remediation or replacement in order to render these items
Year 2000 compliant. As of December 31, 1999, remediation and replacement work
on all required mission critical and non-mission critical information systems,
technology interfaces, facilities and products was completed as planned. As a
result of these efforts, we did not experience any Y2K-related business
disruptions.

   During 1999, 1998 and 1997, we spent $47 million, $92 million and $28
million, respectively, on Y2K remediation efforts, exclusive of software and
systems that were being upgraded or replaced in the normal course of business.

                                                                              35

<PAGE>

Acquisition of the Color Printing and Imaging Division of Tektronix

In January 2000, we acquired the Color Printing and Imaging Division of
Tektronix (CPID) for $925 million in cash including $75 million paid by Fuji
Xerox for the Asia Pacific operations of CPID. CPID manufactures and sells color
printers, ink and related products, and supplies. This transaction will result
in goodwill and other identifiable intangible assets of approximately $575
million, which will be amortized over their useful lives, predominantly 20
years. In addition, we will also recognize a charge in the first quarter of 2000
for acquired in-process research and development of approximately $25 million
associated with this acquisition.

New Accounting Standards

In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No.133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at their fair value.
Gains or losses resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. We will adopt SFAS No. 133, as amended, beginning January
1, 2001. We do not expect this Statement to have a material impact on our
consolidated financial statements.


Capital Resources and Liquidity

We manage the capital structure of our non-financing operations separately from
that of our captive finance companies, which employ a more highly leveraged
capital structure typical of captive finance companies.

   At year-end 1999, total debt, including ESOP and Discontinued Operations
debt, was $106 million less than at year-end 1998. During 1998, total debt
increased by $2,204 million from $12,903 million to $15,107 million.


<TABLE> 
<CAPTION> 
==================================================================== 
(In millions)                          1999        1998       1997
==================================================================== 
Total debt* as of January 1         $15,107     $12,903    $12,448
==================================================================== 
<S>                                 <C>         <C>        <C> 
Non-Financing Businesses:                               
Document Processing                                     
   operations cash                                      
   generation                          (353)        (99)    (1,026)
Brazil dollar debt reallocation         505           -          -
Purchase of The Rank                                    
   Group's remaining                                    
   interests in Xerox Limited             -           -      1,534
Acquisitions, net of cash and                           
   debt acquired                        160         380          -
Mandatorily redeemable                                  
   preferred securities                   -           -       (637)
ESOP                                    (71)        (64)       (60)
Discontinued businesses                (114)       (381)      (541)
--------------------------------------------------------------------  
Subtotal Non-Financing                  127        (164)      (730)
Financing Businesses                   (847)      1,764        760
Shareholder dividends                   586         531        475
All other changes                        28          73        (50)
--------------------------------------------------------------------  
Total debt* as of December 31       $15,001     $15,107    $12,903
==================================================================== 
</TABLE>
 

* Includes discontinued operations.

   For analytical purposes, total equity includes common equity, ESOP preferred
stock, mandatorily redeemable preferred securities and minorities' interests.
Total equity increased by $39 million in 1999, decreased $148 million in 1998
and increased by $523 million in 1997.

   The following is a three-year summary of the changes in total equity:


<TABLE> 
<CAPTION> 
==============================================================
(In millions)                          1999     1998     1997
==============================================================
<S>                                  <C>      <C>      <C> 
Total equity as of January 1         $6,306   $6,454   $5,931
Income from continuing
  operations, before 
  restructuring charge                1,424    1,692    1,452
Restructuring charge                      -   (1,107)       -
Loss from Discontinued
  operations                              -     (190)       -
Mandatorily redeemable
  preferred securities                    -        -      637
Shareholder dividends                  (586)    (531)    (475)
Purchase of treasury stock                -     (172)    (116)
Exercise of stock options                97      112       99
Change in minorities' interests           3       (3)    (716)
Translation adjustments              (1,003)     (56)    (463)
All other, net                          104      107      105
--------------------------------------------------------------
Total equity as of December 31       $6,345   $6,306   $6,454
==============================================================
</TABLE>
 

36

<PAGE>
 
   Debt related to non-financing operations grew by $741 million and $440
million in 1999 and 1998, respectively. The non-financing debt-to-capital ratio
increased to 47.3 percent compared with 43.8 percent and 38.9 percent as of 
year-end 1998 and 1997, respectively. The 1999 growth reflects a 7.4 point
increase related to the significant devaluation of the Brazilian real,
partially offset by net cash from operations and income net of shareholder
dividends. The $1,107 million after-tax restructuring charge taken in 1998 was a
primary factor underlying the 4.9 point increase in 1998.

   The following table summarizes the results of capital and coverage
calculations commonly used to measure the Company's financial strength:


<TABLE> 
<CAPTION> 
================================================================
(In millions)                         1999      1998       1997    
================================================================
<S>                                <C>       <C>        <C> 
Non-Financing:                                                  
Debt*                              $ 4,155   $ 3,414    $ 2,974 
Equity*                              4,630     4,385      4,662 
----------------------------------------------------------------
Total Capital                      $ 8,785   $ 7,799    $ 7,636 
================================================================
Debt-to-Capital                       47.3%     43.8%      38.9%
Ratio of earnings to interest                                   
expense, before 1998                                            
restructuring charge**                 5.9x      7.1x       7.1x
Ratio of earnings to interest                                   
expense, after 1998                                             
restructuring charge**                 5.9x      2.0x       7.1x
Ratio of earnings to fixed                                      
charges, before 1998                                            
restructuring charge**                 4.4x      5.0x       4.8x
Ratio of earnings to fixed                                      
charges, after 1998                                             
restructuring charge**                 4.4x      1.7x       4.8x
================================================================
Financing:                                                      
Debt                               $11,165   $12,012    $10,248 
Equity                               1,396     1,602      1,473 
----------------------------------------------------------------
Total Capital                      $12,561   $13,614    $11,721 
================================================================
Debt-to-Equity                         8.0x      7.5x       7.0x
Ratio of Earnings to                                            
Interest Expense                       1.9x      1.8x       1.7x
================================================================
</TABLE>
 

* Includes $319 million (one-half) share of mandatorily redeemable preferred
  securities.

**Includes one-half share of redeemable preferred securities dividends of $27
  million in 1999 and 1998, and $24 million in 1997.

Non-Financing Operations

The following table summarizes 1999, 1998 and 1997 document processing non-
financing operations cash generation and usage:


<TABLE> 
<CAPTION> 
================================================================
(In millions)                            1999     1998     1997
================================================================
<S>                                    <C>      <C>      <C> 
Document Processing
  Non-Financing:
Income                                 $1,114   $1,381*  $1,217
Depreciation and
  amortization**                          935      821      739
---------------------------------------------------------------- 
Cash from Operations                   $2,049   $2,202   $1,956
---------------------------------------------------------------- 
Additions to land, building
  and equipment                          (594)    (566)    (520)
Increase in on-lease
  equipment                              (401)    (473)    (347)
Decrease/(increase) in
  inventories                              68     (558)    (170)
Increase in accounts
  receivable                              (94)    (540)    (188)
All other changes, net                   (238)     366      295
---------------------------------------------------------------- 
Net Cash Generation, Before
Restructuring Charges                  $  790   $  431   $1,026
---------------------------------------------------------------- 
Cash charges against 1998
restructuring reserve                    (437)    (332)       -
---------------------------------------------------------------- 
Net Cash Generation                    $  353   $   99   $1,026
================================================================
</TABLE>
 

*  Before restructuring charge.

** Includes rental equipment depreciation of $463, $411 and $311 in 1999, 1998
   and 1997, respectively.

[The following data was represented by a chart]

Non-Financing Cash Flows (millions)

1999    $  353

1998    $   99

1997    $1,026

37

<PAGE>
 
   Cash from operations was $2,049 million in 1999 versus $2,202 million in 1998
as lower net income was only partially offset by higher non-cash depreciation
and amortization expenses. Investment in land, buildings and equipment grew by
$28 million and $46 million in 1999 and 1998, respectively, reflecting
investments in Ireland, where we are consolidating European customer support
centers and investing in manufacturing - partially offset by overall spending
constraints. Inventories, other than on-lease equipment, were reduced by $68
million in 1999, a $626 million improvement versus 1998, driven by a major focus
on inventory management as well as lower requirements for analog products. The
improvement was partially offset by inventory build associated with fourth
quarter revenue shortfalls and Y2K inventory contingencies. Inventory growth of
$558 million in 1998 was up from $170 million in 1997, reflecting accelerated
digital product sales growth. Receivables grew by $94 million in 1999 versus
$540 million and $188 million of growth in 1998 and 1997, respectively. Although
days sales outstanding improved in the fourth quarter, progress in receivables
was less than expected in 1999 due primarily to continued disruptions related to
the consolidation of U.S. customer administrative centers. We believe that days
sales outstanding will continue to improve during 2000.

Financing Businesses

Customer financing-related debt declined by $847 million in 1999 and increased
by $1,764 million in 1998. This change reflects the securitization in 1999 of
$1,495 million of financing contracts, and an allocation of $505 million of debt
to non-financing operations based on our 8:1 debt to equity guideline. This
allocation was necessary because of the impact on our Brazilian finance
receivables of the significant devaluation in the Brazilian real. The increase
in 1998 largely reflects improved equipment sales growth and currency
translation effects. Customer financing debt grew by $760 million in 1997 also
due to equipment sales growth, partially offset by currency translation.

   Debt related to discontinued third-party financing and real estate
activities was fully paid down in 1999. Related amounts, included in financing
business debt in 1998 and 1997, totaled $86 million and $117 million,
respectively.

Funding Plans for 2000

   Decisions related to term funding of our non-financing businesses, including
any term funding to replace the $850 million commercial paper borrowing in
January related to our purchase of the Color Printing and Imaging Division of
Tektronix, Inc., will remain based on the interest rate environment and capital
market conditions, and our desire to maintain ample liquidity and capital
strength. 

   Customer financing-related debt is expected to increase in year 2000 in line
with equipment sales growth and securitized asset run-off. Decisions regarding
the size and timing of funding for our financing businesses will be made based
on match funding needs, refinancing requirements and capital market conditions.

   We believe our short-term credit facilities provide an ample source of funds
to finance our day-to-day operations, and we have readily available access to
the global capital markets to satisfy medium- and long-term financing needs. Our
$7 billion global revolving credit agreement with a group of banks expires in
2002. This facility is unused and available to provide backup to Xerox, Xerox
Credit Corporation (XCC) and Xerox Capital (Europe) plc (XCE) commercial paper
borrowings. Commercial paper balances supported by the global credit agreement
totaled $954 million at December 31, 1999. Xerox or XCC may access the facility
up to its $7 billion limit. XCE has access subject to a $4 billion limit. At
December 31, 1999, Xerox and XCE had combined U.S. shelf capacity of $2.1
billion and XCC had U.S. shelf capacity of $2 billion. In addition, a $4 billion
Euro market debt facility is available to Xerox, XCC and XCE, of which $2
billion remained unused at December 31, 1999.

38

<PAGE>
 
Risk Management

Xerox is typical of multinational corporations because it is exposed to market
risk from changes in foreign currency exchange rates and interest rates that
could affect our results of operations and financial condition.

   We have entered into certain financial instruments to manage interest rate
and foreign currency exposures. These instruments are held solely for hedging
purposes and include interest rate swap agreements, forward exchange contracts
and foreign currency swap agreements. We do not enter into derivative instrument
transactions for trading purposes and employ longstanding policies prescribing
that derivative instruments are to be used only to achieve a set of very limited
objectives.

   Currency derivatives are primarily arranged in conjunction with underlying
transactions that give rise to foreign currency-denominated payables and
receivables - for example, an option to buy foreign currency to settle the
importation of goods from foreign suppliers, or a forward exchange contract to
fix the dollar value of a foreign currency-denominated loan.

   As of December 31, 1999 and 1998, our primary foreign currency market
exposures include the Japanese yen, Euro, Brazilian real, British pound sterling
and Canadian dollar.

   In order to manage the risk of foreign currency exchange rate fluctuations,
we hedge a significant portion of all cross-border cash transactions denominated
in a currency other than the functional currency applicable to each of our legal
entities. From time to time, when cost-effective, foreign currency debt and
currency derivatives are used to hedge international equity investments.

   Consistent with the nature of the economic hedge of such foreign currency
exchange contracts, associated unrealized gains or losses would be offset by
corresponding decreases or increases in the value of the underlying asset or
liability being hedged.

     Assuming a 10 percent appreciation or depreciation in foreign currency
exchange rates as of December 31, 1999, the potential change in fair value of
our net foreign currency portfolio would approximate $22million. The amount
permanently invested in foreign subsidiaries and affiliates, primarily Xerox
Limited, Fuji Xerox and Xerox do Brasil, and translated into dollars using the
year-end exchange rate, was $6.5 billion at December 31, 1999, net of foreign
currency-denominated liabilities designated as a hedge of our net investment.
Assuming a 10 percent appreciation or depreciation of the U.S. dollar against
all currencies from the quoted foreign currency exchange rates at December 31,
1999, the unrealized loss or gain would approximate $650million.

With regard to interest rate hedging, virtually all customer financing assets
earn fixed rates of interest. Therefore, within industrialized economies, we
"lock in" an interest rate spread by arranging fixed-rate liabilities with
similar maturities as the underlying assets and fund the assets with liabilities
in the same currency. We refer to the effect of these conservative practices as
"match funding" customer financing assets. This practice effectively eliminates
the risk of a major decline in interest margins during a period of rising
interest rates. Conversely, this practice effectively eliminates the opportunity
to materially increase margins when interest rates are declining.

   Pay fixed-rate and receive variable-rate swaps are typically used in place of
more expensive fixed-rate debt. Additionally, pay variable-rate and receive
fixed-rate swaps are used from time to time to transform longer term fixed-rate
debt into variable-rate obligations. The transactions performed within each of
these categories enable more cost-effective management of interest rate
exposures. The potential risk attendant to this strategy is the non-performance
of the swap counterparty. We address this risk by arranging swaps with a diverse
group of strong-credit counterparties, regularly monitoring their credit ratings
and determining the replacement cost, if any, of existing transactions.

                                                                              39

<PAGE>
 
   On an overall worldwide basis, and including the impact of our hedging
activities, weighted average interest rates for 1999, 1998 and 1997 approximated
5.6 percent, 6.1 percent and 6.2 percent, respectively.

   Many of the financial instruments we use are sensitive to changes in interest
rates. Hypothetically, interest rate changes result in gains or losses related
to the market value of our term debt and interest rate swaps due to differences
between current market interest rates and the stated interest rates within the
instrument. Applying an assumed 10 percent reduction or increase in the yield
curves at December 31, 1999, the fair value of our term debt and interest swaps
would increase or decrease by approximately $69 million.

   Our currency and interest rate hedging are typically unaffected by changes in
market conditions as forward contracts, options and swaps are normally held to
maturity consistent with our objective to lock in currency rates and interest
rate spreads on the underlying transactions.

Liquidity

Our primary sources of liquidity are cash generated from operations and
borrowings. The consolidated statements of cash flows detailing changes in our
cash balances are on page 44.

   Operating activities resulted in a net cash inflow of $1,224 million in 1999
compared with outflow of $1,165 in 1998. This year-over-year improvement largely
results from the 1999 finance receivables securitizations, containment of the
trend toward higher days sales outstanding, improved inventory turns and higher
non-cash charges. Higher restructuring payments and infrastructure investment
had a modest offsetting effect on cash flow from operations. The unusually high
level of operations cash usage experienced in 1998 was largely attributable to
strong growth in our customer financing businesses and lower inventory and
receivables turnover, which more than offset higher income and non-cash charges.

   1999 investing activities resulted in net cash usage of $627 million, or $240
million less than in 1998 due to our 1998 purchase of XLConnect. Net cash
outflows from investing activities reached $1,251 million in 1997 largely due to
an initial $812 million payment to The Rank Group under our agreement to
purchase The Rank Group's remaining interests in Xerox Limited.

   Financing activities used $569 million of cash in 1999, and generated $1,887
million and $184 million in 1998 and 1997, respectively. These significant year-
to-year financing movements primarily result from operations cash flow changes
and, in 1997, include $637 million of proceeds from the issuance of mandatorily
redeemable preferred securities.

   Year-end cash balances were $126 million in 1999, $79 million in 1998 and $75
million in 1997, consistent with our objective to minimize investments that do
not provide added value to our shareholders.

Discontinued Operations -Insurance and Other

The net investment in our discontinued businesses, which includes Insurance and
Other Discontinued Businesses, totaled $702 million at December 31, 1999
compared with $759 million at December 31, 1998. The decrease in 1999 was
primarily caused by the sale of seven of our remaining eight financing leases,
the sale of other Real Estate investments and other run-off activity that were
partially offset by the funding of reinsurance coverage for the former Talegen
Holdings, Inc. (Talegen) companies to Ridge Reinsurance Limited (Ridge Re) and
interest for the period on the assigned debt. A discussion of the discontinued
businesses follows.

40

<PAGE>
 
Net Investment in Insurance

In 1995, we recorded a $1,546 million after-tax charge in connection with the
disengagement activities for our five then remaining Talegen insurance companies
and three related service companies. In the first quarter of 1998, an additional
after-tax charge of $190 million was recorded. For a complete description of the
status of insurance, see Note 10 to the Consolidated Financial Statements.

   The net investment in Insurance at December 31, 1999, totaled $621 million
compared with a balance of $513 million and $1,076 million at December 31, 1998
and 1997, respectively. The increase in 1999 is primarily due to contractual
payments to Ridge Re for annual premium installments and associated finance
charges, a settlement payment related to the sale of one of the former Talegen
units and interest on the assigned insurance debt, partially offset by dividends
received from Ridge Re. The decrease in 1998 versus 1997 primarily reflects the
sales of the remaining insurance and service companies and the reserve increase
recorded in the first quarter of 1998, somewhat offset by contractual payments
to Ridge Re for annual premium installments and associated finance charges and
interest on the assigned insurance debt.

Net Investment in Other Discontinued Business

The net investment in our Other Discontinued Businesses at December 31, 1999,
which includes Other Financial Services and Third-Party Financing and Real
Estate, totaled $131 million compared with $382 million and $423 million at
December 31, 1998 and 1997, respectively. The reduction primarily relates to
sales of financing leases and an office building and other real estate,
partially offset by interest on the assigned debt and other expenses. Debt
associated with these assets totaled $50 million at December 31, 1999 compared
with $136 million and $167 million at December 31, 1998 and 1997, respectively.

Forward-Looking Cautionary Statements

This Annual Report contains forward-looking statements and information relating
to Xerox that are based on our beliefs, as well as assumptions made by and
information currently available to us. The words "anticipate," "believe,"
"estimate," "expect," "intend," "will" and similar expressions, as they relate
to us, are intended to identify forward-looking statements. Actual results could
differ materially from those projected in such forward-looking statements.
Information concerning certain factors that could cause actual results to differ
materially is included in the company's 1999 10-K filed with the SEC in March
2000. We do not intend to update these forward-looking statements.

                                                                              41

<PAGE>
 
Consolidated Statements of Income


<TABLE> 
<CAPTION> 
=============================================================================================================================
Year ended December 31 (in millions, except per-share data)                                    1999        1998        1997
=============================================================================================================================
<S>                                                                                          <C>        <C>         <C> 
Revenues
Sales                                                                                        $10,346     $10,696    $  9,881
Service and rentals                                                                            7,856       7,678       7,257
Finance income                                                                                 1,026       1,073       1,006
-----------------------------------------------------------------------------------------------------------------------------
Total Revenues                                                                                19,228      19,447      18,144
-----------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales                                                                                  5,744       5,662       5,330
Cost of service and rentals                                                                    4,481       4,205       3,778
Inventory charges                                                                                  -         113           -
Equipment financing interest                                                                     547         570         520
Research and development expenses                                                                979       1,040       1,065
Selling, administrative and general expenses                                                   5,144       5,321       5,212
Restructuring charge and asset impairments                                                         -       1,531           -
Other, net                                                                                       297         242          98
-----------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses                                                                      17,192      18,684      16,003
-----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and Minorities` Interests                            2,036         763       2,141
Income taxes                                                                                     631         207         728
Equity in net income of unconsolidated affiliates                                                 68          74         127
Minorities' interests in earnings of subsidiaries                                                 49          45          88
-----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations                                                              1,424         585       1,452
Discontinued operations                                                                            -        (190)          -
-----------------------------------------------------------------------------------------------------------------------------
Net Income                                                                                   $ 1,424     $   395    $  1,452
=============================================================================================================================
Basic Earnings (Loss) per Share
Continuing operations                                                                        $  2.09     $  0.82    $   2.16
Discontinued operations                                                                            -       (0.29)          -
-----------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share                                                                     $  2.09     $  0.53    $   2.16
============================================================================================================================= 
Diluted Earnings (Loss) per Share
Continuing operations                                                                        $  1.96     $  0.80    $   2.02
Discontinued operations                                                                            -       (0.28)          -
-----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share                                                                   $  1.96     $  0.52    $   2.02
============================================================================================================================= 
</TABLE>
 

The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.

42

<PAGE>
 
Consolidated Balance Sheets


<TABLE> 
<CAPTION> 
================================================================================================================= 
December 31 (in millions)                                                                         1999       1998
================================================================================================================= 
<S>                                                                                      <C>             <C> 
Assets
Cash                                                                                       $       126   $     79
Accounts receivable, net                                                                         2,622      2,671
Finance receivables, net                                                                         5,115      5,220
Inventories                                                                                      2,961      3,269
Deferred taxes and other current assets                                                          1,161      1,236
-----------------------------------------------------------------------------------------------------------------
Total Current Assets                                                                            11,985     12,475
Finance receivables due after one year, net                                                      8,203      9,093
Land, buildings and equipment, net                                                               2,456      2,366
Investments in affiliates, at equity                                                             1,615      1,456
Goodwill, net                                                                                    1,724      1,731
Other assets                                                                                     1,701      1,233
Investment in discontinued operations                                                            1,130      1,670
-----------------------------------------------------------------------------------------------------------------
Total Assets                                                                               $    28,814   $ 30,024
=================================================================================================================
Liabilities and Equity
Short-term debt and current portion of long-term debt                                      $     3,957   $  4,104
Accounts payable                                                                                 1,016        948
Accrued compensation and benefits costs                                                            630        722
Unearned income                                                                                    186        210
Other current liabilities                                                                        2,161      2,523
-----------------------------------------------------------------------------------------------------------------
Total Current Liabilities                                                                        7,950      8,507
Long-term debt                                                                                  10,994     10,867
Postretirement medical benefits                                                                  1,133      1,092
Deferred taxes and other liabilities                                                             2,263      2,711
Discontinued operations liabilities - policyholders' deposits and other                            428        911
Deferred ESOP benefits                                                                            (299)      (370)
Minorities' interests in equity of subsidiaries                                                    127        124
Company-obligated, mandatorily redeemable preferred securities of subsidiary
  trust holding solely subordinated debentures of the Company                                      638        638
Preferred stock                                                                                    669        687
Common shareholders' equity                                                                      4,911      4,857
-----------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity                                                               $    28,814   $ 30,024
=================================================================================================================
</TABLE>
 

Shares of common stock issued and outstanding at December 31, 1999 were (in
thousands) 665,156. Shares of common stock issued and out- standing at December
31, 1998 were (in thousands) 657,196 and 656,787, respectively. 
The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.

                                                                              43

<PAGE>
 
Consolidated Statements of Cash Flows


<TABLE> 
<CAPTION> 
  ================================================================================================================================  
  Year ended December 31 (in millions)                                                                1999        1998       1997
  ================================================================================================================================  
  <S>                                                                                               <C>        <C>        <C>  
  Cash Flows from Operating Activities                                   
  Income from continuing operations                                                                  $ 1,424    $  585    $  1,452
  Adjustments required to reconcile income to cash flows from
  operating activities:
    Depreciation and amortization                                                                        935       821        739
    Provision for doubtful accounts                                                                      359       301        265
    Restructuring charge and other charges                                                                 -     1,644          -
    Provision for postretirement medical benefits, net of payments                                        41        33         29
    Cash charges against 1998 restructuring reserve                                                     (437)     (332)         -
    Minorities' interests in earnings of subsidiaries                                                     49        45         88
    Undistributed equity in income of affiliated companies                                               (68)      (27)       (84 )
    Decrease (increase) in inventories                                                                    68      (558)      (170 )
    Increase in on-lease equipment                                                                      (401)     (473)      (347 )
    Increase in finance receivables                                                                   (1,788)   (2,169)    (1,629 )
    Proceeds from securitization of finance receivables                                                1,495         -          -
    Increase in accounts receivable                                                                      (94)     (540)      (188 )
    (Decrease) increase in accounts payable and accrued
      compensation and benefit costs                                                                     (94)      127        250
    Net change in current and deferred income taxes                                                      277      (192)       361
    Change in other current and non-current liabilities                                                  (78)       67         83
    Other, net                                                                                          (464)     (497)      (377 )
  --------------------------------------------------------------------------------------------------------------------------------
  Total                                                                                                1,224    (1,165)       472
  --------------------------------------------------------------------------------------------------------------------------------
  Cash Flows from Investing Activities
  Cost of additions to land, buildings and equipment                                                    (594)     (566)      (520)
  Proceeds from sales of land, buildings and equipment                                                    99        74         36
  Acquisitions, net of cash acquired                                                                    (107)     (380)      (812)
  Other, net                                                                                             (25)        5         45
  --------------------------------------------------------------------------------------------------------------------------------
  Total                                                                                                 (627)     (867)     (1,25 1)
  --------------------------------------------------------------------------------------------------------------------------------
  Cash Flows from Financing Activities
  Net change in debt                                                                                     (97)    2,468          5
  Dividends on common and preferred stock                                                               (586)     (531)      (475)
  Proceeds from sale of common stock                                                                     144       126        140
  Repurchase of preferred and common stock                                                                 -      (172)      (116)
  Dividends to minority shareholders                                                                     (30)       (4)        (7)
  Proceeds from issuance of mandatorily redeemable preferred securities                                    -         -        637
  --------------------------------------------------------------------------------------------------------------------------------
  Total                                                                                                 (569)    1,887        184
  --------------------------------------------------------------------------------------------------------------------------------
  Effect of exchange rate changes on cash                                                                 (9)      (29)       (18)
  --------------------------------------------------------------------------------------------------------------------------------
  Cash provided (used) by continuing operations                                                           19      (174)      (613)
  Cash provided by discontinued operations                                                                28       178        584
  --------------------------------------------------------------------------------------------------------------------------------
  Increase (decrease) in cash                                                                             47         4        (29)
  Cash at beginning of year                                                                               79        75        104
  --------------------------------------------------------------------------------------------------------------------------------
  Cash at end of year                                                                                  $ 126     $  79      $  75
  ================================================================================================================================
  </TABLE>
 

  The accompanying notes on pages 46 to 65 are an integral part of the
  consolidated financial statements.

44

<PAGE>
 
                Consolidated Statements of Shareholders' Equity


<TABLE> 
<CAPTION> 
==================================================================================================================================
                                                                                       Accumulated                                
                                              Common    Common   Additional                 Other     Treasury   Treasury         
                                              Stock     Stock    Paid-In     Retained  Comprehen-        Stock      Stock         
(In millions, except share data in thousands) Shares    Amount   Capital     Earnings  sive Income/1/   Shares     Amount   Total 
==================================================================================================================================
<S>                                           <C>       <C>      <C>         <C>       <C>            <C>        <C>       <C>    
Balance at December 31, 1996                  651,804   $655     $1,025      $3,090      $  (242)       (4,442)   $  (161) $ 4,367
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                    1,452                                          1,452
Net income during stub period                                                     8                                              8
Translation adjustments                                                                     (463)                             (463)
                                                                                                                           -------  
    Comprehensive income                                                                                                       997
Purchase of treasury stock                                                                              (3,975)      (116)    (116)
Stock option and incentive plans                  360               (17)       (129)                     7,296        245       99
Xerox Canada exchangeable stock                   116                                                      126
Convertible securities                            202                 9                                    995         32       41
Cash dividends declared
    Common stock ($0.64 per share)                                             (418)                                          (418)
    Preferred stock                                                             (57)                                           (57)
Tax benefits on ESOP dividends                                                   14                                             14
Premiums from sale of put options                                    13                                                         13
Tax benefits on stock options                                        45                                                         45
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                  652,482   $655     $1,075      $3,960      $  (705)            -    $     -  $ 4,985
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                      395                                            395
Net loss during stub period                                                      (6)                                            (6)
Translation adjustments                                                                      (56)                              (56)
                                                                                                                           -------
    Comprehensive income                                                                                                       333
Purchase of treasury stock                                                                              (3,683)      (172)    (172)
Stock option and incentive plans                3,899      4         69        (116)                     2,364        111       68
Xerox Canada exchangeable stock                   350                                                       12
Convertible securities                            465      1         28                                    898         42       71
Cash dividends declared
    Common stock ($0.72 per share)                                             (475)                                          (475)
    Preferred stock                                                             (56)                                           (56)
Tax benefits on ESOP dividends                                                   10                                             10
Premiums from sale of put options                                     5                                                          5
Tax benefits on stock options                                        88                                                         88
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998                  657,196   $660     $1,265      $3,712      $  (761)         (409)   $   (19) $ 4,857
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                    1,424                                          1,424
Translation adjustments                                                                   (1,003)                           (1,003)
Minimum pension liability                                                                    (32)                              (32)
                                                                                                                           -------
    Comprehensive income                                                                                                       389
Stock option and incentive plans                5,331      6        136         (57)                       270         12       97
Xerox Canada exchangeable stock                 1,362
Convertible securities                          1,267      1         63                                    139          7       71
Cash dividends declared
    Common stock ($0.80 per share)                                             (532)                                          (532)
    Preferred stock                                                             (54)                                           (54)
Tax benefits on ESOP dividends                                                    8                                              8
Settlement of put options                                            (5)                                                        (5)
Tax benefits on stock options                                        80                                                         80
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999                  665,156   $667     $1,539      $4,501      $(1,796)            -    $     -  $ 4,911
==================================================================================================================================
</TABLE>
 

/1/ Accumulated Other Comprehensive Income is composed of cumulative translation
    of $(1,764) and minimum pension liability of $(32). The accompanying notes
    on pages 46 to 65 are an integral part of the financial statements.

                                                                              45

<PAGE>
 

Notes to Consolidated Financial Statements

(Dollars in millions, except per-share data and unless otherwise indicated)

1  Summary of Significant Accounting Policies

     Basis of Consolidation. The consolidated financial statements include the
accounts of Xerox Corporation and all majority owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated.
References herein to "we" or "our" refer to Xerox and consolidated subsidiaries
unless the context specifically requires otherwise.

     Xerox Limited, Xerox Holding (Nederland) BV, Xerox Investments (Bermuda)
Limited, Xerox Holdings (Bermuda) Limited and their respective subsidiaries are
referred to as Xerox Limited.

     Investments in which we have a 20 to 50 percent ownership interest are
generally accounted for on the equity method.

     Upon the sale of stock by a subsidiary, we recognize a gain or loss equal
to our proportionate share of the increase or decrease in the subsidiary's
equity.

     Fuji Xerox Co. Ltd. (Fuji Xerox), changed its reporting period from a
fiscal year ending October 20, 1996 to a fiscal year ending December 20. The
results of operations during the period between the end of the 1996 fiscal year
and the beginning of the new fiscal year (the stub period) amounted to a gain of
$8. Fuji Xerox again changed its reporting period from a fiscal year ending
December 20, 1997 to a fiscal year ending December 31. The results of operations
during this stub period amounted to a loss of $6. The stub period results were
recorded directly in retained earnings to avoid reporting more than 12 months'
results of operations in one year.

Earnings per Share. Basic earnings per share are based on net income less
preferred stock dividend requirements divided by the average common shares
outstanding during the period. Diluted earnings per share assume exercise of 
in-the-money stock options outstanding and full conversion of convertible debt
and convertible preferred stock into common stock at the beginning of the year
or date of issuance, unless they are antidilutive.

Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Goodwill. Goodwill represents the cost of acquired businesses in excess of the
net assets purchased and is amortized on a straight-line basis, over periods
ranging from 15 to 40 years. Goodwill is reported net of accumulated
amortization, and the recoverability of the carrying value is evaluated on a
periodic basis by assessing current and future levels of income and cash flows
as well as other factors. Accumulated amortization at December 31, 1999 and 1998
was $176 and $119, respectively.

Accounting Changes. In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to recognize all derivatives as assets or liabilities
measured at their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. We will adopt SFAS No.
133, as amended, beginning January 1, 2001. We do not expect this Statement to
have a material impact on our consolidated financial statements.

Revenue Recognition. Revenues from the sale of equipment under installment
contracts and from sales-type leases are recognized at the time of sale or at
the inception of the lease, respectively. Associated finance income is earned on
an accrual basis under an effective annual yield method. Revenues from equipment
under other leases are accounted for by the operating lease method and are
recognized over the lease term. Service revenues are derived primarily from
maintenance contracts on our equipment sold to customers and are recognized over
the term of the contracts. Sales of equipment subject to the Company's operating
leases to third-party lease finance companies are recorded as sales at the time
the equipment is accepted by the third party.

46

<PAGE>
 
Provisions for Losses on Uncollectible Receivables.
The provisions for losses on  uncollectible  trade and finance  receivables  are
determined principally on the basis of past collection experience.

Inventories. Inventories are carried at the lower of average cost or market.

Buildings and Equipment. Our fixed assets are depreciated over their estimated
useful lives. Depreciation is computed using principally the straight-line
method. Significant improvements are capitalized; maintenance and repairs are
expensed. See Note 7 on page 49.

Classification of Commercial Paper and Bank Notes Payable. It is our policy to
classify as long-term debt that portion of commercial paper and notes payable
that is intended to match fund finance receivables due after one year to the
extent that we have the ability under our revolving credit agreement to
refinance such commercial paper and notes payable on a long-term basis. See Note
11 on page 54.

Foreign Currency Translation. The functional currency for most foreign
operations is the local currency. Net assets are translated at current rates of
exchange, and income and expense items are translated at the average exchange
rate for the year. The resulting translation adjustments are recorded in
Accumulated Other Comprehensive Income. The U.S. dollar is used as the
functional currency for certain subsidiaries that conduct their business in U.S.
dollars or operate in hyperinflationary economies. A combination of current and
historical exchange rates is used in remeasuring the local currency transactions
of these subsidiaries, and the resulting exchange adjustments are included in
income. Aggregate foreign currency losses were $1, $29 and $85 in 1999, 1998 and
1997, respectively, and are included in Other, net in the consolidated
statements of income.

Stock-Based Compensation. The Company follows the intrinsic value-based method
of accounting for its stock-based compensation.

Reclassifications. Prior years' financial statements have been restated to
reflect certain reclassifications to conform with the 1999 presentation. The
impact of these changes is not material and did not affect net income.

2  Restructuring

In 1998, we announced a worldwide restructuring program intended to enhance our
competitive position and lower our overall cost structure. In connection with
this program, we recorded a pre-tax provision of $1,644 ($1,107 after taxes and
including our $18 share of a restructuring charge recorded by Fuji Xerox). The
program includes the elimination of approximately 9,000 jobs, net, worldwide,
the closing and consolidation of facilities, and the write-down of certain
assets. The charges associated with this restructuring program include $113 of
inventory charges recorded as cost of revenues and $316 of asset
impairments. Included in the asset impairment charge is facility fixed asset
write-downs of $156 and other asset write-downs of $160. For facility fixed
assets classified as assets to be disposed of, the impairment loss recognized is
based on fair value less cost to sell, with fair value based on third-party
valuations as well as our internal estimates of existing market prices for
similar assets. The effect of suspending depreciation on assets no longer in use
for 1999 and 1998 is not material. The remaining $160 of asset impairments
includes the write-down of certain technology assets and other items impacted by
the consolidation initiatives described below. Key initiatives of the
restructuring include:

1.   Consolidating 56 European customer support centers into one facility and
     implementing a shared services organization for back-office operations.
2.   Streamlining manufacturing, logistics, distribution and service operations.
     This will include centralizing U.S. parts depots and outsourcing storage
     and distribution.
3.   Overhauling our internal processes and associated resources, including
     closing one of four geographically organized U.S. customer administrative
     centers.

     The reductions are occurring primarily in administrative functions, but
also impact service, research and manufacturing.

                                                                              47

<PAGE>
 
     The following table summarizes the status of the restructuring reserve (in
millions):

===========================================================================
                                               Charges
                                    Total      Against    12/31/99
                                  Reserve   Reserve/1/     Balance
===========================================================================
Severance and related costs        $1,017       $  717       $ 300
Asset impairment                      316          316           -
Lease cancellation and
     other costs                      198          104          94
Inventory charges                     113          113           -
===========================================================================
Total                              $1,644       $1,250        $394/2/
===========================================================================

/1/  Includes the impact of currency changes.
/2/  Of this amount, $273 is included in Other current liabilities.

     As of December 31, 1999, approximately 10,000 employees have left the
Company under the restructuring program.

     The restructuring reserve is reviewed quarterly and there have been no
material changes to the program since its announcement in April 1998. The
remaining reserve will be primarily utilized during 2000 for the completion of
certain European initiatives that extended beyond 1999 due to local regulatory
issues as they relate to the workforce.

3  Common Stock Split

     On January 25, 1999, the Board of Directors approved a two-for-one split of
the Company's common stock. The effective date of the stock split was February
23 for shareholders of record as of February 4. Shareholders' equity has been
restated to give retroactive recognition to the stock split in prior periods by
reclassifying from additional paid-in capital to common stock the par value of
the additional shares arising from the split. In addition, all prior period
references in the financial statements to number of shares and per-share
amounts have been restated to reflect the stock split.

4  Acquisitions

     In August 1999, we purchased the OmniFax division from Danka Business
Systems for $45 in cash. OmniFax is a supplier of business laser multifunction
fax systems. The acquisition resulted in goodwill of approximately $31
(including transaction costs), which is being amortized over 15 years. Also
during the third quarter, we paid $62 to increase our ownership in our joint
venture in India from approximately 40 percent to 68 percent. This transaction
resulted in additional goodwill of $48, which is being amortized over 40 years.
The operating results of these companies, which are immaterial, have been
included in our consolidated statement of income from the dates of acquisition.

     In May 1998, we acquired XLConnect Solutions, Inc. (XLConnect), an
information technology services company, and its parent company, Intelligent
Electronics,Inc., for $413 in cash. The operating results of these companies,
which are not material, have been included in our consolidated statement of
income from the date of the acquisition. Based on the allocation of the purchase
price, the transaction resulted in goodwill of $395 (including transaction
costs), which is being amortized over 25 years.

     In June 1997, we acquired the remaining 20 percent of Xerox Limited from
The Rank Group Plc (Rank) in a transaction valued at (pound)940 million, or
approximately $1.5 billion. As a result of this transaction, we now own 100
percent of Xerox Limited. The transaction was funded entirely by debt consisting
of (pound)500 million of third-party debt and (pound)440 million of notes
payable issued to Rank, which were paid in deferred installments, half paid on
June 29, 1998 and the other half paid on June 30, 1999. The purchase price
(including transaction costs) was allocated such that goodwill increased by
$737, minority interest in equity of subsidiaries was reduced by approximately
$720, with the balance of $70 applied to other assets and liabilities, primarily
investment in affiliates, at equity.

5  Finance Receivables, Net

     Finance receivables result from installment sales and sales-type leases
arising from the marketing of our business equipment products. These receivables
generally mature over two to five years and are typically collateralized by a
security interest in the underlying assets. The components of finance
receivables, net at December 31, 1999, 1998 and 1997 follow:

====================================================================
                                   1999       1998      1997
====================================================================
Gross receivables               $14,666    $16,139   $14,094
Unearned income                  (1,677)    (2,084)   (1,909)
Unguaranteed residual
    values                          752        699       557
Allowance for doubtful
accounts                           (423)      (441)     (389)
--------------------------------------------------------------------
Finance receivables, net         13,318     14,313    12,353
Less current portion              5,115      5,220     4,599
====================================================================
Amounts due after one
year, net                       $ 8,203    $ 9,093   $ 7,754
====================================================================

48

<PAGE>
 
     Contractual maturities of our gross finance receivables subsequent to
December 31, 1999 follow:

========================================================================
     2000          2001      2002      2003      2004   Thereafter
========================================================================
   $5,430        $3,938    $2,719    $1,640      $676         $263
========================================================================

     Experience has shown that a portion of these finance receivables will be
prepaid prior to maturity. Accordingly, the preceding schedule of contractual
maturities should not be considered a forecast of future cash collections.

     During 1999, the Company sold $1,495 of finance receivables. This resulted
in a net increase in finance income of approximately $17, which includes the
unfavorable flow through impacts.

     Allowances for doubtful accounts on our accounts receivable balances at
December 31, 1999, 1998 and 1997 amounted to $137, $102 and $92, respectively.

6  Inventories

     The components of inventories at December 31, 1999, 1998 and 1997 follow:

=======================================================================
                                   1999      1998        1997
=======================================================================
Finished goods                   $1,800    $1,923      $1,549
Work in process                     122       111          97
Raw materials                       363       464         406
Equipment on operating
  leases, net                       676       771         740
-----------------------------------------------------------------------
Inventories                      $2,961    $3,269      $2,792
=======================================================================

     Equipment on operating leases consists of our business equipment products
that are rented to customers and are depreciated to estimated residual value.
Depreciable lives vary from two to four years. Our business equipment operating
lease terms vary, generally from 12 to 36 months.

     Accumulated depreciation on equipment on operating leases at December 31,
1999, 1998 and 1997 amounted to $1,082, $1,260 and $1,198, respectively.
Scheduled minimum future rental revenues on operating leases with original terms
of one year or longer are:

=======================================================================
 2000             2001            2002          Thereafter
=======================================================================
 $308             $160             $68                 $24
=======================================================================

     Total contingent rentals, principally usage charges in excess of minimum
allowances relating to operating leases, for the years ended December 31, 1999,
1998 and 1997 amounted to $163, $161 and $186, respectively.

7  Land, Buildings and Equipment, Net

     The components of land, buildings and equipment, net at December 31, 1999,
1998 and 1997 follow:

==========================================================================
                           Estimated
                              Useful
                               Lives
                              (Years)      1999     1998      1997
==========================================================================
Land                                     $   66   $   80    $   88
Buildings and building
     equipment              25 to 50      1,087      973     1,012
Leasehold
     improvements         Lease term        434      425       403
Plant machinery              4 to 12      1,897    1,926     1,870
Office furniture and
     equipment               3 to 15      1,339    1,299     1,285
Other                        3 to 20        235      260       190
Construction in progress                    328      283       310
--------------------------------------------------------------------------
Subtotal                                  5,386    5,246     5,158
Less accumulated
     depreciation                         2,930    2,880     2,781
--------------------------------------------------------------------------
Land, buildings and
     equipment, net                      $2,456   $2,366    $2,377
==========================================================================

     We lease certain land, buildings and equipment, substantially all of which
are accounted for as operating leases. Total rent expense under operating leases
for the years ended December 31, 1999, 1998 and 1997 amounted to $397, $436 and
$419, respectively. Future minimum operating lease commitments that have
remaining non-cancelable lease terms in excess of one year at December 31, 1999
follow:

==========================================================================
 2000         2001       2002      2003       2004      Thereafter 
==========================================================================
 $275         $218       $157      $131       $113            $329
==========================================================================

     In certain circumstances, we sublease space not currently required in
operations. Future minimum sublease income under leases with non-cancelable
terms in excess of one year amounted to $22 at December 31, 1999.

     In 1994, we awarded a contract to Electronic Data Systems Corp. (EDS) to
operate our worldwide data processing and telecommunications network through the
year 2004. Subject to making a payment defined in the contract, effective July
1, 1999, Xerox obtained the right to terminate this agreement with six months`
notice to EDS. Minimum payments due EDS under the contract follow:

==========================================================================
 2000         2001       2002      2003       2004
==========================================================================
 $229         $217       $198      $183        $95
==========================================================================

                                                                              49

<PAGE>
 
8  Investments in Affiliates, at Equity

     Investments in corporate joint ventures and other companies in which we
generally have a 20 to 50 percent ownership interest at December 31, 1999, 1998
and 1997 follow:

==========================================================================
                                    1999      1998       1997
-------------------------------------------------------------------------- 
Fuji Xerox                        $1,513    $1,354     $1,231
Other investments                    102       102        101
-------------------------------------------------------------------------- 
Investments in affiliates,
     at equity                    $1,615    $1,456     $1,332
==========================================================================


     Xerox Limited owns 50 percent of the outstanding stock of Fuji Xerox, a
corporate joint venture with Fuji Photo Film Co. Ltd. (Fuji Photo). Fuji Xerox
is headquartered in Tokyo and operates in Japan and other areas of the Pacific
Rim, Australia and New Zealand, except for China. Condensed financial data of
Fuji Xerox for its last three fiscal years follow:

==========================================================================
                                     1999      1998       1997
==========================================================================
Summary of Operations
Revenues                           $7,751    $6,809     $7,415
Costs and expenses                  7,440     6,506      6,882
--------------------------------------------------------------------------
Income before income taxes            311       303        533
Income taxes                          201       195        295
--------------------------------------------------------------------------
Net income                         $  110    $  108     $  238
==========================================================================
Balance Sheet Data 
Assets
Current assets                     $3,521    $2,760     $2,461
Non-current assets                  3,521     3,519      2,942
Total assets                       $7,042    $6,279     $5,403
==========================================================================
Liabilities and Shareholders'
    Equity
Current liabilities                $2,951    $2,628     $2,218
Long-term debt                        169       101        286
Other non-current liabilities       1,079     1,028        679
Shareholders' equity                2,843     2,522      2,220
--------------------------------------------------------------------------
Total liabilities and
    shareholders' equity           $7,042    $6,279     $5,403
==========================================================================


9  Segment Reporting

     Our reportable segments are as follows: Core Business, Fuji Xerox, Paper
and Media, and Other.

     The Core Business operating segment consists of the worldwide development,
manufacturing, marketing, financing and servicing of document processing
products and services. We have aggregated all Core Business operating units due
to commonality of economic characteristics, products and services, the
production process, class of customer and distribution process. This segment
also includes our corporate headquarters.

     The Fuji Xerox operating segment is composed of our corporate joint
venture with Fuji Photo and is managed jointly.

     The Paper and Media segment operates as a distributor of print media and
supplies to our customers. The mission of Paper and Media is to charge a spread
over mill wholesale prices to cover our costs and value added as a distributor
and is managed as a separate operating segment.

     The Other operating segment is composed primarily of our Channels business
and Xerox Technology Enterprises companies. Channels distributes products
primarily through retail channels and value-added resellers. Xerox Technology
Enterprises comprises our investments in emerging companies with important
document processing hardware and software technologies in various stages of
development. Total assets for this segment also includes our investment in
discontinued operations.

     The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.

50

<PAGE>
 

<TABLE> 
<CAPTION> 
==============================================================================================================================
                                                                                    Document Processing Segments
==============================================================================================================================
                                                                       Core                 Paper and 
                                                                   Business   Fuji Xerox        Media      Other         Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>        <C>           <C>           <C>          <C>  
1999                                                                                                  
Information about profit or loss                                                                      
   Revenues from external customers                                 $15,224            -      $ 1,148     $1,830       $18,202
   Finance income                                                     1,016            -            -         10         1,026
   Intercompany revenues                                               (206)           -            -        206             -
                                                                   -----------------------------------------------------------
     Total segment revenues                                          16,034            -        1,148      2,046        19,228
   Depreciation and amortization                                        930            -            -          5           935
   Interest expense                                                     803            -            -          -           803
   Segment profit (loss)                                              2,014            -           62        (40)        2,036
   Earnings of non-consolidated affiliates                               13       $   55            -          -            68
Information about assets                                                                              
   Investments in non-consolidated affiliates                           102        1,513            -          -         1,615
   Total assets                                                      25,319        1,513           86      1,896        28,814
   Capital expenditures                                                 580            -            -         14           594
==============================================================================================================================
1998                                                                                                  
Information about profit or loss                                                                      
   Revenues from external customers                                 $15,553            -       $1,162     $1,659       $18,374
   Finance income                                                     1,064            -            -          9         1,073
   Intercompany revenues                                               (326)           -            -        326             -
                                                                   -----------------------------------------------------------
     Total segment revenues                                          16,291            -        1,162      1,994        19,447
   Depreciation and amortization                                        803            -            -         18           821
    Interest expense                                                    749            -            -          -           749
   Segment profit (loss) before restructuring                         2,424            -           58        (75)        2,407
   Segment profit (loss) after restructuring                            916            -           58       (211)          763
   Earnings of non-consolidated affiliates/1/                            19       $   72            -          1            92
Information about assets                                                                              
   Investments in non-consolidated affiliates                            81        1,354            -         21         1,456
   Total assets                                                      26,238        1,354           84      2,348        30,024
   Capital expenditures                                                 539            -            -         27           566
==============================================================================================================================
1997                                                                                                  
Information about profit or loss                                                                      
   Revenues from external customers                                 $14,937            -       $1,117     $1,084       $17,138
   Finance income                                                     1,006            -            -          -         1,006
   Intercompany revenues                                               (118)           -            -        118             -
                                                                   -----------------------------------------------------------
      Total segment revenues                                         15,825            -        1,117      1,202        18,144
   Depreciation and amortization                                        732            -            -          7           739
   Interest expense                                                     617            -            -          -           617
   Segment profit (loss)                                              2,180            -           44        (83)        2,141
   Earnings of non-consolidated affiliates                                6       $  119            -          2           127
Information about assets                                                                              
   Investments in non-consolidated affiliates                            91        1,231            -         10         1,332
   Total assets                                                      22,913        1,231           91      3,497                    
   Capital expenditures                                                 510            -            -         10           520
==============================================================================================================================
</TABLE>
 

/1/  Excludes our $18 share of a restructuring charge recorded by Fuji Xerox.

Products and services and  geographic  area data for our  continuing  operations
follow:


<TABLE> 
<CAPTION> 
==============================================================================================================================
                                                                                                         Revenues             
==============================================================================================================================
                                                                                                 1999       1998          1997
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>           <C>          <C>  
Information about products and services                                                                                       
    Digital                                                                                   $10,198    $ 8,644       $ 6,347
    Light-lens                                                                                  5,785      7,351         8,304
    Paper and Other                                                                             3,245      3,452         3,493
------------------------------------------------------------------------------------------------------------------------------
Total                                                                                         $19,228    $19,447       $18,144
==============================================================================================================================
</TABLE>
 

                                                                              51

<PAGE>
 

<TABLE> 
<CAPTION> 
===========================================================================================================================
                                                              Revenues                      Long-Lived Assets
===========================================================================================================================
                                                  1999          1998         1997       1999     1998        1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>          <C>         <C>      <C>         <C> 
Information about Geographic Areas                                                                         
United States                                  $10,417       $10,122      $ 9,187     $2,250   $2,090      $2,020
Europe                                           5,345         5,155        4,794        616      503         456
Other Areas                                      3,466         4,170        4,163        751      804         801
---------------------------------------------------------------------------------------------------------------------------
Total                                          $19,228       $19,447      $18,144     $3,617   $3,397      $3,277
===========================================================================================================================
</TABLE>
 

10   Discontinued Operations

In January 1993, we announced our intent to sell or otherwise disengage from our
Insurance and Other Financial Services (IOFS) businesses. Since that time, we
have sold all of our Talegen Holdings, Inc. (Talegen) insurance businesses and
have disposed of a number of other financial services businesses through sale
and run-off collection activities. At December 31, 1999, our sole remaining
insurance operation is the Ridge Reinsurance Limited (Ridge Re) reinsurance
business. Our other discontinued businesses, consisting of OakRe Life Insurance
Company (OakRe) and Third-Party Financing and Real Estate, are primarily in
asset and liability run-off. A discussion of the status of IOFS follows.

Insurance. In the fourth quarter of 1995, we recorded a $1,546 after-tax charge
in connection with the disengagement activities for our five then remaining
Talegen insurance companies and three related service companies. In the first
quarter of 1998, an additional after-tax charge of $190 was recorded. 

     In 1997 and 1998, all of the Talegen insurance companies and service
companies were sold for an aggregate $1,793 in cash, the assumption or repayment
of $269 of debt, less approximately $145 in transaction-related costs. As part
of the consideration for one of the companies, The Resolution Group, Inc. (TRG),
which closed in 1997, we received a $462 performance-based instrument. We will
participate in the future cash flows of TRG via the performance-based
instrument. The recovery of this instrument is dependent upon the sufficiency of
TRG's available cash flows. Based on current forecasts at December 31, 1999, we
expect to realize $462 for this instrument. However, the ultimate realization
may be more or less than this amount.

     The net proceeds of the above sales transactions, after transaction-related
costs, were used primarily to retire debt.

     At December 31, 1999, the insurance business consists of Ridge Re and
headquarters costs associated with the insurance activities of Xerox Financial
Services, Inc. (XFSI), a wholly owned subsidiary.

     XFSI continues to provide aggregate excess of loss reinsurance coverage
(the Reinsurance Agreements) to one of the former Talegen units and TRG through
Ridge Re, a wholly owned subsidiary of XFSI. The coverage limits for these two
remaining Reinsurance Agreements total $578, which is net of 15 percent
coinsurance and exclusive of $234 in coverage that was reinsured under a
retrocession arrangement during 1998. Through December 31, 1999, Ridge Re had
recognized the discounted value of approximately $366 of this available coverage
and it is possible that some additional reserves could ultimately be needed
within the coverage limit. During 1999, Ridge Re entered into agreements with
other insurers to eliminate its obligations for reinsurance coverage related to
two of the former Talegen units. The coverage limit under the policies totaled
$170. In connection with the agreements, Ridge Re paid the insurers $105.

     XFSI has guaranteed that Ridge Re will meet all of its financial
obligations under the two remaining Reinsurance Agreements. Related premium
payments to Ridge Re are made by XFSI and guaranteed by us. As of December 31,
1999, there were three remaining annual installments of $38, plus finance
charges. We have also guaranteed that Ridge Re will meet its financial
obligations on $578 of the Reinsurance Agreements and we have provided a $400
partial guaranty of Ridge Re's $600 letter of credit facility. This facility is
required to provide security with respect to aggregate excess of loss
reinsurance obligations under the two remaining Reinsurance Agreements.

     XFSI may also be required, under certain circumstances, to purchase, over
time, additional redeemable preferred shares of Ridge Re, up to a maximum of
$301.

52

<PAGE>
 
Other Discontinued Businesses. In 1995, we completed the sale of Xerox Financial
Services Life Insurance Company and related companies (Xerox Life). In
connection with the transaction, OakRe, a wholly owned XFSI subsidiary, assumed
responsibility, via coinsurance agreements, for the Single Premium Deferred
Annuity (SPDA) policies issued by Xerox Life. As a result of these coinsurance
agreements, at December 31, 1999 and 1998, the consolidated balance sheets
include approximately $400 and $800, respectively, of invested assets and the
related reinsurance liabilities associated with these SPDA policies. Most of
these liabilities are expected to be satisfied during the year 2000 as the
policies are either terminated by the policyholder or renewed and transferred to
the buyer. In support of OakRe's coinsurance obligations, XFSI established a
$500 letter of credit and line of credit, expiring in July 2000, with a group of
banks. These facilities are unused and available at December 31, 1999. Upon a
drawing under the letter of credit, XFSI has the option to cover the drawing
using the credit line.

     We have made substantial progress in disengaging from the Third-Party
Financing and Real Estate businesses that were discontinued in 1990. During the
three years ended December 31, 1999, we received net cash proceeds of $460 ($260
in 1999, $48 in 1998 and $152 in 1997) from the sale of individual assets and
from run-off and collection activities. These proceeds were used primarily to
retire debt. The remaining assets at December 31, 1999 primarily represent real
estate held for sale in Virginia and one asset-based financing lease, with a
long-duration contractual maturity and unique tax attributes.

Total Discontinued Operations. The consolidated financial statements present the
Insurance and Other Discontinued Businesses as discontinued operations. Debt was
assigned to discontinued operations based on historical levels assigned to the
businesses when they were continuing operations, adjusted for subsequent
paydowns. Interest expense thereon is primarily determined based on our annual
average domestic borrowing costs. Assigned interest expense for the discontinued
businesses for the years ended December 31, 1999, 1998 and 1997 was $50, $143
and $201, respectively.

     Summarized information of discontinued operations for the three years ended
December 31, 1999 follows:

=======================================================================  
                                   1999         1998         1997         
=======================================================================  
Balance Sheet Data                                                       
Assets                                                                   
Insurance                                                                
Investment, net                 $   621      $   513      $ 1,076        
-----------------------------------------------------------------------  
Other Discontinued                                                       
     Businesses                                                          
OakRe investments                   408          805        1,537        
All other assets, net               101          352          412        
-----------------------------------------------------------------------  
Investments, net                    509        1,157        1,949        
Investment in discontinued                                               
     operations                 $ 1,130      $ 1,670      $ 3,025        
-----------------------------------------------------------------------  
Liabilities                                                              
OakRe policyholders'                                                     
     deposits                   $   378      $   775      $ 1,526        
Assigned debt                        50          136          167        
-----------------------------------------------------------------------  
Discontinued operations                                                  
     liabilities                $   428      $   911      $ 1,693        
-----------------------------------------------------------------------  
Net investment in                                                        
     discontinued operations    $   702      $   759      $ 1,332        
=======================================================================  

     Based on current estimates, we believe that the proceeds received from
disposition or run-off and collection activities from the remaining net
discontinued assets will be consistent with our net carrying value of these
businesses.

                                                                              53

<PAGE>
 
11   Debt

Short-Term Debt. Short-term borrowings data at December 31, 1999 and 1998
follow:

=============================================================================
                                Weighted
                        Average Interest
                                   Rates
                                      at
                                12/31/99        1999      1998
=============================================================================
Notes payable                          -      $    -    $  536
Foreign commercial
     paper                             -           -       384
-----------------------------------------------------------------------------
Total short-term debt                  -           -       920
Current maturities of
     long-term debt                            3,957     3,184
-----------------------------------------------------------------------------
Total                                         $3,957    $4,104
=============================================================================
     
     Notes payable generally represent foreign currency denominated borrowings
of non-U.S. subsidiaries.

Long-Term Debt. A summary of long-term debt by final maturity date at
December 31, 1999 and 1998 follows:

=============================================================================
                                Weighted
                        Average Interest
                                   Rates
                                      at
                                12/31/99         1999       1998
=============================================================================
U.S. Operations
Xerox Corporation
   (parent company)
Guaranteed ESOP
   notes due 1999-2003              7.60%      $  299     $  370
Notes due 1999                         -            -      1,108
Notes due 2000                      6.24        2,041        600
Notes due 2001                      6.67          721        675
Notes due 2002                      7.90          230        230
Notes due 2003                      5.60        1,398      1,360
Notes due 2004                      4.95          502        200
Notes due 2016                      7.20          250        250
Convertible notes due 2018          3.63          601        575
Notes due 2038                      5.96           25         25
Other debt due 1999-2018            6.91          120        137
-----------------------------------------------------------------------------
Subtotal                                        6,187      5,530
-----------------------------------------------------------------------------
Xerox Credit Corporation            
Notes due 1999                         -            -      1,175
Notes due 2000                      5.47        2,026        536
Notes due 2001                      6.21          401         51
Notes due 2002                      2.20/1/       668          -
Notes due 2003                      6.10          200          -
Floating rate notes due 2048        5.19           60         60
-----------------------------------------------------------------------------
Subtotal                                        3,355      1,822
-----------------------------------------------------------------------------
Total U.S. operations                           $9,542    $7,352
=============================================================================

/1/  Weighted average interest rate includes Japanese yen bonds of $488 issued
by Xerox Credit Corporation in 1999 with an interest rate of 0.80%.

=============================================================================
                              Weighted 
                      Average Interest 
                              Rates at
                              12/31/99       1999       1998
=============================================================================
International Operations

Various obligations, 
     payable in: 
Canadian dollars due
     1999-2007                   11.46%   $    88    $    99 
Dutch guilders due                                            
     1999-2001                    4.67          9         37  
French francs due                      
     1999-2004                    4.60        133          7 
Pounds sterling due 
     1999-2003                    8.75        202        207 
Italian lire due 1999                -          -        140 
Euros due 2000-2004               6.41        195          -
U.S. dollars due  
     1999-2008                    6.02      2,995      1,013 
Other currencies due 
     1999-2000                    6.93          7        212 
Capital lease obligations         5.93          3          1
-----------------------------------------------------------------------------
Total international 
     operations                             3,632      1,716
=============================================================================
Other borrowings 
     deemed long-term                       1,827      5,119
-----------------------------------------------------------------------------
Subtotal                                   15,001     14,187 
Less current maturities                     3,957      3,184
-----------------------------------------------------------------------------
Total long-term debt                      $11,044    $11,003
=============================================================================

Consolidated Long-Term Debt Maturities.

Payments due on long-term debt for the next five years and thereafter follow:

=============================================================================
       2000      2001      2002      2003    2004   Thereafter
=============================================================================
     $3,957    $1,316    $3,230    $2,918    $530       $1,223
=============================================================================

     These payments do not include amounts relating to domestic commercial paper
and foreign bank notes payable, which have been classified as long-term debt
under the caption "Other borrowings deemed long-term." These borrowings are
classified as long-term because we have the intent to refinance them on a long-
term basis and the ability to do so under our revolving credit agreement.

     Certain of our debt agreements allow us to redeem outstanding debt prior to
scheduled maturity. Outstanding debt issues with these call features are
classified in the preceding five-year maturity table in accordance with
management's current expectations. The actual decision as to early redemption
will be made at the time the early redemption option becomes exercisable and
will be based on prevailing economic and business conditions and the relative
costs of new borrowing.

54

<PAGE>
 
Convertible Debt. In April 1998, we issued convertible subordinated debentures
for net proceeds of $575. The amount due upon maturity in April 2018 is $1,012,
resulting in an effective interest rate of 3.625 percent per annum, including
1.003 percent payable in cash semiannually beginning in October 1998. These
debentures are convertible at any time at the option of the holder into 7.808
shares of our stock per $1,000 principal amount at maturity of debentures.

Lines of Credit. We have a $7 billion revolving credit agreement with a group of
banks, which matures in 2002. This revolver is also accessible by the following
wholly owned subsidiaries: Xerox Credit Corporation (up to a $7 billion limit)
and Xerox Capital (Europe) plc (up to a $4 billion limit) with our guarantee.
Any amounts borrowed under this facility would be at rates based, at the
borrower's option, on spreads above certain reference rates such as LIBOR. This
agreement is unused and is available to back commercial paper borrowings of our
domestic operations, Xerox Capital (Europe) plc and Xerox Overseas Holdings
Ltd., which amounted to $1.0 billion at December 31, 1999. In addition, our
foreign subsidiaries had unused committed long-term lines of credit used to back
short-term indebtedness that aggregate $0.2 billion in various currencies at
prevailing interest rates.

Match Funding of Finance Receivables and Indebtedness. We employ a match funding
policy for customer financing assets and related liabilities. Under this policy,
which is more fully discussed in the accompanying Financial Review on page 39,
the interest and currency characteristics of the indebtedness are, in most
cases, matched to the interest and currency characteristics of the finance
receivables. At December 31, 1999, these operations had approximately $13.3
billion of net finance receivables, which will service approximately $11.2
billion of assigned short- and long-term debt.

Guarantees. At December 31, 1999, we have guaranteed the borrowings of our ESOP
and $1,279 of indebtedness of our foreign subsidiaries.

Interest. Interest paid by us on our short- and long-term debt, including
amounts relating to debt assigned to discontinued operations, amounted to $787,
$859 and $812 for the years ended December 31, 1999, 1998 and 1997,
respectively.

Total Short- and Long-Term Debt. Our total indebtedness, at December 31, 1999
and 1998, is reflected in the consolidated balance sheet captions as follows:

============================================================================
                                                 1999             1998
============================================================================
Short-term debt and current portion
     of long-term debt                       $  3,957         $  4,104
Long-term debt                                 10,994           10,867
Discontinued operations liabilities -                           
     policyholders' deposits and other             50              136
----------------------------------------------------------------------------
Total debt                                   $ 15,001         $ 15,107
============================================================================

A summary of changes in  consolidated  indebtedness for the three years ended
December 31, 1999 follows:

============================================================================
                                       1999         1998        1997    
============================================================================
Increase (decrease) in                                                 
     short-term debt, net           $(4,140)     $   553     $  (276)  
Proceeds from long-term                                                
     debt                             5,446        3,464       1,807   
Principal payments on                                                  
     long-term debt                  (1,489)      (1,580)     (1,632)  
----------------------------------------------------------------------------
Subtotal                               (183)       2,437        (101)  
Less change in debt of                                                 
     discontinued operations            (86)         (31)       (106)  
----------------------------------------------------------------------------
Total change in debt of                                                
     continuing operations          $   (97)/1/  $ 2,468     $     5       
============================================================================

/1/  Excludes debt of $51 assumed with the increased ownership in our India
joint venture and accretion of $26 on convertible debt.

12   Financial Instruments

Derivative Financial Instruments.

     Certain financial instruments with off-balance-sheet risk have been entered
into by us to manage our interest rate and foreign currency exposures. These
instruments are held solely for hedging purposes and include interest rate swap
agreements, forward exchange contracts and foreign currency swap agreements. We
do not enter into derivative instrument transactions for trading or other
speculative purposes.

     We typically enter into simple, unleveraged derivative transactions which,
by their nature, have low credit and market risk. Our policies on the use of
derivative instruments prescribe an investment-grade counterparty credit floor
and at least quarterly monitoring of market risk on a counterparty-by-
counterparty basis. We utilize numerous counterparties to ensure that there are
no significant concentrations of credit risk with any individual counterparty or
groups of counterparties. Based upon our ongoing evaluation of the replacement
cost of our derivative transactions and counterparty creditworthiness, we
consider the risk of

                                                                              55

<PAGE>
 
credit default significantly affecting our financial position or results of
operations to be remote.

     We employ the use of hedges to reduce the risks that rapidly changing
market conditions may have on the underlying transactions. Typically, our
currency and interest rate hedging activities are not affected by changes in
market conditions, as forward contracts and swaps are arranged and normally held
to maturity in order to lock in currency rates and interest rate spreads related
to underlying transactions.

     None of our hedging activities involves exchange-traded instruments.

Interest Rate Swaps. We enter into interest rate swap agreements to manage
interest rate exposure. An interest rate swap is an agreement to exchange
interest rate payment streams based on a notional principal amount. We follow
settlement accounting principles for interest rate swaps whereby the net
interest rate differentials to be paid or received are recorded currently as
adjustments to interest expense.

     Virtually all customer financing assets earn fixed rates of interest.
Accordingly, through the use of interest rate swaps in conjunction with the
contractual maturity terms of outstanding debt, we "lock in" an interest spread
by arranging fixed-rate interest obligations with maturities similar to the
underlying assets. Additionally, in industrialized countries customer financing
assets are funded with liabilities denominated in the same currency. We refer to
the effects of these conservative practices as "match funding" our customer
financing assets. This practice effectively eliminates the risk of a major
decline in interest margins resulting from adverse changes in the interest rate
environment. Conversely, this practice does effectively eliminate the
opportunity to materially increase margins when interest rates are declining.

     More specifically, pay fixed/receive variable interest rate swaps are often
used in place of more expensive fixed-rate debt for the purpose of match funding
fixed-rate customer contracts.

     Pay variable/receive variable interest rate swaps ("basis swaps") are used
to transform variable rate, medium-term debt into commercial paper or local
currency LIBOR rate obligations. Pay variable/receive fixed interest rate swaps
are used to transform term fixed-rate debt into variable rate obligations.
During 1999, 7 such agreements were cancelled in connection with the early
retirement of 7 issues of medium-term notes. The transactions performed within
each of these three categories enable the cost-effective management of interest
rate exposures. During 1999, the average notional amount of an interest rate
swap agreement was $31.

     For the three years ended December 31, 1999, no pay fixed/receive variable
interest rate swap agreements were terminated prior to maturity.

     The total notional amounts of these transactions at December 31, 1999 and
1998, based on contract maturity, follow:

==============================================================================
                                              1999      1998
==============================================================================
Commercial paper/bank borrowings           $ 5,352   $ 2,242
Medium-term debt                            10,493     6,629
Long-term debt                               4,238     5,128
------------------------------------------------------------------------------
Total                                      $20,083   $13,999
==============================================================================

     The aggregate notional amounts of interest rate swaps by maturity date and
type at December 31, 1999 and 1998 follow:


<TABLE> 
<CAPTION> 
===========================================================================================================
                                                                    2001-      2004-
                                              1999         2000      2003       2018      Total
===========================================================================================================
<S>                                         <C>          <C>      <C>         <C>       <C> 
1999                                      
Pay fixed/receive variable                  $    -       $2,699   $ 6,380     $2,903    $11,982
Pay variable/receive variable                    -          443       550          -        993
Pay variable/receive fixed                       -        2,210     3,563      1,335      7,108
-----------------------------------------------------------------------------------------------------------
Total                                       $    -       $5,352   $10,493     $4,238    $20,083
-----------------------------------------------------------------------------------------------------------
Memo:                                            
Interest rate paid                               -         5.94%     4.95%      5.92%      5.42%
Interest rate received                           -         5.48%     5.27%      5.82%      5.44%
===========================================================================================================
1998                                      
Pay fixed/receive variable                  $1,792       $1,788   $ 5,489     $  479    $ 9,548
Pay variable/receive variable                    -           53       550          -        603
Pay variable/receive fixed                     450          587     1,901        910      3,848
-----------------------------------------------------------------------------------------------------------
Total                                       $2,242       $2,428   $ 7,940     $1,389    $13,999
-----------------------------------------------------------------------------------------------------------
Memo:                                     
Interest rate paid                            6.36%        6.08%     4.89%      5.51%      5.39%
Interest rate received                        5.10%        5.25%     5.01%      6.54%      5.22%
===========================================================================================================
</TABLE>
 

56

<PAGE>
 
Forward Exchange Contracts. We utilize forward exchange contracts to hedge
against the potentially adverse impacts of foreign currency fluctuations on
foreign currency-denominated receivables and payables; firm foreign currency
commitments; and investments in foreign operations. Firm foreign currency
commitments generally represent committed purchase orders for foreign-sourced
inventory. These contracts generally mature in six months or less. At December
31, 1999 and 1998, we had outstanding forward exchange contracts of $3,838 and
$2,817, respectively. Of the outstanding contracts at December 31, 1999, the
largest single currency represented was the Euro. Contracts denominated in
Euros, U.S. dollars, British pounds sterling, Brazilian reais, French francs and
Japanese yen accounted for over 85 percent of our forward exchange contracts. On
contracts that hedge foreign currency-denominated receivables and payables,
gains or losses are reported currently in income, and premiums or discounts are
amortized to income and included in Other, net in the consolidated statements of
income. Gains or losses, as well as premiums or discounts, on contracts that
hedge firm commitments are deferred and subsequently recognized as part of the
underlying transaction. At December 31, 1999, we had a net deferred gain of $13.
Gains or losses on contracts that hedge an investment in a foreign operation are
reported currently in the balance sheet as a component of cumulative translation
adjustments. The premium or discount on contracts that hedge an investment in a
foreign operation are amortized to income and included in Other, net in the
consolidated statements of income. During 1999, the average notional amount of a
forward exchange contract amounted to $16.

Foreign Currency Swap Agreements. We enter into cross-currency interest rate
swap agreements, whereby we issue foreign currency-denominated debt and swap the
proceeds with a counterparty. In return, we receive and effectively denominate
the debt in local currencies. Currency swaps are utilized as hedges of the
underlying foreign currency borrowings, and exchange gains or losses are
recognized currently in Other, net in the consolidated statements of income. At
December 31, 1999 and 1998, we had outstanding cross-currency interest rate swap
agreements with aggregate notional amounts of $3,968 and $3,143, respectively.
Of the outstanding agreements at December 31, 1999, the largest single currency
represented was the British pound sterling. Contracts denominated in British
pounds sterling, U.S. dollars, Japanese yen and French francs accounted for over
75 percent of our currency interest rate swap agreements.

Fair Value of Financial Instruments. The estimated fair values of our financial
instruments at December 31, 1999 and 1998 follow:

==========================================================================
                                    1999                 1998
==========================================================================
                           Carrying       Fair  Carrying       Fair
                             Amount      Value    Amount      Value
--------------------------------------------------------------------------
Cash                       $    126    $   126  $     79    $    79
Accounts                                                           
    receivable, net           2,622      2,622     2,671      2,671
Short-term debt                   -          -       920        920
Long-term debt               15,001     14,839    14,187     14,524
Interest rate and                                                  
    currency swap                                                      
agreements                        -        (40)        -         47
Forward exchange                                                   
    contracts                     -        131         -         51 
==========================================================================

     The fair value amounts for Cash, Accounts receivable, net and Short-term
debt approximate carrying amounts due to the short maturities of these
instruments.

     The fair value of Long-term debt was estimated based on quoted market
prices for these or similar issues or on the current rates offered to us for
debt of the same remaining maturities. The difference between the fair value and
the carrying value represents the theoretical net premium or discount we would
pay or receive to retire all debt at such date. We have no plans to retire
significant portions of our long-term debt prior to scheduled maturity. We are
not required to determine the fair value of our finance receivables, the match
funding of which is the source of much of our interest rate swap activity.

     The fair values for interest rate and cross-currency swap agreements and
forward exchange contracts were calculated by us based on market conditions at
year-end and supplemented with quotes from brokers. They represent amounts we
would receive (pay) to terminate/replace these contracts. We have no present
plans to terminate/replace significant portions of these contracts.

                                                                              57

<PAGE>
 
13 Employee Benefit Plans

   We sponsor numerous pension and other postretirement benefit plans in our
   U.S. and international operations. 


<TABLE> 
<CAPTION> 
=====================================================================================================================
                                                                               Pension Benefits        Other Benefits
=====================================================================================================================
                                                                               1999       1998       1999        1998
---------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>        <C>       <C>         <C> 
Change in Benefit Obligation
Benefit obligation, January 1                                                $8,040     $7,399    $ 1,095     $   997 
Service cost                                                                    191        172         27          26
Interest cost                                                                 1,009        916         77          72
Plan participants' contributions                                                 14         13          -           -
Actuarial (gain)/loss                                                           (79)       157        (78)         40
Currency exchange rate changes                                                 (139)        31          2          (3)
Curtailments                                                                     (3)        (9)         -          20 
Settlements                                                                       2          -          -           -
Special termination benefits                                                     11         99          2           2
Benefits paid                                                                  (628)      (738)       (65)        (59) 
---------------------------------------------------------------------------------------------------------------------
Benefit obligation, December 31                                               8,418      8,040      1,060       1,095 
=====================================================================================================================
Change in Plan Assets
Fair value of plan assets, January 1                                          7,958      7,708          -           -
Actual return on plan assets                                                  1,422        872          -           -
Employer contribution                                                            96         80         65          59 
Plan participants' contributions                                                 14         13          -           -
Currency exchange rate changes                                                  (91)        23          -           -
Benefits paid                                                                  (628)      (738)       (65)        (59) 
---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, December 31                                        8,771      7,958          -           -
=====================================================================================================================
Funded status (including under-funded and non-funded plans)                     353        (82)    (1,060)     (1,095) 
Unamortized transition assets                                                   (36)       (61)         -           -
Unrecognized prior service cost                                                  21         28         (4)         (4) 
Unrecognized net actuarial (gain) loss                                         (381)       121        (69)          7
---------------------------------------------------------------------------------------------------------------------
Net amount recognized                                                       $   (43)    $    6    $(1,133)    $(1,092)
=====================================================================================================================
Amounts recognized in the consolidated balance sheets consist of:
  Prepaid benefit cost                                                      $   377     $  349    $     -     $     -
  Accrued benefit liability                                                    (456)      (343)    (1,133)     (1,092) 
  Intangible asset                                                                4          -          -           -
  Accumulated other comprehensive income                                         32          -          -           -
---------------------------------------------------------------------------------------------------------------------
Net amount recognized                                                       $   (43)    $    6    $(1,133)    $(1,092)
=====================================================================================================================
Under-funded or non-funded plans                                                           
  Aggregate benefit obligation                                              $   497     $  345    $ 1,060     $ 1,095
  Aggregate fair value of plan assets                                       $   174     $   35    $     -     $     -
=====================================================================================================================
Weighted average assumptions as of December 31                                             
Discount rate                                                                   7.4%       7.0%       8.0%        7.0% 
Expected return on plan assets                                                  8.9        9.2
Rate of compensation increase                                                   4.2        4.2
=====================================================================================================================
=====================================================================================================================
                                                             Pension Benefits                    Other Benefits
=====================================================================================================================
                                                      1999         1998        1997       1999       1998        1997
---------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost                                                    
Defined benefit plans                                                                      
Service cost                                       $   191      $   172     $   167     $   27    $    26     $    25 
Interest cost                                        1,009          916         948         77         72          66 
Expected return on plan assets                      (1,090)      (1,010)     (1,014)         -          -           -
Recognized net actuarial (gain)/loss                    11           10          16          1          -          (4) 
Amortization of prior service cost                       8            6           8          -          -           -
Recognized net transition asset                        (18)         (19)        (20)         2          -           -
Recognized curtailment/settlement gain                  (9)         (60)        (31)         -          -           -
---------------------------------------------------------------------------------------------------------------------
  Net periodic benefit cost                            102           15          74        107         98          87 
Defined contribution plans                              28           32          23          -          -           -
---------------------------------------------------------------------------------------------------------------------
Total                                              $   130      $    47     $    97     $  107    $    98     $    87
=====================================================================================================================
</TABLE>


58

<PAGE>
 
   Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. For measurement purposes, a 7.5
percent annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1999. The rate was assumed to decrease to 5.25 percent
in 2002 and thereafter.
   A one-percentage-point change in assumed health care cost trend rates would
have the following effects:

=============================================================================== 
                                                              One-         One- 
                                                       percentage-  percentage- 
                                                             point        point 
                                                          increase     decrease 
=============================================================================== 
Effect on total service and interest                                            
cost components                                                $ 5         $ (4)
Effect on postretirement benefit                                                
obligation                                                     $62         $(53)
=============================================================================== 

Employee Stock Ownership Plan (ESOP) Benefits. In 1989, we established an ESOP
and sold to it 10 million shares of Series B Convertible Preferred Stock
(Convertible Preferred) of the Company for a purchase price of $785. Each ESOP
share is convertible into six common shares of the Company. The Convertible
Preferred has a $1 par value and a guaranteed minimum value of $78.25 per share
and accrues annual dividends of $6.25 per share. The ESOP borrowed the purchase
price from a group of lenders. The ESOP debt is included in our consolidated
balance sheets because we guarantee the ESOP borrowings. A corresponding amount
classified as Deferred ESOP benefits represents our commitment to future
compensation expense related to the ESOP benefits.

   The ESOP will repay its borrowings from dividends on the Convertible
Preferred and from our contributions. The ESOP's debt service is structured such
that our annual contributions (in excess of dividends) essentially correspond to
a specified level percentage of participant compensation. As the borrowings are
repaid, the Convertible Preferred is allocated to ESOP participants and Deferred
ESOP benefits are reduced by principal payments on the borrowings. Most of our
domestic employees are eligible to participate in the ESOP.

   Information relating to the ESOP for the three years ended December 31, 1999
follows:

================================================================================
                                                   1999        1998         1997
================================================================================
Interest on ESOP Borrowings                         $28         $33          $38
--------------------------------------------------------------------------------
Dividends declared on
    Convertible Preferred
    Stock                                           $54         $56          $57
--------------------------------------------------------------------------------
Cash contribution to the                                             
    ESOP                                            $44         $41          $39
--------------------------------------------------------------------------------
Compensation expense                                $46         $44          $40
================================================================================

We recognize ESOP costs based on the amount committed to be contributed to the
ESOP plus related trustee, finance and other charges.

14 Income Taxes

   The parent company and its domestic subsidiaries file consolidated U.S.
income tax returns. Generally, pursuant to tax allocation arrangements, domestic
subsidiaries record their tax provisions and make payments to the parent company
for taxes due or receive payments from the parent company for tax benefits
utilized.

   Income before income taxes from continuing operations for the three years
ended December 31, 1999 consists of the following:

================================================================================
                                                   1999        1998         1997
================================================================================
Domestic income                                  $1,243        $625       $1,082
Foreign income                                      793         138        1,059
--------------------------------------------------------------------------------
Income before income taxes                       $2,036        $763       $2,141
================================================================================

Provisions for income taxes from continuing operations for the three years ended
December 31, 1999 consist of the following:

================================================================================
                                                   1999        1998         1997
================================================================================
Federal income taxes
    Current                                        $168       $ 265         $253
    Deferred                                        189        (149)          67
Foreign income taxes                                                            
    Current                                         124         178          168
    Deferred                                         68        (143)         158
State income taxes                                                              
    Current                                          52          70           69
    Deferred                                         30         (14)          13
--------------------------------------------------------------------------------
Income taxes                                       $631       $ 207         $728
================================================================================
                                                                                
                                                                              59

<PAGE>
 
A reconciliation of the U.S. federal statutory income tax rate to the effective
income tax rate for continuing operations for the three years ended December 31,
1999 follows:

==============================================================================
                                                    1999        1998      1997
==============================================================================
U.S. federal statutory
   income tax rate                                  35.0%       35.0%     35.0%
Foreign earnings and                                                           
   dividends taxed at                                                          
   different rates                                  (6.8)       (7.3)     (3.2)
Goodwill amortization                                 .7          .7        .3 
Tax-exempt income                                   (1.0)       (2.3)      (.8)
State taxes                                          2.6         4.7       2.5 
Other                                                 .5        (3.7)       .2 
------------------------------------------------------------------------------
Effective income tax rate                           31.0%       27.1%     34.0%
==============================================================================

   The 1999 effective tax rate of 31.0 percent is 0.6 percentage points lower
than 1998, after excluding the 1998 worldwide restructuring program from the
1998 effective tax rate.

   The 1998 effective tax rate of 27.1 percent is 6.9 percentage points lower
than 1997. Excluding the 1998 worldwide restructuring program, the 1998
effective tax rate is 31.6 percent, which is 2.4 percentage points lower than
1997. This lower 1998 rate is primarily attributable to an increase in foreign
tax credits, refund of foreign taxes and mix of profits from our worldwide
operations.

   On a consolidated basis, including the effects of discontinued operations,
we paid a total of $238, $217 and $241 in income taxes to federal, foreign and
state income-taxing authorities in 1999, 1998 and 1997, respectively.

   Total income tax expense (benefit) for the three years ended December 31,
1999 was allocated as follows:

===============================================================================
                                                     1999        1998      1997
===============================================================================
Income taxes on income
   from continuing
   operations                                       $ 631       $ 207     $ 728
Tax benefit included in                                                        
   minorities' interests/1/                           (20)        (20)      (19)
Discontinued operations                               (26)        (54)     (166)
Common shareholders'                                                           
   equity/2/                                         (106)       (140)      (57)
-------------------------------------------------------------------------------
Total                                               $ 479       $  (7)    $ 486 
===============================================================================

/1/ Benefit relates to preferred securities as more fully described in Note 16
    on page 63.

/2/ For dividends paid on shares held by the ESOP, cumulative translation
    adjustments and tax benefit on nonqualified stock options.

   Deferred income taxes have not been provided on the undistributed earnings
of foreign subsidiaries and other foreign investments carried at equity. The
amount of such earnings included in consolidated retained earnings at December
31, 1999 was approximately $4.9 billion. These earnings have been substantially
reinvested, and we do not plan to initiate any action that would precipitate the
payment of income taxes thereon. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings.

   The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1999 and 1998 follow:

===============================================================================
                                                                1999       1998
===============================================================================
Tax effect of future tax deductions                                            
    Depreciation                                             $   385    $   443
    Postretirement medical benefits                              436        419
    Restructuring reserves                                       160        329
    Other operating reserves                                     198        277
    Deferred intercompany profit                                  90         76
    Allowance for doubtful accounts                              104         93
    Deferred compensation                                        159        165
    Tax credit carryforwards                                      98        104
    Research and development                                     641        564
    Other                                                        145        116
-------------------------------------------------------------------------------
Total                                                        $ 2,416    $ 2,586
===============================================================================
Tax effect of future taxable income                                            
    Installment sales and leases                             $(1,041)   $(1,407)
    Leveraged leases                                             (29)       (23)
    Deferred income                                             (848)      (630)
    Other                                                       (298)      (264)
-------------------------------------------------------------------------------
Total                                                        $(2,216)   $(2,324)
===============================================================================

   The above amounts are classified as current or long-term in the consolidated
balance sheets in accordance with the asset or liability to which they relate.
Current deferred tax assets at December 31, 1999 and 1998 amounted to $478 and
$551, respectively.

   We have concluded that it is more likely than not that the deferred tax
assets will be realized in the ordinary course of operations based on scheduling
of deferred tax liabilities and income from operating activities.

   At December 31, 1999, we have tax credit carry-forwards for federal income
tax purposes of $98 available to offset future federal income taxes
indefinitely. We also have net operating loss carry-forwards for income tax
purposes of $94 that are available to offset future taxable income through 2006
and $291 available to offset future taxable income indefinitely.

60

<PAGE>
 
15 Litigation

   On March 10, 1994, a lawsuit was filed in the United States District Court
for the District of Kansas by two independent service organizations (ISOs) in
Kansas City and St. Louis and their parent company. Subsequently, a single
corporate entity, CSU, L.L.C. (CSU), was substituted for the three affiliated
companies. CSU claimed damages predominately resulting from the Company's
alleged refusal to sell parts for high-volume copiers and printers to CSU prior
to 1994. The Company's policies and practices with respect to the sale of parts
to ISOs were at issue in an antitrust class action in Texas, which was settled
by the Company during 1994. Claims for individual lost profits of ISOs who were
not named parties, such as CSU, were not included in that class action. The
Company asserted counter-claims against CSU alleging patent and copyright
infringement relating to the copying of diagnostic software and service manuals.
On April 8, 1997, the District Court granted partial summary judgment in favor
of the Company on CSU's antitrust claims, ruling that the Company's unilateral
refusal to sell or license its patented parts cannot give rise to antitrust
liability. On January 8, 1999, the Court dismissed with prejudice all of CSU's
antitrust claims. The District Court also granted summary judgment in favor of
the Company on its patent infringement claim, leaving open with respect to
patent infringement only the issues of willfulness and the amount of damages,
and granted partial summary judgment in favor of the Company with respect to
some of its claims of copyright infringement. A judgment in the amount of $1 was
entered in favor of the Company and against CSU on the copyright infringement
counterclaim. On February 16, 2000, the United States Court of Appeals for the
Federal Circuit affirmed the judgment of the District Court dismissing CSU's
antitrust claims.

   On April 11, 1996, an action was commenced by Accuscan Corp. (Accuscan), in
the United States District Court for the Southern District of New York, against
the Company seeking unspecified damages for infringement of a patent of Accuscan
which expired in 1993. The suit, as amended, was directed to facsimile and
certain other products containing scanning functions and sought damages for
sales between 1990 and 1993. On April 1, 1998, the jury entered a verdict in
favor of Accuscan for $40. However, on September 14, 1998, the Court granted the
Company's motion for a new trial on damages. The trial ended on October 25, 1999
with a jury verdict of $10. The Company is also seeking to appeal the issue of
liability and believes that the liability verdict should be set aside. We filed
a motion to have the judge dismiss or modify the verdict.

   A consolidated lawsuit is currently pending in the United States District
Court for the Western District of Texas. It is a consolidation of two previously
separate lawsuits, one of which had been filed in the United States District
Court for the District of New Jersey and had been transferred to Texas, and the
other which was commenced in Texas. Plaintiffs in both cases claimed that the
withdrawal of Crum & Forster Holdings, Inc. (a former subsidiary of ours) (C&F)
from the Xerox Corporation Employee Stock Ownership Plan (ESOP) constituted a
wrongful termination under the Employee Retirement Income Security Act (ERISA).
Both cases were also brought as purported class actions. The complaints in the
two cases asserted different legal theories for recovery. In one case damages of
$250 were alleged and in the other case damages were unspecified.

   On December 14, 1999, the Court granted plaintiffs' motion to amend their
complaint. The amended complaint alleges violations of ERISA only and seeks
unspecified damages, injunctive relief, costs and attorneys' fees. Under the
amended complaint, plaintiffs purport to bring this action on behalf of
themselves and a class of approximately 10,000 persons who were C&F participants
in the ESOP on January 1, 1993. The plaintiffs have filed a new motion for class
certification based upon the allegations in the amended complaint, which is
currently pending. Plaintiffs' previous motion to certify a class action was
denied by the Court. Xerox denies liability and intends to vigorously defend
this action.

   On June 24, 1999, Xerox Corporation was served with a summons and complaint
filed in the Superior Court of the State of California for the County of Los
Angeles. The complaint was filed on behalf of 681 individual plaintiffs claiming
damages as a result of Xerox' alleged disposal and/or release of hazardous
substances into the soil, air and groundwater. On July 22, 1999, a complaint was
filed in the same Court, which has not yet been served on Xerox, in a separate
action on behalf of an additional 80 plaintiffs with the same claims for damages
as the earlier action. Plaintiffs in both cases further allege that they have
been exposed to such hazardous substances by inhalation, ingestion and dermal
contact, including but not limited to hazardous substances contained within the
municipal drinking water supplied by the City of Pomona and the Southern
California Water Company. Plaintiffs' claims against Xerox include personal
injury,

                                                                              61

<PAGE>
 
wrongful death, property damage, negligence, trespass, nuisance, fraudulent
concealment, absolute liability for ultra-hazardous activities, civil
conspiracy, battery and violation of the California Unfair Trade Practices Act.
Damages are unspecified.

   We deny any liability for the plaintiffs' alleged damages and intend to
vigorously defend these actions. The Court has issued a stay in this case until
March 2, 2000.

   On December 9, 1999, a complaint was filed in the United States District
Court for the District of Connecticut in an action entitled Giarraputo, et al.
vs. Xerox Corporation, Barry Romeril, Paul Allaire and Richard Thoman which
purports to be a class action on behalf of the named plaintiff and all other
purchasers of Common Stock of the Company between January 25, 1999 and October
7, 1999, (Class Period). On December 13, 1999, an amended complaint was filed
adding an additional named plaintiff, extending the Class Period through
December 10, 1999, and expanding the class to include individuals who purchased
call options or sold put options. The amended complaint alleges that pursuant to
the Securities Exchange Act of 1934, as amended, each of the defendants is
liable as a participant in a fraudulent scheme and course of business that
operated as a fraud or deceit on purchasers of the Company's Common Stock during
the Class Period by disseminating materially false and misleading statements
and/or concealing material facts. The amended complaint further alleges that the
alleged scheme: (i) deceived the investing public regarding the economic
capabilities, sales proficiencies, growth, operations and intrinsic value of the
Company's Common Stock; (ii) allowed several corporate insiders, such as the
named individual defendants, to sell shares of privately held Common Stock of
the Company while in possession of materially adverse, non-public information;
and (iii) caused the individual plaintiffs and the other members of the
purported class to purchase Common Stock of the Company at inflated prices. The
amended complaint seeks unspecified compensatory damages in favor of the
plaintiffs and the other members of the purported class against all defendants,
jointly and severally, for all damages sustained as a result of defendants'
alleged wrongdoing, including interest thereon, together with reasonable costs
and expenses incurred in the action, including counsel fees and expert fees.
S
everal additional class action complaints alleging the same or substantially
similar claims have been filed in the same Court.

   The named individual defendants and we deny any wrongdoing and intend to
vigorously defend these actions, which we expect to be consolidated.

16 Preferred Securities

   As of December 31, 1999, we have four series of outstanding preferred
securities. In total we are authorized to issue 22 million shares of cumulative
preferred stock, $1 par value.

Convertible Preferred Stock. As more fully described in Note 13 on page 59, we
sold, for $785, 10 million shares of our Series B Convertible Preferred Stock
(ESOP shares) in 1989 in connection with the establishment of our ESOP. As
employees with vested ESOP shares leave the Company, these shares are redeemed
by us. We have the option to settle such redemptions with either shares of
common stock or cash. Outstanding preferred stock related to our ESOP at
December 31, 1999 and 1998 follows (shares in thousands):

================================================================================
                                                       1999                 1998
================================================================================
                                           Shares    Amount     Shares    Amount
--------------------------------------------------------------------------------
Convertible
   Preferred Stock                          8,551      $669      8,785      $687
================================================================================

Preferred Stock Purchase Rights. We have a shareholder rights plan designed to
deter coercive or unfair takeover tactics and to prevent a person or persons
from gaining control of us without offering a fair price to all shareholders.

   Under the terms of the plan, one-half of one preferred stock purchase right
(Right) accompanies each share of outstanding common stock (giving effect to the
two-for-one stock split in February 1999). Each full Right entitles the holder
to purchase from us one three-hundredth of a new series of preferred stock at an
exercise price of $250.

   Within the time limits and under the circumstances specified in the plan, the
Rights entitle the holder to acquire either our common stock, the surviving
company in a business combination, or the purchaser of our assets, having a
value of two times the exercise price.

62

<PAGE>
 
The Rights may be redeemed prior to becoming exercisable by action of the Board
of Directors at a redemption price of $.01 per Right. The Rights expire in April
2007.

     The Rights are non-voting and, until they become exercisable, have no
dilutive effect on the earnings per share or book value per share of our common
stock.

Deferred Preferred Stock. In 1996, a subsidiary of ours issued 2 million
deferred preferred shares for Canadian (Cdn.) $50 million. The U.S. dollar value
was $37 and is included in Minorities' interests in equity of subsidiaries in
the consolidated balance sheets. These shares are mandatorily redeemable on
February 28, 2006 for Cdn. $90 million. The difference between the redemption
amount and the proceeds from the issue is being amortized, through the
redemption date, to Minorities' interests in earnings of subsidiaries in the
consolidated statements of income. We have guaranteed the redemption value.

Company-obligated, mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures of the Company. In January 1997, a
trust sponsored and wholly owned by the Company issued $650 aggregate
liquidation amount preferred securities (the "Original Preferred Securities") to
investors and 20,103 shares of common securities to the Company, the proceeds of
which were invested by the trust in $670 aggregate principal amount of the
Company's newly issued 8 percent Junior Subordinated Debentures due 2027 (the
"Original Debentures"). In June 1997, pursuant to a registration statement filed
by the Company and the trust with the Securities and Exchange Commission,
Original Preferred Securities with an aggregate liquidation preference amount of
$644 and Original Debentures with a principal amount of $644 were exchanged for
a like amount of preferred securities (together with the Original Preferred
Securities, the "Preferred Securities") and 8 percent Junior Subordinated
Debentures due 2027 (together with the Original Debentures, the "Debentures")
which were registered under the Securities Act of 1933. The Debentures represent
all of the assets of the trust. The proceeds from the issuance of the Original
Debentures were used by the Company for general corporate purposes. The
Debentures and related income statement effects are eliminated in the Company's
consolidated financial statements.

The Preferred Securities accrue and pay cash distributions semiannually at a
rate of 8 percent per annum of the stated liquidation amount of $1,000 per
Preferred Security. The Company has guaranteed (the "Guarantee"), on a
subordinated basis, distributions and other payments due on the Preferred
Securities. The Guarantee and the Company's obligations under the Debentures and
in the indenture pursuant to which the Debentures were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
trust, taken together, provide a full and unconditional guarantee of amounts due
on the Preferred Securities. 

     The Preferred Securities are mandatorily redeemable upon the maturity of
the Debentures on February 1, 2027, or earlier to the extent of any redemption
by the Company of any Debentures. The redemption price in either such case will
be $1,000 per share plus accrued and unpaid distributions to the date fixed for
redemption.

17   Common Stock

     We have 1.05 billion authorized shares of common stock, $1 par value. At
December 31, 1999 and 1998, 84.3 and 45.3 million shares, respectively, were
reserved for issuance under our incentive compensation plans. In addition, at
December 31, 1999,13.2 million common shares were reserved for the conversion of
$654 of convertible debt, and 51.3 million common shares were reserved for
conversion of ESOP-related Convertible Preferred Stock.

Treasury Stock. The Board of Directors has authorized us to repurchase up to $1
billion of our common stock. The stock will be repurchased from time to time on
the open market depending on market and other conditions. No shares were
repurchased during 1999. During 1998, we repurchased 3.7 million shares for
$172. Since inception of the program we have repurchased 20.6 million shares for
$594. Common shares issued for stock option exercises, conversion of convertible
securities and other exchanges were partially satisfied by reissuances of
treasury shares.

                                                                              63

<PAGE>
 
Put Options. In connection with the share repurchase program, during 1999, 1998
and 1997, we sold 0.8 million, 1.0 million and 8.0 million put options,
respectively, that entitle the holder to sell one share of our common stock to
us at a specified price. These put options are exercisable only at maturity and
can be settled in cash at our option. The put options had original maturities
ranging from six months to two years. 

In 1999, put options on 1.0 million shares of common stock were exercised and
settled for a net cash payment of $5.

At December 31, 1999, 0.8 million put options remain outstanding with a strike
price of $40.56 per share.

Stock Option and Long-Term Incentive Plans. We have a long-term incentive plan
whereby eligible employees may be granted nonqualified stock options and
performance unit rights. Subject to vesting and other requirements, performance
unit rights are typically paid in our common stock, beginning with the 1998
awards, and are typically paid in cash for units awarded prior to 1998. Prior to
1999, the value of each performance unit was typically based upon the level of
return on assets during the year in which granted. Beginning with the 1999
awards, the value of each performance unit is based on the growth in earnings
per share during the year in which granted. Performance units ratably vest in
the three years after the year awarded.

     Beginning in 1999, certain incentive compensation plans were modified to
provide for the issuance of stock options as part of the total payments due
under the plans.

     Stock options and rights are settled with newly issued or treasury shares
of our common stock. Stock options granted prior to December 31, 1995 normally
vest in two years and expire five years from the date of grant. Stock options
granted subsequent to December 31, 1995 generally vest in three years and expire
between eight and ten years from the date of grant. The exercise price of the
options is equal to the market value of our common stock on the effective date
of grant.

     At December 31, 1999 and 1998, 36.2 million and 6.4 million shares,
respectively, were available for grant of options or rights. The following
table provides information relating to the status of, and changes in, options
granted:


<TABLE> 
<CAPTION> 
==========================================================================================================================
Employee Stock Options                                   1999                       1998                     1997
==========================================================================================================================
                                                                   Average                Average                 Average
                                                   Stock            Option       Stock     Option        Stock     Option
(Options in thousands)                           Options             Price     Options      Price      Options      Price
--------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>         <C>        <C>          <C>        <C>  
Outstanding at January 1                         30,344             $33        27,134      $26          22,206     $19
Granted                                          19,059              51         8,980       47          12,201      34
Cancelled                                          (870)             47          (199)      37            (300)     24
Exercised                                        (5,145)             23        (5,571)      20          (6,973)     17
---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31                       43,388              42        30,344       33          27,134      26
---------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year                       13,467                         9,622                    8,850
==========================================================================================================================
</TABLE>
 

Options outstanding and exercisable at December 31, 1999 are as follows:


<TABLE>
<CAPTION>
==========================================================================================================================
Thousands except per-share data                  Options Outstanding                       Options Exercisable
==========================================================================================================================
                                                          Weighted
Range of                                         Average Remaining   Weighted Average          Number       Weighted Average
Exercise Prices           Number Outstanding      Contractual Life     Exercise Price     Exercisable        Exercise Price
---------------------------------------------------------------------------------------------------------------------------
<S>                       <C>                    <C>                 <C>                  <C>              <C>
$13.18 to $19.63                       2,058                  1.55              $18.16            2,058              $18.16
 20.11 to  28.91                       7,737                  6.84               23.99            3,954               22.07
 30.97 to  44.16                      15,358                  5.37               37.10            6,396               35.82
 46.88 to  60.95                      18,235                  7.10               56.02            1,059               48.60
---------------------------------------------------------------------------------------------------------------------------
$13.18 to $60.95                      43,388                  6.18              $41.81           13,467              $30.09
===========================================================================================================================
</TABLE>
 

64

<PAGE>
 
We do not recognize compensation expense relating to employee stock options
because the exercise price of the option equals the fair value of the stock on
the effective date of grant. If we had deter mined the compensation based on the
value as determined by the modified Black-Scholes option pricing model, in
accordance with SFAS No. 123, the pro forma net income and earnings per share
would be as follows:

===========================================================
                                  1999        1998    1997
===========================================================
Net income - as reported        $1,424      $  395   $1,452
Net income - pro forma           1,323         350    1,429
Basic EPS - as reported           2.09        0.53     2.16
Basic EPS - pro forma             1.94        0.46     2.12
Diluted EPS - as reported         1.96        0.52     2.02
Diluted EPS - pro forma           1.82        0.45     1.99
===========================================================

The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.

     As reflected in the pro forma amounts in the table at left, the fair value
of each option granted in 1999, 1998 and 1997 was $15.83, $13.31 and $9.03,
respectively. The fair value of each option granted was estimated on the date of
grant using the following weighted average assumptions:

============================================================
                                 1999        1998      1997
============================================================
Risk-free interest rate          5.1%        5.2%      6.1%
Expected life in years           6.2         5.3       5.0
Expected volatility             28.0%       24.9%     23.5%
Expected dividend yield          1.8%        1.4%      1.9%
============================================================

18   Earnings per Share

     A reconciliation of the numerators and denominators of the basic and
diluted EPS calculation follows:


<TABLE> 
<CAPTION> 
=========================================================================================================================
                                              1999                          1998                         1997
=========================================================================================================================
                                     Income   Shares       Per      Income   Shares     Per      Income    Shares     Per
                                     (Numer-  (Denom-     Share    (Numer-  (Denom-   Share     (Numer-   (Denom-   Share
(Shares in thousands)                  ator)  inator)    Amount      ator)  inator)  Amount        ator)   inator) Amount
-------------------------------------------------------------------------------------------------------------------------- 
<S>                                  <C>      <C>        <C>       <C>      <C>       <C>       <C>      <C>       <C> 
Basic EPS
     Income from continuing
        operations                   $1,424                        $585                         $1,452
     Accrued dividends on 
        preferred stock                 (38)                        (46)                           (44)  
---------------------------------------------------------------------------------------------------------------------------
Basic EPS                            $1,386   663,493    $2.09     $539     658,956   $0.82     $1,408   653,371   $2.16
---------------------------------------------------------------------------------------------------------------------------
Diluted EPS
     Stock options and other
        incentives                              8,727                         9,811                        7,929
     ESOP Adjustment,                                                              
        net of tax                       43    51,989                                               44    54,686
     Convertible debt,                                                             
        net of tax                       17    13,191                 3       5,287                  3     5,287
--------------------------------------------------------------------------------------------------------------------------
Diluted EPS                          $1,446   737,400    $1.96     $542     674,054   $0.80     $1,455   721,273   $2.02
========================================================================================================================== 
</TABLE>
 

Note: Recalculation of per-share amounts may be off by $0.01 in certain
instances due to rounding.

           
19   Subsequent Events 

     In January 2000, we and Fuji Xerox acquired the Color Printing and Imaging
Division of Tektronix, Inc. (CPID). The aggregate consideration paid of $925 in
cash, which includes $75 paid directly by Fuji Xerox, is subject to certain 
post-closing adjustments. CPID manufactures and sells color printers, ink and
related products, and supplies. The acquisition was accounted for using the
purchase method and will result in goodwill and other identifiable intangible
assets of approximately $575 (unaudited), which will be amortized over their
useful lives, predominantly 20 years. In addition, we will also recognize a
charge in the first quarter of 2000 for accrued in-process research and
development of approximately $25 (unaudited). We have engaged an independent
appraiser to value the intangible assets, including amounts allocable to accrued
in-process research and development. Accordingly, the amounts included herein
are based on preliminary estimates and will be revised to reflect the final
appraisal.

                                                                              65

<PAGE>
 
Quarterly Results of Operations

(Unaudited)


<TABLE> 
<CAPTION> 
==================================================================================================================
                                                           First      Second         Third      Fourth       Full
In millions, except per-share data                       Quarter     Quarter       Quarter     Quarter       Year
==================================================================================================================
<S>                                                     <C>         <C>             <C>         <C>        <C> 
1999
Revenues                                                $  4,300     $ 4,862        $4,628      $5,438     $19,228
Costs and Expenses                                         3,806       4,229         4,123       5,034      17,192
------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and
   Minorities' Interests                                     494         633           505         404       2,036
Income Taxes                                                 153         196           157         125         631
Equity in Net Income of Unconsolidated Affiliates             10          24             5          29          68
Minorities' Interests in Earnings of Subsidiaries              8          13            14          14          49
------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations                            343         448           339         294       1,424
Discontinued Operations                                        -           -             -           -           -
------------------------------------------------------------------------------------------------------------------
Net Income                                              $    343     $   448        $  339     $   294     $ 1,424
==================================================================================================================
Basic Earnings per Share
   Continuing Operations                                $   0.50     $  0.66        $ 0.50      $ 0.43     $  2.09
   Discontinued Operations                                     -           -             -           -           -
------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share                                $   0.50     $  0.66        $ 0.50      $ 0.43     $  2.09
==================================================================================================================
Diluted Earnings per Share/1/
   Continuing Operations                                $   0.48     $  0.62        $ 0.47      $ 0.41     $  1.96
   Discontinued Operations                                     -           -             -           -           -
------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share/1/                           $   0.48     $  0.62        $ 0.47      $ 0.41     $  1.96
==================================================================================================================
1998
Revenues                                                $  4,304     $ 4,742        $4,607      $5,794     $19,447
Costs and Expenses                                         3,859       5,841         4,067       4,917      18,684
------------------------------------------------------------------------------------------------------------------
Income (Loss) before Income Taxes (Benefits),
   Equity Income and Minorities' Interests                   445      (1,099)          540         877         763
Income Taxes (Benefits)                                      147        (385)          173         272         207
Equity in Net Income of Unconsolidated Affiliates             14          12            28          20          74
Minorities' Interests in Earnings of Subsidiaries             11          10            14          10          45
------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations                     301        (712)          381         615         585
Discontinued Operations                                     (190)          -             -           -        (190)
------------------------------------------------------------------------------------------------------------------
Net Income (Loss)/2/                                    $    111     $  (712)       $  381      $  615     $   395
==================================================================================================================
Basic Earnings (Loss) per Share
    Continuing Operations                               $   0.44     $ (1.10)       $ 0.56      $ 0.92     $  0.82
    Discontinued Operations                                (0.29)          -             -           -       (0.29)
------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share                                $   0.15     $ (1.10)       $ 0.56      $ 0.92     $  0.53
==================================================================================================================
Diluted Earnings (Loss) per Share/1/
   Continuing Operations                                $   0.42     $ (1.10)       $ 0.53      $ 0.84     $  0.80
   Discontinued Operations                                 (0.26)          -             -           -       (0.28)
------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share/1/                           $   0.16     $ (1.10)       $ 0.53      $ 0.84     $  0.52
==================================================================================================================
</TABLE>


/1/  Quarterly diluted earnings per share differ from the full-year amounts
     because securities that are antidilutive in certain quarters are not
     antidilutive on a full-year basis.
/2/  1998 second quarter includes a restructuring charge of $1,644 ($1,107 after
     taxes and including our $18 share of a restructuring charge recorded by
     Fuji Xerox).

66

<PAGE>
 
Reports of Management and Independent Auditors

Report of Management

Xerox Corporation management is responsible for the integrity and objectivity of
the financial data presented in this annual report. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles and include amounts based on management's best estimates and
judgments.

     The Company maintains an internal control structure designed to provide
reasonable assurance that assets are safeguarded against loss or unauthorized
use and that financial records are adequate and can be relied upon to produce
financial statements in accordance with generally accepted accounting
principles. This structure includes the hiring and training of qualified people,
written accounting and control policies and procedures, clearly drawn lines of
accountability and delegations of authority. In a business ethics policy that is
communicated annually to all employees, the Company has established its intent
to adhere to the highest standards of ethical conduct in all of its business
activities.

The Company monitors its internal control structure with direct management
reviews and a comprehensive program of internal audits. In addition, KPMG LLP,
independent auditors, have audited the consolidated financial statements and
have reviewed the internal control structure to the extent they considered
necessary to support their report, which follows.

     The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets regularly with the independent auditors, the internal
auditors and representatives of management to review audits, financial reporting
and internal control matters, as well as the nature and extent of the audit
effort. The Audit Committee also recommends the engagement of independent
auditors, subject to shareholder approval. The independent auditors and internal
auditors have free access to the Audit Committee.


/s/ G. Richard Thoman                  /s/ Barry D. Romeril

G. Richard Thoman                      Barry D. Romeril 
President and Chief Executive Officer  Vice Chairman and Chief Financial Officer
                                        

Report of Independent Auditors

To the Board of Directors and Shareholders of Xerox Corporation:

We have audited the consolidated balance sheets of Xerox Corporation and
consolidated subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements appearing on pages 42
through 65 present fairly, in all material respects, the financial position of
Xerox Corporation and consolidated subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.


/s/ KPMG LLP

KPMG LLP
Stamford, Connecticut 
January 25, 2000


                                                                              67

<PAGE>
 
Eleven Years in Review


<TABLE> 
<CAPTION> 
==============================================================================================================================
(Dollars in millions, except per-share data)              1999              1998            1997             1996
==============================================================================================================================
<S>                                                   <C>              <C>              <C>             <C>   
Per-Share Data
Earnings (loss) from continuing operations
    Basic                                             $   2.09         $    0.82        $   2.16        $    1.78
    Diluted                                               1.96              0.80            2.02             1.66
Dividends declared                                        0.80              0.72            0.64             0.58
==============================================================================================================================
Operations
Revenues                                              $ 19,228         $  19,447        $ 18,144        $  17,378
Research and development expenses                          979             1,040           1,065            1,044
Income (loss) from continuing operations                 1,424               585           1,452            1,206
Net income (loss)                                        1,424               395           1,452            1,206
==============================================================================================================================
Financial Position
Accounts and finance receivables, net                 $ 15,940         $  16,984        $ 14,498        $  13,394
Inventories                                              2,961             3,269           2,792            2,676
Land, buildings and equipment, net                       2,456             2,366           2,377            2,256
Investment in discontinued operations                    1,130             1,670           3,025            4,398
Total assets                                            28,814            30,024          27,732           26,818
Consolidated capitalization
    Short-term debt                                      3,957             4,104           3,707            3,536
    Long-term debt                                      11,044            11,003           8,946            8,697
------------------------------------------------------------------------------------------------------------------------------
       Total debt                                       15,001            15,107          12,653           12,233
    Deferred ESOP benefits                                (299)             (370)           (434)            (494)
    Minorities' interests in equity of subsidiaries        127               124             127              843
    Company-obligated, mandatorily redeemable
     preferred securities of subsidiary trust
     holding solely subordinated debentures
     of the Company                                        638               638             637                -
    Preferred stock                                        669               687             705              721
    Common shareholders' equity                          4,911             4,857           4,985            4,367
    Total capitalization                                21,047            21,043          18,673           17,670
==============================================================================================================================
Selected Data and Ratios
Common shareholders of record at year-end               55,297            52,048          54,689           55,908
Book value per common share/1/                        $   7.35         $    7.35        $   7.59        $    6.71
Year-end common stock market price                    $  22.69         $   59.00        $  36.94        $   26.31
Employees at year-end                                   94,600            92,700          91,500           86,700
Working capital                                       $  4,035         $   3,968        $  3,074        $   2,948
Current ratio                                              1.5               1.5             1.4              1.4
Additions to land, buildings and equipment            $    594         $     566        $    520        $     510
Depreciation on land, buildings and equipment         $    416         $     362        $    400        $     372
==============================================================================================================================
</TABLE>
 

*    Data that conform with the 1999 basis of presentation were not available.
/1/  Book value per common share is computed by dividing common shareholders'
     equity by outstanding common shares plus common shares reserved for the
     conversion of the Xerox Canada Inc. Exchangeable Class B Stock.

68

<PAGE>
 

<TABLE> 
<CAPTION> 
==============================================================================================================================
          1995             1994             1993             1992           1991               1990            1989
==============================================================================================================================
<S>                    <C>             <C>              <C>             <C>               <C>             <C> 
      $   1.73         $   1.14        $   (0.42)       $    0.87       $   0.63          $    0.91       $    0.74
          1.61             1.07            (0.42)            0.77           0.62               0.87            0.73
          0.50             0.50             0.50             0.50           0.50               0.50            0.50
==============================================================================================================================

        16,588         $ 15,084        $  14,229        $  14,298       $ 13,438          $  13,210       $  12,095
           949              895              883              922            890                848             809
         1,174              794             (193)             562            436                599             488
          (472)             794             (126)          (1,020)           454                243             704
==============================================================================================================================

      $ 12,389         $ 11,759        $  10,565        $  10,250       $  8,952          $   8,016       $   7,272
         2,656            2,294            2,162            2,257          2,091              2,148           2,413
         2,105            2,108            2,219            2,150          1,950              1,851           1,781
         4,810            7,904            8,841            8,652          9,164              9,695               *
        26,008           27,278           26,999           25,792         24,342             24,116               *
==============================================================================================================================

         3,274            3,159            2,698            2,533          2,038              1,828           1,482
         8,148            7,355            7,386            8,105          7,825              8,726           9,247
------------------------------------------------------------------------------------------------------------------------------
        11,422           10,514           10,084           10,638          9,863             10,554          10,729
          (547)            (596)            (641)            (681)          (720)              (756)           (785)
           755            1,021              844              885            818                832             715

             -                -                -                -              -                  -               -
           763              832            1,066            1,072          1,078              1,081           1,081
         3,878            4,177            3,972            3,875          5,140              5,051           5,035
        16,271           15,948           15,325           15,789         16,179             16,762          16,775
==============================================================================================================================
        54,262           56,414           65,820           68,877         71,213             74,994          78,876
      $   5.92         $   6.48        $    6.28        $    6.70       $   9.07          $    8.96       $    8.93
      $  22.84         $  16.50        $   14.69        $   13.21       $  11.42          $    5.92       $    9.54
        85,900           87,600           97,000           99,300        100,900             99,000          99,000
      $  2,843         $  2,411        $   2,357        $   2,578       $  2,282          $   2,537               *
           1.4              1.4              1.4              1.5            1.5                1.6               *
      $    438         $    389        $     470        $     582       $    467          $     405       $     390
      $    376         $    446        $     437        $     418       $    397          $     372       $     370
==============================================================================================================================
</TABLE>
 

                                                                              69

<PAGE>
 
How to Reach Us

Xerox Corporation                       Developing Markets
800 Long Ridge Road                     Operations
P.O. Box 1600                           800 Long Ridge Road
Stamford, CT 06904                      P.O. Box 1600
203 968-3000                            Stamford, CT 06904  
                                        203 968-3000 
Industry Solutions
Operations                              Xerox Europe
800 Long Ridge Road                     Riverview 
P.O. Box 1600                           Oxford Road
Stamford, CT 06904                      Uxbridge 
203 968-3000                            Middlesex 
                                        United Kingdom
General Markets                         UB8 1HS    
Operations                              44 1895 251133  
800 Long Ridge Road 
P.O. Box 1600                           Fuji Xerox Co., Ltd.
Stamford, CT 06904                      2-17-22 Akasaka     
203 968-3000                            Minato-ku, Tokyo 107 
                                        Japan                
                                        813 3585-3211       
                                                             

Products and Services

www.xerox.com or by phone:
.800 ASK-XEROX (800 275-9376) for any product or service

.800 TEAM-XRX (800 832-6979) for any small office or home office product

.800 34-XEROX (800 349-3769) for networked products sold through resellers


Additional Information

The Xerox Foundation and Community Involvement Program: 203 968-3333

Xerox diversity programs and EEO-1 reports: 716 423-6157

Environmental, Health and Safety Progress Report: 800 828-6571

Questions from Students and Educators:
800 594-5015 or 716 423-4828
E-mail:  Nancy.Dempsey@usa.xerox.com

Auditors
KPMG LLP
Certified Public Accountants 
Stamford Square 
3001 Summer Street 
Stamford, CT 06905 
203 356-9800

Consecutive Dividends Paid to Shareholders

At its February 7, 2000, meeting, the Company's Board of Directors declared the
regular quarterly dividend of $.20 per share on the common stock and the regular
quarterly dividend of $1.5625 per share on the preferred stock. Xerox has
declared dividends to its shareholders for 70 consecutive years and has paid
consecutive quarterly dividends since 1948. The Series B Convertible Preferred
stock was issued in July 1989 in connection with the formation of a Xerox
Employee Stock Ownership Plan.
   Both common and preferred dividends are payable April 1 to shareholders of
record March 3.

Xerox Common Stock Prices and Dividends

============================================================================== 
New York Stock Exchange composite prices
============================================================================== 
                First         Second      Third      Fourth
1999            Quarter       Quarter     Quarter    Quarter
============================================================================== 
High             $63.00        $63.69      $59.75     $42.81
Low               51.63         52.50       40.50      19.88
Dividends Paid   $ 0.18        $ 0.20      $ 0.20     $ 0.20
============================================================================== 

============================================================================== 
                First         Second      Third      Fourth
1998            Quarter       Quarter     Quarter    Quarter
============================================================================== 
High             $53.38        $57.50      $58.25     $60.81
Low               33.09         45.16       39.00      40.91
Dividends Paid   $ 0.16        $ 0.18      $ 0.18     $ 0.18
============================================================================== 

Stock Listed and Traded

Xerox common stock (XRX) is listed on the New York Stock Exchange and the
Chicago Stock Exchange. It is also traded on the Boston, Cincinnati, Pacific
Coast, Philadelphia, London and Switzerland exchanges.



Copyright(R) Xerox Corporation 2000. All rights reserved. Xerox(R), The Document
Company(R) and the stylized X(R) are trademarks of Xerox Corporation, as are
ColorSeries, ContentGuard, DataGlyph(R), DigiPath(R), DocuImage(R), Document
Centre(R), DocuPrint(R), DocuShare(R), DocuTech(R), FlowPort, PageCam,
PaperWare(R) and Phaser(R).

Adobe(R) and Postscript(R) are trademarks of Adobe Systems Inc. DocuColor(R) is
a trademark of Identix Inc., licensed to Xerox Corporation. Domino.doc and Lotus
Notes(R) are trademarks of Lotus Development Corp. Microsoft Exchange(R) is a
trademark of Microsoft Corp.

72





                                                                     EXHIBIT 21

Subsidiaries of Xerox Corporation

The following companies are subsidiaries of Xerox Corporation as of February 
10, 2000.  The names of a number of other subsidiaries have been omitted as 
they would not, if considered in the aggregate as a single subsidiary, 
constitute a significant subsidiary:

Name of Subsidiary                               Incorporated In


Intelligent Electronics, Inc.                    Pennsylvania
Intellinet, Ltd.                                 Pennsylvania
Xerox Connect, Inc.                              Pennsylvania
Xerox de Venezuela, C.A.                         Venezuela
Xerox Argentina, I.C.S.A.                        Argentina 
Xerox Canada Capital Ltd.                        Ontario 
Xerox Canada Inc.                                Ontario  
Xerox Canada Finance Inc.                        Ontario  
Xerox Canada Ltd.                                Canada  
Xerox de Chile S.A.                              Chile  
Xerox (China) Limited                            China  
Xerox Financial Services, Inc.                   Delaware  
OakRe Life Insurance Company                     Missouri  
Ridge Reinsurance Limited                        Bermuda  
Talegen Holdings, Inc.                           Delaware  
Xerox Credit Corporation                         Delaware  
Xerox Investments India Private Limited          India
Xerox Investments (Europe) BV                    Netherlands  
Xerox Holdings (Ireland) Limited                 Ireland  
Xerox (Europe) Limited                           Ireland
Xerox XF Holdings (Ireland) Limited              Ireland
Xerox Finance (Ireland) Limited                  Ireland
Xerox Capital (Europe) plc                       United Kingdom  
Xerox Holding (Nederland) B.V.                   Netherlands
Xerox Limited                                    Hong
 Kong  
Xerox Manufacturing (Nederland) B.V.             Netherlands  
Xerox XHB Limited                                Bermuda 
Xerox XIB Limited                                Bermuda
Xerox Limited                                    United Kingdom  
Fuji Xerox Co., Ltd. *                           Japan  
NV Xerox Credit S.A.                             Belgium
NV Xerox Management Services S.A.                Belgium
N.V. Xerox S.A.                                  Belgium
Xerox AB                                         Sweden
Xerox AG                                         Switzerland
Xerox A/S                                        Denmark
Xerox AS                                         Norway
Xerox Austria GmbH                               Austria
Xerox Leasing GmbH                               Austria
Xerox Espana-The Document Company, S.A.U.        Spain
Xerox Exports Limited                            United Kingdom
Xerox Fabricacion S.A.U.                         Spain
Xerox Finance AG                                 Switzerland
Xerox Finance (Nederland) BV                     Netherlands
Xerox de Financiacion S.A.U., E.F.C.             Spain
Xerox GmbH                                       Germany
Xerox Leasing Deutschland GmbH                   Germany
Xerox Hellas AEE                                 Greece
Xerox (Hong Kong) Limited                        Hong Kong
Name of Subsidiary                               Incorporated In

Xerox Modicorp Ltd.                              India
Xerox (Nederland) BV                             Netherlands
Xerox Oy                                         Finland
Xerox Pensions Limited                           United Kingdom
Xerox S.p.A.                                     Italy
Xerox - THE DOCUMENT COMPANY S.A.                France
Xerox (UK) Limited                               United Kingdom
Bessemer Trust Limited                           United Kingdom
Xerox Finance Limited                            United Kingdom
Xerox do Brasil Ltda.                            Brazil
Xerox Real Estate Services, Inc.                 New York
Xerox Servicios Tecnicos, C.A.                   Venezuela

===============================================================================
=

*    Indicates only 50% is owned, directly or indirectly, by Xerox Corporation.






                                                                  EXHIBIT 23

Consent of Independent Auditors



To the Board of Directors and Shareholders of Xerox Corporation

                                                                               
We consent to the incorporation by reference in the Registration Statements of 
Xerox Corporation on Forms S-8 (Nos. 333-93269, 333-09821, 333-22059, 333-22037,
333-22313, 33-65269, 33-44314, 33-44313, 33-18126, 2-86275, 2-86274) and Forms 
S-3 (Nos. 33-9486, 33-32215, 333-34333, 333-59355and 333-73173) of our reports 
dated January 25, 2000 relating to the consolidated balance sheets of Xerox 
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related 
consolidated statements of income, cash flows, and shareholders' equity and 
related financial statement schedule for each of the years in the three-year 
period ended December 31, 1999, which reports appear in or are incorporated by 
reference in the 1999 Annual Report on Form 10-K of Xerox Corporation.


                                               /s/ KPMG LLP


Stamford, Connecticut
March 27, 2000







<TABLE> <S> <C>


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CORPORATION'S DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS 
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-END>                               DEC-31-1999
<CASH>                                             126
<SECURITIES>                                         0
<RECEIVABLES>                                   16,500
<ALLOWANCES>                                       560
<INVENTORY>                                      2,961
<CURRENT-ASSETS>                                11,985
<PP&E>                                           5,386
<DEPRECIATION>                                   2,930
<TOTAL-ASSETS>                                  28,814
<CURRENT-LIABILITIES>                            7,950
<BONDS>                                         15,001
<PREFERRED-MANDATORY>                              638
<PREFERRED>                                        669
<COMMON>                                           667
<OTHER-SE>                                       4,244
<TOTAL-LIABILITY-AND-EQUITY>                    28,814
<SALES>                                         10,346
<TOTAL-REVENUES>                                19,228
<CGS>                                            5,744
<TOTAL-COSTS>                                   10,772
<OTHER-EXPENSES>                                 6,420
<LOSS-PROVISION>                                   359
<INTEREST-EXPENSE>                                 803
<INCOME-PRETAX>                                  2,036
<INCOME-TAX>                                       631
<INCOME-CONTINUING>                              1,424
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     1,424
<EPS-BASIC>                                       2.09
<EPS-DILUTED>                                     1.96
        



</TABLE>