<PAGE>

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, 2000

( )  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: (  )  No: (X)

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 April 30, 2001 was:                             $6,231,027,145.


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                            (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 April 30, 2001
-----                                            -----------------------------

Common Stock, $1 Par Value                                  694,264,863 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 2000 Annual Report to Shareholders         I & II

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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, 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 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

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the pace of that change as well as competitive developments could cause actual
results to vary from those expected.

Expansion of Color - color printing and copying represents an important and
growing segment of the market.  Printing from computers has both facilitated and
increased the demand for color.  A significant part of the Registrant's strategy
and ultimate success in this changing market is its ability to develop and
market machines that produce color prints and copies quickly and at reduced
cost.  The Registrant's continuing success in this strategy depends on its
ability to make the investments and commit the necessary resources in this
highly competitive market.

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.


Customer Financing Activities - On average, 75 - 80 percent of the Registrant's
equipment sales are financed through the Registrant. To fund these arrangements,
the Registrant must access the credit markets and the long-term viability and
profitability of its customer financing activities is dependent on its ability
to borrow and its cost of borrowing in these markets. This ability and cost, in
turn, is dependent on the Registrant's credit ratings. Currently the
registrant's credit ratings are such as to effectively preclude its ready access
to capital markets and the Registrant is currently funding its customer
financing activity from cash on hand. There is no assurance that the Registrant
will be able to continue to fund its customer financing activity at present
levels. The Registrant is actively seeking third parties to provide financing to
its customers.  In the near-term the Registrant's ability to continue to offer
customer financing and be successful in the placement of its equipment with
customers is largely dependent upon obtaining such third party financing.

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.

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International Operations - the Registrant derives approximately half its revenue
from operations outside of the United States. In addition, the Registrant
manufactures or acquires 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. Our ability to enter into new foreign
exchange contracts to manage foreign exchange risk is currently severely
limited, and we anticipate increased volatility in our results of operations due
to changes in foreign exchange rates.

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.

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 and usage growth (i.e., an increase
in the number of images produced by customers). 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. The ability to grow usage may be adversely impacted by the movement
towards distributed printing and electronic substitutes. Our inability to attain
a consistent trend of revenue growth could materially affect the trend of our
actual results.

Turnaround Program  - In October 2000, the Registrant announced a turnaround
program which includes a wide-ranging plan to generate cash, return to
profitability and pay down debt. The success of the turnaround program is
dependent upon successful and timely sales of assets, restructuring the cost
base, placement of greater operational focus on the core business and the
transfer of the financing of customer equipment purchases to third parties. Cost
base restructuring is dependent upon effective and timely elimination of
employees, closing and consolidation of facilities, outsourcing of certain
manufacturing and logistics operations, reductions in operational expenses and
the successful implementation of process and systems changes.

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The Registrant's liquidity is dependent on the timely implementation and
execution of the various turnaround program initiatives as well as its ability
to generate positive cash flow from operations and various financing strategies
including securitizations.  Should the Registrant not be able to successfully
complete the turnaround program, including positive cash generation on a timely
or satisfactory basis, the Registrant will need to obtain additional sources of
funds through other operating improvements, financing from third parties, or a
combination thereof.

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PART I


Item 1. Business
        --------
Overview

Xerox Corporation (Xerox or the Company) is The Document Company and a leader in
the global document market, selling equipment and providing document solutions
including hardware, services and software that enhance productivity and
knowledge sharing. 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, India and parts of Asia,
we distribute through Xerox Limited and related companies (collectively Xerox
Limited). Xerox had 92,500 employees at year-end 2000.

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. Japan represents approximately 80 percent of Fuji
Xerox revenues, and Australia, New Zealand, Singapore, Malaysia, Korea, Thailand
and the Philippines represent 10 percent. The remaining 10 percent of Fuji Xerox
revenues are sales to Xerox. Fuji Xerox conducts business in other Asian Pacific
Rim countries through joint ventures and distributors. In December 2000, as part
of the asset disposition element of our turnaround plan, we completed the sale
of our China operations to Fuji Xerox for $550 million cash and their assumption
of $118 million of debt. The sale included all of our manufacturing, sales and
service functions in China and Hong Kong, including ownership of Xerox (China)
Limited and Xerox (Hong Kong) Limited. The sale strengthened our liquidity and
produced a $119 million after tax gain. In March 2001 we sold half our ownership
interest in Fuji Xerox to Fuji Photo Film for $1,283 million in cash. The
Company retains significant rights as a minority Shareholder. All product and
technology agreements between Xerox and Fuji Xerox will continue, ensuring that
the two companies retain uninterrupted access to each other's portfolio of
patents, technology and products.

Our activities encompass developing, manufacturing, marketing, servicing and
financing a complete range of document processing products, solutions and
services 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
electronic and electronic to paper - better than we do.

The financing of Xerox equipment is primarily carried out by Xerox Credit
Corporation (XCC) in the United States and internationally by foreign financing
subsidiaries and divisions in most countries. As part of our turnaround program,
we intend to transition equipment financing to third parties. As part of this
program, in April 2001 we announced the sale of certain of our European
Financing businesses to Resonia Leasing AB. This transition will significantly
reduce indebtedness on our balance sheet and improve liquidity.

Turnaround Program
------------------

During 2000, the significant business challenges that we began to experience in
the second half of 1999 continued to adversely affect our financial performance.
In May 2000, Paul A. Allaire, Chairman and CEO and Anne Mulcahy, President and

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COO, assumed their new responsibilities and began work stabilizing the business.
After a thorough review, they announced a turnaround plan in October 2000.
Implementation of the turnaround program focuses Xerox on its core business and
prioritizes cash generation, improved liquidity and a return to profitability in
2001.

The program includes asset dispositions and equity partnerships designed to
generate $2 billion to $4 billion. Asset sales include the sale of the Company's
China operations to Fuji Xerox, which was completed in December 2000, and in
March 2001 the sale of half of the company's interest in Fuji Xerox for
approximately $1.3 billion. We are in discussion to form a strategic alliance
for our European paper business. We are actively engaged in discussions to sell
certain other assets, including Xerox Engineering Systems and our interests in
spin-off companies such as ContentGuard and InXight. We are seeking equity
investors for our inkjet business and we are exploring a joint venture with non-
competitive partners for certain of our research centers including the Palo Alto
Research Center. Lastly, Xerox is also seeking to sell or outsource certain
manufacturing operations. It is expected that in most cases asset sales will
result in a gain.

A second element of the turnaround program includes cost reductions of at least
$1 billion annually. Headcount reductions of 2000 and 4,300 were implemented in
the fourth quarter 2000, and the first quarter 2001 respectively.

A third element of the turnaround program includes transitioning equipment
financing to third parties, a move that will significantly improve Xerox's
balance sheet and is designed to avoid negatively impacting customers. In
January 2001 we announced the receipt of $435 million in financing from General
Electric Capital Corporation secured by the Xerox portfolio of lease receivables
in the United Kingdom. In April 2001 we announced the sale of our leasing
businesses in four European countries to Resonia Leasing AB for approximately
$370 million in cash. We are also discussing with several potential vendors
plans for them to provide equipment financing for Xerox customers around the
world.

In addition, the Board of Directors announced in October the decision to reduce
the quarterly dividend to 5 cents per share, saving $400 million a year.

The turnaround program being implemented by the Xerox management team will
refocus the core strategy of the Company going forward - with a greater emphasis
on high-end, high-growth printing supported by color, solutions and services
across the board and serving the office market in new ways. For an additional
discussion of the Company's turnaround program, refer to Note 3 of the
consolidated financial statements included on pages 24 through 25 of the
Company's 2000 Annual Report to Shareholders hereby incorporated by reference in
this document in partial answer to this Item.

Core 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.

Our principle strategy is to focus our core businesses on the most profitable
and highest growth segments of the document market, with a particular emphasis
on color across our product lines and document services and solutions. As our
customers increasingly move towards color documents, we have responded with our
highly successful DocuColor 2000 series of digital color presses and the ongoing
development of FutureColor, the next generation of color technology that we
believe will dramatically expand the color print-on-demand market. Our January
2000 acquisition of the Color Printing and Imaging Division of Tektronix (CPID),

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and its award winning line of Phaser solid ink and laser color printers, has
moved Xerox to a strong number two market share position in the fast growing
network office color printing market. We are also taking significant steps to
satisfy our customers' increasing demand for more advanced services and
solutions. Our products, technology, services and solutions are geared to match
the needs of rapidly growing markets such as high-end, Internet driven digital
printing and custom publishing, graphic arts and on-demand printing and
publishing. Our success is derived from our ability to understand our customers'
needs and to provide true document management services and outsourcing
capabilities. As we increasingly make use of our direct sales force to serve
customers seeking more advanced capabilities and solutions, we will
simultaneously expand our use of more cost-effective distribution channels such
as dealers, agents and concessionaires.

The document industry is undergoing a fundamental transformation, with the
continued transition from analog and offset to digital technology, the
management of publishing and printing jobs over the Internet, the use of
variable data to create customized documents, an increasing reliance on
outsourcing and the rapid transition to color. Documents are increasingly
created and stored in digital electronic form while the Internet is increasing
the amount of information that can be accessed in the form of electronic
documents. We believe that all of these trends play to the strengths of our
products, technology and services, and that such trends represent opportunities
for Xerox's future growth.

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.

Industry Segments

Our financial results by industry segment for 2000, 1999 and 1998, presented in
Note 10 to the consolidated financial statements on pages 29 through 31 of the
Company's 2000 Annual Report to Shareholders are hereby incorporated by
reference in this document in partial answer to this Item.

Market Overview

We estimate the global document market that we serve, excluding Japan and the
Pacific Rim countries served by Fuji Xerox, was approximately $149 billion in

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1999 and will grow to about $209 billion in 2003. To return to growth and
profitability, we continue to shift our focus to, and invest in, the most
profitable and highest growth segments of the document market, with an emphasis
on color throughout our product lines, high-end document systems, services and
solutions, outsourcing and the transition from light-lens to digital technology.
We are focused on providing solutions to our customers, through our products,
technology, document management services and outsourcing capabilities. To drive
future growth, we have increased our R&D spending, concentrating on programs to
develop hardware and value-added solutions to support high-end business and
programs that extend color capabilities. We are also expanding the use of more
cost effective indirect sales channels such as dealers, agents and
concessionaires for less complex product offerings and for those customers whose
main product acquisition criteria is price.

We continue to lead the transition in our industry from black and white to color
capable devices, from box sales to services and solutions that enhance customer
productivity and solve customer problems, from light-lens to digital technology
and from standalone devices to network-connected systems. Xerox growth will be
driven by the accelerating demand for color documents, on-demand high-end
services and solutions, document outsourcing, the transition to digital copying
and printing in the office and the transfer of document production from offset
printing to digital publishing.

Revenues for our major product categories for the three years ending December
31, 2000 are as follows:


<TABLE>
<CAPTION>


Year ended December 31  (in millions)                        2000    1999    1998
---------------------------------------------------------------------------------
<S>                                                      <C>     <C>     <C>
Black and white office and small office/home office(SOHO) $ 7,410 $ 8,150 $ 8,384
Black and white production                                  4,940   5,904   5,954
Color copying and printing                                  2,897   1,851   1,726
Other products and services                                 3,454   3,662   3,529
                                                            ---------------------
    Total                                                 $18,701 $19,567 $19,593

</TABLE>


Production Market

Through our direct sales and service organizations around the world, we provide
products and services directly to Fortune 1000 Graphic Arts and government,
education and public sector customers. The global production market is expected
to grow to $96 billion in 2003 from $49 billion in 1999, an 18 percent compound
annual growth rate. Growth in Production will be propelled by strong demand for
digital color products (expected to grow industrywide at a 20 percent annual
rate) and professional services (increasing 35 percent annually).

Xerox products in this market include monochrome production publishing
(DocuTech), production printing, color printing and production light-lens
devices at speeds over 90 pages per minute. To capture these opportunities, we
have identified color and services as two corporate strategic growth platforms.
As discussed below, during 2000 we strengthened our market leadership with the
introduction of the advanced DocuTech 2000 and DocuColor 2000 suite of products
that combine industry-leading Web capabilities with fast, efficient color and
monochrome printing.

Black and White Production Publishing (DocuTech)
------------------------------------------------
Since we launched the era of Production publishing with the introduction of our
DocuTech Production Publishing family in 1990, we have installed more than
25,000 DocuTech systems worldwide.

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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 and
customize documents "on demand." The market is substantial, as digital
production publishing has less than 20 percent 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. DocuTech prints high-resolution
(600 dots per inch) pages at speeds ranging from 65 to 180 impressions per
minute and is supported by a full line of accessory products and options. Xerox
is alone in offering a complete family of production publishing systems from 65
to 180 impressions per minute.

In 2000, we introduced an 155 page per minute and an 115 page per minute
DocuTech. The DocuTech 6115 provides a clear migration path into the digital
world by offering features for print on demand, 1:1 marketing and distribute
then print. We also introduced an enhanced version of our DigiPath Production
Software, a major productivity tool, which allows a printer's customers to use
the Internet to streamline print job submission and subsequent archiving,
preparation, proofing, and reprinting. This version adds more than 50 new
features, including enhanced Internet connectivity. In February 2001, we
announced a new streamlined version of DigiPath to offer an easy, low-cost way
for print providers to enter the market.

Production Printing
-------------------
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 500 images per minute. Many
of these printers have simultaneous interfaces that can be connected to multiple
host computers as well as local area networks. Our goal is to integrate office,
production and data-center computer printing into a single, seamless, user-
friendly family of production class printers.

We introduced two new DocuPrint high-end printing systems and additional
solutions and services in 2000 and early 2001. The new black-and-white printing
systems, the DocuPrint 115 and DocuPrint 155 Enterprise Printing Systems operate
at speeds of 115 and 155 pages per minute, respectively. They offer large
customers, such as data centers and in-plant print shops, higher print speeds,
advanced system integration and printing capabilities across the enterprise,
from the mainframe to the network.

Breakthrough technology in our highlight color printers including the DocuPrint
4850 and Docuprint 92C allows printing in an industry exclusive single pass of
black-and-white plus one customer-changeable color (as well as shades, tints,
textures and mixtures of each) at production speeds up to 90 pages per minute.

Production Color Printing
-------------------------

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Digital color is one of the fastest growing segments of the Production market.
The DocuColor 40, introduced in 1996, 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. Since then we have expanded the line into networked
and 30 page per minute versions.

DocuColor 12, introduced in 1999, was selected as "Product of the Year" for 2000
among PrintImage International's membership of quick and small commercial
printers. DocuColor 12, designed for professionals in graphic arts environments
such as quick printers, commercial printers and in-plant corporate reprographics
departments, produces 12.5 full-color pages and 50 black-and-white pages per
minute.

In February 2000, we introduced the DocuColor 2000 Series developed to provide
high-volume on-demand printing, personalized printing, and printing and
publishing for e-commerce and Internet delivery. The DocuColor 2045 prints at 45
pages per minute. 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. The 1,900 DocuColor units sold in 2000 exceeded
company projections by 25 percent.

In May 2000 at Drupa 2000, a major industry trade show, we demonstrated our
Futurecolor technology which is an advanced next-generation digital printing
press with modular components which work together as a sophisticated print shop.
Utilizing patented imaging technology enabling photographic quality output
indistinguishable from offset, this breakthrough technology will produce one
million pages/month at breakthrough operating costs. We expect initial customer
engagement to begin in late 2001 and initial revenue producing installations
beginning in the second half of 2002.

Production Light-Lens Copying
-----------------------------

Revenues from black and white light-lens production copiers continued to
decline, as expected, as customers transition to new digital products and amid
increasing price pressures.

Office Market
-------------

The Office market is comprised of global, national and mid-size commercial
customers as well as government, education and other public sector customers.
The global office market is forecast to increase at a modest one percent annual
rate, to $43 billion in 2003 from $41 billion in 1999. Our strategy in the
office is to offer our customers the "best tool for the job" including color
everywhere. As part of our Turnaround Program we are outsourcing manufacturing
and moving more of our sales and service from direct to indirect channels. Our
products and services include multi-function devices, networked and standalone
work group copiers, printers, and fax products sold through a variety of direct
sales and indirect channels. Indirect channels include sales agents and
concessionaires, retail and resellers, Internet sales and telebusiness
offerings.

Black and White Digital Multifunction Products
----------------------------------------------

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Our primary product line in this market is the Document Centre family of
modular, black and white digital multifunction products at speeds ranging from
20 to 75 pages per minute that are better quality, more reliable, and more
feature rich than light-lens copiers and priced at a modest premium over
comparable light- lens copiers. This family was first introduced in 1997 and has
been continually upgraded including six new models in the Document Centre 400
series in 2000. The network and fax options 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.

The proportion of Document Centre devices installed with network connectivity
continued to grow, to over 50 percent installed with network connectivity during
2000. As a result, approximately 45 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 incremental page growth.

Color Copying and Printing
--------------------------
The use of color originals in the office is accelerating. While total office
page volume is expected to grow a modest 2 percent, color pages are expected to
grow at a compound rate of approximately 40 percent through 2003. Color is
expected to represent 4 percent of total office pages and 19 percent of office
page revenue by 2003.

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. In 1999 we 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 and 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.

Our strong number-two market share position in the networked office color market
reflects the January 2000 acquisition of the Color Printing and Imaging Division
of Tektronix (CPID). This division 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. We have launched nine award-winning Phaser products since
acquiring Tektronix's color printing and imaging business in January 2000. Most
recently, on March 20, 2001 we launched the breakthrough 21 page per minute
Phaser 2135 that is 3 times faster than the competition and more cost effective.

Light-lens Copying
------------------
The decline in light-lens copier revenues reflects customer

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transition to new digital black-and-white products and increasing price
pressures. We believe that the trend over the past few years will continue and
that light-lens product revenues will represent a declining share of total
revenues. 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, such as customers who care principally about price or whose
work processes do not require digital products.

Black and White Laser Printers
------------------------------
Our DocuPrint family of monochrome network laser printers was originally
launched in 1997 and currently includes models ranging from 8 to 45 pages per
minute. These laser printers are faster, more advanced and less expensive than
competitive models, offering "copier-like" features such as multiple-set
printing, stapling and collating. 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.

SOHO (Small Office/Home Office) Market

The SOHO market is expected to increase to $46 billion in 2003 from $41 billion
in 1999, representing a 3 percent compound annual growth rate. We service this
market with personal and networked products sold through expanded, indirect
distribution channels such as Office Depot, OfficeMax, Staples, Micro Center,
Fry's and J& R in the United States and Carrefour, Media Market and Merisel in
Europe. The fastest growing segment of the SOHO market is color inkjet.

The Xerox M Series, which includes the DocuPrint M750 and M760 Color Inkjet
Printers, are the first inkjet products to result from our SOHO Printing
Alliance with Sharp Corporation and Fuji Xerox, which we announced in March
2000. The alliance with Fuji Xerox and Sharp leverages our strong brand and
inkjet patent portfolio with Sharp's product development and manufacturing
expertise and Fuji Xerox' technological know-how. As part of our turnaround
plan, we are aggressively seeking equity partners for our inkjet business.

Other Products

                                    Page 14


<PAGE>

We also sell cut-sheet paper to our customers for use in their document
processing products. 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. In June 2000, we sold the U.S. and Canadian commodity paper
business, including an exclusive license for the Xerox brand, to Georgia Pacific
Corporation. In addition to the proceeds from the sale of the business, the
Company will receive royalty payments on future sales of Xerox branded commodity
paper by Georgia Pacific and will earn commissions on Xerox originated sales of
commodity paper as an agent for Georgia Pacific. As part of our turnaround plan,
we have announced that we are in discussions to form a strategic alliance for
our European paper business.

We also offer other document processing products including devices designed to
reproduce large engineering and architectural drawings up to 3 feet by 4 feet in
size developed and sold through Xerox Engineering Systems (XES). We have
announced our intent to sell XES as part of our turnaround plan.

Xerox Competitive Advantages

Research and Development
------------------------
Investment in research and development (R&D) is critical to drive future growth,
and to this end Xerox R&D is directed toward the development of superior new
products and capabilities in support of our document processing strategy. The
goal of Xerox R&D is to continue to create disruptive technologies that will
expand current and future markets. 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 2000, R&D expense was $1,044 million compared with $992 million in 1999 and
$1,035 million in 1998. 2000 R&D spending was focused primarily on programs to
develop high-end business and on programs that extend our color capabilities. 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 our R&D investment in rapid market growth areas such as color and
high-end services and solutions, as well as time to market. FutureColor, an
advanced next-generation digital printing press set for initial customer
engagement in late 2001 that produces photographic quality indistinguishable
from offset, is an example of the type of breakthrough technologies developed by
Xerox R&D that will drive our future growth. Xerox R&D is strategically
coordinated with Fuji Xerox, which invested $615 million in R&D in 2000 for a
combined total of $1.7 billion; adequate to remain technologically competitive.

Marketing and Distribution
--------------------------
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
turnaround plan is focused on the expansion of cost-effective third party
distribution channels for simple commodities, and the continued use of our
direct sales force for our customers' more advanced product needs, capabilities
and

                                    Page 15


<PAGE>

solutions.

To market laser and inkjet printers, digital multi-function devices and digital
copiers, we are significantly expanding our indirect distribution channels. For
our laser printer family we have arrangements with office information technology
(IT) industry channels primarily through distributors including Ingram Micro,
Tech Data, CHS and Computer 2000. These distributors supply our products to a
broad range of IT/IS-oriented Resellers, Dealers, Direct Marketers, VARs,
Systems Integrators and E-Commerce Business-Oriented Resellers, such as CDW. We
also sell directly to some of these IT/IS-oriented Resellers('Resellers').
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 Reseller partners and thus nearly doubled the distribution capacity
and channel coverage to more than 16,000 resellers worldwide. In 2000, we also
forged marketing and reselling relationships with personal computer leaders
Compaq and Dell.

For our inkjet and low-end digital multi-function products we currently have
arrangements with U.S. retail marketing channels including Office Depot,
OfficeMax, Staples, Micro Center, Fry's and J&R, and non-U.S. retail marketing
channels including Carrefour, Media Market and Merisel. Our products are now
available 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 and CDW, for the sale of our equipment
and supplies. We have continued to market copiers, fax machines and multi-
function products through a family of authorized office product dealers.

Service
-------
We have a worldwide service force of approximately 21,000 employees and a
network of independent service agents. As part of our turnaround plan, we intend
to expand our use of cost-effective third party service providers for simple
commodity service, while continuing to focus Xerox's own direct service force on
production products and serving customers in need of more advanced value added
services. 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 major metropolitan areas around the world. As
a result, we are able to guarantee a consistent and superior level of service
nationwide and worldwide.

Customer Satisfaction
---------------------
Our most important priority is customer satisfaction. Our research shows 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. Our products, technology, services and
solutions are designed with one goal in mind - to make our customers' businesses
more productive.

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.

                                    Page 16


<PAGE>

International Operations
------------------------
Our international operations account for 44 percent of revenues. Our largest
interest outside the United States is Xerox Limited which operates predominately
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 and now China.

Our financial results by geographical area for 2000, 1999 and 1998, which are
presented on page -- of the Company's 2000 Annual Report to Shareholders are
hereby incorporated by reference in this document in partial answer to this
item.


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, Oklahoma, and Oregon and the international
facilities are located in Brazil, Canada, England, Ireland, Holland, Mexico, and
India. 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 related land is owned by the Company. In 2001 the Company
announced its intention to move out of this facility and to dispose of the
underlying land. The Company also leases a portion of a training facility,
located in Virginia, which was previously owned by the Company.

In connection with our purchase of the Color Printing and Imaging division of
Tektronix, Inc. (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.

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 16 "Litigation" on pages 40 through 43 of
the Company's 2000 Annual Report to Shareholders is hereby incorporated by
reference in this document in answer to this item.

                                    Page 17


<PAGE>


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 2000 Annual Report to Shareholders is hereby incorporated by
reference in this document in answer to this Item:

              Caption                                           Page No.
              -------                                           --------

      Stock Listed and Traded                                      53
      Xerox Common Stock Prices and Dividends                      53
      Five Years in Review - Common Shareholders
        of Record at Year-End                                      50

Recent Sales of Unregistered Securities
---------------------------------------

During the quarter ended December 31, 2000, Registrant issued the following
securities in transactions which were not registered under the Securities Act of

                                    Page 18


<PAGE>

1933, as amended (the Act):

(a)   Securities Sold: On October 1, 2000, Registrant issued 21,843 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 $4.63 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, 2000,
as set forth and included under the caption "Five Years in Review" on page 50
of the Company's 2000 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 "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 1 through 15
of the Company's 2000 Annual Report to Shareholders is hereby incorporated by
reference in this document in answer to this Item.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
         ----------------------------------------------------------

The information set forth under the caption "Risk Management" on pages 14 and 15
of the Company's 2000 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 16 through 48 and page 49 of the Company's 2000 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
48 of the Company's 2000 Annual Report to Shareholders.

                                    Page 19


<PAGE>

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.

                                    Page 20


<PAGE>


PART III
--------

The information contained in Exhibit 99 to this Form 10-K is hereby incorporated
herein in response to this part.

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. Anne
M. Mulcahy, President and Thomas J. Dolan, Senior Vice President, are sister and
brother. There are no other 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.


<TABLE>
<CAPTION>


                                                             Year
                                                           Appointed
                                                          to Present   Officer

     Name           Age         Present Position           Position     Since_
----------------    ---    --------------------------     -----------  -------
<S>                <C>    <C>                               <C>         <C>

Paul A. Allaire*     62    Chairman of the Board and          1991       1983
                            Chief Executive Officer

Anne M. Mulcahy*     48    President and                      2000       1992
                           Chief Operating Officer

Barry D. Romeril*    57    Vice Chairman and                  1999       1993
                           Chief Financial Officer

Allan E. Dugan       60    Executive Vice President           2000       1990
                           President, Worldwide Business
                           Services

Carlos Pascual       55    Executive Vice President           2000       1994
                           President, Developing Markets
                           Operations

Thomas J. Dolan      56    Senior Vice President              2000       1997
                           President Global Solutions Group

James A. Firestone   46    Senior Vice President              2000       1998
                           Corporate Strategy and

                           Marketing Group

Herve J. Gallaire    56    Senior Vice President              2000       1997
                           Xerox Research and Technology
                           and Chief Technical Officer

Michael C. Mac Donald 46   Senior Vice President              2000       1997
                           President, North American
                           Solutions Group

</TABLE>


                                    Page 21


<PAGE>

* Member of Xerox Board of Directors.

                                    Page 22


<PAGE>

Executive Officers of Xerox, Continued


<TABLE>
<CAPTION>
                                                              Year
                                                           Appointed
                                                          to Present   Officer

     Name           Age         Present Position           Position     Since_
----------------    ---    --------------------------     -----------  -------
<S>                 <C>    <C>                             <C>          <C>

Hector J. Motroni    57    Senior Vice President and          1999       1994
                           Chief Staff Officer

Christina E. Clayton 53    Vice President and                 2000       2000
                           General Counsel

Eunice M. Filter     60    Vice President, Treasurer          1990       1984
                           and Secretary


Jean-Noel Machon     48    Vice President                     2000       2000
                           President, European Solutions

                           Group

Gregory B. Tayler    43    Vice President and Controller      2000       2000

</TABLE>



Each officer named above, with the exception of James A. Firestone, has been an
officer or an executive of Xerox or its subsidiaries for at least the past five
years.

Prior to joining Xerox in 1998, Mr. Firestone had been with International
Business Machines (IBM) where he was General Manager, Consumer Division from
1995 to 1998. He was President, Consumer Services at Ameritech Corporation from
1993 to 1995. Prior to this he was with American Express Company where he was
President, Travelers Cheques in 1993, Executive Vice President, Small Business
and Corporate Services from 1989 to 1993, President, Travel Related Services-
Japan from 1984 to 1989, Vice President, Finance and Planning, Travel Related
Services-Japan from 1982 to 1984 and he held various other positions at American
Express in Japan and at their headquarters from 1978 to 1982.

                                    Page 23


<PAGE>


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 October 2, 2000, October 9, 2000,
      October 24, 2000, October 31, 2000, November 3, 2000, December 1, 2000,
      December 14, 2000 and December 21, 2000 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 (*).

                                    Page 24


<PAGE>

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

June 7, 2001

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.

June 7, 2001



    Signature                                 Title
    ---------                                 -----

Principal Executive Officer:

Paul A. Allaire                            /s/ Paul A. Allaire
                                           -------------------------------

                                            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:

Gregory B. Tayler                           /s/ Gregory B. Tayler
                                            ------------------------------

                                            Vice President and Controller

                                    Page 25


<PAGE>

Directors:



/s/ Antonia Ax:son Johnson                          Director
--------------------------------------------

/s/ Vernon E. Jordan, Jr.                           Director
--------------------------------------------

/s/ Yotaro Kobayashi                                Director
--------------------------------------------

/s/ Hilmar Kopper                                   Director
--------------------------------------------

/s/ Ralph S. Larsen                                 Director
--------------------------------------------

/s/ George J. Mitchell                              Director
--------------------------------------------

/s/ Anne M. Mulcahy                                 Director
--------------------------------------------

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

/s/ John E. Pepper                                  Director
--------------------------------------------

/s/ Martha R. Seger                                 Director
--------------------------------------------

/s/ Thomas C. Theobald                              Director
--------------------------------------------

                                    Page 26


<PAGE>



Report of Independent Auditors


To the Board of Directors of Xerox Corporation:

Under date of May 30, 2001, we reported on the consolidated balance sheets of
Xerox Corporation and consolidated subsidiaries (the "Company") as of December
31, 2000 and December 31, 1999, and the related consolidated statements of
operations, cash flows, and shareholder's equity for each of the years in the
three year period ended December 31, 2000, which are included in the
accompanying financial statements. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule listed in the accompanying index.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.

Our audit report on the Company's consolidated financial statements referred to
above indicates that the consolidated balance sheet as of December 31, 1999,
and the related consolidated statements of operations, cash flows, and
shareholder's equity for the years ended December 31, 1999, and December 31,
1998 have been restated.

Our audit report also indicates that the supplementary quarterly financial
information included in the Company's consolidated financial statements
contains information that we did not audit, and accordingly, we do not express
an opinion on that information. We did not have an adequate basis to complete
reviews of quarterly information in accordance with standards established by
the American Institute of Certified Public Accountants due to matters related
to the restatement issues as described in Note 2 to the consolidated financial
statements.

In our opinion, such financial statement schedule, when considered in relation
to the basic Consolidated Financial Statements as a whole, presents fairly in
all material aspects the information set forth therein.

                                                                  /s/ KPMG LLP

Stamford, Connecticut
May 30, 2001



<PAGE>

Index to Financial Statements and Schedule

Financial Statements:

   Consolidated statements of operations of Xerox Corporation and subsidiaries
     for each of the years in the three-year period ended December 31, 2000

   Consolidated balance sheets of Xerox Corporation and subsidiaries as of
     December 31, 2000 and 1999

   Consolidated statements of cash flows of Xerox Corporation and subsidiaries
     for each of the years in the three-year period ended December 31, 2000

   Consolidated statements of shareholders' equity of Xerox Corporation and
     subsidiaries for each of the years in the three-year period ended December
     31, 2000


   Notes to consolidated financial statements

   Report of Independent Auditors

   Quarterly Results of Operations (unaudited)


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.


                                    Page 28


<PAGE>

 
                                                                    SCHEDULE II

Valuation and Qualifying Accounts
Year ended December 31, 2000, 1999 and 1998

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

2000
----
Allowance for Losses on:
   Accounts Receivable          $137          $291         $146         $282
   Finance Receivables           423           356          329          450
                                --------------------------------------------
                                --------------------------------------------

                                --------------------------------------------
                                $560          $647         $475         $732
                                ============================================


1999
----
Allowance for Losses on:
   Accounts Receivable          $102          $168         $133         $137
   Finance Receivables           441           238          256          423
                                --------------------------------------------
                                --------------------------------------------

                                --------------------------------------------
                                $543          $406         $389         $560
                                ============================================


1998
----
Allowance for Losses on:
   Accounts Receivable          $ 92          $ 78         $ 68         $102
   Finance Receivables           389           225          173          441
                                --------------------------------------------
                                --------------------------------------------
                                $481          $303         $241         $543
                                ============================================



                                    Page 29


<PAGE>

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 9, 2001.

(4) (a) (1) 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 (the "December 1991 Indenture").

            Incorporated by reference to Exhibit 4(a) to Registration Nos.
            33-44597, 33-49177 and 33-54629.

        (2) Instrument of Resignation, Appointment and Acceptance dated as
            of February 1, 2001, among Registrant, Citibank, N.A., as
            resigning trustee, and Wilmington Trust Company, as successor
            trustee, relating to the December 1991 Indenture.

    (b) (1) 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 (the "September 1996 Indenture").

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

        (2) Instrument of Resignation, Appointment and Acceptance dated as
            of February 1, 2001, among Registrant, Citibank, N.A., as
            resigning trustee, and Wilmington Trust Company, as successor
            trustee, relating to the September 1996 Indenture.

    (c) (1) Indenture dated as of January 29, 1997, between Registrant and
            Bank One, National Association (as successor by merger with The
            First National Bank of Chicago) ("Bank One"), (the "January 1997
            Indenture"), relating to Registrant's Junior Subordinated
            Deferrable Interest Debentures ("Junior Subordinated
            Debentures").

            Incorporated by reference to Exhibit 4.1 to Registration
            Statement No. 333-24193.

        (2) Form of Certificate of Exchange relating to Junior Subordinated
            Debentures.


<PAGE>

            Incorporated by reference to Exhibit A to Exhibit 4.1 to
            Registration Statement No. 333-24193.

        (3) Certificate of Trust of Xerox Capital Trust I executed as of
            January 23, 1997.

            Incorporated by reference to Exhibit 4.3 to Registration
            Statement No. 333-24193.

        (4) Amended and Restated Declaration of Trust of Xerox Capital Trust I
            dated as of  January 29, 1997.

            Incorporated by reference to Exhibit 4.4 to Registration
            Statement No. 333-24193.

        (5) Form of Exchange Capital Security Certificate for Xerox Capital
            Trust I.

            Incorporated by reference to Exhibit A-1 to Exhibit 4.4 to
            Registration Statement No. 333-24193.

        (6) Series A Capital Securities Guarantee Agreement of Registrant
            dated as of January 29, 1997, relating to Series A Capital
            Securities of Xerox Capital Trust I.

            Incorporated by reference to Exhibit 4.6 to Registration
            Statement No. 333-24193.

        (7) Registration Rights Agreement dated January 29, 1997, among
            Registrant, Xerox Capital Trust I and the initial purchasers
            named therein.

            Incorporated by reference to Exhibit 4.7 to Registration
            Statement No. 333-24193.

    (d) (1) Indenture dated as of October 1, 1997, among Registrant, Xerox
            Overseas Holding Limited (formerly Xerox Overseas Holding PLC),
            Xerox Capital (Europe) plc (formerly Rank 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 (the "October 1997 Indenture").

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

        (2) Instrument of Resignation, Appointment and Acceptance dated as
            of February 1, 2001, among Registrant, the other issuers under
            the October 1997 Indenture, Citibank, N.A., as resigning
            trustee, and Wilmington Trust Company, as successor trustee,
            relating to the October 1997 Indenture.

    (e)     Indenture dated as of April 21, 1998, between Registrant and
            Bank One, relating to $1,012,198,000 principal amount at


<PAGE>

            maturity of Registrant's Convertible Subordinated Debentures
            due 2018 (the "April 1998 Indenture").

            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 Bank One, 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 ("State Street"), 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) (1) 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 (the "April 1999 XCC Indenture").

            Incorporated by reference to Exhibit 4(a) to XCC's Registration
            Statement No. 33-61481.

        (2) Instrument of Resignation, Appointment and Acceptance dated as
            of February 1, 2001, among XCC, Citibank, N.A., as resigning
            trustee, and Wilmington Trust Company, as successor trustee,
            relating to the April 1999 XCC Indenture.

    (i)     $7,000,000,000 Revolving Credit Agreement dated October 22,
            1997, among Registrant, XCC and certain Overseas Borrowers, as
            Borrowers, various lenders and Morgan Guaranty Trust Company of
            New York, The Chase Manhattan Bank, Citibank, N.A. and Bank One,
            as Agents.

            Incorporated by reference to Exhibit 4(h) to Registrant's
            Quarterly Report on Form 10-Q for the quarter ended September
            30, 2000.

    (j)     Instruments with respect to long-term debt where the total
            amount of securities authorized thereunder does not exceed
            10% of the total assets of Registrant and its subsidiaries on
            a consolidated basis have not been filed. Registrant agrees to
            furnish to the Commission a copy of each such instrument upon


<PAGE>

            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
            2001 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 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
            October 9, 2000.

    (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)     1997 Restatement of Registrant's Unfunded Retirement Income
            Guarantee Plan, as amended through October 9, 2000.

   *(f)     1997 Restatement of Registrant's Unfunded Supplemental
            Retirement Plan, as amended through October 9, 2000.

    (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) (1) 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.

   *    (2) Form of severance agreement entered into with various executive
            officers, effective October 15, 2000.

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


<PAGE>

            Incorporated by reference to Exhibit 10(j) to Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1999.

    (k)     Registrant's Deferred Compensation Plan for Directors, 1997
            Amendment and Restatement, as amended through October 9, 2000.

   *(l)     Registrant's Deferred Compensation Plan for Executives, 1997
            Amendment and Restatement, as amended through October 9, 2000.

   *(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, as amended through
            October 9, 2000.

   *(o)     Registrant's CEO Challenge Bonus Program.

   *(p)     Letter Agreement dated December 4, 2000 between Registrant and
            William F. Buehler, Vice Chairman of Registrant.

   *(q)     Separation Agreement dated May 11, 2000 between Registrant and
            G. Richard Thoman, former President and Chief Executive Officer
            of Registrant.

            Incorporated by reference to Exhibit 10(p) to Registrant's
            Quarterly Report on Form 10-Q for the Quarter Ended June 30,
            2000.

   *(r)     Letter Agreement dated June 4, 1997 between Registrant and G.
            Richard Thoman, former 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.

   *(s)     Letter Agreement dated April 2, 2001 between Registrant and
            Carlos Pascual, Executive Vice President of Registrant.

(11)        Statement re computation of per share earnings.

(12)        Computation of Ratio of Earnings to Fixed charges.

(13)        Registrant's 2001 Annual Report to Shareholders.

(21)        Subsidiaries of Registrant.

(23)        Consent of KPMG LLP.

(99)        Directors and Officers Information.







<PAGE>


                                                                    Exhibit 3(b)

                                     BY-LAWS

                                       of

                                XEROX CORPORATION

                                  April 9, 2001


                                    ARTICLE I

                            MEETINGS OF STOCKHOLDERS

     SECTION 1. Annual Meetings: A meeting of shareholders entitled to vote
shall be held for the election of Directors and the transaction of other
business each year in such month and on such day (except a Saturday, Sunday, or
holiday) as determined by the Board of Directors.

     SECTION 2. Special Meetings: Special Meetings of the shareholders may be
called at any time by the Chairman of the Board, the President or the Board of
Directors.

     SECTION 3. Place of Meetings: Meetings of shareholders shall be held at the
principal office of the Company or at such other place, within or without the
State of New York, as may be fixed by the Board of Directors.

     SECTION 4. Notice of Meetings:

     (a) Notice of each meeting of shareholders shall be in writing and shall
state the place, date and hour of the meeting. Notice of a Special Meeting shall
state the purpose or purposes for which it is being called and shall also
indicate that it is being issued by or at the direction of the person or persons
calling the meeting. If, at any meeting, action is proposed to be taken which
would, if taken, entitle shareholders, fulfilling the requirements of Section
623 of
 the Business Corporation Law to receive payment for their shares, the
notice of such meeting shall include a statement of that purpose and to that
effect.

     (b) A copy of the notice of any meeting shall be given, personally or by
mail, not less than ten nor more than sixty days before the date of the meeting,
to each shareholder entitled to vote at such meeting. If mailed, such notice is
given when deposited in the United States mail, with postage thereon prepaid,
directed to the shareholder at his or her address as it appears on the record of
shareholders, or, if he or she shall have filed with the Secretary a written
request that notices to him or her be mailed to some other address, then
directed to him or her at such other address.

     (c) Notice of meeting need not be given to any shareholder who submits a
signed waiver of notice, in person or by proxy, whether before or after the
meeting. The attendance of any shareholder at a meeting, in person or by proxy,
without protesting prior to the conclusion of the meeting the lack of notice of
such meeting, shall constitute a waiver of notice by him or her.


<PAGE>

     SECTION 5.  Quorum and Adjourned Meetings:

     (a) At any Annual or Special Meeting the holders of a majority of the votes
of shares entitled to vote thereat, present in person or by proxy, shall
constitute a quorum for the transaction of any business, provided that when a
specified item of business is required to be voted on by a class or series,
voting as a class, the holders of a majority of the votes of shares of such
class or series shall constitute a quorum for the transaction of such specified
item of business. When a quorum is once present to organize a meeting, it is not
broken by the subsequent withdrawal of any shareholders.

     (b) Despite the absence of a quorum, the shareholders present may adjourn
the meeting to another time and place, and it shall not be necessary to give any
notice of the adjourned meeting if the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is taken. At the
adjourned meeting any business may be transacted that might have been transacted
on the original date of the meeting. If after the adjournment, however, the
Board of Directors fixes a new record date for the adjourned meeting, a notice
of the adjourned meeting shall be given to each shareholder on the new record
date entitled to notice under Section 4 of this Article I of the By-Laws.

     SECTION 6.  Nominations and Business at Meetings:

     At any annual meeting of shareholders, only persons who are nominated or
business which is proposed in accordance with the procedures set forth in this
Section 6 shall be eligible for election as Directors or considered for action
by shareholders. Nominations of persons for election to the Board of Directors
of the Company may be made or business proposed at a meeting of shareholders (i)
by or at the direction of the Board of Directors or (ii) by any shareholder of
the Company entitled to vote at the meeting who complies with the notice and
other procedures set forth in this Section 6. Such nominations or business
proposals, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Company and such business proposals must, under applicable law, be a
proper matter for shareholder action. To be timely, a shareholder's notice shall
be delivered to or mailed and received at the principal executive offices of the
Company not less than 120 days nor more than 150 days in advance of the date
which is the anniversary of the date the Company's proxy statement was released
to security holders in connection with the previous year's annual meeting or if
the date of the applicable annual meeting has been changed by more than 30 days
from the date contemplated at the time of the previous year's proxy statement,
not less than 90 days before the date of the applicable annual meeting.

     Such shareholder's notice shall set forth (a) as to each person whom such
shareholder proposes to nominate for election or reelection as a Director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected); (b) as to any
other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the


<PAGE>

annual meeting, the reasons for conducting such business at the annual meeting
and any material interest in such business of such person on whose behalf such
proposal is made; and (c) as to the shareholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made,
(i) the name and address of such shareholder, as they appear on the Company's
books and (ii) the class and number of shares of the Company which are
beneficially owned by such shareholder. No person shall be eligible for election
as a Director of the Company and no business shall be conducted at the annual
meeting of shareholders unless nominated or proposed in accordance with the
procedures set forth in this Section 6. The Chairman of the meeting may, if the
facts warrant, determine and declare to the meeting that a nomination or
proposal was not made in accordance with the provisions of this Section 6 and,
if he or she should so determine, he or she shall so declare to the meeting and
the defective nomination or proposal shall be disregarded.

     SECTION 7.  Organization: At every meeting of the shareholders, the
Chairman of the Board, or in his or her absence if the President is a Director,
the President, or if the President is not a Director or is absent, a Vice
Chairman, or in the absence of such officers, an Executive Vice President
designated by the Chairman of the Board, or in the absence of such officers, a
person selected by the meeting, shall act as chairman of the meeting. The
Secretary or, in his or her absence, an Assistant Secretary shall act as
secretary of the meeting, and in the absence of both the Secretary and an
Assistant Secretary, a person selected by the meeting shall act as secretary of
the meeting.

     SECTION 8.  Voting:

     (a) Whenever any corporate action, other than the election of Directors, is
to be taken by vote of the shareholders, it shall, except as otherwise required
by law or by the Certificate of Incorporation be authorized by a majority of the
votes cast in favor of or against such action at a meeting of shareholders by
the holders of shares entitled to vote thereon. An abstention shall not
constitute a vote cast.

     (b) Directors shall, except as otherwise required by law, be elected by a
plurality of the votes cast at a meeting of shareholders by holders of shares
entitled to vote in the election.

     SECTION 9.  Qualification of Voters:

     (a) Every shareholder of record of Common Stock and Series B Convertible
Preferred Stock of the Company shall be entitled at every meeting of such
shareholders to one vote for every share of Common Stock and Series B
Convertible Preferred Stock, respectively, standing in his or her name on the
record of shareholders.

     (b) Shares of stock belonging to the Company and shares held by another
domestic or foreign corporation of any type or kind, if a majority of the shares
entitled to vote in the election of directors of such other corporation is held
by the Company, shall not be shares entitled to vote or to be counted in
determining the total number of outstanding shares.

     (c) Shares held by an administrator, executor, guardian, conservator,
committee, or other fiduciary, except a trustee, may be voted by him or her,
either in person or by proxy, without transfer of such shares into his or her
name. Shares held by a trustee may be voted by him or her, either in person or



<PAGE>

by proxy, only after the shares have been transferred into his or her name as
trustee or into the name of his or her nominee.

     (d) Shares standing in the name of another domestic or foreign corporation
of any type or kind may be voted by such officer, agent or proxy as the By-Laws
of such corporation may provide, or in the absence of such provision, as the
Board of Directors of such corporation may provide.

     SECTION 10.  Proxies:

     (a) Every shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent without a meeting may authorize another person or
persons to act for him or her by proxy.

     (b) No proxy shall be valid after the expiration of eleven months from the
date thereof unless otherwise provided in the proxy. Every proxy shall be
revocable at the pleasure of the shareholder executing it, except as otherwise
provided by law.

     (c) The authority of the holder of a proxy to act shall not be revoked by
the incompetence or death of the shareholder who executed the proxy unless,
before the authority is exercised, written notice of an adjudication of such
incompetence or of such death is received by the Secretary or an Assistant
Secretary.

     (d) Without limiting the manner in which a shareholder may authorize
another person or persons to act for him or her as proxy pursuant to paragraph
(a) of this Section, the following shall constitute a valid means by which a
shareholder may grant such authority:

         (1) A shareholder may execute a writing authorizing another person or
     persons to act for him or her as proxy. Execution may be accomplished by
     the shareholder or the shareholder's authorized officer, director, employee
     or agent signing such writing or causing his or her signature to be affixed
     to such writing by any reasonable means including, but not limited to, by
     facsimile signature.

         (2) A shareholder may authorize another person or persons to act for
     the shareholder as proxy by transmitting or authorizing the transmission of
     a telegram, cablegram or other means of electronic transmission to the
     person who will be the holder of the proxy or to a proxy solicitation firm,
     proxy support service organization or like agent duly authorized by the
     person who will be the holder of the proxy to receive such transmission,
     provided that such telegram, cablegram or other means of electronic
     transmission must either set forth or be submitted with information from
     which it can be reasonably determined that the telegram, cablegram or other
     electronic transmission was authorized by the shareholder. If it is
     determined that such telegrams, cablegrams or other electronic
     transmissions are valid, the inspectors shall specify the nature of the
     information upon which they relied.

     (e) Any copy, facsimile telecommunication or other reliable reproduction of
the writing or transmission created pursuant to paragraph (d) of this Section
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile, telecommunication or other
reproduction shall be a complete reproduction of


<PAGE>

the entire original writing or transmission.

     SECTION 11. Inspectors of Election:

     (a) The Board of Directors, in advance of any shareholders' meeting, shall
appoint one or more inspectors to act at the meeting or any adjournment thereof.
The Board of Directors may designate one or more persons as alternate inspectors
to replace any inspector who fails to act. If no inspector or alternate has been
appointed, or if such persons are unable to act at a meeting of shareholders,
the person presiding at a shareholders' meeting shall appoint one or more
inspectors. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his or her ability.

     (b) The inspectors shall determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all shareholders. On request of the person presiding at
the meeting or any shareholder entitled to vote thereat, the inspectors shall
make a report in writing of any challenge, question or matter determined by them
and execute a certificate of any fact found by them. Any report or certificate
made by them shall be prima facie evidence of the facts stated and of the vote
as certified by them.

     SECTION 12. List of Shareholders at Meetings: A list of shareholders as of
the record date, certified by the Secretary or by the transfer agent, shall be
produced at any meeting of shareholders upon the request thereat or prior
thereto of any shareholder. If the right to vote at any meeting is challenged,
the inspectors of election, or person presiding thereat shall require such list
of shareholders to be produced as evidence of the right of the persons
challenged to vote at such meeting, and all persons who appear from such list to
be shareholders entitled to vote thereat may vote at such meeting.

                              ARTICLE II

                          BOARD OF DIRECTORS

     SECTION 1.  Power of Board and Qualification of Directors: The business of
the Company shall be managed under the direction of the Board of Directors, each
of whom shall be at least eighteen years of age.

     SECTION 2.  Number, Term of Office and Classification:

     (a) The Board of Directors shall consist of not less than five nor more
than twenty-one members. The number of Directors shall be determined from time
to time by resolution of a majority of the entire Board of Directors then in
office, provided that no decrease in the number of Directors shall shorten the
term of any incumbent Director. At each Annual Meeting of shareholders Directors
shall be elected to hold office until the next annual meeting.

     (b) If and whenever six full quarter-yearly dividends (whether or not


<PAGE>

consecutive) payable on the Cumulative Preferred Stock of any series shall be in
arrears, in whole or in part, the number of Directors then constituting the
Board of Directors shall be increased by two and the holders of the Cumulative
Preferred Stock, voting separately as a class, regardless of series, shall be
entitled to elect the two additional Directors at any annual meeting of
shareholders or special meeting held in place thereof, or at a special meeting
of the holders of the Cumulative Preferred Stock called as hereinafter provided.
Whenever all arrears in dividends on the Cumulative Preferred Stock then
outstanding shall have been paid and dividends thereon for the current
quarter-yearly dividend period shall have been paid or declared and set apart
for payment, then the right of the holders of the Cumulative Preferred Stock to
elect such additional two Directors shall cease (but subject always to the same
provisions for the vesting of such voting rights in the case of any similar
future arrearages in dividends), and the terms of office of all persons elected
as Directors by the holders of the Cumulative Preferred Stock shall forthwith
terminate and the number of the Board of Directors shall be reduced accordingly.
At any time after such voting power shall have been so vested in the Cumulative
Preferred Stock, the Secretary of the Company may, and upon the written request
of any holder of the Cumulative Preferred Stock (addressed to the Secretary at
the principal office of the Company) shall, call a special meeting of the
holders of the Cumulative Preferred Stock for the election of the two Directors
to be elected by them as herein provided, such call to be made by notice similar
to that provided in the By-Laws for a special meeting of the shareholders or as
required by law. If any such special meeting required to be called as above
provided shall not be called by the Secretary within twenty days after receipt
of any such request, then any holder of Cumulative Preferred Stock may call such
meeting, upon the notice above provided, and for that purpose shall have access
to the stock books of the Company. The Directors elected at any such special
meeting shall hold office until the next annual meeting of the shareholders or
special meeting held in place thereof. In case any vacancy shall occur among the
Directors elected by the holders of the Cumulative Preferred Stock, a successor
shall be elected to serve until the next annual meeting of the shareholders or
special meeting held in place thereof by the then remaining Director elected by
the holders of the Cumulative Preferred Stock or the successor of such remaining
Director.

     (c)  All Directors shall have equal voting power.

     SECTION 3. Organization: At each meeting of the Board of Directors, the
Chairman of the Board, or in his or her absence, the President, or in his or her
absence, a chairman chosen by a majority of the Directors present shall preside.
The Secretary shall act as secretary of the Board of Directors. In the event the
Secretary shall be absent from any meeting of the Board of Directors, the
meeting shall select its secretary.

     SECTION 4. Resignations: Any Director of the Company may resign at any time
by giving written notice to the Chairman of the Board, the President or to the
Secretary of the Company. Such resignation shall take effect at the time
specified therein or, if no time be specified, then on delivery.

     SECTION 5. Vacancies: Newly created directorships resulting from an
increase in the number of Directors and vacancies occurring in the Board of
Directors for any reason except the removal of Directors without cause may be
filled by a vote of a majority of the Directors then in office, although less
than a quorum exists. A Director elected to fill a vacancy shall hold office
until the next annual meeting.


<PAGE>

     SECTION 6.  Place of Meeting: The Board of Directors may hold its meetings
at such place or places within or without the State of New York as the Board of
Directors may from time to time by resolution determine.

     SECTION 7.  First Meeting: On the day of each annual election of Directors,
the Board of Directors shall meet for the purpose of organization and the
transaction of other business. Notice of such meeting need not be given. Such
first meeting may be held at any other time which shall be specified in a notice
given as hereinafter provided for special meetings of the Board of Directors.

     SECTION 8.  Regular Meetings:  Regular meetings of the Board of Directors
may be held at such times as may be fixed from time to time by resolution of
the Board of Directors without notice.

     SECTION 9.  Special Meetings: Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, the President, or by
any two of the Directors. Oral, telegraphic or written notice shall be given,
sent or mailed not less than one day before the meeting and shall state, in
addition to the purposes, the date, place and hour of such meeting.

     SECTION 10. Waivers of Notice: Notice of a meeting need not be given to any
Director who submits a signed waiver of notice whether before or after the
meeting, or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to him or her.

     SECTION 11. Quorum and Manner of Acting:

     (a) If the number of Directors is twelve or more, seven Directors shall
constitute a quorum for the transaction of business or any specified item of
business. If the number of Directors is less than twelve, a majority of the
entire Board of Directors shall constitute a quorum.

     (b) A majority of the Directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place without notice to any
Director.

     SECTION 12. Written Consents: Any action required or permitted to be taken
by the Board of Directors or any committee thereof may be taken without a
meeting if all members of the Board or the committee consent in writing to the
adoption of a resolution authorizing the action. The resolution and the written
consents thereto by the members of the Board or committee shall be filed with
the minutes of the proceedings of the Board or committee.

     SECTION 13. Participation At Meetings By Telephone: Any one or more members
of the Board of Directors or any committee thereof may participate in a meeting
of such Board or committee by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at a meeting.

     SECTION 14. Compensation:  The Board of Directors shall have authority
to fix the compensation of Directors for services in any capacity.

     SECTION 15. Interested Directors:


<PAGE>

     (a)  No contract or other transaction between the Company and one or more
of its Directors, or between the Company and any other corporation, firm,
association or other entity in which one or more of its Directors are directors
or officers, or are financially interested, shall be either void or voidable for
this reason alone or by reason alone that such Director or Directors are present
at the meeting of the Board of Directors, or of a committee thereof, which
approves such contract or transaction, or that his or her or their votes are
counted for such purpose, provided that the parties to the contract or
transaction establish affirmatively that it was fair and reasonable as to the
Company at the time it was approved by the Board, a committee, or the
shareholders.

     (b)  Any such contract or transaction may not be avoided by the Company
for the reasons set forth in (a) if

          (1) the material facts as to such Director's interest in such contract
     or transaction and as to any such common directorship, officership or
     financial interest are disclosed in good faith or known to the Board or
     committee, and the Board or committee approves such contract or transaction
     by a vote sufficient for such purpose without counting the vote of such
     interested Director or, if the votes of the disinterested Directors are
     insufficient for such purpose, by unanimous vote of the disinterested
     Directors (although common or interested Directors may be counted in
     determining the presence of a quorum at a meeting of the Board or of a
     committee which approves such contract or transactions), or

          (2) the material facts as to such Director's interest in such contract
     or transaction and as to any such common directorship, officership or
     financial interest are disclosed in good faith or known to the shareholders
     entitled to vote thereon, and such contract or transaction is approved by
     vote of such shareholders.

     SECTION 16. Loans to Directors: The Company may not lend money to or
guarantee the obligation of a Director of the Company unless the particular loan
or guarantee is approved by the shareholders, with the holders of a majority of
the shares entitled to vote thereon constituting a quorum, but shares held of
record or beneficially by Directors who are benefited by such loan or guarantee
shall not be entitled to vote or to be included in the determination of a
quorum.

                              ARTICLE III

                          EXECUTIVE COMMITTEE

      SECTION 1. How Constituted and Powers: There shall be an Executive
Committee, consisting of not less than three nor more than nine Directors,
including the Chairman of the Board, the Chairman of the Executive Committee and
the President, if the President is a Director, elected by a majority of the
entire Board of Directors, who shall serve at the pleasure of the Board. The
Executive Committee shall have all the authority of the Board, except it shall
have no authority as to the following matters:

      (a)  The submission to shareholders of any action that needs shareholders'
authorization.



<PAGE>

     (b)  The filling of vacancies in the Board or in any committee.

     (c)  The fixing of compensation of the Directors for serving on the Board
or on any committee.

     (d)  The amendment or repeal of the By-Laws, or the adoption of new By-
Laws.

     (e)  The amendment or repeal of any resolution of the Board which, by its
terms, shall not be so amendable or repealable.

     (f)  The declaration of dividends.

     SECTION 2. Meetings: Meetings of the Executive Committee, of which no
notice shall be necessary, shall be held on such days and at such place as shall
be fixed, either by the Chairman of the Board, the Chairman of the Executive
Committee, or by a vote of the majority of the whole Committee.

     SECTION 3. Quorum and Manner of Acting: Unless otherwise provided by
resolution of the Board of Directors, a majority of the Executive Committee
shall constitute a quorum for the transaction of business and the act of a
majority of all of the members of the Committee, whether present or not, shall
be the act of the Executive Committee. The members of the Executive Committee
shall act only as a Committee. The procedure of the Committee and its manner of
acting shall be subject at all times to the directions of the Board of
Directors.

     SECTION 4. Additional Committees: The Board of Directors by resolution
adopted by a majority of the entire Board may designate from among its members
additional committees, each of which shall consist of one or more Directors and
shall have such authority as provided in the resolution designating the
committee, except such authority shall not exceed the authority conferred on the
Executive Committee by Section 1 of this Article.

     SECTION 5. Alternate Members: The Board of Directors may designate one or
more eligible Directors as alternate members of the Executive Committee, or of
any other committee of the Board, who may replace any absent or disqualified
member or members at any meeting of any such committee.

                                   ARTICLE IV

                                    OFFICERS

     SECTION 1. Number: The officers of the Company shall be a Chairman of the
Board, a President, a Chairman of the Executive Committee, one or more Vice
Chairman of the Board, one or more Vice Presidents, a Treasurer, a Secretary, a
Controller, and such other officers as the Board of Directors may in its
discretion elect. Any two or more offices may be held by the same person.

     SECTION 2. Term of Offices and Qualifications: Those officers whose titles
are specifically mentioned in Section 1 of this Article IV shall be chosen by
the Board of Directors on the day of the Annual Meeting. Unless a shorter term
is provided in the resolution of the Board electing such officer, the term of
office of such officer shall extend to and expire at the meeting of the Board
held on the day of the next Annual Meeting. The Chairman of the




<PAGE>

Board, the Chairman of the Executive Committee and the Vice Chairmen shall be
chosen from among the Directors.

     SECTION 3.  Additional Officers: Additional officers other than those whose
titles are specifically mentioned in Section 1 of this Article IV shall be
elected for such period, have such authority and perform such duties, either in
an administrative or subordinate capacity, as the Board of Directors may from
time to time determine.

     SECTION 4.  Removal of Officers: Any officer may be removed by the Board of
Directors with or without cause, at any time. Removal of an officer without
cause shall be without prejudice to his or her contract rights, if any, but his
or her election as an officer shall not of itself create contract rights.

     SECTION 5.  Resignation: Any officer may resign at any time by giving
written notice to the Board of Directors, or to the Chairman of the Board, or
the President, or to the Secretary. Any such resignation shall take effect at
the time specified therein, or if no time be specified, then upon delivery.

     SECTION 6.  Vacancies:  A vacancy in any office shall be filled by the
Board of Directors.

     SECTION 7.  Chairman of the Board: The Chairman of the Board shall preside
at all meetings of the shareholders at which he or she is present, unless at
such meetings the shareholders shall appoint a chairman other than the Chairman
of the Board. The Chairman of the Board shall preside at all meetings of the
Directors at which he or she is present. The Chairman of the Board shall act as
the Chief Executive Officer of the Company and it shall be his or her duty to
supervise generally the management of the business of the Company with
responsibility direct to the Board and subject to the control of the Board. The
Chairman of the Board shall have such powers and perform such other duties as
may be assigned to him or her by the Board.

     SECTION 8.  President: The President shall, if he or she is also a
Director, in the absence of the Chairman of the Board, preside at all meetings
of the shareholders, Directors or the Executive Committee at which he or she is
present. The President shall act as Chief Operating Officer of the Company. The
President shall have such powers and perform such other duties as may be
assigned to him or her by the Board.

     SECTION 9.  Chairman of the Executive Committee: The Chairman of the
Executive Committee shall have such powers and perform such duties as may be
assigned to him or her by the Board. The Chairman of the Executive Committee
shall preside at meetings of the Executive Committee of the Board of Directors.

     SECTION 10. The Vice Chairmen: Each Vice Chairman of the Board shall have
such power and shall perform such duties as may be assigned to him or her by the
Board of Directors, the Chairman of the Board or the President.

     SECTION 11. The Vice Presidents: Each Vice President shall have such powers
and shall perform such duties as may be assigned to him or her by the Board of
Directors, the Chairman of the Board or the President.

     SECTION 12. The Treasurer: The Treasurer shall, if required by the Board of
Directors, give a bond for the faithful discharge of his or her


<PAGE>

duties, in such sum and with such sureties as the Board of Directors shall
require. He or she shall have charge and custody of, and be responsible for, all
funds and securities of the Company, and deposit all such funds in the name of
and to the credit of the Company in such banks, trust companies, or other
depositories as shall be selected by the Board of Directors. The Treasurer may
sign certificates for stock of the Company authorized by the Board of Directors.
He or she shall also perform all other duties customarily incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
or her by the Board of Directors.

     SECTION 13. The Controller: The Controller shall keep and maintain the
books of account for internal and external reporting purposes. He or she shall
also perform all other duties customarily incident to the office of Controller
and such other duties as may be assigned to him or her from time to time by the
Board of Directors.

     SECTION 14. The Secretary: It shall be the duty of the Secretary to act as
secretary of all meetings of the Board of Directors, and of the shareholders,
and to keep the minutes of all such meetings at which he or she shall so act in
a proper book or books to be provided for that purpose; he or she shall see that
all notices required to be given by the Company are duly given and served; he or
she may sign and execute in the name of the Company certificates for the stock
of the Company, deeds, mortgages, bonds, contracts or other instruments
authorized by the Board of Directors; he or she shall prepare, or cause to be
prepared, for use at meetings of shareholders the list of shareholders as of the
record date referred to in Article I, Section 12 of these By-Laws and shall
certify, or cause the transfer agent to certify, such list; he or she shall keep
a current list of the Company's Directors and officers and their residence
addresses; he or she shall be custodian of the seal of the Company and shall
affix the seal, or cause it to be affixed, to all agreements, documents and
other papers requiring the same. The Secretary shall have custody of the Minute
Book containing the minutes of all meetings of shareholders, Directors, the
Executive Committee, and any other committees which may keep minutes, and of all
other contracts and documents which are not in the custody of the Treasurer or
the Controller of the Company, or in the custody of some other person authorized
by the Board of Directors to have such custody.

     SECTION 15. Appointed Officers:  The Board of Directors may delegate to
any officer or committee the power to appoint and to remove any subordinate
officer, agent or employee.

     SECTION 16. Assignment and Transfer of Stocks, Bonds, and Other Securities:
The Chairman of the Board, the President, the Treasurer, the Secretary, any
Assistant Secretary, any Assistant Treasurer, and each of them, shall have power
to assign, or to endorse for transfer, under the corporate seal, and to deliver,
any stock, bonds, subscription rights, or other securities, or any beneficial
interest therein, held or owned by the Company.

                                    ARTICLE V

                 CONTRACTS, CHECKS, DRAFTS AND BANK ACCOUNTS

     SECTION 1.  Execution of Contracts: The Board of Directors, except as in
these By-Laws otherwise provided, may authorize any officer or officers, agent,
or agents, in the name of and on behalf of the Company to enter into


<PAGE>

any contract or execute and dliver any instrument, and such authority may be
general or confined to specific instances; but, unless so authorized by the
Board of Directors, or expressly authorized by these By-Laws, no officer, agent
or employee shall have any power or authority to bind the Company by any
contract or engagement or to pledge its credit or to render it liable
pecuniarily in any amount for any purpose.

     SECTION 2. Loans: No loans shall be contracted on behalf of the Company,
and no negotiable paper shall be issued in its name unless specifically
authorized by the Board of Directors.

     SECTION 3. Checks, Drafts, etc.: All checks, drafts, and other orders for
the payment of money out of the funds of the Company, and all notes or other
evidences of indebtedness of the Company, shall be signed on behalf of the
Company in such manner as shall from time to time be determined by resolution of
the Board of Directors.

     SECTION 4. Deposits: All funds of the Company not otherwise employed shall
be deposited from time to time to the credit of the Company in such banks, trust
companies or other depositories as the Board of Directors may select.

                              ARTICLE VI

                         STOCKS AND DIVIDENDS

     SECTION 1. Shares of Stock: Shares of stock of the Company shall be
represented by certificates except to the extent that the Board of Directors of
the Company shall provide by resolution that some or all of any or all classes
and series of the Company's shares shall be uncertificated shares, provided that
such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the Company. Except as otherwise expressly
provided by law, the rights and obligations of holders of uncertificated shares
and the rights and obligations of the holders of certificates representing
shares of the same class and series shall be identical.

     SECTION 2. Certificates For Shares. To the extent that shares of stock of
the Company are to be represented by certificates, the certificates therefor
shall be in such form as shall be approved by the Board of Directors. The
certificates of stock shall be numbered in order of their issue, shall be signed
by the Chairman of the Board, the President, a Vice Chairman or a Vice
President, and the Secretary or an Assistant Secretary, or the Treasurer or an
Assistant Treasurer. The signature of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the Company itself or its employee. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Company with the same effect as if he or she
were an officer at the date of issue.

     SECTION 3. Transfer of Stock: Transfers of stock of the Company shall be
made only on the books of the Company by the holder thereof, or by his or her
duly authorized attorney, on surrender of the certificate or certificates for
stock represented by certificates, properly endorsed, or in the case of shares
of stock not represented by certificates, on delivery to the Company of


<PAGE>

proper transfer instructions. Within a reasonable time after the issuance or
transfer of uncertificated stock, the Company shall send to the registered owner
thereof a written notice containing the information required to be set forth or
stated on certificates pursuant to the Business Corporation Law of the State of
New York. Every certificate surrendered to the Company shall be marked
"Canceled", with the date of cancellation, and no new certificate shall be
issued in exchange therefor until the old certificate has been surrendered and
canceled. A person in whose name stock of the Company stands on the books of the
Company shall be deemed the owner thereof as regards the Company; provided that,
whenever any transfer of stock shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary of the Company, or to its
transfer agent shall be so expressed in the entry of the transfer. No transfer
of stock shall be valid as against the Company, or its shareholders for any
purpose, until it shall have been entered in the stock records of the Company as
specified in these By-Laws by an entry showing from and to whom transferred.

     SECTION 4. Transfer and Registry Agents: The Company may, from time to
time, maintain one or more transfer offices or agencies and/or registry offices
at such place or places as may be determined from time to time by the Board of
Directors; and the Board of Directors may, from time to time, define the duties
of such transfer agents and registrars and make such rules and regulations as it
may deem expedient, not inconsistent with these By-Laws, concerning the issue,
transfer and registration of certificates for stock or uncertificated stock of
the Company.

     SECTION 5. Lost, Destroyed and Mutilated Certificates: The holder of any
certificated stock of the Company shall immediately notify the Company of any
loss, destruction or mutilation of the certificate therefor. The Company may
issue a new certificate or uncertificated stock in place of the lost or
destroyed certificate, but as a condition to such issue, the holder of such
certificate must make satisfactory proof of the loss or destruction thereof, and
must give to the Company a bond of indemnity in form and amount and with one or
more sureties satisfactory to the Treasurer, the Secretary or any Assistant
Treasurer or Assistant Secretary. Such bond of indemnity shall also name as
obligee each of the transfer agents and registrars for the stock the certificate
for which has been lost or destroyed.

     SECTION 6. Record Dates for Certain Purposes: The Board of Directors of the
Company shall fix a day and hour not more than sixty days preceding the date of
any meeting of shareholders, or the date for payment of any cash or stock
dividend, or the date for the allotment of any rights of subscription, or the
date when any change or conversion or exchange of capital stock shall go into
effect, as a record date for the determination of the shareholders entitled to
notice of, and to vote at, any such meeting and any adjournment thereof, or
entitled to receive payment of any such dividend, or entitled to receive any
such allotment of rights of subscription, or entitled to exercise rights in
respect of any such change, conversion or exchange of capital stock, and in such
case, such shareholders and only such shareholders as shall be shareholders of
record on the day and hour so fixed shall be entitled to such notice of, and to
vote at, such meeting or any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights of subscription, or to exercise
rights in connection with such change or conversion or exchange of capital
stock, as the case may be, notwithstanding any transfer of any stock on the
books of the Company after such day and hour fixed as aforesaid.


<PAGE>

     SECTION 7. Dividends and Surplus: Subject to the limitations prescribed by
law, the Board of Directors (1) may declare dividends on the stock of the
Company whenever and in such amounts as, in its opinion, the condition of the
affairs of the Company shall render it advisable, (2) may use and apply, in its
discretion, any part or all of the surplus of the Company in purchasing or
acquiring any of the shares of stock of the Company, and (3) may set aside from
time to time out of such surplus or net profits such sum or sums as it in its
absolute discretion, may think proper as a reserve fund to meet contingencies or
for equalizing dividends, or for the purpose of maintaining or increasing the
property or business of the Company, or for any other purpose it may think
conducive to the best interest of the Company.

                                   ARTICLE VII

                                OFFICES AND BOOKS

     SECTION 1. Offices: The Company shall maintain an office at such place in
the County of Monroe, State of New York, as the Board of Directors may
determine. The Board of Directors may from time to time and at any time
establish other offices of the Company or branches of its business at whatever
place or places seem to it expedient.

     SECTION 2.  Books and Records:

     (a) There shall be kept at one or more offices of the Company (1) correct
and complete books and records of account, (2) minutes of the proceedings of the
shareholders, Board of Directors and the Executive Committee, (3) a current list
of the Directors and officers of the Company and their residence addresses, and
(4) a copy of these By-Laws.

     (b) The stock records may be kept either at the office of the Company or at
the office of its transfer agent or registrar in the State of New York, if any,
and shall contain the names and addresses of all shareholders, the number and
class of shares held by each and the dates when they respectively became the
owners of record thereof.

                                  ARTICLE VIII

                                     GENERAL

     SECTION 1.  Seal:  The corporate seal shall be in the form of a circle
and shall bear the full name of the Company and the words and figures
"Incorporated 1906, Rochester, N. Y.".

     SECTION 2. Indemnification of Directors and Officers: Except to the extent
expressly prohibited by law, the Company shall indemnify any person, made or
threatened to be made, a party in any civil or criminal action or proceeding,
including an action or proceeding by or in the right of the Company to procure a
judgment in its favor or by or in the right of any other corporation of any type
or kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit


<PAGE>

plan or other enterprise, which any Director or officer of the Company served in
any capacity at the request of the Company, by reason of the fact that he or
she, his or her testator or intestate is or was a Director or officer of the
Company or serves or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, in any capacity, against
judgments, fines, penalties, amounts paid in settlement and reasonable expenses,
including attorneys' fees, incurred in connection with such action or
proceeding, or any appeal therein, provided that no such indemnification shall
be required with respect to any settlement unless the Company shall have given
its prior approval thereto. Such indemnification shall include the right to be
paid advances of any expenses incurred by such person in connection with such
action, suit or proceeding, consistent with the provisions of applicable law. In
addition to the foregoing, the Company is authorized to extend rights to
indemnification and advancement of expenses to such persons by i) resolution of
the shareholders, ii) resolution of the Directors or iii) an agreement, to the
extent not expressly prohibited by law.

                                   ARTICLE IX

                                   FISCAL YEAR

     SECTION 1.  Fiscal Year:  The fiscal year of the Company shall end on the
31st day of December in each year.


                                    ARTICLE X

                                   AMENDMENTS

     SECTION 1. Amendments: By-Laws of the Company may be amended, repealed or
adopted by a majority of the votes of the shares at the time entitled to vote in
the election of any Directors. If, at any meeting of shareholders, action is
proposed to be taken to amend, repeal or adopt By-Laws, the notice of such
meeting shall include a brief statement or summary of the proposed action. The
By-Laws may also be amended, repealed or adopted by the Board of Directors, but
any By-Law adopted by the Board may be amended or repealed by shareholders
entitled to vote thereon as hereinabove provided. If any By-Law regulating an
impending election of Directors is adopted, amended or repealed by the Board of
Directors, there shall be set forth in the notice of the next meeting of
shareholders for the election of Directors the By-Law so adopted, amended or
repealed, together with a concise statement of the changes made.




<PAGE>

                                                                 Exhibit 4(a)(2)

            INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE
            -----------------------------------------------------


     THIS INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, ("Instrument"),
dated and effective as of February 1, 2001 (the "Effective Date"), among XEROX
CORPORATION, a corporation organized under the laws of the State of New York
(the "Company"), CITIBANK, N.A., a national banking association organized under
the laws of the United States of America (the "Resigning Trustee"), and
WILMINGTON TRUST COMPANY, a banking corporation organized under the laws of the
State of Delaware (the "Successor Trustee"). Capitalized terms not otherwise
defined herein shall have the same meaning ascribed to such terms in the
Indenture as referred to below.

                                    RECITALS
                                    --------

     WHEREAS, pursuant to an Indenture, dated as of December 1, 1991 (the
"Indenture"), among the Company and the Resigning Trustee, the Company issued
its $200,000,000 8 1/8% Notes Due April 15, 2002 (Cusip 984121AT0), its
$200,000,000 7.15% Notes due August 1, 2004 (Cusip 984121AU7), its Medium Term
Notes, Series B (Base Cusip 98412J), and its Medium Term Notes, Series C (Base
Cusip 98412J) (collectively all such issued notes, the "Securities");

     WHEREAS, the Company appointed the Resigning Trustee as the trustee under
the Indenture of all
 Securities issued under the Indenture;

     WHEREAS, there is presently issued and outstanding $962,000,000 in
aggregate principal amount of the Securities;

     WHEREAS, the Indenture provides that the trustee may resign at any time
with respect to any series of Securities and be discharged from the trusts
created by the Indenture by notifying the Company in writing;

     WHEREAS, the Indenture further provides that if the trustee resigns with
respect to any series of Securities, the Company, by or pursuant to a Board
Resolution, shall promptly appoint a successor Trustee with respect to such
applicable series of Securities;

     WHEREAS, the Resigning Trustee desires to resign as the trustee with
respect to all Securities issued pursuant to the Indenture, and the Company
desires to appoint the Successor Trustee as trustee to succeed the Resigning
Trustee as the trustee with respect to the Securities; and

     WHEREAS, the Successor Trustee is willing to accept the appointment as
trustee under the Indenture.

     NOW, THEREFORE, in consideration of the covenants set forth herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

     1. Acceptance of Resignation of Resigning Trustee and Appointment of
Successor Trustee. The Company having received written notice of the Resigning
Trustee's request to resign as trustee pursuant to Section 8.07(b) of the


<PAGE>

Indenture, hereby accepts the resignation of the Resigning Trustee as trustee
under the Indenture. Pursuant to Section 8.07(e) of the Indenture, the Company
acting pursuant to Board Resolution hereby appoints the Successor Trustee as
trustee under the Indenture, and vests and confirms to the Successor Trustee all
rights, powers, trusts, privileges, duties and obligations of the trustee under
the Indenture.

     2. Company's Representations and Warranties. The Company hereby represents
and warrants to the Successor Trustee that:

     a. It is duly organized and validly existing and in good standing under all
applicable law, and, this Instrument has been duly authorized, executed and
delivered on its behalf and constitutes its legal, valid, binding and
enforceable obligation;

     b. It has not entered into any amendment or supplement to the Indenture,
and the Indenture is in full force and effect;

     c.   No Event of Default and no default exists under the Indenture;

     d. No covenant or condition contained in the Indenture has been waived by
the Holders of a percentage in aggregate principal amount of the Securities
required by the Indenture to effect any such waiver;

     e. The Indenture was validly executed and delivered by it, and the
Securities are validly issued securities of the Company; and

     f. The execution and delivery of this Instrument do not and will not
conflict with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, any (i) contract, agreement, indenture or other
instrument (including, without limitation, its certificate of incorporation,
by-laws and/or any and all other applicable organizational documents) to which
it is a party or by which it or its property is bound, or (ii) any judgment,
decree or order of any court or governmental agency or regulatory body or law,
rule or regulation applicable to it or its property.

     3. Resigning Trustee's Representations and Warranties. The Resigning
Trustee hereby represents and warrants to the Successor Trustee that:

     a. It has not entered into any amendment or supplement to the Indenture and
the Indenture is in full force and effect;

     b. No covenant or condition contained in the Indenture has been waived by
the Resigning Trustee or by the Holders of a percentage in aggregate principal
amount of the Securities required by the Indenture to effect any such waiver;

     c. There is no action, suit or proceeding pending or threatened against the
Resigning Trustee of which it has actual knowledge before any court or
governmental authority arising out of any action or omission by the Resigning
Trustee as trustee under the Indenture;

     d. It has made, or promptly will make, available to the Successor Trustee
originals, if available, or copies in its possession, of all documents relating
to the trusts created by the Indenture (the "Trusts") and all information in the
possession of its corporate trust administration department relating to the
administration and status of the Trusts and shall do such other things as the
Successor Trustee may reasonably request to more fully vest and confirm in the
Successor Trustee all the rights, powers, trusts, privileges, duties and
obligations assigned and transferred hereby to the Successor Trustee;


                                     Page 2


<PAGE>

     e. It has lawfully discharged its duties as trustee under the Indenture;

     f. Pursuant to Section 3.03 of the Indenture, it duly authenticated and
delivered the Securities in an aggregate principal face amount of $962,000,000
and there is currently issued and outstanding $962,000,000 in aggregate
principal amount of the Securities;

     g. As of the Effective Date, it holds no property or money in its capacity
as trustee under the Indenture; and

     h. This Instrument has been duly authorized, executed and delivered on
behalf of the Resigning Trustee and constitutes its legal, valid, binding and
enforceable obligation.

     4. Successor Trustee's Representations and Warranties. The Successor
Trustee represents and warrants to the Resigning Trustee and the Company that:

     a. It is qualified and eligible to serve as trustee under the Indenture and
the Trust Indenture Act of 1939, as amended (the "Act"); and

     b. This Instrument has been duly authorized, executed and delivered on
behalf of the Successor Trustee and constitutes its legal, valid, binding and
enforceable obligation.

     5. Acceptance by Successor Trustee. The Successor Trustee hereby accepts
its appointment, as of the Effective Date, as successor trustee under the
Indenture, and assumes, as of the Effective Date, all rights, powers, trusts,
privileges, duties and obligations of the trustee thereunder, subject to the
terms and conditions therein.

     6. Notice to Holders. Promptly after the Effective Date of this Instrument,
the Company shall give notice in accordance with Section 8.07(f) of the
Indenture of the resignation of the Resigning Trustee and the appointment of the
Successor Trustee.

     7. Assignment by Resigning Trustee. The Resigning Trustee hereby confirms,
assigns, transfers, delivers and conveys, as of the Effective Date, to the
Successor Trustee, as successor trustee under the Indenture, upon the Trusts
expressed in the Indenture, all rights, powers, trusts, privileges, duties and
obligations, which the Resigning Trustee, as trustee now holds under and by
virtue of the Indenture, and shall pay over to the Successor Trustee, any and
all property and moneys held by the Resigning Trustee under and by virtue of the
Indenture, subject to the lien provided by Section 8.05 of the Indenture, which
lien the Resigning Trustee expressly reserves to the fullest extent necessary to
secure the Company's obligations under said section to the Resigning Trustee,
which lien shall also secure the Company's obligations under said section to the
Successor Trustee. Not withstanding any other provision in this Instrument, the
Successor Trustee assumes none of the obligations or duties of the Paying Agent
or Registrar in the Indenture.

     8. Indemnification

     a. The parties to this Instrument agree that this Instrument does not
constitute an assumption by the Successor Trustee of any liability of the
Resigning Trustee arising out of any breach by the Resigning Trustee in the
performance of its duties as trustee under the Indenture.

     b. The Company agrees to pay or indemnify, as applicable, the Successor
Trustee and save the Successor Trustee harmless from and against any and all


                                     Page 3


<PAGE>

costs, claims, liabilities, losses or damages whatsoever (including the
reasonable fees, expenses and disbursements of the Successor Trustee's legal
counsel and other advisors) arising out of the actual, alleged or adjudicated
actions or omissions of the Resigning Trustee that the Successor Trustee may
suffer or incur as a result of the Successor Trustee accepting this appointment
and acting as successor trustee under the Indenture. The Successor Trustee will
furnish to the Company, promptly upon receipt, all documents with respect to any
action the outcome of which would make the indemnity provided for in this
paragraph operative. The Successor Trustee shall notify the Company in writing
of any claim for which it may seek indemnity.

     c. As security for the performance of the obligations of the Company under
this Section 8 and under Section 8.05 of the Indenture, the Successor Trustee
shall have a lien prior to the Securities upon all property and funds held or
collected by the Trustee as such.

     9. Further Assurances. The Company and the Resigning Trustee, for the
purposes of more fully and certainly vesting in and confirming to the Successor
Trustee, as successor trustee under the Indenture, said rights, powers, trusts,
privileges, duties and obligations, agree upon reasonable request of the
Successor Trustee, to execute, acknowledge and deliver such further instruments
of conveyance and further assurance and to do such other things as may
reasonably be required for more fully and certainly vesting and confirming to
the Successor Trustee all rights, powers, trusts, privileges, duties and
obligations which the Resigning Trustee now holds under and by virtue of the
Indenture.

     10. Survival of Certain Obligations of the Company. Notwithstanding the
resignation of the Resigning Trustee, the Company shall remain obligated under
the Indenture to compensate, reimburse and indemnify the Resigning Trustee in
connection with its trusteeship under the Indenture, and nothing contained in
this Instrument shall in any way abrogate the obligations of the Company to the
Resigning Trustee under the Indenture or any lien created in favor of the
Resigning Trustee thereunder.

     11. Corporate Trust Office. Reference in the Indenture to the "Corporate
Trust Office" of the Resigning Trustee or other similar terms shall be deemed to
refer to the Corporate Trust Office of the Successor Trustee at Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890 or any other office
of the Successor Trustee at which, at any particular time, its corporate trust
business shall be principally administered.

     12. Notices. All notices, whether faxed or mailed will be deemed received
when sent pursuant to the following instructions:

           TO THE SUCCESSOR TRUSTEE:
           WILMINGTON TRUST COMPANY
           Attn:  Corporate Trust Administration
           Rodney Square North
           1100 North Market Street
           Wilmington, Delaware 19890
           TELEPHONE:  (302) 651-1343
           TELECOPIER:  (302) 651-8882


           TO THE RESIGNING TRUSTEE:
           CITIBANK, N.A.
           111Wall Street, 14th Floor
           New York, New York 10005
           TELEPHONE:  (212) 657-7805
           TELECOPIER:  (212) 657-4009


                                     Page 4


<PAGE>

           TO THE COMPANY:
           XEROX CORPORATION
           800 Long Ridge Road
           Stamford, Connecticut 06904
           Attn:  Assistant Treasurer
           TELEPHONE:  (203) 968-4653
           TELECOPIER:  (203) 968-3972


     13. Effective Date. This Instrument and the resignation, appointment and
acceptance effected hereunder shall be effective as of the close of business on
the Effective Date.

     14. Governing Law. This Instrument shall be governed by and construed in
accordance with the laws of the State of New York.

     15. Counterparts. This Instrument may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.





                            [SIGNATURE PAGE FOLLOWS]



     IN WITNESS WHEREOF, the parties have executed this Instrument to be
effective as of the day and year first above written.

                                       WILMINGTON TRUST COMPANY,
                                       Successor Trustee

                                       By:   _____________________________
                                       Name:
                                       Title:


                                       CITIBANK, N.A.,
                                       Resigning Trustee

                                       By:   _____________________________
                                       Name:
                                       Title:


                                       XEROX CORPORATION,
                                       Company


                                       By:   _____________________________
                                       Name:
                                       Title:






                                     Page 5




<PAGE>

                                                                 Exhibit 4(b)(2)

       INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE


  THIS INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE,
("instrument"), dated and effective as of February 1, 2001 (the "Effective
Date"), among XEROX CORPORATION, a corporation organized under the laws of the
State of New York (the "Company"), CITIBANK, N.A., a national banking
association organized under the laws of the United States of America (the
"Resigning Trustee"), and WILMINGTON TRUST COMPANY, a banking corporation
organized under the laws of the State of Delaware (the "Successor Trustee").
Capitalized terms not otherwise defined herein shall have the same meaning
ascribed to such terms in the Indenture as referred to below.


                 RECITALS

  WHEREAS, pursuant to an Indenture, dated as of September 20, 1996 (the
"Indenture"), between the Company and the Resigning Trustee, the Company
issued its Medium Term Notes, Series D (Base Cusip 98412J) (the "Securities");

  WHEREAS, the Company appointed the Resigning Trustee as the trustee under
the Indenture and in its capacity as the paying agent and registrar (in each
such capacity, the "Paying Agent") of all Securities issued under the
Indenture;

  WHEREAS, there is presently issued and outstanding $420,774,000 in
aggregate
 principal amount of the Securities;

  WHEREAS, the Indenture provides that the trustee may resign at any time
with respect to any series of Securities and be discharged from the trusts
created by the Indenture by notifying the Company in writing;

  WHEREAS, the Indenture further provides that if the trustee resigns with
respect to any series of Securities, the Company, by or pursuant to a Board
Resolution, shall promptly appoint a successor Trustee with respect to such
applicable series of Securities;

  WHEREAS, the Resigning Trustee desires to resign as the trustee with
respect to all Securities issued pursuant to the Indenture, and the Company
desires to appoint the Successor Trustee as trustee to succeed the Resigning
Trustee as the trustee with respect to the Securities;

  WHEREAS, the Resigning Trustee will remain Paying Agent with respect to
the Securities;  and

  WHEREAS, the Successor Trustee is willing to accept the appointment as
trustee under the Indenture.

  NOW, THEREFORE, in consideration of the covenants set forth herein and


<PAGE>

other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

  1.  Acceptance of Resignation of Resigning Trustee and Appointment of
Successor Trustee.  The Company having received written notice of the
Resigning Trustee's request to resign as trustee pursuant to Section 8.07(b)
of the Indenture, hereby accepts the resignation of the Resigning Trustee as
trustee under the Indenture.  Pursuant to Section 8.07(e) of the Indenture,
the Company acting pursuant to Board Resolution hereby appoints the Successor
Trustee as trustee under the Indenture, and vests and confirms to the
Successor Trustee all rights, powers, trusts, privileges, duties and
obligations of the trustee under the Indenture.

  2.  Company's Representations and Warranties.  The Company hereby represents
and warrants to the Successor Trustee that:

  a.  It is duly organized and validly existing and in good standing under
  all applicable law, and, this Instrument has been duly authorized,
  executed and delivered on its behalf and constitutes its legal, valid,
  binding and enforceable obligation;

  b.  It has not entered into any amendment or supplement to the Indenture,
  and the Indenture is in full force and effect;

  c.  No Event of Default and no default exists under the Indenture;

  d.  No covenant or condition contained in the Indenture has been waived
  by the Holders of a percentage in aggregate principal amount of the
  Securities required by the Indenture to effect any such waiver;

  e.  The Indenture was validly executed and delivered by it, and the
  Securities are validly issued securities of the Company; and

  f.  The execution and delivery of this Instrument do not and will not
  conflict with, or result in a breach of, any of the terms or provisions
  of, or constitute a default under, any (i) contract, agreement, indenture
  or other instrument (including, without limitation, its certificate of
  incorporation, by-laws and/or any and all other applicable organizational
  documents) to which it is a party or by which it or its property is
  bound, or (ii) any judgment, decree or order of any court or governmental
  agency or regulatory body or law, rule or regulation applicable to it or
  its property.

  3.  Resigning Trustee's Representations and Warranties.  The Resigning
Trustee hereby represents and warrants to the Successor Trustee that:

  a.  It has not entered into any amendment or supplement to the Indenture
  and the Indenture is in full force and effect;

  b.  No covenant or condition contained in the Indenture has been waived
  by the Resigning Trustee or by the Holders of a percentage in aggregate


<PAGE>

  principal amount of the Securities required by the Indenture to effect
  any such waiver;

  c.  There is no action, suit or proceeding pending or threatened against
  the Resigning Trustee of which it has actual knowledge before any court
  or governmental authority arising out of any action or omission by the
  Resigning Trustee as trustee under the Indenture;

  d.  It has made, or promptly will make, available to the Successor
  Trustee originals, if available, or copies in its possession, of all
  documents relating to the trusts created by the Indenture (the "trusts")
  and all information in the possession of its corporate trust
  administration department relating to the administration and status of
  the Trusts and shall do such other things as the Successor Trustee may
  reasonably request to more fully vest and confirm in the Successor
  Trustee all the rights, powers, trusts, privileges, duties and
  obligations assigned and transferred hereby to the Successor Trustee;

  e.  It has lawfully discharged its duties as trustee under the Indenture;

  f.  Pursuant to Section 3.03 of the Indenture, it duly authenticated and
  delivered the Securities in an aggregate principal face amount of
  $950,000,000 and there is currently issued and outstanding $420,774,000
  in aggregate principal amount of the Securities;

  g.  As of the Effective Date, it holds no property or money in its
  capacity as trustee under the Indenture; and

  h.  This Instrument has been duly authorized, executed and delivered on
  behalf of the Resigning Trustee and constitutes its legal, valid, binding
  and enforceable obligation.

  4.  Successor Trustee's Representations and Warranties.  The Successor
Trustee represents and warrants to the Resigning Trustee and the Company that:

  a.  It is qualified and eligible to serve as trustee under the Indenture
  and the Trust Indenture Act of 1939, as amended (the "Act"); and

  b.  This Instrument has been duly authorized, executed and delivered on
  behalf of the Successor Trustee and constitutes its legal, valid, binding
  and enforceable obligation.

  5.  Acceptance by Successor Trustee.  The Successor Trustee hereby
accepts its appointment, as of the Effective Date, as successor trustee under
the Indenture, and assumes, as of the Effective Date, all rights, powers,
trusts, privileges, duties and obligations of the trustee thereunder, subject
to the terms and conditions therein.

  6.  Notice to Holders. Promptly after the Effective Date of this
Instrument, the Company shall give notice in accordance with Section 8.07(f)
of the Indenture of the resignation of the Resigning Trustee and the


<PAGE>

appointment of the Successor Trustee.

  7.  Assignment by Resigning Trustee.  The Resigning Trustee hereby
confirms, assigns, transfers, delivers and conveys, as of the Effective Date,
to the Successor Trustee, as successor trustee under the Indenture, upon the
Trusts expressed in the Indenture, all rights, powers, trusts, privileges,
duties and obligations, which the Resigning Trustee, as trustee now holds
under and by virtue of the Indenture, and shall pay over to the Successor
Trustee, any and all property and moneys held by the Resigning Trustee under
and by virtue of the Indenture, subject to the lien provided by Section 8.05
of the Indenture, which lien the Resigning Trustee expressly reserves to the
fullest extent necessary to secure the Company's obligations under said
section to the Resigning Trustee, which lien shall also secure the Company's
obligations under said section  to the Successor Trustee.  Not withstanding
any other provision in this Instrument, the Resigning Trustee shall continue
to act as Paying Agent under the Indenture to the extent that the Resigning
Trustee acts as Paying Agent under any series of Securities, and the Successor
Trustee assumes none of the obligations or duties of the Paying Agent in the
Indenture.

  8.  Indemnification

  a.  The parties to this Instrument agree that this Instrument does not
  constitute an assumption by the Successor Trustee of any liability of the
  Resigning Trustee arising out of any breach by the Resigning Trustee in
  the performance of its duties as trustee under the Indenture.

  b.  The Company agrees to pay or indemnify, as applicable, the Successor
  Trustee and save the Successor Trustee harmless from and against any and
  all costs, claims, liabilities, losses or damages whatsoever (including
  the reasonable fees, expenses and disbursements of the Successor
  Trustee's legal counsel and other advisors) arising out of the actual,
  alleged or adjudicated actions or omissions of the Resigning Trustee that
  the Successor Trustee may suffer or incur as a result of the Successor
  Trustee accepting this appointment and acting as successor trustee under
  the Indenture.  The Successor Trustee will furnish to the Company,
  promptly upon receipt, all documents with respect to any action the
  outcome of which would make the indemnity provided for in this paragraph
  operative.  The Successor Trustee shall notify the Company in writing of
  any claim for which it may seek indemnity.

  c.  As security for the performance of the obligations of the Company
  under this Section 8 and under Section 8.05 of the Indenture, the
  Successor Trustee shall have a lien prior to the Securities upon all
  property and funds held or collected by the Trustee as such.

  9.  Further Assurances.  The Company and the Resigning Trustee, for the
purposes of more fully and certainly vesting in and confirming to the
Successor Trustee, as successor trustee under the Indenture, said rights,
powers, trusts, privileges, duties and obligations, agree upon reasonable
request of the Successor Trustee, to execute, acknowledge and deliver such


<PAGE>

further instruments of conveyance and further assurance and to do such other
things as may reasonably be required for more fully and certainly vesting and
confirming to the Successor Trustee all rights, powers, trusts, privileges,
duties and obligations which the Resigning Trustee now holds under and by
virtue of the Indenture.

  10.  Survival of Certain Obligations of the Company.  Notwithstanding the
resignation of the Resigning Trustee, the Company shall remain obligated under
the Indenture  to compensate, reimburse and indemnify the Resigning Trustee in
connection with its trusteeship under the Indenture, and nothing contained in
this Instrument shall in any way abrogate the obligations of the Company to
the Resigning Trustee under the Indenture or any lien created in favor of the
Resigning Trustee thereunder.

  11.  Corporate Trust Office.  Reference in the Indenture to the
"Corporate Trust Office" of the Resigning Trustee or other similar terms shall
be deemed to refer to the Corporate Trust Office of the Successor Trustee at
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890 or
any other office of the Successor Trustee at which, at any particular time,
its corporate trust business shall be principally administered.

  12.  Notices.  All notices, whether faxed or mailed will be deemed
received when sent pursuant to the following instructions:

     TO THE SUCCESSOR TRUSTEE:

     WILMINGTON TRUST COMPANY
     Attn:  Corporate Trust Administration
     Rodney Square North
     1100 North Market Street
     Wilmington, Delaware 19890
     TELEPHONE:  (302) 651-1343
     TELECOPIER:  (302) 651-8882

     TO THE RESIGNING TRUSTEE:

     CITIBANK, N.A.
     111 Wall Street, 14th Floor
     New York, New York 10005
     TELEPHONE:  (212) 657-7805
     TELECOPIER:  (212) 657-4009

     TO THE COMPANY:

     XEROX CORPORATION
     800 Long Ridge Road
     Stamford, Connecticut 06904
     Attn:  Assistant Treasurer
     TELEPHONE:  (203) 968-4653
     TELECOPIER:  (203) 968-3972


<PAGE>

  13.  Effective Date.  This Instrument and the resignation, appointment
and acceptance effected hereunder shall be effective as of the close of
business on the Effective Date.

  14.  Governing Law.  This Instrument shall be governed by and construed
in accordance with the laws of the State of New York.

  15.  Counterparts.  This Instrument may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.


              [SIGNATURE PAGE FOLLOWS]


     IN WITNESS WHEREOF, the parties have executed this Instrument to be
effective as of the day and year first above written.


                 WILMINGTON TRUST COMPANY,
                 Successor Trustee


                 By:
                   Name:
                   Title:


                 CITIBANK, N.A.,
                 Resigning Trustee


                 By:
                   Name:
                   Title:


                 XEROX CORPORATION,
                 Company


                 By:
                   Name:
                   Title:




<PAGE>

                                                                 Exhibit 4(d)(2)

            INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE
            -----------------------------------------------------

     THIS INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, ("Instrument"),
dated and effective as of February 1, 2001 (the "Effective Date"), among XEROX
CORPORATION, a corporation organized under the laws of the State of New York
(the "Company," and in its capacity as guarantor under the Indenture referred to
below, the "Guarantor"), XEROX OVERSEAS HOLDINGS LIMITED, formerly known as
Xerox Overseas Holdings PLC, a limited liability company organized under the
laws of England and Wales ("Xerox Overseas"), XEROX CAPITAL (EUROPE) PLC,
formerly known as Rank Xerox Capital (Europe) PLC, a public limited company
organized under the laws of England and Wales ("Xerox Capital," and together
with Xerox Overseas, the "Subsidiary Issuers," and each a "Subsidiary Issuer"),
CITIBANK, N.A., a national banking association organized under the laws of the
United States of America (the "Resigning Trustee"), and WILMINGTON TRUST
COMPANY, a banking corporation organized under the laws of the State of Delaware
(the "Successor Trustee"). The Company together with the Subsidiary Issuers,
each in its capacity as an issuer of securities under the Indenture referred to
below, are referred
 to herein as an "Issuer," and collectively the "Issuers."
Capitalized terms not otherwise defined herein shall have the same meaning
ascribed to such terms in the Indenture as referred to below.

                                    RECITALS
                                    --------

     WHEREAS, pursuant to an Indenture, dated as of October 21, 1997(the
"Indenture"), among the Issuers, the Guarantor and the Resigning Trustee, Xerox
Capital issued its $500,000,000 5.75% Notes Due May 15, 2002 (Cusip 98411MAB4),
its $500,000,000 5.875% Notes due May 15, 2004 (Cusip 98411MAA6) and its
$25,000,000 Medium Term Notes, Series E due April 24, 2008 (Cusip 98411PAA9);
and Xerox issued its $600,000,000 5.5% Notes due November 15, 2003 (Cusip
984121AW3), its Medium Term Notes, Series E (Base Cusip 98412J) and its Medium
Term Notes, Series F (Base Cusip 98412J) (collectively all such issued notes,
the "Securities");

     WHEREAS, the Issuers appointed the Resigning Trustee as the trustee under
the Indenture and in its capacity as the paying agent and registrar (in each
such capacity, the "Paying Agent") of all Securities issued under the Indenture;

     WHEREAS, there is presently issued and outstanding $2,400,000,000 in
aggregate principal amount of the Securities;



                                    Page 11


<PAGE>

     WHEREAS, the Indenture provides that the trustee may resign at any time
with respect to any series of Securities and be discharged from the trusts
created by the Indenture by notifying the Issuer of any and all such Securities
and the Guarantor in writing;

     WHEREAS, the Indenture further provides that if the trustee resigns with
respect to any Securities, the Issuer of the applicable series of Securities and
the Guarantor, by or pursuant to a Board Resolution, shall promptly appoint a
successor Trustee with respect to such applicable series of Securities;

     WHEREAS, the Resigning Trustee desires to resign as the trustee with
respect to all Securities issued pursuant to the Indenture, and the Issuers and
the Guarantor desire to appoint the Successor Trustee as trustee to succeed the
Resigning Trustee as the trustee with respect to the Securities;

     WHEREAS, the Resigning Trustee will remain Paying Agent with respect to the
Securities; the Calculation Agent pursuant to the Interest Calculation Agency
Agreement, dated as of October 21, 1997, among the Issuers and the Resigning
Trustee; and the Exchange Agent pursuant to the Exchange Rate Agent Agreement,
dated as of October 21, 1997, among the Issuers and the Resigning Trustee; and

     WHEREAS, the Successor Trustee is willing to accept the appointment as
trustee under the Indenture.

     NOW, THEREFORE, in consideration of the covenants set forth herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

     1. Acceptance of Resignation of Resigning Trustee and Appointment of
Successor Trustee. The Issuers and Guarantor having received written notice of
the Resigning Trustee's request to resign as trustee pursuant to Section 8.07(b)
of the Indenture, hereby accept the resignation of the Resigning Trustee as
trustee under the Indenture. Pursuant to Section 8.07(e) of the Indenture, the
Issuers and Guarantor acting pursuant to Board Resolution hereby appoint the
Successor Trustee as trustee under the Indenture, and vest and confirm to the
Successor Trustee all rights, powers, trusts, privileges, duties and obligations
of the trustee under the Indenture.

     2. Issuers' and Guarantor's Representations and Warranties. Each Issuer and
the Guarantor, as applicable, hereby represent and warrant to the Successor
Trustee that:

     a. It is duly organized and validly existing and in good standing under all
applicable law, and, this Instrument has been duly authorized, executed and
delivered on its behalf and constitutes its legal, valid, binding and
enforceable obligation;

     b. It has not entered into any amendment or supplement to the Indenture,
and the Indenture is in full force and effect;

     c. No Event of Default and no default exists under the Indenture;

     d. No covenant or condition contained in the Indenture has been waived by
the Holders of a percentage in aggregate principal amount of the Securities
required by the Indenture to effect any such waiver;

     e. The Indenture was validly executed and delivered by it, and the
Securities are validly issued securities of the Issuer; and



                                    Page 12


<PAGE>

     f. The execution and delivery of this Instrument do not and will not
conflict with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, any (i) contract, agreement, indenture or other
instrument (including, without limitation, its certificate of incorporation,
by-laws and/or any and all other applicable organizational documents) to which
it is a party or by which it or its property is bound, or (ii) any judgment,
decree or order of any court or governmental agency or regulatory body or law,
rule or regulation applicable to it or its property.

     3. Resigning Trustee's Representations and Warranties. The Resigning
Trustee hereby represents and warrants to the Successor Trustee that:

     a. It has not entered into any amendment or supplement to the Indenture and
the Indenture is in full force and effect;

     b. No covenant or condition contained in the Indenture has been waived by
the Resigning Trustee or by the Holders of a percentage in aggregate principal
amount of the Securities required by the Indenture to effect any such waiver;

     c. There is no action, suit or proceeding pending or threatened against the
Resigning Trustee of which it has actual knowledge before any court or
governmental authority arising out of any action or omission by the Resigning
Trustee as trustee under the Indenture;

     d. It has made, or promptly will make, available to the Successor Trustee
originals, if available, or copies in its possession, of all documents relating
to the trusts created by the Indenture (the "Trusts") and all information in the
possession of its corporate trust administration department relating to the
administration and status of the Trusts and shall do such other things as the
Successor Trustee may reasonably request to more fully vest and confirm in the
Successor Trustee all the rights, powers, trusts, privileges, duties and
obligations assigned and transferred hereby to the Successor Trustee;

     e. It has lawfully discharged its duties as trustee under the Indenture;

     f. Pursuant to Section 3.03 of the Indenture, it duly authenticated and
delivered the Securities in an aggregate principal face amount of $2,400,000,000
and there is currently issued and outstanding $2,400,000,000 in aggregate
principal amount of the Securities;

     g. As of the Effective Date, it holds no property or money in its capacity
as trustee under the Indenture; and

     h. This Instrument has been duly authorized, executed and delivered on
behalf of the Resigning Trustee and constitutes its legal, valid, binding and
enforceable obligation.

     4. Successor Trustee's Representations and Warranties. The Successor
Trustee represents and warrants to the Resigning Trustee, the Issuers and the
Guarantor that:

     a. It is qualified and eligible to serve as trustee under the Indenture and
the Trust Indenture Act of 1939, as amended (the "Act"); and

     b. This Instrument has been duly authorized, executed and delivered on
behalf of the Successor Trustee and constitutes its legal, valid, binding and
enforceable obligation.



                                    Page 13


<PAGE>

     5. Acceptance by Successor Trustee. The Successor Trustee hereby accepts
its appointment, as of the Effective Date, as successor trustee under the
Indenture, and assumes, as of the Effective Date, all rights, powers, trusts,
privileges, duties and obligations of the trustee thereunder, subject to the
terms and conditions therein.

     6. Notice to Holders. Promptly after the Effective Date of this Instrument,
the applicable Issuer shall give notice in accordance with Section 8.07(f) of
the Indenture of the resignation of the Resigning Trustee and the appointment of
the Successor Trustee.

     7. Assignment by Resigning Trustee. The Resigning Trustee hereby confirms,
assigns, transfers, delivers and conveys, as of the Effective Date, to the
Successor Trustee, as successor trustee under the Indenture, upon the Trusts
expressed in the Indenture, all rights, powers, trusts, privileges, duties and
obligations, which the Resigning Trustee, as trustee now holds under and by
virtue of the Indenture, and shall pay over to the Successor Trustee, any and
all property and moneys held by the Resigning Trustee under and by virtue of the
Indenture, subject to the lien provided by Section 8.05 of the Indenture, which
lien the Resigning Trustee expressly reserves to the fullest extent necessary to
secure the Issuers' and the Guarantor's obligations under said section to the
Resigning Trustee, which lien shall also secure the Issuers' and the Guarantor's
obligations under said section to the Successor Trustee. Not withstanding any
other provision in this Instrument, the Resigning Trustee shall continue to act
as Paying Agent under the Indenture to the extent that the Resigning Trustee
acts as Paying Agent under any series of Securities, and the Successor Trustee
assumes none of the obligations or duties of the Paying Agent in the Indenture.

     8. Indemnification

     a. The parties to this Instrument agree that this Instrument does not
constitute an assumption by the Successor Trustee of any liability of the
Resigning Trustee arising out of any breach by the Resigning Trustee in the
performance of its duties as trustee under the Indenture.

     b. The Company, Xerox Capital and Xerox Overseas agree jointly and
severally to pay or indemnify, as applicable, the Successor Trustee and save the
Successor Trustee harmless from and against any and all costs, claims,
liabilities, losses or damages whatsoever (including the reasonable fees,
expenses and disbursements of the Successor Trustee's legal counsel and other
advisors) arising out of the actual, alleged or adjudicated actions or omissions
of the Resigning Trustee that the Successor Trustee may suffer or incur as a
result of the Successor Trustee accepting this appointment and acting as
successor trustee under the Indenture. The Successor Trustee will furnish to the
Company, promptly upon receipt, all documents with respect to any action the
outcome of which would make the indemnity provided for in this paragraph
operative. The Successor Trustee shall notify the Company in writing of any
claim for which it may seek indemnity.

     c. As security for the performance of the obligations of the Issuers and
the Guarantor under this Section 8 and under Section 8.05 of the Indenture, the
Successor Trustee shall have a lien prior to the Securities of such Issuer upon
all property and funds held or collected in respect of such Securities of such
Issuer by the Trustee as such.

     9. Further Assurances. The Issuers, the Guarantor and the Resigning
Trustee, for the purposes of more fully and certainly vesting in and confirming
to the Successor Trustee, as successor trustee under the Indenture, said rights,
powers, trusts, privileges, duties and obligations agrees, upon reasonable


                                    Page 14


<PAGE>

request of the Successor Trustee, to execute, acknowledge and deliver such
further instruments of conveyance and further assurance and to do such other
things as may reasonably be required for more fully and certainly vesting and
confirming to the Successor Trustee all rights, powers, trusts, privileges,
duties and obligations which the Resigning Trustee now holds under and by virtue
of the Indenture.

     10. Survival of Certain Obligations of the Company. Notwithstanding the
resignation of the Resigning Trustee, the Issuers and the Guarantor shall remain
obligated under the Indenture to compensate, reimburse and indemnify the
Resigning Trustee in connection with its trusteeship under the Indenture, and
nothing contained in this Instrument shall in any way abrogate the obligations
of the Issuers or the Guarantor to the Resigning Trustee under the Indenture or
any lien created in favor of the Resigning Trustee thereunder.

     11. Corporate Trust Office. Reference in the Indenture to the "Corporate
Trust Office" of the Resigning Trustee or other similar terms shall be deemed to
refer to the Corporate Trust Office of the Successor Trustee at Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890 or any other office
of the Successor Trustee at which, at any particular time, its corporate trust
business shall be principally administered.

     12. Notices. All notices, whether faxed or mailed will be deemed received
when sent pursuant to the following instructions:

           TO THE SUCCESSOR TRUSTEE:
           WILMINGTON TRUST COMPANY
           Attn:  Corporate Trust Administration
           Rodney Square North
           1100 North Market Street
           Wilmington, Delaware 19890
           TELEPHONE:  (302) 651-1343
           TELECOPIER:  (302) 651-8882


           TO THE RESIGNING TRUSTEE:
           CITIBANK, N.A.
           111Wall Street, 14th Floor
           New York, New York 10005
           TELEPHONE:  (212) 657-7805
           TELECOPIER:  (212) 657-4009

           TO THE COMPANY:
           XEROX CORPORATION
           800 Long Ridge Road
           Stamford, Connecticut 06904
           Attn:  Assistant Treasurer
           TELEPHONE:  (203) 968-4653
           TELECOPIER:  (203) 968-3972

           TO XEROX OVERSEAS:
           XEROX OVERSEAS HOLDINGS LIMITED
           Bridge House, Oxford Road
           Uxbridge, Middlesex UB8 1HS,
           United Kingdom
           TELEPHONE:  011 44(0) 1895 251133
           TELECOPIER:  011 44(0) 1895 845472

           (with a copy to the Company)



                                    Page 15


<PAGE>

           TO XEROX CAPITAL:
           XEROX CAPITAL (EUROPE) PLC
           Bridge House, Oxford Road
           Uxbridge, Middlesex UB8 1HS,
           United Kingdom
           TELEPHONE:  011 44(0) 1895 251133
           TELECOPIER:  011 44(0) 1895 845472

           (with a copy to the Company)

     13. Effective Date. This Instrument and the resignation, appointment and
acceptance effected hereunder shall be effective as of the close of business on
the Effective Date.

     14. Governing Law. This Instrument shall be governed by and construed in
accordance with the laws of the State of New York.

     15. Counterparts. This Instrument may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.

     IN WITNESS WHEREOF, the parties have executed this Instrument to be
effective as of the day and year first above written.

                                       WILMINGTON TRUST COMPANY,
                                       Successor Trustee

                                       By:   _____________________________
                                       Name:
                                       Title:


                                       CITIBANK, N.A.,
                                       Resigning Trustee

                                       By:   _____________________________
                                       Name:
                                       Title:


                                       XEROX CORPORATION,
                                       Company

                                       By:   _____________________________
                                       Name:
                                       Title:


                                       XEROX OVERSEAS HOLDINGS LIMITED,
                                       Issuer

                                       By:   _____________________________
                                       Name:
                                       Title:


                                       XEROX (CAPITAL) EUROPE PLC,
                                       Issuer

                                       By:   _____________________________
                                       Name:
                                       Title:





                                    Page 16




<PAGE>

Exhibit 4(h)(2)

            INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE


     THIS INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, ("instrument"),
dated and effective as of February 1, 2001 (the "Effective Date"), among XEROX
CREDIT CORPORATION, a corporation organized under the laws of the State of
Delaware (the "Company"), CITIBANK, N.A., a national banking association
organized under the laws of the United States of America (the "Resigning
Trustee"), and WILMINGTON TRUST COMPANY, a banking corporation organized under
the laws of the State of Delaware (the "Successor Trustee"). Capitalized terms
not otherwise defined herein shall have the same meaning ascribed to such terms
in the Indenture as referred to below.

                               RECITALS

     WHEREAS, pursuant to an Indenture, dated as of April 1, 1999 (the
"Indenture"), between the Company and the Resigning Trustee, the Company issued
its $300,000,000 Medium Term Notes, Series G due November 1, 2001 (Cusip
983917BT1) (the "Securities");

     WHEREAS, the Company appointed the Resigning Trustee as the trustee under
the Indenture and in its capacity as the paying agent and registrar (in each
such capacity, the "Paying Agent") of all Securities issued under the Indenture;

     WHEREAS, there is presently issued and
 outstanding $300,000,000 in
aggregate principal amount of the Securities;

     WHEREAS, the Indenture provides that the trustee may resign at any time
with respect to any series of Securities and be discharged from the trusts
created by the Indenture by notifying the Company in writing;

     WHEREAS, the Indenture further provides that if the trustee resigns with
respect to any series of Securities, the Company, by or pursuant to a Board
Resolution, shall promptly appoint a successor Trustee with respect to such
applicable series of Securities;

     WHEREAS, the Resigning Trustee desires to resign as the trustee with
respect to all Securities issued pursuant to the Indenture, and the Company
desires to appoint the Successor Trustee as trustee to succeed the Resigning
Trustee as the trustee with respect to the Securities;

     WHEREAS, the Resigning Trustee will remain Paying Agent with respect to
the Securities;  and

     WHEREAS, the Successor Trustee is willing to accept the appointment as
trustee under the Indenture.

     NOW, THEREFORE, in consideration of the covenants set forth herein and


<PAGE>

other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

     1. Acceptance of Resignation of Resigning Trustee and Appointment of
Successor Trustee. The Company having received written notice of the Resigning
Trustee's request to resign as trustee pursuant to Section 8.07(b) of the
Indenture, hereby accepts the resignation of the Resigning Trustee as trustee
under the Indenture. Pursuant to Section 8.07(e) of the Indenture, the Company
acting pursuant to Board Resolution hereby appoints the Successor Trustee as
trustee under the Indenture, and vests and confirms to the Successor Trustee all
rights, powers, trusts, privileges, duties and obligations of the trustee under
the Indenture.

     2.  Company's Representations and Warranties.  The Company hereby
represents and warrants to the Successor Trustee that:

     a. It is duly organized and validly existing and in good standing under all
     applicable law, and, this Instrument has been duly authorized, executed and
     delivered on its behalf and constitutes its legal, valid, binding and
     enforceable obligation;

     b.  It has not entered into any amendment or supplement to the Indenture,
     and the Indenture is in full force and effect;

     c.  No Event of Default and no default exists under the Indenture;

     d.  No covenant or condition contained in the Indenture has been waived
     by the Holders of a percentage in aggregate principal amount of the
     Securities required by the Indenture to effect any such waiver;

     e.  The Indenture was validly executed and delivered by it, and the
     Securities are validly issued securities of the Company; and

     f. The execution and delivery of this Instrument do not and will not
     conflict with, or result in a breach of, any of the terms or provisions of,
     or constitute a default under, any (i) contract, agreement, indenture or
     other instrument (including, without limitation, its certificate of
     incorporation, by-laws and/or any and all other applicable organizational
     documents) to which it is a party or by which it or its property is bound,
     or (ii) any judgment, decree or order of any court or governmental agency
     or regulatory body or law, rule or regulation applicable to it or its
     property.

     3.  Resigning Trustee's Representations and Warranties.  The Resigning
Trustee hereby represents and warrants to the Successor Trustee that:

     a.  It has not entered into any amendment or supplement to the Indenture
     and the Indenture is in full force and effect;

     b.  No covenant or condition contained in the Indenture has been waived
     by the Resigning Trustee or by the Holders of a percentage in aggregate
     principal amount of the Securities required by the Indenture to effect
     any such waiver;

     c. There is no action, suit or proceeding pending or threatened against the
     Resigning Trustee of which it has actual knowledge before any court or
     governmental authority arising out of any action or omission by the


<PAGE>

     Resigning Trustee as trustee under the Indenture;

     d. It has made, or promptly will make, available to the Successor Trustee
     originals, if available, or copies in its possession, of all documents
     relating to the trusts created by the Indenture (the "Trusts") and all
     information in the possession of its corporate trust administration
     department relating to the administration and status of the Trusts and
     shall do such other things as the Successor Trustee may reasonably request
     to more fully vest and confirm in the Successor Trustee all the rights,
     powers, trusts, privileges, duties and obligations assigned and transferred
     hereby to the Successor Trustee;

     e. It has lawfully discharged its duties as trustee under the Indenture;

     f. Pursuant to Section 3.03 of the Indenture, it duly authenticated and
     delivered the Securities in an aggregate principal face amount of
     $300,000,000 and there is currently issued and outstanding $300,000,000 in
     aggregate principal amount of the Securities;

     g. As of the Effective Date, it holds no property or money in its capacity
     as trustee under the Indenture; and

     h. This Instrument has been duly authorized, executed and delivered on
     behalf of the Resigning Trustee and constitutes its legal, valid, binding
     and enforceable obligation.

     4. Successor Trustee's Representations and Warranties.  The Successor
Trustee represents and warrants to the Resigning Trustee and the Company that:

     a. It is qualified and eligible to serve as trustee under the Indenture
     and the Trust Indenture Act of 1939, as amended (the "Act"); and

     b. This Instrument has been duly authorized, executed and delivered on
     behalf of the Successor Trustee and constitutes its legal, valid, binding
     and enforceable obligation.

     5. Acceptance by Successor Trustee. The Successor Trustee hereby accepts
its appointment, as of the Effective Date, as successor trustee under the
Indenture, and assumes, as of the Effective Date, all rights, powers, trusts,
privileges, duties and obligations of the trustee thereunder, subject to the
terms and conditions therein.

     6. Notice to Holders. Promptly after the Effective Date of this Instrument,
the Company shall give notice in accordance with Section 8.07(f) of the
Indenture of the resignation of the Resigning Trustee and the appointment of the
Successor Trustee.

     7. Assignment by Resigning Trustee. The Resigning Trustee hereby confirms,
assigns, transfers, delivers and conveys, as of the Effective Date, to the
Successor Trustee, as successor trustee under the Indenture, upon the Trusts
expressed in the Indenture, all rights, powers, trusts, privileges, duties and
obligations, which the Resigning Trustee, as trustee now holds under and by
virtue of the Indenture, and shall pay over to the Successor Trustee, any and
all property and moneys held by the Resigning Trustee under and by virtue of the
Indenture, subject to the lien provided by Section 8.05 of the Indenture, which
lien the Resigning Trustee expressly reserves to the fullest extent necessary to
secure the Company's obligations under said



<PAGE>

section to the Resigning Trustee, which lien shall also secure the Company's
obligations under said section to the Successor Trustee. Not withstanding any
other provision in this Instrument, the Resigning Trustee shall continue to act
as Paying Agent under the Indenture to the extent that the Resigning Trustee
acts as Paying Agent under any series of Securities, and the Successor Trustee
assumes none of the obligations or duties of the Paying Agent in the Indenture.

     8.  Indemnification

     a.  The parties to this Instrument agree that this Instrument does not
     constitute an assumption by the Successor Trustee of any liability of the
     Resigning Trustee arising out of any breach by the Resigning Trustee in the
     performance of its duties as trustee under the Indenture.

     b.  The Company agrees to pay or indemnify, as applicable, the Successor
     Trustee and save the Successor Trustee harmless from and against any and
     all costs, claims, liabilities, losses or damages whatsoever (including the
     reasonable fees, expenses and disbursements of the Successor Trustee's
     legal counsel and other advisors) arising out of the actual, alleged or
     adjudicated actions or omissions of the Resigning Trustee that the
     Successor Trustee may suffer or incur as a result of the Successor Trustee
     accepting this appointment and acting as successor trustee under the
     Indenture. The Successor Trustee will furnish to the Company, promptly upon
     receipt, all documents with respect to any action the outcome of which
     would make the indemnity provided for in this paragraph operative. The
     Successor Trustee shall notify the Company in writing of any claim for
     which it may seek indemnity.

     c.  As security for the performance of the obligations of the Company under
     this Section 8 and under Section 8.05 of the Indenture, the Successor
     Trustee shall have a lien prior to the Securities upon all property and
     funds held or collected by the Trustee as such.

     9.  Further Assurances. The Company and the Resigning Trustee, for the
purposes of more fully and certainly vesting in and confirming to the Successor
Trustee, as successor trustee under the Indenture, said rights, powers, trusts,
privileges, duties and obligations, agree upon reasonable request of the
Successor Trustee, to execute, acknowledge and deliver such further instruments
of conveyance and further assurance and to do such other things as may
reasonably be required for more fully and certainly vesting and confirming to
the Successor Trustee all rights, powers, trusts, privileges, duties and
obligations which the Resigning Trustee now holds under and by virtue of the
Indenture.

     10. Survival of Certain Obligations of the Company. Notwithstanding the
resignation of the Resigning Trustee, the Company shall remain obligated under
the Indenture to compensate, reimburse and indemnify the Resigning Trustee in
connection with its trusteeship under the Indenture, and nothing contained in
this Instrument shall in any way abrogate the obligations of the Company to the
Resigning Trustee under the Indenture or any lien created in favor of the
Resigning Trustee thereunder.

     11. Corporate Trust Office. Reference in the Indenture to the "Corporate
Trust Office" of the Resigning Trustee or other similar terms shall be deemed to
refer to the Corporate Trust Office of the Successor Trustee at Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890 or


<PAGE>

any other office of the Successor Trustee at which, at any particular time, its
corporate trust business shall be principally administered.

     12.  Notices.  All notices, whether faxed or mailed will be deemed
received when sent pursuant to the following instructions:

          TO THE SUCCESSOR TRUSTEE:

          WILMINGTON TRUST COMPANY
          Attn:  Corporate Trust Administration
          Rodney Square North
          1100 North Market Street
          Wilmington, Delaware 19890
          TELEPHONE:  (302) 651-1343
          TELECOPIER:  (302) 651-8882

          TO THE RESIGNING TRUSTEE:

          CITIBANK, N.A.
          111 Wall Street, 14th Floor
          New York, New York 10005
          TELEPHONE:  (212) 657-7805
          TELECOPIER: (212) 657-4009

          TO THE COMPANY:

          XEROX CREDIT CORPORATION
          800 Long Ridge Road
          Stamford, Connecticut 06904
          Attn:  Assistant Treasurer
          TELEPHONE:  (203) 968-4653
          TELECOPIER: (203) 968-3972

     13.  Effective Date. This Instrument and the resignation, appointment and
acceptance effected hereunder shall be effective as of the close of business on
the Effective Date.

     14.  Governing Law. This Instrument shall be governed by and construed in
accordance with the laws of the State of New York.

     15.  Counterparts. This Instrument may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.

                           [SIGNATURE PAGE FOLLOWS]

          IN WITNESS WHEREOF, the parties have executed this Instrument to be
effective as of the day and year first above written.

                                   WILMINGTON TRUST COMPANY,
                                   Successor Trustee




<PAGE>

                                                                   Exhibit 10(b)

                                                   As Amended Through 10/9/00

                                XEROX CORPORATION

                          1991 LONG-TERM INCENTIVE PLAN

1.  Purpose

The purpose of the Xerox Corporation 1991 Long-Term Incentive Plan (the "Plan")
is to advance the interests of Xerox Corporation (the "Company") and to increase
shareholder value by providing officers and employees with a proprietary
interest in the growth and performance of the Company and with incentives for
continued service with the Company, its subsidiaries and affiliates.

2.  Term

The Plan shall be effective as of May 16, 1991 and shall remain in effect until
May 20, 2004 unless sooner terminated by the Company's Board of Directors (the
"Board"). After termination of the Plan, no future awards may be granted but
previously made awards shall remain outstanding in accordance with their
applicable terms and conditions and the terms and conditions of the Plan.

3.  Plan Administration

The Executive Compensation and Benefits Committee of the Board, or such other
committee as the Board shall determine, comprised of not less than three members
shall be responsible for administering the Plan (the "Compensation


<PAGE>

Committee"). To the extent specified by the Compensation Committee it may
delegate its administrative
 responsibilities to a subcommittee of the
Compensation Committee comprised of not less than three members (the
Compensation Committee and such subcommittee being hereinafter referred to as
the "Committee"). The Compensation Committee or such subcommittee members, as
appropriate, shall be qualified to administer this Plan as contemplated by (a)
Rule 16b-3 under the Securities and Exchange Act of 1934 (the "1934 Act") or any
successor rule and (b) Section 162(m) of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder ("Section 162(m)"). The Committee, and
such subcommittee to the extent provided by the Committee, shall have full and
exclusive power to interpret, construe and implement the Plan and any rules,
regulations, guidelines or agreements adopted hereunder and to adopt such rules,
regulations and guidelines for carrying out the Plan as it may deem necessary or
proper. These powers shall include, but not be limited to, (i) determination of
the type or types of awards to be granted under the Plan; (ii) determination of
the terms and conditions of any awards under the Plan; (iii) determination of
whether, to what extent and under what circumstances awards may be settled, paid
or exercised in cash, shares, other securities, or other awards, or other
property, or canceled, forfeited or suspended; (iv) adoption of such
modifications, amendments, procedures, subplans and the like as are necessary to
comply with provisions of the laws of other countries in which the Company may
operate in order to assure the viability of awards granted under the Plan and to
enable participants employed in such other countries to receive advantages and
benefits under the Plan and such laws; (v) subject to the rights of
participants, modification, change, amendment or cancellation of any award to
correct an administrative error and (vi) taking any other action the Committee
deems necessary or desirable for the administration of the Plan. All
determinations, interpretations, and other decisions under or with respect to
the Plan or any award by the Committee shall be final, conclusive and binding
upon the Company, any participant, any holder or beneficiary of any award under
the Plan and any employee of the Company. Except for the power to amend this
Plan as provided in Section 13 and except for determinations regarding employees
who are subject to Section 16 of the 1934 Act or certain key employees who are
or may become, as determined by the Committee, subject to the Section 162(m)
compensation deductibility limit (the "Covered Employees"), the Committee may
delegate any or all of its duties, powers and authority under the Plan pursuant
to such conditions or limitations as the Committee may establish to any officer
or officers of the Company.

4.  Eligibility

Any employee of the Company shall be eligible to receive an award under the
Plan. "Employee" shall also include any former employee of the Company eligible
to receive a replacement award as contemplated in Sections 5 and 7, and
"Company" shall include any entity that is directly or indirectly controlled by
the Company or any entity in which the Company has a significant equity
interest, as determined by the Committee.

5.  Shares of Stock Subject to the Plan

For each calendar year from and including 1991 to but excluding 1999, a number
of shares of Common Stock, par value $1.00 per share, of the Company ("Common
Stock") equal in an amount of up to one percent (1%) of the adjusted average
shares of Common Stock outstanding used to calculate diluted earnings per share
(previously known as fully diluted earnings per share) as reported in the annual
report to shareholders for the preceding year shall become


<PAGE>

available for issuance under the Plan; and for the calendar year 1999, and for
each calendar year thereafter, a number of shares of Common Stock equal in an
amount to two percent (2%) of the adjusted average shares of Common Stock
outstanding used to calculate diluted earnings per share (previously known as
fully diluted earnings per share) as reported in the annual report to
shareholders for the preceding year shall become available for issuance under
the Plan. In addition, (a) any shares of Common Stock which as of the effective
date of the Plan are reserved for issuance under the company's 1976 Executive
Long-Term Incentive Plan the "1976 Plan" and which are not thereafter issued and
(b) any shares of Common Stock available for issuance under the Plan in previous
years but not actually issued, shall be added to the aggregate number of shares
of common Stock available for issuance in that calendar year under the Plan.

For purposes of the preceding paragraph, the following shall not be counted
against shares available for issuance under the Plan: (i) settlement of stock
appreciation rights ("SAR") in cash or any form other than shares and (ii)
payment in shares of dividends and dividend equivalents in conjunction with
outstanding awards. Any shares that are issued by the Company, and any awards
that are granted by, or become obligations of, the Company, through the
assumption by the Company or an affiliate of, or in substitution for,
outstanding awards previously granted by an acquired company shall not be
counted against the shares available for issuance under the Plan.

In no event, however, except as subject to adjustment as provided in Section 6
shall more than (a) fifteen million (15,000,000) shares of Common Stock be
available for issuance pursuant to the exercise of incentive stock options
("ISOs") awarded under the Plan(1); (b) thirteen million seven hundred ninety
six thousand one hundred eighty-one (13,796,181) shares of Common Stock shall be
available for issuance pursuant to stock awards granted under Section 7(c) of
the Plan(1) ;and (c) five million (5,000,000) shares of Common Stock shall be
made the subject of awards under any combination of awards under Sections 7(a),
7(b) or 7(c) of the Plan to any single individual(2). SARs whether settled in
cash or shares of Common Stock shall be counted against the limit set forth in
(c).

(1)  Effective May 23, 1996
(2)  Effective May 15, 1997

Any shares issued under the Plan may consist in whole or in part, of authorized
and unissued shares or of treasury shares, and no fractional shares shall be
issued under the Plan. Cash may be paid in lieu of any fractional shares in
settlements of awards under the Plan.

6.  Adjustments and Reorganizations

The Committee may make such adjustments as it deems appropriate to meet the
intent of the Plan in the event of changes that impact the Company's share price
or share status, provided that any such actions are consistently and equitably
applicable to all affected participants.

In the event of any stock dividend, stock split, combination or exchange of
shares, merger, consolidation, spin-off or other distribution (other than normal
cash dividends) of Company assets to shareholders, or any other change affecting
shares, such adjustments, if any, as the Committee in its discretion may deem
appropriate to reflect such change shall be made with respect to (i) the
aggregate number of shares that may be issued under the Plan; (ii) the


<PAGE>

number of shares subject to awards of a specified type or to any individual
under the Plan; and/or (iii) the price per share for any outstanding stock
options, SARs and other awards under the Plan.

7.  Awards

The Committee shall determine the type or types of award(s) to be made to each
participant under the Plan and shall approve the terms and conditions governing
such awards in accordance with Section 12. Awards may include but are not
limited to those listed in this Section 7. Awards may be granted singly, in
combination or in tandem so that the settlement or payment of one automatically
reduces or cancels the other. Awards may also be made in combination or in
tandem with, in replacement of, as alternatives to, or as the payment form for,
grants or rights under any other employee or compensation plan of the Company,
including the plan of any acquired entity. However, under no circumstances may
stock option awards be made which provide by their terms for the automatic award
of additional stock options upon the exercise of such awards.

     (a) Stock Option is a grant of a right to purchase a specified number of
shares of Common Stock during a specified period. The purchase price of each
option shall be not less than 100% of Fair Market Value (as defined in Section
10) on the effective date of grant, except that, in the case of a stock option
granted retroactively in tandem with or as a substitution for another award, the
exercise or designated price may be no lower than the Fair Market Value of a
share on the date such other award was granted. A stock option may be exercised
in whole or in installments, which may be cumulative. A stock option may be in
the form of an ISO which complies with Section 422 of the Internal Revenue Code
of 1986, as amended, and the regulations thereunder at the time of grant. The
price at which shares of Common Stock may be purchased under a stock option
shall be paid in full at the time of the exercise in cash or such other method
as provided by the Committee at the time of grant or as provided in the form of
agreement approved in accordance herewith, including tendering (either actually
or by attestation) Common Stock, surrendering a stock award valued at Fair
Market Value on the date of surrender, surrendering a cash award, or any
combination thereof.

     (b) Stock Appreciation Right is a right to receive a payment, in cash
and/or Common Stock, as determined by the Committee, equal to the excess of the
Fair Market Value of a specified number of shares of Common Stock on the date
the SAR is exercised over the Fair Market Value on the date of grant of the SAR
as set forth in the applicable award agreement, except that, in the case of a
SAR granted retroactively in tandem with or as a substitution for another award,
the exercise or designated price may be no lower than the Fair Market Value of a
share on the date such other award was granted

     (c) Stock Award is an award made in stock or denominated in units of stock.
All or part of any stock award may be subject to conditions established by the
Committee, and set forth in the award agreement, which may include, but are not
limited to, continuous service with the Company, achievement of specific
business objectives, and other measurements of individual, business unit or
Company performance.

     (d) Cash Award is an award denominated in cash with the eventual payment
amount subject to future service and such other restrictions and conditions as
may be established by the Committee, and as set forth in the award agreement,
including, but not limited to, continuous service with the


<PAGE>

Company, achievement of specific business objectives, and other measurement of
individual, business unit or Company performance. Cash Awards to any single
Covered Employee, including dividend equivalents in cash or shares of Common
Stock payable based upon attainment of specific performance goals, may not
exceed in the aggregate $5,000,000 for each performance period established by
the Committee under Section 23 of the Plan.

8.  Dividends and Dividend Equivalents

The Committee may provide that awards denominated in stock earn dividends or
dividend equivalents. Such dividend equivalents may be paid currently in cash or
shares of Common Stock or may be credited to an account established by the
Committee under the Plan in the name of the participant. In addition, dividends
or dividend equivalents paid on outstanding awards or issued shares may be
credited to such account rather than paid currently. Any crediting of dividends
or dividend equivalents may be subject to such restrictions and conditions as
the Committee may establish, including reinvestment in additional shares or
share equivalents.

9.  Deferrals and Settlements

Payment of awards may be in the form of cash, stock, other awards, or in such
combinations thereof as the Committee shall determine at the time of grant, and
with such restrictions as it may impose. The Committee may also require or
permit participants to elect to defer the issuance of shares or the settlement
of awards in cash under such rules and procedures as it may establish under the
Plan. It may also provide that deferred settlements include the payment or
crediting of interest on the deferral amounts or the payment or crediting of
dividend equivalents on deferred settlements denominated in shares.

10. Fair Market Value

Fair Market Value for all purposes under the Plan shall mean the average of the
high and low prices of Common Stock as reported in The Wall Street Journal in
the New York Stock Exchange composite transactions or similar successor
consolidated transactions reports for the relevant date, or if no sales of
Common Stock were made on said exchange on that date, the average of the high
and low prices of Common Stock as reported in said composite transaction report
for the preceding day on which sales of Common Stock were made on said Exchange.
Under no circumstances shall Fair Market Value be less than the par value of the
Common Stock.

11. Transferability and Exercisability

All awards under the Plan will be nontransferable and shall not be assignable,
alienable, saleable or otherwise transferable by the participant other than by
will or the laws of descent and distribution except pursuant to a domestic
relations order entered by a court of competent jurisdiction or as otherwise
determined by the Committee. In the event that a participant terminates
employment with the Company to assume a position with a governmental,
charitable, educational or similar non-profit institution, the Committee may
authorize a third party, including but not limited to a "blind" trust, to act on
behalf of and for the benefit of the respective participant with respect to any
outstanding awards. Except as otherwise provided in this Section 11, during the
life of the participant, awards under the Plan shall be exercisable only by him
or her except as otherwise determined by the Committee. In


<PAGE>

addition, if so permitted by the Committee, a participant may designate a
beneficiary or beneficiaries to exercise the rights of the participant and
receive any distributions under this Plan upon the death of the participant.

12.  Award Agreements

Awards under the Plan shall be evidenced by one or more agreements approved by
the Committee that set forth the terms and conditions of and limitations on an
award, except that in no event shall the term of any ISO exceed a period of ten
years from the date of its grant. The Committee need not require the execution
of any such agreement by a participant in which case acceptance of the award by
the respective participant will constitute agreement to the terms of the award.

13.  Plan Amendment

The Compensation Committee may amend the Plan as it deems necessary or
appropriate, except that no such amendment which would cause the Plan not to
comply with the requirements of (i) Section 162(m) with respect to
performance-based compensation, (ii) the Code with respect to ISOs or (iii) the
New York Business Corporation Law as in effect at the time of such amendment
shall be made without the approval of the Company's shareholders. No such
amendment shall adversely affect any outstanding awards under the Plan without
the consent of all of the holders thereof.

14.  Tax Withholding

The Company shall have the right to deduct from any settlement of an award made
under the Plan, including the delivery or vesting of shares, an amount
sufficient to cover withholding required by law for any federal, state or local
taxes or to take such other action as may be necessary to satisfy any such
withholding obligations. The Committee may permit shares to be used to satisfy
required tax withholding and such shares shall be valued at the Fair Market
Value as of the settlement date of the applicable award.

15.  Other Company Benefit and Compensation Programs

Unless otherwise determined by the Committee, settlements of awards received by
participants under the Plan shall not be deemed a part of a participant's
regular, recurring compensation for purposes of calculating payments or benefits
from any Company benefit plan, severance program or severance pay law of any
country.

16.  Unfunded Plan

Unless otherwise determined by the Committee, the Plan shall be unfunded and
shall not create (or be construed to create) a trust or a separate fund or
funds. The Plan shall not establish any fiduciary relationship between the
Company and any participant or other person. To the extent any person holds any
rights by virtue of a grant awarded under the Plan, such right (unless otherwise
determined by the Committee) shall be no greater than the right of an unsecured
general creditor of the Company.

17.  Future Rights

No person shall have any claim or right to be granted an award under the Plan,
and no participant shall have any right by reason of the grant of any award


<PAGE>

under the Plan to continued employment by the Company or any subsidiary of the
Company.

18.  General Restriction

Each award shall be subject to the requirement that, if at any time the
Committee shall determine, in its sole discretion, that the listing,
registration or qualification of any award under the Plan upon any securities
exchange or under any state or federal law, or the consent or approval of any
government regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such award or the exercise settlement thereof,
such award may not be granted, exercised or settled in whole or in part unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Committee.

19.  Governing Law

The validity, construction and effect of the Plan and any actions taken or
relating to the Plan shall be determined in accordance with the laws of the
state of New York and applicable Federal law.

20.  Successors and Assigns

The Plan shall be binding on all successors and permitted assigns of a
participant, including, without limitation, the estate of such participant and
the executor, administrator or trustee of such estate, or any receiver or
trustee in bankruptcy or representative of such participant's creditors.

21.  Rights as a Shareholder

A participant shall have no rights as a shareholder until he or she becomes the
holder of record of Common Stock.

22.  Change in Control

Notwithstanding anything to the contrary in the Plan, the following shall apply
to all awards granted and outstanding under the Plan:

     (a)  Definitions.  The following definitions shall apply to this Section
22:

     A "Change in Control," unless otherwise defined by the Compensation
Committee, shall be deemed to have occurred if (a) any "person," as such term in
used in Section 13(d) and 14(d) of the 1934 Act, other than (1) the Company, (2)
any trustee or other fiduciary holding securities under an employee benefit plan
of the Company, (3) 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, or (4) any person who becomes a "beneficial
owner" (as defined below) in connection with a transaction described in clause
(1) of subparagraph (c) below, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the
Company (not including in the securities beneficially owned by such person any
securities acquired directly from the Company or its affiliates) representing 20
percent or more of the combined voting power of the Company's then outstanding
voting securities; (b) the following individuals cease for any reason to
constitute a majority of the


<PAGE>

directors then serving; individuals who, on October 9, 2000 constitute the Board
and any new director (other than a director whose initial assumption of office
is in connection with an actual or threatened election contest, including but
not limited to a consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or nomination for
election by the Company's shareholders was approved or recommended by a vote of
at least two-thirds of the directors then still in office who were directors on
October 9, 2000 or whose appointment, election or nomination for election was
previously so approved or recommended; (c) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the Company
with any other corporation, other than (1) a merger or consolidation which
results in the directors of the Company immediately prior to such merger or
consolidation continuing to constitute at least a majority of the board of
directors of the Company, the surviving entity or any parent thereof or (2) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no person is or becomes the beneficial owner,
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired directly
from the Company or its affiliates) representing 20% or more of the combined
voting power of the Company's then outstanding securities; or (d) the
shareholders of the Company approve a plan of complete liquidation or
dissolution of the Company or there is consummated an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or substantially all of
the Company's assets to an entity, at least 50% of the combined voting power of
the voting securities of which are owned by stockholders of the Company in
substantially the same proportions as their ownership of the Company immediately
prior to such sale.

     "CIC Price" shall mean the higher of (a) the highest price paid for a share
of the Company's Common Stock in the transaction or series of transactions
pursuant to which a Change in Control of the Company shall have occurred, or (b)
the highest price paid for a share of the Company's Common Stock during the 60
day period immediately preceding the date upon which the event constituting a
Change in Control shall have occurred as reported in The Wall Street Journal in
the New York Stock Exchange Composite Transactions or similar successor
consolidated transactions reports.

     (b)  Acceleration of Vesting and Payment of SARs, Stock Awards, Cash
Awards, and Dividends and Dividend Equivalents.

         (1) Upon the occurrence of an event constituting a Change in Control,
all SARs, stock awards, cash awards, dividends and dividend equivalents
outstanding on such date shall become 100% vested and shall be paid in cash as
soon as may be practicable. Upon such payment, such awards and any related stock
options shall be cancelled.

         (2) The amount of cash to be paid shall be determined by multiplying
the number of such awards, as the case may be, by: (i) in the case of stock
awards, the CIC Price; (ii) in the case of SARs, the difference between the
exercise price of the related option per share and the CIC Price; (iii) in the
case of cash awards where the award period, if any, has not been completed upon
the occurrence of a Change in Control, the maximum value of such awards as
determined by the Committee at the time of grant, without regard to the
performance criteria, if any, applicable to such award; and (iv) in the case of
cash awards where the award period, if any, has been completed on or prior to
the occurrence of a Change in Control: (aa) where the cash


<PAGE>

award is payable in cash, the value of such award as determined in accordance
with the award agreement, and (bb) where the cash award is payable in shares of
Common Stock, the CIC Price.

     (c)  Option Surrender Rights.

         (1) All stock options granted under the Plan shall be accompanied by
option surrender rights ("OSRs"). OSRs shall be evidenced by OSR agreements in
such form and not inconsistent with the Plan as the Committee shall approve from
time to time. Upon the occurrence of an event constituting a Change in Control,
all OSRs, to the extent that the CIC Price exceeds the exercise price of the
related stock options, shall be paid in cash as soon as may be practicable. Upon
such payment, such rights and any related stock options shall be cancelled.

         (2) The amount of cash payable in respect of an OSR shall be determined
by multiplying the number of unexercised shares as to which the right then
relates by the difference between the option price of such shares and the CIC
Price.

         (3) Upon the grant of SARs, with respect to the same shares covered by
then outstanding OSRs the OSRs relating to such shares shall be automatically
cancelled.

     (d) Notwithstanding the foregoing subsections (a), (b) and (c), SARs, OSRs
and any stock-based award held by an officer or director subject to Section 16
of the 1934 Act which have been outstanding less than six months (or such other
period as may be required by the 1934 Act) upon the occurrence of an event
constituting a Change in Control shall not be paid in cash until the expiration
of such period, if any, as shall be required pursuant to such Section, and the
amount to be paid shall be determined by multiplying the number of SARs, OSRs or
stock awards by the CIC Price determined as though the event constituting the
Change in Control had occurred on the first day following the end of such
period.

23.  Certain Provisions Applicable to Awards to Covered Employees

Performance-based awards made to Covered Employees shall be made by the
Committee within the time period required under Section 162(m) for the
establishment of performance goals and shall specify, among other things, the
performance period(s) for such award (which shall be not less than one year),
the performance criteria and the performance targets. The performance criteria
shall be any one or more of the following as determined by the Committee and may
differ as to type of award and from one performance period to another: earnings
per share, total shareholder return, return on shareholders' equity, economic
value added measures, return on assets, revenue, profit before tax, profit after
tax, stock price and return on sales. Payment or vesting of awards to Covered
Employees shall be contingent upon satisfaction of the performance criteria and
targets as certified by the Committee by resolution of the Committee. To the
extent provided at the time of an award, the Committee may in its sole
discretion reduce any award to any Covered Employee to any amount, including
zero.




<PAGE>

                                                                   EXHIBIT 10(d)

Annual Performance Incentive Plan

Under the Annual Performance Incentive Plan (APIP), executive officers of the
Company may be entitled to receive performance related cash payments provided
that performance thresholds, established annually bythe Executive Compensation
and Benefits Committee, 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
threshold, target and maximum measures of performance and associated payment
schedules. For 2000, 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 to corporate officers are subject
 to approval
by the Committee following the end of the year. As a result of the Company's
performance during 2000, no cash bonuses under APIP were paid to officers with
respect to 2000 performance.




<PAGE>

                                                                   Exhibit 10(e)

                             As amended by Board of Directors through 10/9/00


                                1997 Restatement

                                       of

                                XEROX CORPORATION

                    UNFUNDED RETIREMENT INCOME GUARANTEE PLAN





XEROX CORPORATION, a New York corporation having its principal executive office
in the City of Stamford, County of Fairfield and State of Connecticut, hereby
adopts the XEROX CORPORATION UNFUNDED RETIREMENT INCOME GUARANTEE PLAN effective
on the Effective Date as follows:

                          Restatement October 13, 1997


<PAGE>

                                      INDEX

                                                                     Page No.

ARTICLE 1   Definitions                                                 3

ARTICLE 2   Purpose of Plan                                             3

ARTICLE 3   Eligibility                                                 4

ARTICLE 4   Benefits                                                    4

ARTICLE 5   Change in Control                                           6

ARTICLE 6   Administration                                              7

ARTICLE 7   Amendment and Termination                                   7

ARTICLE 8   Miscellaneous                                               8


<PAGE>

                                XEROX CORPORATION

                  UNFUNDED RETIREMENT INCOME GUARANTEE PLAN


                                    ARTICLE 1

                                   Definitions

     When used herein, the words and phrases defined hereinafter shall have the
following meaning unless a different meaning is clearly required by the context
of the Plan. Terms used herein which are defined in Article 1 of the Funded Plan
shall have the meanings assigned to them in the Funded Plan.

     Section 1.1.   Administrator. The Administrator appointed by the Vice
President, Human Resources of the Company

     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.

     Section 1.3.   Board. The Board of Directors of the Company.

     Section 1.4.   Code. The Internal Revenue Code of 1986 as amended, or as it
may be amended from time to time.

     Section 1.5.   Company. Xerox Corporation.

     Section 1.6.   Effective Date. The original effective date of the Plan was
July 1, 1977. This Restatement is effective as of October 13, 1997.

     Section 1.7.   Employee. A Member in the Funded Plan.

     Section 1.8.   Funded Plan. The Xerox Corporation Retirement Income
Guarantee Plan.

     Section 1.9.   Plan. The "Xerox Corporation Unfunded Retirement Income
Guarantee Plan", as set forth herein or in any amendment hereto.

                                    ARTICLE 2

                                 Purpose of Plan


<PAGE>

     Section 2.1.   Purpose. The Plan is designed to provide retirement benefits
payable out of the general assets of the Company as provided in Section 4.1.

                                   ARTICLE 3

                                  Eligibility

     Section 3.1.   Eligibility. All Employees and beneficiaries of Employees
eligible to receive benefits from the Funded Plan shall be eligible to receive
benefits under this Plan in accordance with Section 4.1 regardless of when the
Employees may have retired.

                                   ARTICLE 4

                                   Benefits

     Section 4.1.   Amount of Benefits. The amount of the benefit payable under
the Plan shall be equal to the monthly benefit which would be payable to or on
behalf of an Employee under the Funded Plan as a Life Annuity if Section 9.5 of
the Funded Plan were inapplicable and if the amount of any compensation deferred
by the Employee was included in the calculation of Average Monthly Compensation
(except the increase in compensation which became payable under the Company's
policy of increasing compensation by the amount which cannot be added to an
Employee's accounts under the Profit Sharing Plan by reason of the limitation
contained in Section 415 of the Code), less the following:

     (a)  The monthly benefit actually payable as a Life Annuity to or on behalf
of the Employee under the Funded Plan other than the RIGP Plus Benefit payable
under Article 17 thereof.

     (b)  The monthly benefit which could be purchased as a Life Annuity with
the balance, if any, in the Employee's deferred compensation account under the
Xerox Corporation Deferred Compensation Plan For Executives arising from the
Retirement Account portion of the Profit Sharing Adjustment under Section 4
thereof.

     (c)  Any amount paid to the Employee from which FICA taxes are withheld
related to nonqualified retirement benefits from a plan sponsored by the Company
which have not been previously withheld (or deemed to be withheld because the
maximum tax had already been paid) and are payable upon retirement but cannot be
withheld from any single sum payment of compensation or other nonqualified plan
benefits translated to an annuity (single life or joint and survivor as
appropriate) payable commencing on the date of retirement.

     (d)  The amount of that certain provisional supplement provided to certain
high-paid Employees in RIGP effective in 1989 when the RIGP benefit was modified
payable to Employees in a lump sum translated to an annuity (single life or
joint and survivor as appropriate) payable commencing on the date of retirement.

     Section 4.1A   Additional Benefit. In addition to the benefit provided by
the foregoing provisions of Section 4.1, there shall be an additional benefit
equal to the excess of (a) over (b) where (a) is the RIGP Plus Benefit which
would be payable under Article 17 of the Funded Plan as if "Annual Pay", as
defined in Article 17 of the Funded Plan, had been calculated without regard


<PAGE>

to the applicable limitations of the "Code" as defined in the Funded Plan and to
include deferred compensation to the extent not already included and (b) is the
RIGP Plus Benefit calculated under Article 17 of the Funded Plan subject to such
Code limitations. Notwithstanding any provision of this Plan to the contrary,
the benefit under this Section 4.1A shall be payable in cash in a lump sum. Such
benefit shall be paid at the time specified in Section 4.4. If payment is not
made at or about termination of employment, the Administrator may, in his or her
discretion, determine to increase the amount of the additional benefit at the
CBRA interest rate (within the meaning of the Funded Plan) for the period
between termination and payout hereunder.

     Section 4.2.  Form of Benefit Payments. The forms of benefit available
under the Plan shall be for single Employees a 10-Year certain and life annuity
or a life annuity and for married Employees a 50% or 100% joint and survivor
annuity option, all as shall have been elected by Employee on forms provided by
the Administrator. The benefit payable to a single Employee who has failed to
make such an election shall be a life annuity and for any such married Employee
a 50% joint and survivor annuity. The 10-year certain and life annuity is the
actuarial equivalent of the life annuity and the 100% joint and survivor annuity
is the actuarial equivalent of the 50% joint and survivor annuity. Except as
otherwise provided in Section 5.1 in no event is the benefit payable in a lump
sum.

     Notwithstanding the above, the lump sum actuarial equivalent of any benefit
otherwise payable as a monthly amount of one hundred dollars ($100.00) or less,
shall be distributed in accordance with Section 4.3. The interest rate used in
computing the lump sum actuarial equivalent amount shall be the interest rate
described in the section entitled "Optional Forms of Benefit Payment" of the
Funded Plan.

     Section 4.3   Death Prior to Benefit Commencement. The spouse of a
Participant who dies before commencement of benefits under the Plan shall be
entitled to a survivor benefit calculated in accordance with Article 7 of the
Funded Plan in an amount equal to the amount determined under (a) or (b) below.

     (a)  In the case of a Participant who is eligible to retire under the
Funded Plan on the date of his or her death, one-half of the retirement benefit
to which the Participant would have been entitled under the Plan if he or she
had retired on the last day of the month coincident with or next following the
date of the Participant's death; or

     (b)  In the case of a Participant who is not eligible to retire under the
Funded Plan on the date of his or her death, one-half of the retirement benefit
to which the Participant would have been entitled under the Plan if he or she
had terminated on his or her date of death and survived to the date of payment
of benefits as determined under Section 4.4 below.

     Section 4.4.  Time of Benefit Payments. Benefits due under the Plan shall
be paid coincident with the payment date of benefits under the Funded Plan or at
such other time or times as the Administrator in his discretion determines.

     Section 4.5.  Employee'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 Employee to receive benefits under the provisions


<PAGE>

of the Plan shall be an unsecured claim against the general assets of the
Company.

                                   ARTICLE 5

                               Change in Control

     Section 5.1.  Change In Control. Notwithstanding anything to the contrary
in this Plan, in the event of a change in control of the Company, as hereinafter
defined, each Employee, including retired Employees, shall be entitled to a
benefit hereunder without regard to his or her age or Years of Service at the
time of such change in control. Upon the occurrence of a change in control of
the Company, the benefit of each Employee shall be payable in a lump sum within
30 days of such change in control equal in amount to the then present value of a
benefit expressed in the form provided in Section 4.1 hereof, commencing on the
later of (i) the date of such change in control and (ii) the date the Employee
would be eligible for a benefit under the Funded Plan, and based upon such
Employee's Average Monthly Compensation and Years of Participation as of the
date of such change in control. A "change in control of the Company" shall have
the meaning set forth in the Xerox Corporation Retirement Income Guarantee Plan,
as may be amended or restated from time to time.

     Section 5.2.  Termination of Employment Following Change in Control. Upon
the termination of employment of a Employee following a change in control of the
Company, such Employee, if he or she has otherwise satisfied the requirements of
the Funded Plan for a benefit, shall be entitled to a benefit equal to the
benefit to which he or she would have been entitled without application of
Section 5.1, reduced (but not below zero) to reflect the value of the benefit he
or she received pursuant to Section 5.1.

     Section 5.3.  Calculation of Present Value. For purposes of Section 5.1
hereof, the present value of a benefit shall be calculated based upon the
interest rate which would be used by the Pension Benefit Guaranty Corporation
for purposes of determining lump sums for benefits payable as immediate
annuities with respect to plans terminating on the date on which the change in
control of the Company occurs and the 1983 GAM mortality table, provided,
however, that effective upon the date that the applicable interest rate as
specified in Section 417(e)(3)(A) of the Code is adopted for use in the Funded
Plan, the present value hereunder shall thereafter be determined under such
applicable interest rate and the applicable mortality table as defined in
Section 417(e)(3)(A)(ii)(l) of the Code. For purposes of the Funded Plan, each
Employee shall be treated as if they terminated employment upon the change in
control and had their benefits determined as if they were to begin receiving
benefits on the commencement date used in developing the present value of the
benefit in Section 5.1.

                                   ARTICLE 6

                                Administration

     Section 6.1.  Duties of Administrator. The Plan shall be administered by
the Administrator in accordance with its terms and purposes. The Administrator
shall determine the amount and manner of payment of the benefits due to or on
behalf of each Employee from the Plan and shall cause them to be paid by the
Company accordingly.


<PAGE>

     Section 6.2.  Finality of Decisions. The decisions made by and the actions
taken by the Administrator in the administration of the Plan shall be final and
conclusive on all persons, and the Administrator shall not be subject to
individual liability with respect to the Plan.

                                   ARTICLE 7

                           Amendment and Termination

     Section 7.1.  Amendment and Termination. It is the intention of the Company
to continue the Plan indefinitely. The Company expressly reserves the right to
amend the Plan at any time and in any particular manner, provided that any such
amendment shall be made in accordance with ERISA. Such amendments, other than
amendments relating to termination of the Plan or relating to benefit levels
under Section 4.1 of the Plan, may be effected by (i) the Board of Directors,
(ii) a duly constituted committee of the Board of Directors, 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 benefit levels under Section 4.1 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

     Section 7.2.  Contractual Obligation. Notwithstanding Section 7.1, the
Company hereby makes a contractual commitment to pay the benefits accrued under
the Plan to the extent it is financially capable of meeting such obligations.

                                   ARTICLE 8

                                 Miscellaneous

     Section 8.1.  No Employment Rights. Nothing contained in the Plan shall be
construed as a contract of employment between the Company and an Employee, or as
a right of any Employee 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.

     Section 8.2.  Assignment. The benefits payable under this Plan may not be
assigned or alienated except as may otherwise be required by law or pursuant to
the terms of a domestic relations order that has been approved by the Plan
Administrator.

     Section 8.3.  Law Applicable. This Plan shall be governed by the laws of
the State of New York.




<PAGE>

                                                                   Exhibit 10(f)

                                                  As amended by the Board of
                                                  Directors through 10/9/00


                                1997 Restatement

                                       of

                                XEROX CORPORATION

                      UNFUNDED SUPPLEMENTAL RETIREMENT PLAN

XEROX CORPORATION, a New York corporation having its principal executive office
in the City of Stamford, County of Fairfield and State of Connecticut, hereby
adopts the XEROX CORPORATION UNFUNDED SUPPLEMENTAL RETIREMENT PLAN effective on
the Effective Date as follows:


<PAGE>

                         Restatement October 13, 1997

                               XEROX CORPORATION

                     UNFUNDED SUPPLEMENTAL RETIREMENT PLAN

Section 1.  Plan Name

     The plan name is the Xerox Corporation Unfunded Supplemental Retirement
Plan (the "Plan").

Section 2.  Effective Date

     The original effective date of the Plan is June 30, 1982. The Plan was
restated on three previous occasions, effective February 4, 1985, January 1,
1990, December 6, 1993 and December 9, 1996. This Restatement is effective as of
October 13, 1997.

Section 3.  Purpose of the Plan

     The Plan is designed to address special circumstances involved in the
retirement of executives.


<PAGE>

Section 4.  Covered Employees

     The following employees of Xerox Corporation (the "Company") are covered by
the Plan:

     A.   All employees who were corporate officers of the Company at grade
level 25 and above
 on the original effective date of the Plan (the
"Grandfathered Officers").

     B.   All employees who were corporate officers at grades 23 or 24 on the
original effective date of the Plan or who first become corporate officers of
the Company at grade level 23 and above after the original effective date of the
Plan and do not fall within categories D through G below (the "Officers").

     C.   Certain employees who received a letter dated September 2, 1982 from
David T. Kearns regarding Executive Retirement Guidelines (the "Guideline
Employees").

     D.   All employees who are corporate officers of the Company on the date of
this 1996 Restatement who first commenced employment with the Company on or
after attainment of age 40 and whose names appear on Schedule A ("Schedule A")
presented at the meeting of the Executive Compensation and Benefits Committee
held December 9, 1996 and made part of the records of that meeting which
Schedule is incorporated herein by reference and made a part of the Plan
("Grandfathered Mid-Career Officers").

     E.   All employees who after the date of the 1996 Restatement first
commence employment with the Company on or after attainment of age 40 who are
elected corporate officers and whose names are added to Schedule A upon
selection by the Chief Executive Officer of the Company as maintained with
records of the Executive Compensation department of the Company which Schedule
as so modified from time to time is incorporated herein by reference and made a
part hereof ("Mid-Career Officer Hires").

     F.   All employees who are in payroll Band A of the Company on the date of
the 1996 Restatement who first commenced employment with the Company on or after
attainment of age 40 and whose names are set forth on Schedule B ("Schedule B")
which has been approved by the Vice President responsible for Human Resources
and placed with the records of the Executive Compensation department of the
Company which Schedule is incorporated herein by reference and made a part of
the Plan ("Grandfathered Mid-Career Band A Employees").

     G.   All employees who after the date of the 1996 Restatement first
commence employment with the Company on or after attainment of age 40 who are
hired into payroll Band A selected by the Vice President of the Company
responsible for Human Resources, or his or her designee, such selection to be
evidenced by the placement of the employee's name on Schedule C to be maintained
from time to time by such Vice President or his or her designee, which Schedule
is incorporated herein by reference and made a part of the Plan ("Mid-Career
Band A Hires")

     H.   Grandfathered Mid-Career Officers, Mid-Career Officer Hires,
Grandfathered Mid-Career Band A Employees and Mid-Career Band A Hires are
sometimes together referred to as "Mid-Career Executives".

     I.   The employees referred to in paragraphs A through G above are


<PAGE>

together referred to herein as "Participants".

Section 5.   Eligibility for Benefits

     Participants must have attained the following age and completed the
following Years of Service to be eligible for benefits under the Plan:

     A.   Grandfathered Officers and Guideline Employees -- age 55, Years of
Service -- 5.

     B.   Officers -- age 60, Years of Service -- 10.

     C.   Grandfathered Mid-Career Officers -- the age set forth opposite their
respective names on Schedule A, Years of Service -- 5.

     D.   Mid-Career Officer Hires -- the age determined by the Chief Executive
Officer of the Company as reflected in Schedule A, Years of Service -- 5.

     E.   Grandfathered Mid-Career Band A Employees -- the age set forth
opposite their respective names on the Schedule B, Years of Service -- 5.

     F.   Mid-Career Band A Hires -- the age determined by the Vice President
responsible for Human Resources or his or her delegate as set forth on Schedule
C referred to above, Years of Service 5.

Section 6.  Supplemental Retirement Benefit

     A.   The benefit payable under the Plan shall be a monthly retirement
benefit equal to:

     One and two-thirds percent of Average Monthly Compensation of the
Participant multiplied by the number of full and fractional Years of
Participation up to thirty less

          (a)  One and two-thirds percent of the Social Security Benefit
multiplied by the number of full and fractional Years of Participation up to
thirty; and

          (b)  The monthly retirement benefit payable under the Company's
Retirement Income Guarantee Plan ("RIGP") (stated as a Life Annuity)* as it is
in effect as of and from time to time after January 1, 1990 other than the RIGP
Plus Benefit payable under Article 17 thereof; subject to the "Adjustments" set
forth in subsections B through F below.

     "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.

     "Social Security Benefit" shall mean the monthly benefit which a retired
Participant or a terminated Participant receives or would be entitled to receive
at the age at which unreduced retirement benefits are then paid under the U.S.
Social Security Act (or at his sixty-second birthday, in the case of a retired
Participant who has at least thirty Years of Service or who, on such
Participant's retirement, is the pilot of an airplane operated by the


<PAGE>

Company), as a primary insurance amount under the U.S. Social Security Act, as
amended, whether he or she applies for such benefit or not, and even though he
or she may lose part or all of such benefit for any reason.

     The amount of such Social Security Benefit to which the retired or
terminated Participant is or would be entitled shall be computed by the
Administrator for the purposes of the Plan as of the January 1 of the calendar
year of retirement or termination. In computing such amount, the Administrator
shall use estimated benefit tables developed by the Plan's actuary, the
five-year average compensation of the Participant and the assumption that the
Participant's compensation prior to the fifth year preceding the year of
termination grew in accordance with average national wages.

     B.  Grandfathered Officers -- Adjustments shall be

         1.  The monthly benefit and the Social Security Benefit shall be
calculated at the rate of 3 1/3% of Average Monthly Compensation and of the
Social Security Benefit, respectively, for each full or fractional Year of
Participation up to a maximum of 15 Years of Participation.

         2.  There shall be no reduction in the benefit payable upon retirement
on or after attainment of age 55 on account of payment commencing prior to
attainment of age 65.

         3.  Amounts included in the Participant's Executive Expense Allowance
shall be included in determining Average Monthly  Compensation.

     C.  Officers -- Adjustments shall be that there shall be no reduction in
the benefit payable upon retirement on or after attainment of age 60 on account
of payment commencing prior to attainment of age 65 and no part of the Executive
Expense Allowance shall be included in determining Average Monthly Compensation.

     D.  Guideline Employees -- An adjustment shall be that there shall be no
reduction in the benefit payable upon retirement on or after attainment of age
55.

* Defined terms in RIGP shall have the same meanings in the Plan, except as
otherwise noted herein.

     E.  Mid-Career Executives -- Adjustments shall be

         1.  The monthly benefit and the Social Security Benefit shall be
calculated at the rate of 2.5% of the Average Monthly Compensation and of the
Social Security Benefit, respectively, for each full or fractional Year of
Participation up to a maximum of 20 Years of Participation.

         2.  There shall be no reduction in the benefit payable upon retirement
on or after attainment of age 60 on account of payment commencing prior to
attainment of age 65 and no part of the Executive Expense Allowance, if any,
shall be included in determining Average Monthly Compensation.

     F.  All Participants -- Adjustments shall be

         1.  Average Monthly Compensation shall be calculated including any


<PAGE>

compensation deferred by the Participant during the period used in calculating
Average Monthly Compensation (except that there shall not be included any
increase in Participant's compensation which became payable under the Company's
policy of increasing compensation by the amount which cannot be added to the
Participant's accounts under the Company's Profit Sharing and Savings Plan
("Profit Sharing Plan") by reason of the limitation contained in Section 415 of
the Internal Revenue Code of 1986, as amended, hereinafter the "Code").

         2.  The following additional amounts shall be deducted from the
hypothetical monthly benefit:

             (a) The value of the portion of the Participant's Account under the
Company's Deferred Compensation Plan For Executives, if any, resulting from the
Retirement Account portion of the Profit Sharing Adjustment (as defined in such
Deferred Compensation Plan) translated into an annuity (single life or joint and
survivor, as appropriate) payable commencing on the date of retirement.

             (b) The benefit payable under the Company's Unfunded Retirement
Income Guarantee Plan ("Unfunded RIGP") other than the additional benefit
payable under Section 4.1A thereof.

             (c) Any amount paid to the participant from which FICA taxes are
withheld related to nonqualified retirement benefits from a plan sponsored by
the Company which have not been previously withheld (or deemed to have been
withheld because the maximum tax had already been paid) and are payable upon
retirement but cannot be withheld from any single sum payment of compensation or
other nonqualified plan benefits translated to an annuity (single or joint and
survivor as appropriate) payable commencing on the date of retirement.

             (d) The amount of that certain supplement provided to certain
high-paid participants in RIGP effective in 1989 when the RIGP benefit was
modified payable to the Participant in a lump sum translated to an annuity
(single life or joint and survivor as appropriate) payable commencing on the
date of retirement.

     (e)  The amount of any pension, retirement or other post-retirement income
benefits paid or payable to a Participant under plans or arrangements provided
by the Company or any subsidiary of the Company, whether incorporated or
organized in the United States or in any other country of the world.

     Section 7.  Change In Control.

     A.   Notwithstanding anything to the contrary in this Plan, in the event of
a change in control of the Company, as hereinafter defined, each Participant,
including retired Participants, shall be entitled to a benefit hereunder without
regard to his or her age or Years of Service at the time of such change in
control (including, without limitation, the benefit provided under Section 8
hereof, if applicable). Upon the occurrence of a change in control of the
Company, the benefit of each Participant shall be payable in a lump sum within
five days of such change in control equal in amount to the then present value of
a benefit expressed in the form provided in Section 10 hereof, commencing on the
later of (i) the date of such change in control, (ii) the date Guideline
Employee or Grandfathered Officer attains age 55, (iii) the date the Officers
attain age 60 or (iv) in the case of a Mid-Career Executive, the date such
Participant attains the age specified in Schedule A,


<PAGE>

B or C, and based upon such Participant's Average Monthly Compensation and Years
of Participation as of the date of such change in control. A "change in control
of the Company" shall have the meaning set forth in the Xerox Corporation
Retirement Income Guarantee Plan, as may be amended or restated from time to
time.

     B.   Upon the termination of employment of a Participant following a change
in control of the Company, such Participant, if he or she has otherwise
satisfied the requirements of Section 5 hereof, shall be entitled to a benefit
equal to the benefit to which he or she would have been entitled without
application of Section 7A, reduced (but not below zero) to reflect the value of
the benefit he or she received pursuant to Section 7A.

     C.   For purposes of Section 7A hereof, the present value of a benefit
shall be calculated based upon the interest rate which would be used by the
Pension Benefit Guaranty Corporation for purposes of determining lump sums for
benefits payable as immediate annuities with respect to plans terminating on the
date on which the change in control of the Company occurs and the 1983 GAM
mortality table, provided, however, that effective upon the date that the
applicable interest rate as specified in Section 417(e)(3)(A) of the Code is
adopted for use in RIGP, the present value hereunder shall thereafter be
determined under the applicable interest rate and mortality table as defined in
Section 417(e)(3)(A) (ii)(l) of the Code. For purposes of RIGP, each Participant
shall be treated as if he or she terminated employment upon the change in
control and had his or her benefits determined as if he or she were to begin
receiving benefits on the commencement date used in developing the present value
of the benefit in Section 7.A.

Section 8.   Minimum Benefit

     In no event shall the monthly retirement benefit payable to any Participant
other than Mid-Career Executives under the Plan be less than an amount which,
when added to the benefits payable under RIGP, 25% of the amount of the Social
Security Benefit and the amounts described in Section 6F2 above, is equal to 25%
of such Participant's Average Monthly Compensation as adjusted in Section 6F1
for Participants and Section 6B3 for Grandfathered Officers.

Section 9.   Pre-Retirement Spouse's Benefit

     The spouse of a Participant who dies after completing the appropriate age
and number of Years of Service pursuant to Section 5 (but in no case less than
10) while still employed by the Company shall be entitled to a survivor benefit,
commencing on the death of the Participant, in an amount equal to one-half of
the retirement benefit to which the Participant would have been entitled under
the Plan if the Participant had retired on the last day of the month coincident
with or next following the date of the Participant's death.

Section 10.  Form of Benefit

     The forms of benefit available under the Plan shall be for single
Participants a 10-Year certain and life annuity or life annuity and for married
Participants a 50% or 100% joint and survivor annuity option, all as shall have
been elected by Participant on forms provided by the Administrator. The benefit
payable to single Participant who has failed to make such an election shall be a
life annuity and for a married Participant a 50% joint and survivor annuity. The
10 year certain and life annuity is the actuarial equivalent of the life annuity
and the 100% joint and survivor annuity is the


<PAGE>

actuarial equivalent of the 50% joint and survivor annuity. Except as otherwise
provided in Section 7A in no event is the benefit payable in a lump sum.

Section 11.  Participant's Rights Unsecured

     The benefits payable under this Plan shall be unfunded. Consequently, no
assets shall be segregated for purposes of the Plan and placed beyond the reach
of the Company's general creditors. The right of any Participant to receive
benefits under the provisions of the Plan shall be an unsecured claim against
the general assets of the Company.

Section 12.  Other Plan Provisions

     Other Plan provisions necessary to determine any benefit under the Plan
shall be the same as those described in RIGP.

Section 13.  Duties of Administrator

     The Plan shall be administered by the Administrator in accordance with its
terms and purposes. The Administrator shall determine the amount and manner of
payment of the benefits due to or on behalf of each Participant from the Plan
and shall cause them to be paid by the Company accordingly. The Administrator
shall be appointed by the Vice President, Human Resources of the Company.

Section 14.  Finality of Decisions

     The decisions made by and the actions taken by the Administrator in the
administration of the Plan shall be final and conclusive on all persons, and the
Administrator shall not be subject to individual liability with respect to the
Plan.

Section 15.  Amendment and Termination

     It is the intention of the Company to continue the Plan indefinitely. The
Company expressly reserves the right to amend the Plan at any time and in any
particular manner, provided that any such amendment shall be made in accordance
with ERISA. Such amendments, other than amendments relating to termination of
the Plan or relating to benefit levels 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, 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 benefit levels 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.

Section 16.  No Employment Rights


<PAGE>

     Nothing contained in the Plan 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.

Section 17.  Assignment

     The benefits payable under this Plan may not be assigned or alienated
except as may otherwise be required by law or pursuant to the terms of a
domestic relations order that has been approved by the Plan Administrator.

Section 18.  Law Applicable

     This Plan shall be governed by the laws of the State of New York.

     Restatement adopted and approved as of October 13, 1997.




<PAGE>

Exhibit 10(i)(2)
                                                                    CONFIDENTIAL

                               XEROX CORPORATION
                              800 Long Ridge Road
                              Stamford, CT 06904

                                                                October 15, 2000

Dear             :

     Xerox Corporation (the "Company") considers it essential to the best
interests of its shareholders to foster the continuous employment of key
management personnel. In this connection, the Board of Directors of the Company
(the "Board") recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its shareholders.

     The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control of the Company, although no such change is
now contemplated.

     In order to induce you to remain in the employ of the Company and in
consideration of your agreement set forth in Section 2(ii) hereof,
 the Company
agrees that you shall receive the severance benefits set forth in this letter
agreement in the event your employment with the Company is terminated subsequent
to a "Change in Control of the Company" (as defined in Section 2 hereof) under
the circumstances described below.

     1.   Term of Agreement. This Agreement shall commence on October 15, 2000
and shall continue in effect through December 31, 2001; provided, however, that
commencing on January 1, 2002, and each January 1 thereafter, the term of this
Agreement shall automatically be extended for one additional year unless not
later than September 30 of the preceding year, the Company shall have given
notice that it does not wish to extend this Agreement (provided that no such
notice may be given during the pendency of a potential Change in Control of the
Company, as defined in Section 2); provided, further, that notwithstanding any
such notice by the Company not to extend, if a Change in Control of the Company,
as defined in Section 2 hereof, shall have occurred while this Agreement is in
effect, this Agreement shall continue in effect until the last day of the 24th
month following the month in which occurs such Change in Control of the Company.

     2.   Change in Control.


<PAGE>

         (i)   No benefits shall be payable hereunder unless there shall have
been a Change in Control of the Company, as set forth below, and your employment
by the Company shall thereafter have been terminated in accordance with Section
3 below. For purposes of this Agreement, 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 (1) the Company, (2) any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, (3)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,
or (4) any person who becomes a "beneficial owner" (as defined below) in
connection with a transaction described in clause (1) of subparagraph (C) below,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such person any securities
acquired directly from the Company or its affiliates) representing 20% or more
of the combined voting power of the Company's then outstanding securities; (B)
the following individuals cease for any reason to constitute a majority of the
directors then serving: individuals who, on the date hereof constitute the Board
and any new director (other than a director whose initial assumption of office
is in connection with an actual or threatened election contest, including but
not limited to a consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or nomination for
election by the Company's shareholders was approved or recommended by a vote of
at least two-thirds of the directors then still in office who were directors on
the date hereof or whose appointment, election or nomination for election was
previously so approved or recommended; (C) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the Company
with any other corporation, other than (1) a merger or consolidation which
results in the directors of the Company immediately prior to such merger or
consolidation continuing to constitute at least a majority of the board of
directors of the Company, the surviving entity or any parent thereof or (2) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no person is or becomes the beneficial owner,
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired directly
from the Company or its affiliates) representing 20% or more of the combined
voting power of the Company's then outstanding securities; or (D) the
shareholders of the Company approve a plan of complete liquidation or
dissolution of the Company or there is consummated an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or substantially all of
the Company's assets to an entity, at least 50% of the combined voting power of
the voting securities of which are owned by stockholders of the Company in
substantially the same proportions as their ownership of the Company immediately
prior to such sale..

         (ii)  For purposes of this Agreement, a "Potential Change in Control of
the Company" shall be deemed to have occurred if (A) the Company enters into an
agreement, the consummation of which would result in the occurrence of a Change
in Control of the Company, (B) any person (including the Company) publicly
announces an intention to take or to consider taking actions which if
consummated would constitute a Change in Control of the Company; (C) any person,
other than a trustee or other fiduciary holding securities under an employee
benefit plan of the Company (or a company owned, directly or


<PAGE>

indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company), becomes the beneficial
owner, directly or indirectly, of securities of the Company (not including in
the securities beneficially owned by such person any securities acquired
directly from the Company or its affiliates) representing 10% or more of the
combined voting power of the Company's then outstanding securities; or (D) the
Board of Directors adopts a resolution to the effect that a Potential Change in
Control of the Company for purposes of this Agreement has occurred. You agree
that, subject to the terms and conditions of this Agreement, in the event of a
Potential Change in Control of the Company, you will remain in the employ of the
Company until the earliest of (i) the expiration of nine (9) months from the
occurrence of such Potential Change in Control of the Company, (ii) the
termination by you of your employment by reason of Disability, or (iii) the date
on which you first become entitled under this Agreement to receive the benefits
provided in Section 4(iii) below. For purposes of this Agreement, "Disability"
shall mean a physical or mental incapacity which is incurred subsequent to a
Potential Change in Control of the Company which would allow you to receive
benefits under the Company's Long-Term Disability Income Plan (or any substitute
plans adopted prior to a Change in Control of the Company).

     3.   Termination Following Change in Control. If any of the events
described in Section 2 hereof constituting a Change in Control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 4
hereof upon the subsequent termination of your employment during the term of
this Agreement unless such termination is (A) because of your death, (B) by the
Company for Cause or Disability or (C) by you other than for Good Reason. For
purposes of this Agreement, your employment shall be deemed to have been
terminated following a Change in Control by the Company without Cause or by you
with Good Reason, if (i) your employment is terminated by the Company without
Cause prior to a Change in Control (whether or not a Change in Control ever
occurs) and such termination was at the request or direction of a person who has
entered into an agreement with the Company the consummation of which would
constitute a Change in Control, (ii) you terminate your employment for Good
Reason prior to a Change in Control (whether or not a Change in Control ever
occurs) and the circumstance or event which constitutes Good Reason occurs at
the request or direction of such person, or (iii) your employment is terminated
by the Company without Cause prior to a Change in Control (whether or not a
Change in Control ever occurs) and you reasonably demonstrate that such
termination was otherwise in connection with or in anticipation of a Change in
Control.

          (i)  Disability. If, as a result of your incapacity due to physical or
mental illness, you shall have been receiving payments under the Company's
Long-Term Disability Income Plan, or any substitute plans adopted prior to the
Change in Control, for a period of twelve (12) consecutive months, and within
thirty (30) days after written notice of termination is given you shall not have
returned to the full-time performance of your duties, the Company may terminate
your employment for "Disability".

          (ii) Cause. Termination by the Company of your employment for "Cause"
shall mean termination upon (A) the willful and continued failure by you to
substantially perform your duties with the Company (other than any such failure
resulting from your incapacity due to physical or mental illness or any such
actual or anticipated failure after the issuance of a Notice of Termination by
you for Good Reason), after a written demand for substantial performance is
delivered to you by the Board which specifically identifies


<PAGE>

the manner in which the Board believes that you have not substantially performed
your duties, (B) the willful engaging by you in conduct which is demonstrably
and materially injurious to the Company, monetarily or otherwise, or (C) the
conviction of any crime (whether or not involving the Company) which constitutes
a felony. For purposes of this Subsection, no act, or failure to act, on your
part shall be considered "willful" unless done, or omitted to be done, by you
not in good faith and without reasonable belief that your action or omission was
in the best interest of the Company. Notwithstanding the foregoing, you shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for the purpose (after
reasonable notice to you and an opportunity for you, together with your counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board you were guilty of conduct set forth above in clauses (A), (B) or (C) of
the first sentence of this Subsection and specifying the particulars thereof in
detail.

         (iii)  Good Reason. You shall be entitled to terminate your employment
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean,
without your express written consent, the occurrence after a Change in Control
of the Company and during the term of this Agreement of any of the following
circumstances:

                A.  the assignment to you of any duties inconsistent with your
status as a senior executive of the Company or a substantial adverse alteration
in the nature or status of your responsibilities from those in effect
immediately prior to a Change in Control of the Company (including, without
limitation, if you are an executive officer of the Company prior to a Change in
Control, ceasing to be an executive officer of a public company);

                B.  (i) a reduction in your annual base salary and/or annual
target bonus as in effect on the date hereof or as the same may be increased
from time to time, (ii) a failure by the Company to increase your annual base
salary following a Change in Control of the Company at such periodic intervals
consistent with the Company's practice prior thereto by at least a percentage
equal to the average of the percentage increases in your base salary for the
three merit pay periods immediately preceding such Change in Control or (iii)
the failure to increase your salary as the same may be increased from time to
time for similarly situated senior executives, except that this subparagraph (B)
shall not apply to across-the-board salary reductions similarly affecting all
executives of the Company and all executives of any person in control of the
Company;

                C.  the Company's requiring you to be based anywhere other than
in the metropolitan area in which you were based immediately prior to the Change
in Control, except for required travel on the Company's business to an extent
substantially consistent with your present business travel obligations;

                D.  the failure by the Company to continue in effect any
compensation plan in which you participate immediately prior to the Change in
Control of the Company, including but not limited to the Company's Unfunded
Supplemental Retirement Plan, Unfunded Retirement Income Guarantee Plan, the
1976 Executive Long-Term Incentive Plan and 1991 Long-Term Incentive Plan or any
substitute plans adopted prior to such Change in Control (except to the extent
such plans terminate in accordance with their respective terms),


<PAGE>

unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan in connection with the
Change in Control of the Company, or the failure by the Company to continue your
participation therein (or in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount of benefits provided and
the level of your participation relative to other participants, than existed at
the time of the Change in Control of the Company;

                E.  the failure by the Company to continue to provide you with
benefits substantially similar to those enjoyed by you under any of the
Company's pension, retirement, life insurance, medical, health and accident, or
disability plans in which you were participating at the time of a Change in
Control of the Company, the taking of any action by the Company which would
directly or indirectly materially reduce any of such benefits or deprive you of
any material fringe benefit enjoyed by you at the time of the Change in Control
of the Company, or the failure by the Company to provide you with the number of
paid vacation days to which you are entitled on the basis of years of service
with the Company in accordance with the Company's normal vacation policy in
effect at the time of the Change in Control;

                F.  the failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement,
as contemplated in Section 5 hereof; or

                G.  any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the requirements of
Subsection (iv) below (and, if applicable, Subsection (ii) above); and for
purposes of this Agreement, no such purported termination shall be effective.

         Your right to terminate your employment pursuant to this Subsection
shall not be affected by your incapacity due to physical or mental illness. Your
continued employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.

         (iv)  Notice of Termination. Any purported termination by the Company
or by you shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 6 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of your employment under the provision so indicated.

         (v)   Date of Termination, Etc. "Date of Termination" shall mean (A) if
your employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), and (B) if your employment is otherwise terminated pursuant to
Subsection (ii) or (iii) above or for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination pursuant to
Subsection (ii) above shall not be less than thirty (30) days, and in the case
of a termination pursuant to Subsection (iii) above shall not be less than
fifteen (15) days nor more than sixty (60) days, respectively, from the date
such Notice of Termination is given); provided that, if within thirty (30) days
after any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists


<PAGE>

concerning the termination, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of court of competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected); and provided, further, that the Date of
Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, the Company will continue to pay you your full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, base salary) and continue you as a participant in all compensation, benefit
and insurance plans in which you were participating when the notice giving rise
to the dispute was given, until the dispute is finally resolved in accordance
with this Section. Amounts paid under this Subsection (v) are in addition to all
other amounts due under this Agreement and shall not be offset against or reduce
any other amounts due under this Agreement and shall not be reduced by any
compensation earned by you as the result of employment by another employer.

     4.   Compensation Upon Termination or During Incapacity. Following a Change
in Control of the Company, you shall be entitled to the following benefits
during a period of incapacity, or upon termination of your employment, as the
case may be, provided that such period or termination occurs during the term of
this Agreement:

          (i)   During any period that you fail to perform your duties as a
result of incapacity due to physical or mental illness, you shall continue to
receive your full base salary at the rate then in effect, your bonus and all
compensation, including under the 1991 Long-Term Incentive Plan, paid during the
period until this Agreement is terminated pursuant to Section 3(i) hereof. Your
benefits shall thereafter be determined in accordance with the Company's welfare
benefit programs then in effect, and the Company's Retirement Income Guarantee
Plan, Unfunded Retirement Income Guarantee Plan and Unfunded Supplemental
Retirement Plan (the "Pension Plans") and Profit Sharing Retirement and Savings
Plan (the "Profit Sharing Plan").

          (ii)  If your employment shall be terminated by the Company (a) for
Cause or Disability or (b) by you other than for Good Reason, the Company shall
pay you your full base salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given plus all other amounts to
which you are entitled under any compensation plan of the Company at the time
such payments are due, and the Company shall have no further obligations to you
under this Agreement.

          (iii) If your employment by the Company shall be terminated (a) by the
Company other than for Cause or Disability or (b) by you for Good Reason, then
you shall be entitled to the benefits provided below:

                A.  The Company shall pay you your full base salary through the
Date of Termination at the rate in effect at the time Notice of Termination is
given plus all other amounts to which you are entitled under any compensation
plan of the Company, at the time such payments are due;

                B.  In lieu of any further salary payments to you for periods
subsequent to the Date of Termination, the Company shall pay as severance pay to
you, not later than the fifth day following the Date of Termination, a lump sum
severance payment (the "Severance Payment") equal to [three] [two]


<PAGE>

[(3)] [2] times the sum of (i) the greater of (1) your annual rate of base
salary in effect on the date Notice of Termination is given and (2) your annual
rate of base salary in effect immediately prior to the Change in Control of the
Company and (ii) the greater of (1) the annual target bonus applicable to you
for the year in which Notice of Termination is given and (2) the annual target
bonus applicable to you for the year in which the Change in Control of the
Company occurs.

                C.  In addition to all other amounts payable to you under this
Subsection 4(iii), you shall be entitled to receive all benefits payable under
the Pension Plans, the Profit Sharing Plan and any other plan or agreement
relating to retirement benefits or to compensation previously earned and not yet
paid, in accordance with the respective terms of such plans or agreements.

                D.  For the [36][24]-month period immediately following the Date
of Termination, the Company shall arrange to provide you and your dependents
life, disability, accident and health insurance benefits substantially similar
to those provided to you and your dependents immediately prior to the Date of
Termination or, if more favorable to you, those provided to you and your
dependents immediately prior to the occurrence of a Change in Control, at no
greater cost to you than the cost to you immediately prior to such date or
occurrence. Benefits otherwise receivable by you pursuant to this Section
4(iii)(D) shall be reduced to the extent benefits of the same type are received
by or made available at no greater cost to you by a subsequent employer during
the [36][24]-month period following the Date of Termination (and any such
benefits received by or made available to you shall be reported by you to the
Company).

         (iv)  You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by you as the result of employment by another
employer or by retirement benefits after the Date of Termination, or otherwise
(other than under Subsection (iii)(D) of this Section 4..

         Notwithstanding the foregoing, if you become entitled to the Severance
Payment, you shall not be entitled to receive severance pay under any severance
pay plan, policy or arrangement maintained by the Company or any of its
subsidiaries. If the Company is obligated by law or by contract to pay severance
pay, a termination indemnity, notice pay, or the like, or if the Company is
obligated by law or by contract to provide advance notice of separation ("Notice
Period"), then the Severance Payment shall be reduced, but not below zero, by
the amount of any such severance pay, termination indemnity, notice pay or the
like, as applicable, and by the amount of any compensation received by you
during any Notice Period.

         (v)   (A) Whether or not you become entitled to the Severance Payments,
if any of the payments or benefits received or to be received by you in
connection with a Change in Control or your termination of employment (whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any person affiliated with the Company or such person) (all such
payments and benefits, excluding the Gross-Up Payment, being hereinafter
referred to as the "Total Payments") will be subject to the excise tax (the
"Excise Tax") imposed under section 4999 of the Internal


<PAGE>

Revenue Code of 1986, as amended (the "Code"), the Company shall pay to you an
additional amount (the "Gross-Up Payment"), not later than the later of (1) the
fifth day following the Date of Termination and (2) the tenth day following the
date of initial determination of the amount of the Gross-Up Payment (as set
forth in subparagraph (B) below), such that the net amount retained by you,
after deduction of required withholding taxes (required to be withheld at the
time of payment of the Gross-Up Payment) plus any amounts payable with your
personal federal, state and local income tax returns for any Excise Tax on the
Total Payments and any federal, state and local income and employment taxes and
Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

              (B)   An initial determination of the amount of the Gross-Up
Payment (if any) shall be made by Tax Counsel (as hereinafter defined) not later
than ten days following the Date of Termination. For purposes of determining
whether any of the Total Payments will be subject to the Excise Tax and the
amount of such Excise Tax, (i) all of the Total Payments shall be treated as
"parachute payments" (within the meaning of section 280G(b)(2) of the Code)
unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to
you and the Company and selected by the accounting firm which was, immediately
prior to the Change in Control, the Company's independent auditor (the
"Auditor"), such payments or benefits (in whole or in part) do not constitute
parachute payments, including by reason of section 280G(b)(4)(A) of the Code,
(ii) all "excess parachute payments" within the meaning of section 280G(b)(1) of
the Code shall be treated as subject to the Excise Tax unless, in the opinion of
Tax Counsel, such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered (within the meaning of
section 280G(b)(4)(B) of the Code) in excess of the base amount allocable to
such reasonable compensation, or are otherwise not subject to the Excise Tax,
and (iii) the value of any noncash benefits or any deferred payment or benefit
shall be determined by the Auditor in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, you shall be deemed to pay federal income tax (taking into
account your filing status for the year(s) the Gross-Up Payment(s) are made) at
the highest marginal rate of federal income taxation in the calendar year(s) in
which the Gross-Up Payment(s) are to be made and state and local income taxes at
the highest marginal rate of taxation in the state and locality of your
residence on the Date of Termination (or if there is no Date of Termination,
then the date on which the Gross-Up Payment is calculated for purposes of this
Section 4(v)), net of the maximum reduction in federal income taxes which could
be obtained from deduction of such state and local taxes.

              (C)   In the event that the Excise Tax is finally determined by
the Internal Revenue Service to be less than the amount taken into account
hereunder in calculating the Gross-Up Payment, you shall repay to the Company,
within five business days following the time that the amount of such reduction
in the Excise Tax is finally determined, the portion of the Gross- Up Payment
attributable to such reduction (plus that portion of the Gross-Up Payment
attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by you), to the
extent that such repayment results in a reduction in the Excise Tax and a
dollar-for-dollar reduction in your taxable income and wages for purposes of
federal, state and local income and employment taxes, plus interest on the
amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B)
of the Code. In the event that the Excise Tax is finally determined by the
Internal Revenue Service to exceed the amount taken into


<PAGE>

account hereunder in calculating the Gross-Up Payment (including by reason of
any payment the existence or amount of which cannot be determined at the time of
the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess (plus any interest, penalties or additions payable by you
with respect to such excess) within five business days following the time that
the amount of such excess is finally determined. The Company and you shall each
cooperate with the other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability for Excise Tax with
respect to the Total Payments. For purposes of the foregoing sentence,
cooperation shall include (but not be limited to) providing to the Company
and/or Tax Counsel copies of your Forms W-2 issued by the Company, together with
your federal, state and local income tax returns, for the five calendar years
immediately preceding the calendar year in which the Change in Control occurs
(excluding any such year, if at no point during such year were you employed by
the Company),

          (vi)  The Company also shall pay to you all legal fees and expenses
incurred by you with respect to the initial determination by Tax Counsel (as set
forth in subsection 4(v)(B) above) of the amount of the Gross-Up Payment (if
any), as well as in disputing in good faith any issue hereunder relating to the
termination of your employment, in seeking in good faith to obtain or enforce
any benefit or right provided by this Agreement or in connection with any tax
audit or proceeding to the extent attributable to the application of section
4999 of the Code to any payment or benefit provided hereunder. Such payments
shall be made within five business days after delivery of your written request
for payment accompanied with such evidence of fees and expenses incurred as the
Company reasonably may require.

     5.   Successors; Binding Agreement. (i) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle you to compensation from the
Company in the same amount and on the same terms as you would be entitled
hereunder if you terminated your employment for Good Reason following a Change
in Control of the Company, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law or otherwise.

          (ii)  This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die while
any amount would still be payable to you hereunder if you had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to your devisee, legatee or other designee or
if no such designee, to your estate.

     6.   Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to


<PAGE>

the respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the Board
with a copy to the Secretary of the Company, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.

     7.   Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of New York without regard to its conflicts of law
principles. All references to sections of the Exchange Act or the Code shall be
deemed also to refer to any successor provisions to such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Company under Section
4 shall survive the expiration of the term of this Agreement. This Agreement
shall not be construed as creating an express or implied contract of employment
and, except as otherwise agreed in writing between you and the Company, you
shall not have any right to be retained in the employ of the Company.

     8.   Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.

     9.   Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.

     10.  Entire Agreement. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and during
the term of the Agreement supersedes the provisions of all prior agreements,
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, by any officer, employee or representative
of any party hereto with respect to the subject matter hereof (including,
without limitation, the Severance Agreement previously entered into between you
and the Company as thereafter amended and/or extended).

     11.  Effective Date. This Agreement shall become effective as of the date
set forth above. If this letter correctly sets forth our agreement on the
subject matter hereof, kindly sign and return to the Company the enclosed copy
of this letter which will then constitute our agreement on this subject.

                                        Sincerely,

                                        XEROX CORPORATION


<PAGE>

                                        By
                                          Name:
                                          Title:

Agreed to as of the day
of October 15, 2000




<PAGE>

                                                                   Exhibit 10(k)

                                            As amended through October 9, 2000


                               XEROX CORPORATION
                   DEFERRED COMPENSATION PLAN FOR DIRECTORS
           (Formerly 1989 Deferred Compensation Plan For Directors)

                        1997 AMENDMENT AND RESTATEMENT


<PAGE>

     Preamble. This Plan is a private unfunded nonqualified deferred
compensation arrangement for Directors 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 9, 2000.

     Section 2. Eligibility. Any Director of Xerox Corporation (the "Company")
who is not an officer or employee of the Company or a subsidiary of the Company
is eligible to participate in the Plan (a Director 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
participate again in the Plan until twelve months after the effective date of
such termination.

     Section 3.  Deferred Compensation Accounts.  There shall be established

for each Participant one or more deferred compensation Accounts (as
hereinafter defined).

     Section 4.  Amount of Deferral.

     (a) A Participant may elect to defer receipt of all or a specified part,
expressed as a percentage of the cash compensation otherwise payable to the
Participant for serving on the Company's Board of Directors or committees of the
Board of Directors. Any amount deferred is credited to the Participant's
Accounts on the date such amount is otherwise payable.

     (b) In addition to the foregoing, there shall be credited to the deferred
compensation accounts of each person who is serving as a Director on May 17,
1996 a sum computed by the Company as the present value of his or her accrued
benefit under the Company's Retirement Income Plan For Directors, if any, as of
such date and each such Director shall be given notice of such amount. The
amount so computed shall be final and binding on the Company and each such
Director. Within 30 days of the giving of such notice, each such Director shall
make an election on a form provided by the Company as to the hypothetical
investment of such amount and the payment methods as permitted under Sections 6
and 8 hereof as in effect on such date under the administrative rules adopted by
the Administrator.

     Section 5. Time of Election to Defer. The election to defer will be made
prior to the individual's commencement of services as a Director for amounts to
be earned for the remainder of the calendar year. In the case of an individual
currently serving as a Director, the election to defer must be made prior to
December 31, of any year for amounts to be earned in a subsequent calendar year
or years. An election to totally terminate 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 the (a) Balanced Fund, Income Fund, U.S. Stock
Fund, International Stock Fund, Small Company Stock Fund or Xerox Stock Fund (or
the successors thereto) (the "Funds") established from time to time


<PAGE>

under the Xerox Corporation Profit Sharing and Savings Plan (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 to 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 hypothetical investment
applicable to the amount deferred; and (3) the payment method that will apply to
the deferred compensation. A Participant may elect 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.


<PAGE>

     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 serving as
Directors of 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 serving on the Company's Board of Directors 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


<PAGE>

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 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.

     Section 10.  Acceleration of Payment for Hardship.

     (a) For Hardship. Upon written approval from the Board of Directors (with
the Participant requesting the withdrawal not participating) a Participant may
be permitted to receive all or part of his accumulated benefits if, in the
discretion of such Board of Directors, 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 or her 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 (1) the Company, (2) any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, (3) 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, or (4) any person who
becomes a "beneficial owner" (as defined below) in connection with a transaction
described in clause (1) of subparagraph (C) below, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such person any securities acquired directly from the
Company or its affiliates) representing 20% or more of the combined voting power
of the Company's then outstanding securities; (B) the following individuals
cease for any reason to constitute a majority of the directors then serving:
individuals who, on October 9, 2000 constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a consent
solicitation, relating to the election


<PAGE>

of directors of the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders was approved or
recommended by a vote of at least two-thirds of the directors then still in
office who were directors on October 9, 2000 or whose appointment, election or
nomination for election was previously so approved or recommended; (C) there is
consummated a merger or consolidation of the Company or any direct or indirect
subsidiary of the Company with any other corporation other than (1) a merger or
consolidation which results in the directors of the Company immediately prior to
such merger or consolidation continuing to constitute at least a majority of the
board of directors of the Company, the surviving entity or any parent thereof or
(2) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person is or becomes the beneficial
owner, directly or indirectly, of securities of the Company (not including in
the securities beneficially owned by such person any securities acquired
directly from the Company or its affiliates) representing 20% of more of the
combined voting power of the Company's then outstanding securities; or (D) the
shareholders of the Company approve a plan of complete liquidation or
dissolution of the Company or there is consummated an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or substantially all of
the Company's assets to an entity, at least 50% of the combined voting power of
the voting securities of which are owned by stockholders of the Company in
substantially the same proportions as their ownership of the Company immediately
prior to such sale.

     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.


<PAGE>

     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.




<PAGE>

                                                                   Exhibit 10(l)

                                                  (As amended through 10/9/00)

                               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


<PAGE>

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


<PAGE>

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


<PAGE>

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.


<PAGE>

     (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 (1) the Company, (2) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, (3) 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, or (4) any person
who becomes a "beneficial owner" (as defined below) in connection with a
transaction described in clause (1) of subparagraph (C) below, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company (not including in the securities
beneficially owned by such person any securities acquired directly from the
Company or its affiliates) representing 20% or more of the combined voting power
of the Company's then outstanding securities; (B) the following individuals
cease for any reason to constitute a majority of the directors then serving:
individuals who, on October 9, 2000 constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company's
shareholders was approved or recommended by a vote of at least two-thirds of the
directors then still in office who were directors on October 9, 2000 or whose
appointment, election or nomination for election was previously so approved or
recommended; (C) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any other corporation
other than (1) a merger or consolidation which results in the directors of the
Company immediately prior to such merger or consolidation continuing to
constitute at least a majority of the board of directors of the Company, the
surviving entity or any parent thereof or (2) a merger or consolidation effected
to implement a recapitalization of the Company (or similar transaction) in which
no person is or becomes the beneficial owner, directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such person any securities acquired directly from the Company or its affiliates)
representing 20% of more of the combined voting power of the Company's then
outstanding securities; or (D) the shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets, other than a sale or disposition


<PAGE>

by the Company of all or substantially all of the Company's assets to an entity,
at least 50% of the combined voting power of the voting  securities of which are
owned by stockholders of the Company in  substantially  the same  proportions as
their ownership of the Company immediately prior to such sale.

     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


<PAGE>

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.




<PAGE>

                                                                   Exhibit 10(n)

                                                     As Amended By B/D 10/9/00


                                XEROX CORPORATION

                         1998 EMPLOYEE STOCK OPTION PLAN

                         ARTICLE I--Purpose of the Plan

The purpose of the Xerox Corporation 1998 Employee Stock Option Plan ("Plan") is
to increase the ownership interest in the Company of eligible employees of the
Company so as to align such interests with those of the shareholders of the
Company and to provide a further incentive to serve as an employee of the
Company through the issuance of stock options.

                             ARTICLE II--Definitions

Unless the context clearly indicates otherwise, the following terms shall have
the following meanings:


<PAGE>

2.1 "Administrator" means the individual and/or Committee or subcommittee
referred to in Paragraph 3.1 as the case may be.

2.2 "Award Summary" means the award summary or the agreement delivered by or on
behalf of the Administrator to each Optionee upon grant of an Option under the
Plan which shall set forth details of each Option, including, without
limitation, number of shares, option exercise price, Exercise Period, Waiting
Period and exercise dates.

2.3  "Board" means the Board of Directors of the Company.

2.4 "Change in Control" 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 (1) the Company, (2) any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, (3) 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, or (4) any person who becomes a "beneficial owner" (as defined
below) in connection with a transaction described in clause (1) of subparagraph
(C) below, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such person any securities
acquired directly from the Company or its affiliates) representing 20% or more
of the combined voting power of the Company's then outstanding securities; (B)
the following individuals cease for any reason to constitute a majority of the
directors then serving: individuals who, on October 9, 2000 constitute the Board
and any new director (other than a director whose initial assumption of office
is in connection with an actual or threatened election contest, including but
not limited to a consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or nomination for
election by the Company's shareholders was approved or recommended by a vote of
at least two- thirds of the directors then still in office who were directors on
October 9, 2000 or whose appointment, election or nomination for election was
previously so approved or recommended; (C) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the Company
with any other corporation other than (1) a merger or consolidation which
results in the directors of the Company immediately prior to such merger or
consolidation continuing to constitute at least a majority of the board of
directors of the Company, the surviving entity or any parent thereof or (2) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no person is or becomes the beneficial owner,
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired directly
from the Company or its affiliates) representing 20% of more of the combined
voting power of the Company's then outstanding securities; or (D) the
shareholders of the Company approve a plan of complete liquidation or
dissolution of the Company or there is consummated an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or substantially all of
the Company's assets to an entity, at least 50% of the combined voting power of
the voting securities of which are owned by stockholders of the Company in
substantially the same proportions as their ownership of the Company immediately
prior to such sale.

2.5 "CIC Price" means the higher of (a) the highest price paid for a Share in
the transaction or series of transactions pursuant to which a Change in


<PAGE>

Control of the Company shall have occurred,  or (b) the highest price paid for a
Share  during the 60 day period  immediately  preceding  the date upon which the
event  constituting  a Change in Control  shall have occurred as reported in The
Wall Street Journal in the New York Stock  Exchange  Composite  Transactions  or
similar successor consolidated transactions reports.

2.6  "Company" means Xerox Corporation.

2.7  "Employee" means each employee of the Company or of any entity that is
directly or indirectly controlled by the Company all of whom are eligible for
grants under the Plan.

2.8  "Exercise Period" means the date which is eight years after the Option
Grant Date of such Option.

2.9  "Fair Market Value" means, with respect to any date, the average between
the  highest  and lowest  sale  prices per Share in the New York Stock  Exchange
Composite  Transactions  on such date as reported  in the Wall  Street  Journal,
provided  that if there should be no sale of Shares  reported on such date,  the
Fair Market  Value of a Share on such date shall be deemed  equal to the average
between  the  highest  and  lowest  sale  prices  per  Share  in such  Composite
Transactions for the last preceding date on which sales of Shares were reported.

2.10 "Option" means an option to purchase Shares awarded under the Plan which
does not meet the requirements of Section 422 of the Internal Revenue Code of
1986, as amended, or any successor law.

2.11 "Option Grant Date" means the effective date of an option grant under the
terms of the Plan.

2.12 "Option Surrender Right" has the meaning specified in Paragraph 6.4.

2.13 "Optionee" means each person to whom an Option has been granted.

2.14 "Plan" means the Xerox Corporation 1998 Employee Stock Option Plan, as
amended and restated from time to time.

2.15 "Shares" means shares of the Common Stock, par value $1.00 per share, of
the Company.

                     ARTICLE III--Administration of the Plan

3.1  Administrator of Plan. The Plan shall be administered by the individual who
is the Vice President of the Company then having responsibility for Human
Resources other than in respect of matters relating to officers of the Company
who are subject to Section 16 under the Securities Exchange Act of 1934, as
amended ("Section 16 Officers"). The Plan shall be administered in respect of
Section 16 Officers by the Executive Compensation and Benefits Committee of the
Board of Directors of the Company or the successor to such Committee or by a
subcommittee of such Committee.

3.2  Authority of the Administrator. Except as otherwise provided herein, the
Administrator shall have full power and authority to (i) designate the Employees
to whom Options are to be granted, (ii) determine the number of Shares to be
covered by each Option, (iii) determine the terms and conditions of Options
granted under Plan, (iv) interpret and construe the Plan, (v) adopt


<PAGE>

such  rules and  regulations  as the  Administrator  shall  deem  necessary  and
advisable to implement and  administer  the Plan and (vi)  designate  persons to
carry out the  Administrator's  responsibilities,  subject to such  limitations,
restrictions   and  conditions  as  the   Administrator   may  prescribe,   such
determinations to be made in accordance with the  Administrator's  best business
judgment as to the best  interests  of the Company and its  shareholders  and in
accordance  with the  purposes  of the Plan.  Options  granted and the number of
shares  covered by Options  shall be based upon one or more  measures of Company
performance selected by the Administrator.

                   ARTICLE IV--Shares Subject to the Plan

The total number of Shares which may be issued upon exercise of Options under
the Plan shall be 25,000,000 subject to adjustment as provided in Article IX.
Any Shares issued under the Plan may consist of authorized and unissued Shares
or of treasury Shares.

                 ARTICLE V--Non-Transferability of Options

All Options under the Plan will be nontransferable and shall not be assignable,
alienable, salable or otherwise transferable by the Optionee other than by will
or the laws of descent and distribution except pursuant to a domestic relations
order entered by a court of competent jurisdiction or as otherwise determined by
the Administrator. During the life of the Optionee, Options under the Plan shall
be exercisable only by him or her.

If so permitted by the Administrator, an Optionee may designate a beneficiary or
beneficiaries to exercise the rights of the Optionee under this Plan upon the
death of the Optionee.

                               ARTICLE VI--Options

Each Option shall be subject to the following terms and conditions:

6.1 Purchase Price. The purchase price per Share under each Option granted
pursuant to this Article shall be 100% of the Fair Market Value per Share on the
Option Grant Date. Any Option granted to replace an earlier unexercised Option
Grant shall have a price per share not less than the price per share of the
option being replaced.

6.2 Option Waiting Period and Exercise Dates. The Shares subject to an Option
may be purchased commencing on the January 1 next following the Option Grant
Date (the "Waiting Period") as follows:

    33-1/3% of such Shares commencing at the end of the Waiting Period;

    33-1/3% of such Shares commencing on the first day of the second year
following the Waiting Period; and

    33-1/3% of such Shares commencing on the first day of the third year
following the Waiting Period.

Subject to Article VII, an Option may be exercised until the end of the Exercise
Period. An Option, or portion thereof, may be exercised in whole or in part only
with respect to whole Shares.

To the extent that an Option is not exercised when it becomes initially


<PAGE>

exercisable, it shall not expire but shall be carried forward and shall be
exercisable until the expiration of the Exercise Period. Partial exercise will
be permitted from time to time within the percentage limitation described above
provided that no partial exercise may be for less than the lesser of twenty
Shares or the total number of Shares remaining unexercised under the Option.

6.3 Method of Exercising Option. The Options may be exercised from time to time
by written notice to the Company, which shall state the election to exercise the
Options and the number of shares with respect to which the Options are being
exercised, and shall be signed by the person exercising the Options. Such notice
must be accompanied by a check payable to the Company in payment of the full
purchase price. After receipt of such notice, the Company will advise the person
exercising the option of the amount of withholding tax which must be paid under
U.S. Federal, and where applicable, state and local law resulting from such
exercise. Upon receipt of payment of the purchase price and the withholding tax
the Company shall, without transfer or issue tax to the person exercising the
Options, issue a certificate or certificates for the number of shares covered by
such notice of exercise. In the event that the Options are being exercised
through the Company's cashless exercise program, there shall be no requirement
for the Employee to deliver a check in payment of the purchase price or for the
withholding tax, all of which shall be effectuated between the Company and its
then acting agent appointed to administer the cashless exercise program.

6.4 Option Surrender Rights. All Options granted hereunder shall be accompanied
by option surrender rights ("OSRs") covering an equal number of shares as are
covered under the related Option. Upon the occurrence of an event constituting a
Change in Control, all OSRs, to the extent that the CIC Price exceeds the
exercise price of the related Options, shall be paid in cash as soon as may be
practicable. Upon such payment, such rights and any related Option shall be
canceled. The amount of cash payable in respect of an OSR shall be determined by
multiplying the number of unexercised shares under the Option to which the right
relates by the difference between the option price of such shares and the CIC
Price.

6.5  Award Summary.  Each Option granted under the Plan shall be evidenced by
an Award Summary.

6.6  Reload Options.  Options shall not be granted which by the terms of the
grant provide for automatic award of additional Options upon exercise thereof.

                       ARTICLE VII--Termination of Service

Unless otherwise determined by the Administrator, termination of service,
disability, retirement or death of an Optionee shall have the following effects
on Options:

7.1 Termination of Service. If an Optionee ceases to be an employee of the
Company or any of its subsidiaries other than by reason of disability,
retirement or death, each Option held by such Optionee may thereafter be
exercised by such Optionee (or such Optionee's executor, administrator,
guardian, legal representative, beneficiary or similar person) solely to the
extent that they were exercisable on the date of such termination and shall
expire on the earlier of: (i) three months from the date of such termination or
(ii) expiration of the Exercise Period. Options which are not exercisable on the
date the Optionee ceases to be such an employee shall terminate.


<PAGE>

7.2 Disability, Retirement or Death. If an Optionee ceases to be an employee of
the Company or any of its subsidiaries by reason of disability or retirement,
each Option held by such Optionee may thereafter be exercised by such Optionee
in accordance with the provisions of Article VI. If the Optionee dies following
termination of service by reason of retirement or disability, outstanding
Options shall be exercisable to the extent that they were exercisable on the
date of death by such Optionee's executor, administrator, guardian, legal
representative, beneficiary or similar person and shall expire on the earlier
of: one year following the date of death or expiration of the Exercise Period.
If the Optionee ceases to be such an employee as a result of death after the
expiration of the Waiting Period for an Option award, such Option shall be
immediately vested and exercisable by the Optionee's legal representative at any
time within one year of the Optionee's death but in no event after the
expiration of the Exercise Period. Options which are not exercisable on the date
the Optionee ceases to be such an employee in accordance with the foregoing
shall terminate.

                     ARTICLE VIII--Amendment and Termination

The Board may amend the Plan from time to time or terminate the Plan at any time
except to the extent otherwise required by the Business Corporation Law of the
State of New York; provided, however, that no action authorized by this Article
shall adversely change the terms and conditions of an outstanding Option without
the Optionee's consent.

                        ARTICLE IX--Adjustment Provisions

9.1 If the Company shall at any time change the number of issued Shares without
new consideration to the Company (such as by stock dividend, stock split,
recapitalization, reorganization, exchange of shares, liquidation, combination
or other change in corporate structure affecting the Shares) or make a
distribution of cash or property which has a substantial impact on the value of
issued Shares, the number of Shares covered by each outstanding Option and the
purchase price per Share under each outstanding Option shall be adjusted so that
the aggregate consideration payable to the Company and the value of each such
Option shall not be changed.

9.2 Notwithstanding any other provision of the Plan, and without affecting the
number of Shares reserved or available hereunder, the Administrator shall
authorize the issuance, continuation or assumption of outstanding Options or
provide for other equitable adjustments after changes in the Shares resulting
from any merger, consolidation, sale of assets, acquisition of property or
stock, recapitalization, reorganization or similar occurrence in which the
Company is the continuing or surviving corporation, upon such terms and
conditions as it may deem necessary to preserve Optionees' rights under the
Plan.

9.3 In the case of any sale of assets, merger, consolidation or combination of
the Company with or into another corporation other than a transaction in which
the Company is the continuing or surviving corporation and which does not result
in the outstanding Shares being converted into or exchanged for different
securities, cash or other property, or any combination thereof (an
"Acquisition"), any Optionee who holds an outstanding Option shall have the
right (subject to the provisions of the Plan and any limitation applicable to
the Option) thereafter and during the term of the Option, to receive upon
exercise thereof the Acquisition Consideration (as defined below) receivable


<PAGE>

upon the Acquisition by a holder of the number of Shares which would have been
obtained upon exercise of the Option or portion thereof, as the case may be,
immediately prior to the Acquisition. The term "Acquisition Consideration" shall
mean the kind and amount of shares of the surviving or new corporation, cash,
securities, evidence of indebtedness, other property or any combination thereof
receivable in respect of one Share of the Company upon consummation of an
Acquisition.

9.4  Notwithstanding anything to the contrary in this Article IX, if any of the
events or transactions described herein constitute a Change in Control, to the
extent that the CIC Price exceeds the exercise price of the related Options,
then in lieu of the adjustments provided for in this Article IX, the provisions
of Paragraph 6.4 shall apply and outstanding Options shall be cashed out as
provided for therein.

                            ARTICLE X--Effective Date

The Plan shall be submitted to the shareholders of the Company for adoption in
accordance with the provisions of Section 505 of the Business Corporation Law of
the State of New York and, if adopted by a majority of the votes cast at the
1998 annual meeting of shareholders, shall become effective as of the date of
adoption by shareholders.

                      ARTICLE XI--Miscellaneous Provisions

11.1 Governing Law. The validity, construction and effect of the Plan and any
actions taken or relating to the Plan shall be determined in accordance with the
laws of the State of New York and applicable Federal law.

11.2 Successors and Assigns. The Plan shall be binding on all successors and
permitted assigns of an Optionee, including, without limitation, the estate of
such Optionee and the executor, administrator or trustee of such estate, or any
receiver or trustee in bankruptcy or representative of the Optionee's creditors.

11.3 General Restriction. Each Option shall be subject to the requirement that,
if at any time the Administrator shall determine, in its sole discretion, that
the listing, registration or qualification of any Option under the Plan upon any
securities exchange or under any state or federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such Options or the grant
or settlement thereof, such Option may not be exercised or settled in whole or
in part unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to
the Administrator.

11.4 Future Rights. No Employee shall have any rights by reason of the grant of
any Options under the Plan to continue as an employee of the Company or any
subsidiary of the Company for any period of time, or at any particular rate of
compensation.

11.5 Rights as a Shareholder. An Optionee shall have no rights as a shareholder
with respect to shares covered by Options granted hereunder until the date of
issuance of a stock certificate therefor, and no adjustment will be made for
dividends or other rights for which the record date is prior to the date such
certificate is issued.


<PAGE>

11.6 Fractions of Shares. The Company shall not be required to issue fractions
of shares. Whenever under the terms of the Plan a fractional share would be
required to be issued the Optionee shall be paid in cash for such fractional
share based upon Fair Market Value at the time of exercise of the Option.

11.7 Term of the Plan. No Option shall be granted under the Plan after May 21,
2003. However, any Option theretofore granted may extend beyond such date and
continue to be exercisable pursuant to its terms for its remaining Exercise
Period.




<PAGE>

                                                                   EXHIBIT 10(o)

CEO Challenge Bonus

A CEO Challenge Bonus program was established for the calendar years 2000 and
2001. The goals of the CEO Challenge Bonus program are to support the Company's
need to retain key executives and provide additional incentives to improve the
financial performance of the Company. Executive officers are eligible to
participate in the CEO Challenge Bonus. The CEO Challenge bonus provides an
annual opportunity equal to one-half of each executive's annual bonus target
amount payable over a period of four quarters if performance targets are met.
For 2000, the CEO Challenge Bonus was based on quarterly EPS targets. The EPS
target for the first quarter was achieved and bonus amounts were paid
accordingly. For the remaining quarters of 2000, EPS targets were not achieved
and bonus opportunities were forfeited. For 2001, the CEO Challenge bonus will
also be based on quarterly EPS targets.






<PAGE>

                                                                   Exhibit 10(p)

                              THE DOCUMENT COMPANY
                                      XEROX

                                  CONFIDENTIAL

Xerox Corporation
800 Long Ridge Road
Stamford, CT  06904

Paul A. Allaire
Chairman of the Board

December 4, 2000


Mr. William F. Buehler
535 Smith Ridge Road
New Canaan, CT 06840

Dear Bill:

The purpose of this letter is to summarize the arrangements for your retirement
from Xerox Corporation (the Company) as follows:

     Last day of active employment:       January 15, 2001
     Salary Continuance:                  12 months
                                          January 16, 2001 to January 15, 2002
     Salary Continuance Amount:           $56,250 per month
     Retirement Date:                     January 16, 2002

If you obtain employment as an employee of, or consultant to, another firm or
corporation (other than the Company or an affiliate) that is a direct competitor
of the Company in any business presently engaged in by the Company or in which
the Company as of the date hereof may reasonably be expected to engage in the
future, or is or may become such a competitor indirectly through a partnership,
joint venture or other business arrangement with, or as a supplier or consultant
to, such a direct competitor ("Competitor"), the salary continuance described
above will terminate upon the commencement of such employment. However, if the
Company advises you in writing that
 in its reasonable judgment such other firm
or corporation is not a Competitor, the remaining salary continuance will
continue to be paid. We will provide notice to you upon your request as to the
competitive nature of a prospective employer.

The Company may also terminate the salary continuance in the event you disclose
confidential business information or if you publicly make any


<PAGE>

derogatory or disparaging statements about the Company, its management or its
business.

If your salary continuance ends pursuant to the preceding paragraphs, your
employment with the Company will terminate on the same date that salary
continuance terminates and any benefits described below or otherwise that are
dependent upon continued employment, including without limitation, continued
vesting of benefits and determination of years of service for retirement, will
also terminate. In addition, stock options both vested and unexercised and
non-vested will be cancelled immediately. As referred to in this letter, your
retirement date means January 16, 2002 or the earlier termination of your salary
continuance pursuant to this paragraph.

BONUS

Your 2000 bonus will be paid in February 2001 based on achievement against
metrics. No bonus will be paid during the time you receive salary continuance.

Summarized below are the relevant provisions that apply to your long-term
incentive awards, profit sharing and savings accounts, pension benefits, life
insurance benefits and other benefits arrangements. In case of inconsistencies
between this summary and the relevant plan, the terms of the plan will govern.

LONG-TERM INCENTIVE AWARDS


<TABLE>
<CAPTION>
Grant         Grant      Amount       Vesting               Payment
Date          Price     Remaining      Date                  Date
<S>         <C>         <C>        <C>              <C>
N/Q Stock Options:

12/31/97    $36.7032    109,634    53,997 (Now)     Options continue to be
(LEEP)                             55,637 on        available as if an active
                                   1/1/2001         employee.
10/12/98    $46.8750     70,128    46,752 (Now)     Options continue to be
(LEEP)                             23,376 on        available as if an active
                                   1/1/2001         employee.
12/7/98     $54.8594    104,440    52,220 (Now)     Options continue to be
(LEEP)                             52,220 on        available as if an active
                                   1/1/2001         employee.
1/1/99      $59.4375      2,154    718 (Now)        All vested options remain
(Profit                            718 on 1/1/2001  exercisable for 12 months
Sharing)                                            following retirement date.
                                   718 on 1/1/2002
11/9/99     $25.8125     21,563    21,563 on        Options will vest as
(SO Bonus)                         3/1/2003         indicated for retirees
                                                    and the exercise period
                                                    will be until 12/31/09.
2/7/2000    $21.7812     50,000    50,000 on        Options not vested at
(CEO                               1/1/2005         time of retirement are
Challenge)                                          cancelled.
5/18/00     $27.0000    100,000    50,000 on        Options continue to be
(Non-trad                          1/1/2001         available as if an active
NQ)                                50,000 on        employee.
                                   1/1/2002
</TABLE>



<PAGE>


<TABLE>
<S>         <C>         <C>        <C>              <C>
    Total               457,919

Incentive Stock Rights

10/13/97                 20,000    20,000 on
                                   10/13/2001

12/31/97                 15,896    15,896 on        ISRs vest if EPS targets
(LEEP)                             3/1/2001         are met.
12/7/98                  10,444    10,444 on        ISRs vest if EPS targets
(LEEP)                             3/1/2001         are met.
5/18/00                  30,000    15,000 on
(Special ISR)                      1/1/2001
                                   15,000 on

                                   1/1/2002

    Total               76,340
</TABLE>


PROFIT SHARING AND SAVINGS ACCOUNTS

As you know, under relevant plan provisions, you have choices available
regarding the continued investment of your account balances and the time and
form of distribution. Please refer to You and Xerox: Wealthwise for a
description. A determination of your account balances will be done at
retirement.

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

Upon retirement, your ESOP account can be taken as cash, in stock, or rolled
over to the Xerox 401(k) savings plan. A determination of your final plan
benefit will be done at retirement.

PENSION BENEFITS

Effective on your retirement date, you will become a retiree of Xerox. As a
retiree, you will receive pension benefits accrued in the Retirement Income
Guarantee Plan (RIGP).

In addition to your vested RIGP benefit, you will receive a benefit under the
Supplemental Executive Retirement Plan (SERP), which as you know, will allow you
to begin to receive retirement income benefits unreduced for age and will be
offset by your RIGP benefits. This benefit will commence on your retirement
date, and will be paid in monthly installments reflecting your survivor
election. This benefit is unfunded and is not tax qualified.

In addition to RIGP and SERP benefits you will receive a retirement supplement
approved by the ECBC and communicated to you last November. It will provide the
equivalent of $75K per year and will be paid in 3 equal installments of $280,746
beginning 1/1/02. You can elect a single lump sum payment ($842,238) of this
part of your retirement benefits if you make that election prior to December 31,
2001.

MEDICAL BENEFITS

As a retiree, you are eligible to receive medical coverage under Xerox Retiree
Flex. This program will include, among other things, coordination of benefits if
you are covered by more than one plan including Medicare. As you get closer to
your retirement date, an information package will be sent to you


<PAGE>

from United HealthCare.

LIFE INSURANCE

Your Contributory Life Insurance coverage of $1,500,000 will continue during
your salary continuance period. During this period, both you and the Company
will continue to share in the cost of premiums according to the original plan
agreement. In the event of your death during salary continuance, salary would
cease and your beneficiaries will, subject to applicable plan provisions receive
the proceeds of your life insurance coverage. Additional information will be
sent to you from LongMiller, our consultants for this program.

DEFERRED COMPENSATION PLAN

Your deferred compensation accounts will be paid out according to the terms of
your prior elections following retirement.

OTHER ARRANGEMENTS

You will be paid for any accrued and unused vacation upon commencement of salary
continuance. You will not accrue any further vacation.

Your company financial counseling program will be continued through the end of
2002.

Tax preparation will be extended through 2002 for the 2001 tax year.

When salary continuance begins, you will not be entitled to any future Executive
Expense Allowance payments.

INDEMNITY

You will be entitled to be indemnified with respect to all periods of your
service as a director or officer of the Company or any of its subsidiaries in
accordance with 1) the provisions of Sections 721 through 725 of the Business
Corporation Law of the State of New York, 2) Section 2 of Article VIII of the
by-laws of the Company as in effect on the date hereof and 3) the Company
directors and officers liability insurance policies with Federal Insurance
Company, National Union Fire Insurance Company Of Pittsburgh P.A., Reliance
Insurance Company, Chubb Atlantic Ltd., Gulf Insurance Company and A.C.E
Insurance Company, Ltd., or any successor insurance company.

RELEASE

This agreement shall not become effective until you execute and delivery to the
Company the release in the form attached.

COOPERATION IN LITIGATION

You will cooperate fully with the Company and its counsel in any litigation that
arises out of or is related to your service with the Company or any of its
subsidiaries, or in which you are named as a party. That cooperation includes
making yourself available for reasonable periods of time for consultation with
the Company's counsel in any such litigation and to testify in such litigation
at the Company's expense for travel and lodging, if required.


<PAGE>

Margie Filter will contact you regarding your resignation as a Corporate Officer
and Vice Chairman of the Board of Directors.

Bill, if you have any questions on the above, please call me or Pat Nazemetz at
(203) 968-3158. Otherwise, please sign this letter and return it to me.

Sincerely,

/s/ Paul A. Allaire

Paul A. Allaire
PAA/bjf

Attachment

Copies:

HJMotroni
PMNazemetz
RLStrahota

                                               AGREED AND ACCEPTED

                                               /s/ W. F. Buehler
                                               William F. Buehler

                                               Date: 12/8/00




<PAGE>

                                                                   Exhibit 10(s)

                             THE DOCUMENT COMPANY
                                     XEROX

                                 CONFIDENTIAL

Xerox Corporation
800 Long Ridge Road
Stamford, CT 06904

Anne M. Mulcahy
President and Chief Operating Officer


April 2, 2001

Mr. Carlos Pascual
7 Ridge Road
Weston, CT 06883

Dear Carlos:

This letter will summarize our understanding and agreement regarding your
employment status. I appreciate your agreement to remain employed at Xerox
Corporation ("Xerox" or the "Company") until the end of 2002. I am counting on
your support to help us during this turnaround period.

I know your pension and other aspects of your pay have been of concern to you. I
have received Executive Compensation and Benefits Committee approval for the
following actions, assuming you remain employed through 12/31/2002:

At the earliest possible date, Xerox will direct Xerox Spain to move to
"externalize" your Spanish pension in a manner consistent with proposed Spanish
law requirements. For purposes of this agreement, "externalization" of the
Spanish pension plans refers to actions taken by Xerox in Spain under Spanish
legislation which results, inter alia, in the complete segregation of pension
assets for the benefit of plan beneficiaries and the denial of any creditor
access
 to such plan assets unless and until all plan liabilities are settled.
You will sign documents as may be necessary to enable vesting at age 60 and
benefits payments beginning at age 60. Your benefits will be based on your
Notional Salary in Spanish Pasetas at the time of "externalization" updated by
the Company's actuary with the general rules applied to the participants of the
Xerox Spain Pension Fund.

To the extent "externalization" results in an imposition of U.S. Tax to you,
Xerox will indemnify you for the actual amount of such tax arising from the
"externalization" of your Spanish pension for the period ending 12/31/2006. For
purposes of this Agreement, 'Tax" shall be: (i) the incremental amount of U.S.
and state individual income taxes (including any penalties or interest) net of
any foreign tax credit you actually receive in Spain or any other foreign
jurisdiction for such Tax (ii) plus a gross-up amount in an amount that makes
you economically whole on an after-tax basis. For the sake of clarity it is
understood between the parties hereto that the Tax shall be calculated by
comparing the Tax you would owe with the inclusion of your Spanish pension
versus the Tax you would owe without inclusion of your Spanish pension. The
calculation of Tax shall be made by tax advisors


<PAGE>

acceptable to the Company. You agree that you will cooperate with the Company
and its advisors in order to determine the proper amount of Tax. Such
cooperation shall include but not be limited to; providing Xerox with copies of
all your relevant tax returns plus any relevant correspondence from the
appropriate taxing jurisdictions and; instructing your advisors to cooperate
with Xerox including sharing copies of all their relevant tax workpapers. You
will be responsible for payment of taxes in Spain, or other jurisdictions. You
will be responsible for any U.S. tax payments after 12/31/2006. Xerox shall have
the right to contest any imposition with the Internal Revenue Service and/or the
appropriate state taxing jurisdiction ("Contest"). Xerox shall control such
Contest. No payment of Tax will be due until the conclusion of the Contest. You
will, and you will instruct your tax advisors, to cooperate with Xerox in a
Contest.

Following the completion of your active employment on 12/31/2002, the Company
will provide relocation assistance per the terms of the Transferred Relocation
policy, at a cost not to exceed $100,000, and you will remain as an employee of
Xerox Espana, S.A. on salary continuance for the three-year period ending
12/31/2005. Your retirement will be effective 1/1/2006. Your rate of salary paid
during salary continuance will be Pesetas 4,389,600 per month for 36 months,
less applicable taxes. You agree to waive any other severance benefits that you
otherwise may be eligible to receive. If you cannot waive rights to any
additional severance benefit, the amount of salary continuance shall be reduced
by an amount equal to the other amounts payable. Required withholding taxes will
be taken out of all such payments and reported on the appropriate Form W-2 or
Form 1099.

During salary continuation, you will remain as Chairman of Xerox Espana, S.A. at
the discretion of the CEO of Xerox Corporation.

Salary continuance will be conditioned upon your signing a General Release
acceptable to the Company prior to the commencement of salary continuance.

You agree that your awards under the New LEEP program granted effective on
1/1/2001 and to be granted effective on 1/1/2002 will vest 100% on 1/1/2007
notwithstanding any other terms or provisions of the award. You agree that these
awards will be forfeited in their entirety if the Company is required to make
tax reimbursement and related payments in excess of the Value of the New LEEP
awards as a result of U.S. taxation of your Spanish pension. If the tax
reimbursement and related payments made by the Company are less than the Value
of your New LEEP awards, you will continue to vest, per the terms of the awards,
in that portion of the New LEEP awards that the Value exceeds the amount of tax
reimbursement and related payments made by the Company. For purposes of this
paragraph, Value means an amount equal to the sum of the following:

  - Number of shares of restricted stock granted to you under the New LEEP
program times the Fair Market Value of each share on 1/1/2007, or any earlier
vesting date; and

  - An amount equal to the total spread (the Fair Market Value of Xerox stock as
of 1/1/2007, or any earlier vesting date, less the option Purchase Price) on the
stock options awarded to you under the New LEEP program.

.   You will not be eligible for a New LEEP award in 2003.


<PAGE>

Should you leave the Company's employment for any reason other than death or
under circumstances which would give you the right to receive severance payments
under the Severance Agreement between you and the Company dated as of October
15, 2000 prior to 12/31/2002:

  - Unless the CEO authorizes (subject to ECBC approval) continuation of vesting
in some or all LEEP awards granted 1/1/2001 and 1/1/2002 they will immediately
cancel;

  - You will not be eligible for any salary continuance or other termination
benefits whatsoever;

  - The Company's promise to reimburse you for any U.S. tax on your Spanish
pension will immediately expire; and

  - You will immediately reimburse the Company for any tax related payments made
to you with respect to your Spanish pension.

This letter agreement supersedes and replaces the letter agreement dated
December 21, 2000.

Sincerely,

/s/ ANNE M. MULCAHY

Anne M. Mulcahy

AMM/pba
                                        AGREED AND ACCEPTED

                                        /s/ Carlos Pascual
                                        -------------------------
                                        Carlos Pascual

                                        Date:

Copies:
-------

HJMotroni
PMNazemetz
RLStrahota




<PAGE>

                                                                      EXHIBIT 11
Computatio
n 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


                                    Page 82


<PAGE>


    2000            1999            1998            1997          1996
----------------------------------------------------------------------

$   (257)       $  1,339        $    463        $  1,452      $  1,206
     (35)            (38)            (46)            (44)          (43)
       -               -               -               -            (1)
----------------------------------------------------------------------
    (292)          1,301             417           1,408         1,162
       -               -            (190)              -             -
----------------------------------------------------------------------
$   (292)       $  1,301        $    227        $  1,408      $  1,162
======================================================================

 666,663         661,917         655,676         649,608       648,924

     918           1,576           3,280           3,763         5,464
----------------------------------------------------------------------
 667,581         663,493         658,956         653,371       654,388
======================================================================


$   (.44)       $   1.96        $    .63        $   2.16      $   1.78
       -               -            (.29)              -             -
----------------------------------------------------------------------
$   (.44)       $   1.96        $    .34        $   2.16      $   1.78
======================================================================


$   (257)       $  1,339        $    463        $  1,452      $  1,206
     (35)              -             (46)              -             -
       -               -               -               -            (1)
       -               5               -               -            (3)
       -              17               3               3             3
----------------------------------------------------------------------
    (292)          1,361             420           1,455         1,205
       -               -            (190)              -             -
----------------------------------------------------------------------
$   (292)       $  1,361        $    230        $  1,455      $  1,205
======================================================================

 666,663         661,917         655,676         649,608       648,924

     918          10,303          13,091          11,691        16,106
       -          13,191           5,287           5,287         5,288
       -          51,989               -          54,687        55,962
----------------------------------------------------------------------
 667,581         737,400         674,054         721,273       726,280
======================================================================

$   (.44)       $   1.85        $    .62        $   2.02      $   1.66
       -               -            (.28)              -             -
----------------------------------------------------------------------
$   (.44)       $   1.85        $    .34        $   2.02      $   1.66
======================================================================




                                    Page 83




<PAGE>

                                                                      EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

Year ended December 31  (in millions)    2000    1999    1998    1997    1996
-----------------------------------------------------------------------------

Fixed Charges:
  Interest expense                     $1,031  $  803  $  749  $  617  $  592
  Rental expense                          115     132     145     140     140
                                       --------------------------------------
    Total fixed charges before
     capitalized interest and
     preferred stock dividend
     of subsidiary                      1,146     935     894     757     732
  Capitalized interest                      3       8       -       -       -
  Preferred stock dividend of
   subsidiary                              55      55      55      50       -
                                       --------------------------------------
    Total fixed charges                $1,204  $  998  $  949  $  807  $  732
                                       ======================================

Earnings available for fixed charges:

  Earnings**                           $ (323) $1,976  $  653  $2,132  $2,045
  Less undistributed income in
   minority owned companies               (20)    (68)    (27)    (84)    (84)
  Add fixed charges before capitalized
   interest and preferred stock
   dividend of subsidiary               1,146     935     894     757     732
                                       --------------------------------------
    Total earnings available for
     fixed charges                     $  803  $2,843  $1,520  $2,805  $2,693
                                       ======================================

Ratio of earnings to fixed
 charges (1)(2)                           *      2.85    1.60    3.48    3.68


(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.

(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.

 *  Earnings for the year ended December 31, 2000 were inadequate to cover fixed
    charges. The coverage deficiency was $401.

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



                                    Page 84




<PAGE>

                                                                      EXHIBIT 13


Management's Discussion and Analysis of
Results of Operations and Financial Condition

Summary of
Total Company Results

As more fully discussed below and in Note 2 to the Consolidated Financial
Statements, the Company has restated its 1999 and 1998 financial statements.
All dollar and per share amounts and financial ratios have been revised, as
appropriate, for the effects of the restatements.
  We were advised in June, 2000 that the Securities and Exchange Commission
(SEC) had entered an order of a formal, non-public investigation into our
accounting and financial reporting practices in Mexico and other areas. The SEC
is continuing its investigation into Mexican accounting issues and other
accounting matters which include consideration of the attached Consolidated
Financial Statements including all the items affected by the restatements. We
continue to fully cooperate with the investigation. The Company cannot predict
when the SEC will conclude its investigation or its outcome.
  Management intends to restate, as appropriate, the Company's quarterly
financial information, and to refile any restated quarterly financial
information with the SEC. At such time, the Company's
 Annual Report on Form
10-K will bere-filed, as amended, for any restatement of quarterly information.
Our independent auditors' opinion on the Consolidated Financial Statements for
each of the years in the three year period ended December 31, 2000, presently
contains an explanatory paragraph referring to our supplementary quarterly
financial information and to the fact that the independent auditors were unable
to complete their reviews of such quarterly information due to matters related
to the restatement issues as described in Note 2 to the Consolidated Financial
Statements. After we have completed our restatement of such quarterly
information, the Company believes that our independent auditors will be able to
complete their reviews and modify their Report of Independent Auditors
accordingly.
  The business challenges that began to impact our performance in the second
half of 1999 continued to adversely affect our financial performance in 2000.
We reported a net loss of $257 million or 44 cents per share in 2000 compared
with a profit of $1,339 million or $1.85 per share in 1999. These business
challenges included company specific issues such as the realignment of our
sales force from a geographic to an industry structure resulting in higher
sales force turnover, open sales territories and lower sales productivity; the
disruption and incremental costs associated with consolidation of our U.S.
customer administration centers and changes in our European infrastructure;
competitive and industry changes; and adverse economic conditions in our Latin
American affiliates and in the U.S. toward the latter part of the year. These
operational challenges, exacerbated by significant technology and acquisition
investments, have resulted in credit rating downgrades, limited access to
capital markets and marketplace concerns regarding our liquidity.
  To counter these challenges, in October of 2000 we announced a turnaround
program including anticipated asset sales totaling $2 - $4 billion, accelerated
cost reductions and plans to transition the equipment financing business to
third party vendors. At this time we believe our plan is on track as our prime
objective of cash generation is being realized. We strengthened our cash
position in the fourth quarter and ended the year with more than $1.7 billion
in cash and equivalents, with approximately $400 million positive cash flow
from operations in the fourth quarter. We concluded 2000 by selling our China
operations to Fuji Xerox for $550 million. In January 2001, we obtained $435
million in financing from an affiliate of General Electric Capital Corporation
(GE Capital) and announced that we were also discussing possible plans for GE
Capital to provide ongoing equipment financing for Xerox customers in several
European countries. In March 2001, we sold half of our ownership interest in
Fuji Xerox to Fuji Photo Film Co., Ltd. (Fujifilm) for $1,283 million in cash.
In April 2001, we entered an agreement to sell our leasing businesses in four
Euro pean countries to Resonia Leasing AB for approximately $370 million in
cash at approximately book value. In addition to our asset disposition
initiatives, we are aggressively finalizing and implementing cost-reduction
plans, which we anticipate will yield at least $1 billion in annualized savings
by the end of 2001. Since the third quarter of 2000, we have taken actions that
account for more than one-half of this target, including the reduction of
approximately 2,000 and 4,300 jobs in the fourth quarter of 2000 and the first
quarter of 2001, respectively.

                                                                              1


<PAGE>

  We have restated our Consolidated Financial Statements for the fiscal years
ended December 31, 1999 and 1998 as a result of two separate investigations
conducted by the Audit Committee of the Board of Directors. These
investigations involved previously disclosed issues in our Mexico operations
and a review of our accounting policies and procedures and application thereof.
As a result of these investigations, it was determined that certain accounting
practices and the application thereof misapplied generally accepted accounting
principles (GAAP) and certain accounting errors and irregularities were
identified. The Company has corrected the accounting errors and irregularities
in its Consolidated Financial Statements. The Consolidated Financial Statements
have been adjusted as follows:
  In fiscal 2000 the Company had recorded charges totaling $170 million ($120
million after taxes) which arose from imprudent and improper business practices
in Mexico that resulted in certain accounting errors and irregularities. Over a
period of years, several senior managers in Mexico had collaborated to
circumvent certain Xerox accounting policies and administrative procedures. The
charges related to provisions for uncollectible long-term receivables, the
recording of liabilities for amounts due to conces-sionaires and, to a lesser
extent, for contracts that did not fully meet the requirements to be recorded
as sales-type leases. The investigation of the accounting issues discovered in
Mexico has been completed. The Company has restated its prior years'
Consolidated Financial Statements to reflect reductions to pre-tax income
(loss) of $53 million and $13 million in 1999 and 1998, respectively. The vast
majority of the approximate remaining $101 million of the fiscal 2000 Mexican
charge relates to bad debt provisions.
  In connection with our acquisition of the remaining 20 percent of Xerox
Limited from Rank Group, Plc in 1997, we recorded a liability of $100 million
for contingencies identified at the date of acquisition. One of the
investigations conducted by the Audit Committee of the Board of Directors
expressed a judgment that this liability should not have been recorded.
However, management believes that the liability and corresponding goodwill
asset were established appropriately in 1997; such asset and liability were
only 0.4 percent and 0.5 percent, respectively of total assets and total
liabilities. During 1998, we determined that the liability was no longer
required. During 1998 and 1999, we charged to the liability certain expenses
incurred as part of the consolidation of our European back-office operations.
This reversal should have been recorded as a reduction of Goodwill and Deferred
tax assets. Therefore, we have restated our previously reported Consolidated
Financial Statements to reflect decreases of $67 million to Goodwill and $33
million to Deferred tax assets and increases in Selling, administrative and
general expenses of $76 million in 1999 and $24 million in 1998.
  In addition to the above items, we have made adjustments in connection with
certain misapplications of GAAP under Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" (SFAS No. 13). These adjustments
primarily relate to the accounting for lease modifications and residual values
as well as certain other items. The following table presents the effects of all
the aforementioned items on our pre-tax income (loss).*


<TABLE>
<CAPTION>
                                         Year ended December 31,
               (in millions)               2000     1999    1998
               -------------------------------------------------
               <S>                       <C>    <C>      <C>
               Increase (decrease) to
                  pre-tax income (loss)*
                 Mexico                    $ 69   $ (53)  $ (13)
                 Rank Group Acquisition       6     (76)    (24)
                 Lease issues, net           87      83    (165)
                 Other, net                  10     (82)     18
               -------------------------------------------------
                 Total                     $172   $(128)  $(184)
               -------------------------------------------------
</TABLE>


* Pre-tax income (loss) refers to income (loss) from Continuing Operations
  before income taxes (benefits), Equity Income and Minorities Interests. For
  convenience, that financial statement caption is hereafter referred to as
  pre-tax income (loss).

  These adjustments resulted in the cumulative net reduction of Common
shareholders' equity and Consolidated Tangible Net Worth (as defined in our $7
Billion Revolving Credit Agreement) of $137 million and $76 million,
respectively, as of December 31, 2000. Retained earnings at December 31, 1997
were restated from $3,960 million to $3,852 million as a result of the effect
of these aforementioned adjustments on years prior to 1998.
  Throughout the following Management's Discussion and Analysis of Results of
Operation and Financial Condition all referenced amounts reflect the above
described restatement adjustments.
  Revenues of $18.7 billion in 2000 declined 4 percent (1 percent pre-currency)
from 1999. Excluding the beneficial impact of the January 1, 2000 acquisition
of the Tektronix, Inc. Color Printing and Imaging Division (CPID), 2000
revenues declined 8 percent (5 percent pre-currency.) Revenues were impacted by
a combination of company specific issues, an increased competitive environment
and some weaker economies toward the latter part of the year. Revenues of $19.6
billion in 1999 were flat (and increased 1 percent pre-currency) from 1998,
including a very substantial revenue decline in Brazil due to the currency
devaluation and subsequent economic weakness.
  In reviewing our performance, we discuss our results of operations, as
reported in our consolidated financial statements and also as adjusted for the
effects of certain

2


<PAGE>

special items. This means that we analyze our results both before and after the
effects of these special items. We believe that this will assist readers in
better understanding the trend in our results. A discussion of these special
items, including a table which illustrates their effects on our Consolidated
Statement of Operations, appears below.


<TABLE>
<CAPTION>
         (In millions, except per-share data)     2000   1999     1998
         -------------------------------------------------------------
         <S>                                   <C>     <C>    <C>
         Memo:
         Pre-tax income (loss)                 $ (384) $1,908 $   579
         Pre-tax income before restructuring
            and special items                      62   1,908   2,223
         -------------------------------------------------------------
         Income (loss) from
            Continuing operations              $ (257) $1,339 $   463
         Loss from Discontinued operations          -       -    (190)
         -------------------------------------------------------------
         Net income (loss)                       (257)  1,339     273
         -------------------------------------------------------------
         Restructuring and other special items   (353)      -  (1,107)
         Income before special items           $   96  $1,339 $ 1,380
         -------------------------------------------------------------
         Earnings (loss) per share
         Income (loss) from
            Continuing operations              $(0.44) $ 1.85 $  0.62
         Loss from Discontinued operations          -       -   (0.28)
         -------------------------------------------------------------
         Diluted earnings (loss) per share      (0.44)   1.85    0.34
         -------------------------------------------------------------
         Restructuring and special items        (0.53)      -   (1.64)
         Income from Continuing operations
            before special items               $ 0.09  $ 1.85 $  2.26
         -------------------------------------------------------------
</TABLE>


Net loss in 2000 includes a $200 million pre-tax gain ($119 million after
taxes) related to the Company's December 2000 sale of its China operations to
Fuji Xerox, $619 million of restructuring, inventory and asset impairment
charges ($456 million after taxes and including our $37 million share of a Fuji
Xerox restructuring charge), and a $27 million ($16 million after taxes)
in-process research and development charge from the CPID acquisition. The net
loss in 2000 was $257 million including these items or income of $96 million
excluding these special items. Excluding the 1998 restructuring charge, income
from continuing operations decreased 3 percent in 1999.
  Including these special items, our diluted loss per share was $0.44 in 2000.
Excluding these special items, diluted earnings per share declined 95 percent
in 2000 and decreased 18 percent in 1999.
  In the ordinary course of business, management makes many estimates in the
accounting for items that affect our reported results of operations and
financial position. The following table summarizes the more
significant of these estimates, and changes therein, and their impacts on
pre-tax income (loss):


<TABLE>
<CAPTION>
           ----------------------------------------------------------
           Increase (decrease) in Pre-tax income
                       (in millions)               2000   1999   1998
           ----------------------------------------------------------
           <S>                                   <C>    <C>    <C>
           Provisions for doubtful accounts      $(647) $(406) $(303)
           Provisions for obsolete and excess     (146)  (158)   (85)
              inventory
           Revenue allocations                      44    102    101
           Finance discount rates                   24    101    128
           Indirect taxes                           17     35     21
           Sales and consumption taxes              11     --     51
           ----------------------------------------------------------
</TABLE>

  The preceding items are analyzed as appropriate in succeeding sections of
this Management's Discussion and Analysis of Operations and Financial Condition
and/or the accompanying Notes to Consolidated Financial Statements.

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 European and Canadian 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 and Canadian
currencies on a revenue-weighted basis, the U.S. dollar was approximately 10
percent stronger in 2000 and 4 percent stronger in 1999. As a result, foreign
currency translation unfavorably impacted revenue growth by approximately 3
percentage points in 2000 and 1 percentage point in 1999.
  In the early part of 1999, the Brazilian real was devalued substantially
against the U.S. dollar. For the full year, the average real exchange rate
declined 36 percent 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.

Revenue by Segment
At the beginning of 2000, we realigned our organization according to the
segments identified below. It was impracticable for us to reclassify our 1998
results to conform to these segments. Accordingly no discussion of the changes
in revenues for 1999 as compared to

                                                                               3


<PAGE>

1998 is presented here. Revenues and year-over-year revenue growth rates by
segment are as follows:


<TABLE>
<CAPTION>
                                   Revenues/1/      Growth
               -------------------------------------------------
                                                   Post     Pre-
                  (in billions)     2000  1999 Currency Currency
               -------------------------------------------------
               <S>                 <C>   <C>   <C>      <C>
               Total Revenues      $18.7 $19.6     (4)%     (1)%
               Industry Solutions    9.2  10.1    (10)      (6)
               General Markets       5.3   4.9      8       12
               Developing Markets    2.7   2.8     (2)      (1)
               Other Businesses      1.5   1.8    (14)     (10)
               Memo: Fuji Xerox/2/   8.4   7.8      8        4
               -------------------------------------------------
</TABLE>

/1/ Revenues have been restated as required by FASB EITF 2000-10 for all
    periods presented to include shipping and handling charges billed to
    customers. These amounts were historically reported as a reduction of cost
    of goods sold.
/2/ Represents total revenue of Fuji Xerox, of which approximately 10%
    represents sales to the Company.

  Industry Solutions Operations (ISO) covers the direct sales and service
organization in North America and Europe. 2000 revenues declined 10 percent (6
percent pre-currency) as the impact of the January 2000 final phase of the
realignment of the sales force from a geographic to an industry approach first
necessitated establishment of many new customer relationships and subsequently
resulted in increased sales turnover, open sales territories and less
experienced sales personnel. This was compounded by a strengthening of our
competitor's product capabilities, an increase in distributed printing which
has adversely impacted new equipment sales and recurring revenues on our
equipment population and, toward the latter part of the year, a weakening U.S.
economic environment. U.S. revenues were further adversely impacted by customer
administration issues. Revenues declined in the U.S., France and Germany,
reflected good growth in the U.K. and grew modestly in Canada.
  General Markets Operations (GMO) includes sales agents in North America,
concessionaires in Europe and our Channels Group, which includes retailers and
resellers. Including the CPID acquisition, GMO 2000 revenue grew 8 percent (12
percent pre-currency). Excluding CPID, GMO revenue declined 5 percent (1
percent pre-currency). Strong European concessionaire growth was offset by weak
North American sales agent revenues and the adverse impact of declining office
monochrome laser printer unit sales, which was consistent with the trend
throughout the industry. As a result of the January 2000 CPID acqui-sition,
equipment sales and supplies revenues from office color network printers were
strong reflecting the introduction of new CPID color laser and solid ink
products throughout the year. Excellent growth in inkjet equipment placements,
including the new DocuPrint M series resulting from our alliance with Sharp
Corporation and Fuji Xerox Co., Ltd. (Fuji Xerox), was mitigated by significant
inkjet equipment pricing pressures.  Developing Market Operations (DMO)
includes operations in Latin America, China (sold in December 2000), Russia,
India, the Middle East and Africa. The 2 percent decline in DMO revenues
reflected flat revenues in Brazil, a significant decline in Mexico associated
with the dislocation in that operation, declines throughout the rest of Latin
America and excellent growth in China, India and the Middle East. Revenues in
Brazil reflected an improved economic environment but this improvement was
offset by increased competitive activity and lower prices during the latter
part of the year as the Company focused on reducing inventory.
  The Company's Latin America operations can be subject to volatile economies
and currency fluctuations. While our Brazilian operations currently represent
less than 5 percent of total revenue they continue to have an adverse impact on
the Company's results of operations. Historically, the Brazilian operations
have managed to offset the economic impact of devaluation through pricing
changes, customer upgrades and reductions in its cost base and accordingly have
successfully managed their operations so as to moderate the effects of these
economic events. The Brazilian economy remains unsettled, and as a result the
recovery in our Brazil operation has not returned to pre-1999 levels, nor is
recovery expected in 2001.
  The Company sells most of its products and services under bundled
arrangements which contain multiple deliverable elements, or alternatively
sells its equipment and services on a stand-alone basis. In 2000, bundled
transactions represented approximately 64 percent, 65 percent, and 57 percent
of the total value of transactions in the U.S., Europe (excluding indirect
sales channels) and DMO (primarily Brazil), respectively. Multiple element
arrangements typically include equipment, services, supplies and financing
components for which the customer pays a single defined price. These
arrangements typically also include a variable service component for copy
volumes in excess of stated minimums. Prices listed in these multiple element
arrangements with our customers may not be representative of the fair value of
those elements because the prices of the different components of the
arrangement may be altered in customer negotiations, although the aggregate
consideration may remain the same. Management's objective is to ensure that
revenues under these arrangements are allocated based upon estimated fair
values of the elements in accordance with GAAP. The fair value of each element
is estimated based on a review of a number of factors including average selling
prices for the elements when they are sold on a stand-alone basis. The average
selling prices are

4


<PAGE>

based on management's best estimates of market conditions and competitive
pricing considerations.
  The principal change in estimate relating to such revenue allocations among
multiple elements is made with respect to the estimated fair value of those
elements and their related margins. This is a significant factor considered in
our revenue allocation process along with other factors, such as pricing
changes and customer discounts, also affect the overall allocation process. The
effect of such changes in estimates of fair values and related margins in the
years 2000, 1999 and 1998 was $193 million, $202 million, and $141 million,
respectively, which management understood to result, generally, in increases of
sales revenues and decreases to deferred elements of those arrangements. The
net effects of such allocations when offset by corresponding decreases in
deferred revenues was to increase pre-tax income in 2000, 1999 and 1998 by $44
million, $102 million, and $101 million, respectively.
  As we transition to third-party vendor financing, the proportion of our sales
to customers through bundled arrangements containing the same multiple
deliverable elements will decrease, as third parties will finance stand-alone
equipment sales.
  Our primary arrangements with customers conform with SFAS No. 13 as
sales-type leases allowing the recording of equipment sale revenue. Certain
customer arrangements which did not meet the sales-type lease criteria for
revenue recognition were recorded as operating leases.
  Since 1985 the Company, primarily in North America, has sold pools of
equipment subject to operating leases to third party finance companies (the
counter-party) and recorded these transactions as sales at the time the
equipment is accepted by the counter-party. The various programs provided us
with additional funding sources and/or enhanced credit positions. The
counter-party accepts the risks of ownership of the equipment. Remanufacturing
and remarketing of off-lease equipment belonging to the counter-party is
performed by the Company on a nondiscriminatory basis for a fee. North American
transactions are structured to provide cash proceeds up front from the
counter-party versus collection over time from the underlying customer lessees.
The following shows the effects of such sales of equipment under operating
leases, offset by the associated reductions of operating lease revenues from
current and prior years transactions:


<TABLE>
<CAPTION>
              (in millions)                     2000   1999   1998
              ----------------------------------------------------
              <S>                             <C>    <C>    <C>
              Sales of equipment              $  22  $ 120  $  74
              ----------------------------------------------------
              Reduced Operating Lease Revenue  (106)  (104)  (123)
              ----------------------------------------------------
                                              $ (84) $  16  $ (49)
              ----------------------------------------------------
</TABLE>


  Beginning in 1999 several Latin American affiliates entered into certain
structured transactions involving contractual arrangements which transferred
the risks of ownership of equipment subject to operating leases to third party
financial companies who are obligated to pay the Company a fixed amount each
month. The Company accounts for these transactions similar to its sales-type
leases. The counter-party assumes the risks associated with the payments from
the underlying customer lessees thus mitigating risk and variability from the
cash flow stream. The following shows the effects of such sales of equipment
under structured finance arrangements offset by the associated reductions of
operating lease revenues from current and prior year transactions:

               (in millions)                     2000  1999 1998
               -------------------------------------------------
               Sales of equipment              $ 126  $280   $--
               -------------------------------------------------
               Reduced Operating Lease Revenue  (132)  (17)   --
               -------------------------------------------------
                                               $  (6) $263   $--
               -------------------------------------------------

  Over time the number and value of the contracts will vary depending on the
number of operating leases entered into in any given period, the willingness of
third party financing institutions to accept the risks of ownership, and our
consideration as to the desirability of entering into such arrangements. For
example, the decline in 2000 from 1999 was driven by the lower volume of sales
in 2000, reduced equipment on operating lease available for sale and the
absence of rental revenue from sales of operating leases in prior years. The
increase in 1999 resulted from a marketing strategy in Brazil following the
maxi-devaluation of that country's currency in the first quarter of 1999. The
strategy emphasized offering operating leases to our customers and subsequently
selling the equipment under these leases to third party financial institutions
to mitigate the credit risk of the portfolio. By the end of 1999 operating
lease contracts increased to approximately 11 percent of total activity versus
historical levels of approximately 6 percent.
  As more fully discussed in the accompanying Capital Resources and Liquidity,
the Company presently has limited access to the capital markets. This situation
also impacts our current ability to enter into transactions for the sales of
equipment subject to operating leases.

Gross Margin, Cost and Expenses
The trend in gross margin was as follows:

                                                2000  1999  1998
               -------------------------------------------------
               Total Gross Margin*             37.4% 43.3% 44.4%
               Gross margin by revenue stream:
               Sales***                        37.5  43.1  43.8
               Service and rental              44.1  47.4  47.6
               Document outsourcing**          24.0  29.6  32.9
               Finance Income                  34.5  49.4  50.1
               -------------------------------------------------

*   Includes inventory charges associated with the 2000 and 1998
    restructurings. If excluded, the gross margins would have been 37.9% and
    45.0%, respectively.
**  Equipment sales included in Document outsourcing arrangements are included
    in the Sales Margin.
*** Includes inventory charges associated with the 2000 and 1998 restructuring.
    If excluded, sales gross margins would have been 38.4 percent and 44.9
    percent in 2000 and 1998, respectively.

                                                                               5


<PAGE>

  Gross margin of 37.4 percent in 2000 was 5.9 percentage points below 1999 or
5.4 percentage points lower excluding the 2000 restructuring inventory charge.
Approximately half of the 5.4 percentage point 2000 gross margin decline was
the result of the ISO segment's weak DocuTech and production printing equipment
sales. Higher growth in the lower-margin document outsourcing business of the
ISO segment, and in the small office/home office business of the GMO segment,
reduced the gross margin by approximately 1.5 percentage points. Our inkjet
strategy for the small office/home office is to build an equipment population
that will generate profitable supplies revenue over time. Significant
competitive equipment pricing pressures have strained profits and liquidity as
we build the inkjet equipment population. Finally, gross margin was adversely
impacted by competitive price pressure, unfavorable transaction currency and
temporary pricing actions to reduce inventory on certain products in the latter
part of the year. Manufacturing and other productivity improvements only
partially offset the above items.
  The 1999 gross margin of 43.3 percent was 1.1 percentage points below 1998.
Excluding the 1998 inventory restructuring charge, the 1.7 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
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 had not been
accompanied by corresponding cost reductions. Substantial competitive price
pressures were partially offset by some manufacturing and other productivity
improvements.
  We expect that the total gross margin will stabilize in 2001 at the fourth
quarter 2000 level of 33.7 percent which was significantly lower than the full
year gross margin. We expect equipment sales margins will continue to be under
pressure as our business mix continues to shift to lower equipment margin
products and due to competitive pricing pressures. We expect equipment margin
declines will be offset by improving service margins in 2001 as productivity
savings are expected to be achieved.
  Financing income is determined by the discount applied to minimum contract
payments, excluding service and supplies, used in the estimation of the fair
value of the equipment. Finance interest rates include the aforementioned
discount rates in customer arrangements as well as related sources of income.
Over the years the Company's finance interest rates have changed as a result of
a number of factors including money market conditions; the economic
environment; debt coverage; return on equity; debt to equity ratios and other
external factors which are particularly relevant to our financing business.
During the period from 1998 to 2000 such finance interest rates and the
Company's average cost of funds used in our customer financing activities were:


<TABLE>
<CAPTION>
                                                2000 1999 1998
                 ---------------------------------------------
                 <S>                            <C>  <C>  <C>
                 Average Finance Interest Rates 8.3% 9.2% 9.3%
                 ---------------------------------------------
                 Average Cost of Funds          5.4% 4.7% 5.1%
                 ---------------------------------------------
</TABLE>


  In line with market comparables, the Company's financing operations are
targeted to achieve a 15 percent return on equity. The Company periodically
reviews, and may change,the discount rates in order to be consistent with this
objective and to reflect the estimated fair value of the financing component in
its lease arrangements. Changes in the rate applied to a bundled arrangement
may affect one or more elements of the arrangement. In general, the following
changes in discount rates are reflected as reciprocal changes in equipment
revenues, partially offset by the resulting change in customer finance income.
  Such changes in accounting estimate had the following approximate effects on
pre-tax income (loss):


<TABLE>
<CAPTION>
                  Increase/(Decrease)           2000 1999 1998
                  --------------------------------------------
                  <S>                           <C>  <C>  <C>
                  Effect of changes in discount
                     Interest rates/1/           $24 $101 $128
                  --------------------------------------------
</TABLE>

/1/ Represents the impact of changes in discount rates net of amortization of
  the related cumulative unearned income effects.

  Gross residual values on our finance receivables declined in 2000 by $16
million and increased in 1999 by $80 million from 1998. Unguaranteed residual
values are assigned primarily to our high volume copying, printing and
production publishing products. Residual values are reviewed on a quarterly
basis as to their ultimate realization using both internal and external data.
Impairments, if any, are recorded as necessary as a result of these reviews.
The assigned values are generally established in order to result in a normal
profit margin on the subsequent transaction.
  The trend in Selling, administrative and general expenses as a percent of
revenue is as follows:


<TABLE>
<CAPTION>
                                       2000  1999  1998
                        -------------------------------
                        <S>           <C>   <C>   <C>
                        SAG % Revenue 30.2% 27.0% 27.3%
                        -------------------------------
</TABLE>


  Selling, administrative and general expenses (SAG) grew 7 percent in 2000 (3
percent excluding CPID). Excluding the favorable effect of currency, SAG grew
10 percent, or 7 percent excluding CPID. SAG includes bad debt provisions of
$647 million in 2000 which is $241 million higher than 1999. The increase
reflects higher worldwide provisions of approximately $50

6


<PAGE>

million due to continued resolution of aged billing and receivables issues in
the U.S., an increase of over $100 million in Mexico, and unsettled business
and economic conditions in many Latin American countries. A review of our
worldwide internal controls to determine that the issues identified in Mexico
were not present elsewhere has been completed. The issues identified in Mexico
were not found to be in evidence in any other major unit in which we operate
however several small Developing Markets Operations affiliates were found to
have used imprudent business practices resulting in certain adjustments and
contributing to the impact of the restatement.
  SAG growth in 2000 also includes increased salesforce payscale and incentive
compensation, significant transition costs associated with implementation of
the European shared services organization, continued impacts of the U.S.
customer administration issues and significant marketing, advertising and
promotional investments for our major inkjet printer initiative. When combined
with the lower revenues, SAG as a percent of revenue deteriorated to 30.2
percent in 2000.
  SAG declined 1 percent in 1999 (and was flat pre-currency). The improved
ratio of 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. Provisions for uncollectible accounts and receivables
issues were $647 million in 2000, $406 million in 1999 and $303 million in
1998.
  Research and development (R&D) expense grew 5 percent in 2000 including CPID
and declined 4 percent in 1999. Increased spending in 2000 reflected increased
program spending primarily for solid ink, solutions and FutureColor, an
advanced next-generation digital printing press technology which we expect will
begin early customer engagement later this year. 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 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 $615
million in R&D in 2000 for a combined total of $1.7 billion. We expect R&D
spending in 2001 will be essentially unchanged from 2000 and believe this level
is adequate to remain technologically competitive.
Restructuring Charges
On March 31, 2000, we announced details of a worldwide restructuring program.
In connection with this program we recorded a pre-tax provision of
$596 million ($423 million after taxes, including our $18 million share of a
restructuring charge recorded by Fuji Xerox). The $596 million pre-tax charge
included severance costs related to the elimination of 5,200 positions
worldwide. Approximately 65 percent of the positions to be eliminated are in
the U.S., 20 percent are in Europe, and the remainder are predominantly in
Latin America. The employment reductions primarily affect employees in
manufacturing, logistics, customer service and back office support functions.
For facility fixed assets classified as assets to be disposed of, the
impairment loss recognized is based on the fair value less cost to sell, with
fair value based on estimates of existing market prices for similar assets. The
inventory charges relate primarily to the consolidation of distribution centers
and warehouses and the exit from certain product lines.
  Weakening business conditions and operating results during 2000 required a
re-evaluation of the initiatives announced in March 2000. Accordingly, during
the fourth quarter of 2000, $71 million, primarily rela-ted to severance costs
for 1,000 positions, of the original $596 million provision, was reversed. The
reversals primarily relate to delays in the consolidation and outsourcing of
certain of our warehousing and logistics operations and the cancellation of
certain European initiatives no longer necessary as a result of higher than
expected attrition.
  Also during the fourth quarter of 2000, we announced a turnaround program,
which includes a wide-ranging plan to sell assets, cut costs and strengthen
core operations. Additionally, we have initiated discussions with third parties
to provide financing for customers in a manner that does not involve the Xerox
balance sheet. As part of this initiative we announced the sale of certain
European financing businesses, in April 2001, to Resonia Leasing AB. As more
fully discussed below, in December 2000 we sold to Fuji Xerox our operations in
China and Hong Kong for $550 million, and in March 2001, we sold half of our 50
percent ownership interest in Fuji Xerox to Fujifilm for $1,283 million, in
cash. We are in discussions to form a strategic alliance for our European paper
business. We are actively engaged in discussions to sell certain other assets,
including: Xerox Engineering Systems and our interests in spin-off companies
such as ContentGuard and Inxight. We are seeking equity investors for our
inkjet business and we are exploring a joint venture with non-competitive
partners for certain of our research centers including the Palo Alto Research

                                                                               7


<PAGE>

Center. Lastly, we are pursuing outsourcing or selling certain manufacturing
operations. It is expected that in most cases asset sales will result in a
gain.
  Regarding the cost reductions, we are finalizing and aggressively
implementing plans designed to reduce costs by at least $1.0 billion annually.
During the fourth quarter of 2000, we recorded an additional pre-tax
restructuring provision totaling $105 million ($87 million after taxes,
including our $19 million share of an additional restructuring charge recorded
by Fuji Xerox) in connection with finalized initiatives under the turnaround
program. This charge included estimated costs of $71 million for severance
costs associated with work force reductions related to the elimination of 2,300
positions worldwide and $34 million associated with the disposition of a
noncore business. The severance costs relate to further streamlining of
existing work processes, elimination of redundant resources and the
consolidation of existing activities into other existing operations.
  At December 31, 2000, the ending liability balance is $209 million for the
March 2000 restructuring program and $71 million for the turnaround program
resulting in a total liability balance of $280 million as of December 31, 2000.
For the 1998 restructuring, the liability balance as of December 31, 2000 is
$107 million, the majority of which will be utilized throughout 2001 as
all initiatives have been substantially completed.
  Worldwide employment decreased by 2,100 in 2000 to 92,500, including 4,600
employees leaving the Company under the restructuring programs and a reduction
of 1,300 associated with the sale of our China operations to Fuji Xerox. These
reductions were partially offset by the acquisition of CPID with 2,200
employees and the net hiring of 1,600 people in the early part of the year,
primarily for the Company's fast-growing document outsourcing business.

Gain on Affiliate's Sale of Stock
Gain on affiliate's sale of stock of $21 million reflects our proportionate
share of the increase in equity of Scansoft Inc. (NASDAQ: SSFT) resulting from
Scansoft's issuance of stock in connection with an acquisition. This gain is
partially offset by a $5 million charge reflecting our share of Scansoft's
write-off of in-process research and development associated with this
acquisition, which is included in Equity in net income of unconsolidated
affiliates. Scansoft, an equity affiliate, is a developer of digital imaging
software that enables users to leverage the power of their scanners, digital
cameras, and other electronic devices.

Sale of China Operations
In December 2000, we completed the sale of our China operations to Fuji Xerox
for a purchase price of $550 million and assumption of $118 million of debt.
The pre-tax gain recorded in the fourth quarter of 2000 was $200 million.

Other, net
Other expenses, net, were $341 million in 2000, $285 million in 1999 and $219
million in 1998. The $56 million increase in Other, net in 2000 reflects
increased non-financing interest expense and goodwill and intangible asset
amortization offset by gains on sales of businesses, as described below, and
aggregate foreign currency exchange gains. Non-financing interest expense was
$426 million in 2000, $256 million in 1999 and $179 million in 1998. The
significant increase in 2000 is the result of the CPID acquisition, generally
higher debt levels and increased interest rates. Goodwill and intangible asset
amortization was $87 million in 2000, $53 million in 1999 and $38 million in
1998. 2000 expenses were offset by $99 million of mark-to-market gains
resulting from unhedged foreign currency-denominated assets and liabilities.
This includes $69 million which arose as a direct result of a December 1, 2000
rating agency downgrade of our debt, resulting in liquidation of certain
derivative contracts in place to hedge our exposure to currency fluctuations.
The gains represent the change in the value of the underlying assets and
liabilities from the date the related derivatives were terminated. Due to the
inherent volatility in the foreign currency markets, we are unable to predict
the amount of any such mark-to-market gains or losses in future periods.
  In April 2000, we sold a 25 percent ownership interest in our wholly-owned
subsidiary, ContentGuard, to Microsoft, Inc. for $50 million and recognized a
pre-tax gain of $23 million, which is included in Other, net. An additional
pre-tax gain of $27 million was deferred pending the achievement of certain
performance criteria. In connection with the sale, ContentGuard also received
$40 million from Microsoft for a non-exclusive license of its patents and other
intellectual property and a $25 million advance against future royalty income
from Microsoft on sales of products incorporating ContentGuard's technology.
The license payment is being amortized over the life of the license agreement
of 10 years and the royalty advance will be recognized in income as earned.
  In June 2000, we sold the U.S. and Canadian commodity paper business,
including an exclusive license for the Xerox brand, to Georgia Pacific and
recorded a

8


<PAGE>

pre-tax gain of approximately $40 million which is included in Other, net. In
addition to the proceeds from the sale of the business, the Company will
receive royalty payments on future sales of Xerox branded commodity paper by
Georgia Pacific and will earn commissions on Xerox originated sales of
commodity paper as an agent for Georgia Pacific.
  The increase of $66 million in Other, net 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 $413 million 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 (Y2K) remediation spending
and net gains from several small asset sales including the sale of our European
headquarters in 1998 for a pre-tax gain of $36 million.

Income Taxes and Equity in Net Income of Unconsolidated Affiliates
Pre-tax income/(loss) was a loss of $384 million in 2000 including the gain
from the China sale, restructuring and asset impairments and CPID in-process
R&D write-off. Excluding these items, the income before income taxes was $62
million. Pre-tax income was $1,908 million in 1999 and $579 million in 1998.
Excluding the 1998 restructuring and inventory charges, 1998 income was $2,223
million.
  The effective tax rates, were 28.4 percent in 2000, 30.8 percent in 1999 and
25.0 percent in 1998. Excluding the aforementioned items, the effective tax
rate was 32.1 percent in 2000, 30.8 percent in 1999 and 31.5 percent in 1998.
The increase in the effective tax rate before special items in 2000 compared
with 1999 is due primarily to losses in a low tax rate jurisdiction, offset in
part by a benefit of approximately $125 million related to favorable resolution
of tax audits. The 1999 and 1998 rates 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 net income declined to
$61 million in 2000 from $68 million in 1999 and $74 million in 1998. The 2000
decline reflected our $37 million share of Fuji Xerox restructuring charges and
reductions in income from several smaller investments which offset improved
Fuji Xerox underlying results. The decline in 1999 reflected 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.
  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 80 percent of
Fuji Xerox revenues are generated in Japan, with Australia, New Zealand,
Singapore, Malaysia, Korea, Thailand and the Philippines representing another
10 percent. Fuji Xerox conducts business in other Pacific Rim countries through
joint ventures and distributors. Xerox's exposure to economic turmoil in Asia
is mitigated by our joint ownership of Fuji Xerox. The remaining 10 percent of
Fuji Xerox revenues are sales to Xerox.
  In March 2001, we sold half of our ownership interest in Fuji Xerox to
Fujifilm for $1,283 million, in cash. The sale resulted in a pre-tax gain of
$769 million ($300 million after taxes). Under the agreement, Fujifilm's
ownership interest in Fuji Xerox is increased from 50 percent to 75 percent.
While Xerox's ownership interest is decreased to 25 percent, we retain rights
as a minority shareholder. All product and technology agreements between us and
Fuji Xerox continue, ensuring that the two companies generally retain
uninterrupted access to each other's portfolio of patents, technology and
products. With its business scope focused on document processing, Fuji Xerox
will continue to provide color office product technology to us and collaborate
with us on research and development. We maintain our agreement with Fuji Xerox
to provide them high-end production publishing and solid ink products.
  Fuji Xerox 2000 revenues of $8.4 billion grew 8 percent (4 percent
pre-currency) reflecting modest revenue growth in Japan and strong revenue
growth in Fuji Xerox's other Asia Pacific territories. Excluding Fuji Xerox
sales to Xerox Corporation and subsidiaries, Fuji Xerox 2000 revenues grew 8
percent to $7.6 billion. Total Fuji Xerox net income was $214 million before
after-tax restructuring expenses of $74 million, increasing 94 percent from
1999 reflecting gross margin improvements, operating expense controls, gains on
sales of assets and a lower tax rate in Japan.
  Fuji Xerox revenues increased 14 percent (declined 1 percent pre-currency) to
$7.8 billion in 1999. Revenue growth benefited from favorable currency
translation and reflected flat revenues in Japan and in Fuji Xerox's other Asia
Pacific territories.
  Total Fuji Xerox net income, before restructuring expenses, was $110 million
in 1999 and $144 million in 1998. Fuji Xerox had after-tax restructuring
expenses of $36 million in 1998. The Xerox Limited

                                                                               9


<PAGE>

share of these restructuring expenses was $18 million. Xerox Limited's 50
percent share of Fuji Xerox income before restructuring expenses was $107
million in 2000, $55 million in 1999 and $72 million in 1998.

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 $73 million paid by Fuji
Xerox for the Asia/Pacific operations of CPID. CPID manufactures and sells
color printers, ink and related products and supplies. The acquisition
accelerated Xerox to the number 2 market position in office color printing,
doubled our reseller and dealer distribution network and provided us with
scalable solid ink technology. The acquisition also enabled significant product
development and SAG synergies with our monochrome printer organization.
  The acquisition is subject to certain post-closing adjustments which may
potentially reduce the purchase price paid. The excess of cash paid over the
fair value of net assets acquired has been allocated to identifiable intangible
assets and goodwill using a discounted cash flow approach by an independent
appraiser. The value of the identifiable intangible assets includes $27 million
for purchased in-process research and development which was written off in
2000. Other identifiable intangible assets and goodwill are being amortized on
a straight-line basis over their estimated useful lives which range from 7 to
25 years.

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 or 2000, since inception of the program we have
repurchased 20.6 million shares for $594 million. We have no plans to
repurchase stock in 2001.

Delay in Filing our Consolidated Financial Statements
The investigation of the Company's accounting policies and procedures,
conducted by our Audit Committee in cooperation with our independent auditors,
has delayed the filing of our annual report on Form 10-K with the U.S.
Securities and Exchange Commission (SEC). Until we are in compliance with the
SEC's annual filing requirements the Company is unable to raise capital through
registered securities offerings.

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 fair value of derivatives
would be recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, depending on the type of hedge transaction. SFAS No.
133, as amended, is effective for the Company as of January 1, 2001.
  With the adoption of SFAS No. 133, we will record a net cumulative after-tax
charge of $2 million in our Consolidated Statements of Operations and a net
cumulative after-tax loss of $19 million in accumulated other comprehensive
income. Further, as a result of recognizing all derivatives at fair value,
including the differences between the carrying values and fair values of
related hedged assets, liabilities and firm commitments, we will recognize a
$403 million increase in Total Assets and a $424 million increase in Total
Liabilities.
  The Company expects that the adoption of SFAS 133 will increase the future
volatility of reported earnings and other comprehensive income. In general, the
amount of volatility will vary with the level of derivative activities during
any period.

Capital Resources and Liquidity

The availability of worldwide cash, cash equivalents and liquidity resources
for Xerox and its material subsidiaries and affiliates is managed by the
companies through cash management systems and internal policies and procedures.
The management of such worldwide cash, cash equivalents and liquidity resources
is also subject to statutes, regulations and practices of local jurisdictions
in which the companies operate, the legal agreements to which the companies are
parties and the continuing cooperation and policies of financial institutions
utilized by the companies to maintain the cash management systems.
  At December 31, 2000, 1999 and 1998, cash and equivalents on hand was $1,741
million, $126 million and $79 million, respectively, and total debt, including
ESOP debt, was $18,097 million, $15,001 million and $15,107 million,
respectively. Total debt, net of cash on hand, increased by $1,481 million in
2000, decreased by $153 million in 1999, and increased by $2,200 million in
1998.
  The consolidated ratio of total debt to common and preferred equity was
4.4:1, 2.8:1 and 2.8:1 as of December 31, 2000, 1999 and 1998, respectively.
The increase in this ratio is attributable to the 2000 operating loss and the
impact of currency devaluation on the net equity of our foreign operations.
This ratio also reflects the full draw-down on our $7.0 billion Revolving

10


<PAGE>

Credit Agreement (the "Revolver") during 2000 to maintain financial
flexibility, as discussed below, which resulted in cash and equivalents on hand
of $1.7 billion at December 31, 2000. Had the Company's cash balance at
December 31, 2000 been consistent with historical levels, the debt to equity
ratio would have been approximately 4.0:1.
  We have announced our intent to exit customer equipment financing as part of
our global Turnaround Program. This, together with the fact that for much of
2000 and subsequently we have managed liquidity on a total company basis
without reference to non-financing and financing capital structures, means that
it is appropriate to review the total Company's cash flows on this basis.
Accordingly, we believe that a review of operating cash flow, and earnings
before interest, income taxes, depreciation and amortization (EBITDA) provides
the most meaningful understanding of our changes in cash and debt balances. The
following is a summary of EBITDA, operating and other cash flows for each of
the three years in the period ended December 31, 2000:


<TABLE>
<CAPTION>
                                               2000    1999     1998
            ---------------------------------------------------------
            <S>                            <C>      <C>     <C>
            Income (Loss) from
               Continuing operations       $  (257) $1,339  $   463
            Income tax provision (benefit)    (109)    588      145
            Depreciation and amortization      948     779      727
            Restructuring charges              619       -    1,644
            Interest expense (income), net     107    (278)    (394)
            Gains on sales of businesses      (263)    (97)       -
            Other Items                         18     114       33
            ---------------------------------------------------------
               EBITDA                        1,063   2,445    2,618
            Working capital and other
               changes                         403    (316)  (1,183)
            On-Lease inventory spending       (519)   (238)    (387)
            Capital spending                  (452)   (594)    (566)
            Restructuring payments            (372)   (437)    (332)
            Financing cash flow, net of
               interest                     (1,165)    (80)  (1,581)
            ---------------------------------------------------------
               Operating Cash (Usage)/
                Generation*                 (1,042)    780   (1,431)
            Dividends                         (587)   (586)    (531)
            Asset sale proceeds                640      65        -
            Acquisitions                      (856)   (107)    (380)
            Other non-operating items         (113)     78      (91)
            Debt borrowings
               (repayments), net             3,573    (183)   2,437
            ---------------------------------------------------------
               Net Change in Cash          $ 1,615  $   47  $     4
            ---------------------------------------------------------
</TABLE>


* The primary variation from cash flow from operations as reported on the
  Consolidated Statement of Cash Flows is the inclusion above of capital
  spending as an operational use of cash.

Operating cash (usage)/generation was $(1,042) million in 2000 versus $780
million in 1999. Lower EBITDA reflected our poor 2000 operating results.
Significant improvements in working capital and capital spending were more than
offset by higher investments in on-lease equipment, and a significant reduction
in financing cash flow. The working capital improvements stem largely from a
reduction in inventories, offset partially by a net increase in accounts
receivable and tax payments. The inventory reduction reflects management
actions to improve inventory turns, including price reductions on slower-moving
products in the latter part of 2000 and changes in the supply/demand and
logistics processes. We expect to reduce inventory levels further in 2001. The
accounts receivable increase largely reflects the impact of unwinding 1999
securitization transactions which did not recur in 2000. In 2000, we began to
make progress reducing our receivables balances, which has been hampered by the
persisting effects of changes we made in 1998 to the U.S. customer
administration centers. The capital spending includes production tooling and
our investments in Ireland, where we are consolidating European customer
support centers and investing in inkjet supplies manufacturing. The significant
decline in 2000 spending versus 1999 is due primarily to substantial completion
of the Ireland projects as well as significant spending constraints. We expect
2001 spending to be approximately 25 percent below 2000 levels. Investments in
on-lease equipment reflect the growth in our document outsourcing business,
which we expect will continue to grow in 2001. The significant decrease in
financing cash flow in 2000 largely reflects the increase in interest costs
during 2000 plus higher finance receivables in 2000 resulting from the
occurrence in 1999 of several securitization transactions which did not recur
in 2000 due to the downgrades of our debt explained below. Certain lease
originations in 1999 were securitized in transactions treated as asset sales,
thereby generating cash and removing the related financing assets from our
balance sheet, while lease originations in 2000 were not securitized and
therefore remained on our balance sheet at December 31, 2000.
  Operating cash generation was $780 million in 1999 versus cash usage of
$(1,431) million in 1998 reflecting significant improvements in working capital
performance and financing cash flow. The working capital improvements resulted
largely from a modest reduction in inventories versus growth of over $500
million in 1998 and improvement in accounts receivable.
  The accounts receivable decrease and the significant improvement in financing
cash flow compared to 1998 are the result of several 1999 securitization
transactions, discussed below, which generated cash in 1999 and were treated as
asset sales, thereby removing the assets from our balance sheet at December 31,
1999.

                                                                              11


<PAGE>

  Cash restructuring payments were $372 million, $437 million and $332 million
in 2000, 1999 and 1998, respectively. The 2000 spending includes $217 million
related to the 1998 program, reflecting the overall wind-down of the 1998
program. The remaining $155 million reflects new 2000 initiatives. The status
of the restructuring reserves is included in Note 3 of the "Notes to
Consolidated Financial Statements" of this Annual Report.

Liquidity and Funding Plans for 2001
Historically, our primary sources of funding have been cash flows from
operations, borrowings under our commercial paper and term funding programs,
and securitizations of finance and trade receivables. Our overall funding
requirements have been to finance customers' purchases of Xerox equipment, to
fund working capital requirements and to finance acquisitions.
  During 2000, the agencies that assign ratings to our debt downgraded the
Company's senior debt and short-term debt several times. As of May 29, 2001,
debt ratings by Moody's are Ba1 and Not Prime, respectively, and the ratings
outlook is negative; debt ratings by Fitch are BB and B, respectively, and the
ratings outlook is stable; and debt ratings by Standard and Poors (S&P) are
BBB- and A-3, respectively, and the ratings outlook is negative. Since October
2000, the capital markets and uncommitted bank lines of credit have been, and
are expected to continue to be, largely unavailable to us. We expect this to
result in higher borrowing costs going forward.
  Consequently, in the fourth quarter 2000, we drew down the entire $7.0
billion available to us under the revolver, primarily to maintain financial
flexibility and pay down debt obligations as they came due. At December 31,
2000, $5.6 billion of the proceeds under the Revolver was used, with the
balance of $1.4 billion invested in short-term securities and included in Cash
and cash equivalents in our Consolidated Balance Sheets. We are in compliance
with the covenants, terms and conditions in the Revolver, which matures on
October 22, 2002. The only financial covenant in the Revolver requires we
maintain a minimum of $3.2 billion of Consolidated Tangible Net Worth, as
defined (CTNW). At December 31, 2000, our CTNW was $600 million in excess of
the minimum requirement. Further operating losses, restructuring costs and
adverse currency translation adjustments would erode this excess, while gains
on asset sales, operating profits and favorable currency translation would
improve the excess.
  The above referenced downgrades and the resulting withdrawal by certain banks
of uncommitted lines of credit eliminated a primary source of liquidity for
many of our Latin American affiliates. As a result, the Company has increased
its level of intercompany lending to those affiliates to replace the withdrawn
credit facilities.
  As of December 31, 2000, we had approximately $2.7 billion and $9.0 billion
of commercial paper, medium term notes and bank obligations maturing in 2001
and 2002, respectively, as summarized below:


<TABLE>
<CAPTION>
                           (in billions)  2001  2002
                           -------------------------
                           <S>            <C>  <C>
                           First Quarter  $0.6 $0.3
                           Second Quarter  0.9  0.9
                           Third Quarter   0.2    -
                           Fourth Quarter  1.0  7.8*
                           -------------------------
                           Full Year      $2.7 $9.0
                           -------------------------
</TABLE>

* Includes $7.0 billion maturity under the Revolver.

In April 2001, letters of credit totaling $660 million, which supported Ridge
Reinsurance ceded reinsurance obligations were replaced with trusts
collateralized by the Ridge Reinsurance investment portfolio of approximately
$405 million plus approximately $255 million in cash. Except as discussed
above, the Company does not have any other material obligations scheduled to
mature in 2001.
  We are implementing a global turnaround program which includes initiatives to
reduce costs, improve operations, and sell certain assets that we believe will
positively affect our capital resources and liquidity position when completed.
In connection with these initiatives, we announced and completed the sale of
our China operations to Fuji Xerox in the fourth quarter of 2000, which
generated $550 million of cash and transferred debt of $118 million to Fuji
Xerox. In March 2001, we sold half of our interest in Fuji Xerox to Fujifilm
for $1,283 million, in cash.
  We have initiated discussions to implement third-party vendor financing
programs which, when implemented, will significantly reduce our debt and
finance receivable levels going forward. In addition, we are in discussions to
consider selling portions of our existing finance receivables portfolio, and we
continue to actively pursue alternative forms of financing including
securitizations and secured borrowings. In connection with these initiatives,
in January 2001, we received $435 million in financing from an affiliate of GE
Capital, secured by our portfolio of lease receivables in the United Kingdom.
In April 2001, we announced the sales of our leasing businesses in four
European countries to Resonia Leasing AB for approx-

12


<PAGE>

imately $370 million. These sales are part of an agreement under which Resonia
will provide on-going, exclusive equipment financing to our customers in those
countries.
  We have also initiated a worldwide cost reduction program which is expected
to result in annualized expense savings of at least $1 billion by the end of
2001.
  We believe our liquidity is presently sufficient to meet current and
anticipated needs going forward, subject to timely implementation and execution
of the various global initiatives discussed above. Should the Company not be
able to successfully complete these initiatives on a timely or satisfactory
basis, we will need to obtain additional sources of funds through other
operating improvements, financing from third parties, additional asset sales,
or a combination thereof. The adequacy of our continuing liquidity depends on
our ability to successfully generate positive cash flow from an appropriate
combination of these sources.
  On December 1, 2000, Moody's reduced its rating of our debt below investment
grade, effectively eliminating our ability to enter into new foreign-currency
and interest rate derivative agreements and requiring us to immediately
repurchase certain of its then-outstanding derivative agreements in the
aggregate amount of $108 million, including $16 million of accrued interest. In
addition, we negotiated with certain counterparties to maintain certain other
outstanding derivative agreements, for which we posted collateral totaling
approximately $5 million. To minimize the resulting exposures, we also
voluntarily terminated other derivative agreements, which required gross
payments to counterparties of $42 million and resulted in gross receipts from
counterparties of $50 million. At December 31, 2000, the remaining derivative
portfolio has a current net positive value to the Company of $70 million.
Should our debt ratings be downgraded by Standard and Poors to below investment
grade, the Company may be required to repurchase certain of the
out-of-the-money derivative agreements currently in place, in the approximate
aggregate amount as of December 31, 2000 of $100 million, including accrued
interest of $5 million. However, it is also possible that some counterparties
may require, or agree to, the repurchase of certain of the in-the-money
derivatives currently in place, which could reduce or eliminate this cash
requirement.
  There is no assurance that our credit ratings will be maintained, or that the
various counterparties to derivative agreements would not require us to
repurchase the obligations in cases where the agreements permit such
termination.
  In the fourth quarter 2000, we recorded mark-to-market gains of $69 million
on foreign currency-denominated assets and liabilities which were not hedged
following the repurchase of the derivative contracts described above. Due to
the inherent volatility in the foreign currency and interest rate markets, we
are unable to predict the amount of any such mark-to-market gains or losses in
future periods.
  In the third quarter 2000, Xerox Credit Corporation (XCC) securitized certain
finance receivables in the United States, generating gross proceeds of $411
million. This facility was accounted for as a secured borrowing. In connection
with the December 2000 credit rating downgrade, the Company renegotiated the
securitization transaction, resulting in a one-time payment of approximately
$40 million, and bringing the outstanding balance on the facility to $325
million at December 31, 2000.
  In the third quarter 2000, Xerox Corporation securitized certain accounts
receivable in the United States, generating gross proceeds of $315 million.
This revolving facility was accounted for as a sale of receivables, and the
related amounts were removed from our balance sheet. As a result of the debt
downgrade in December 2000, Xerox Corporation renego-tiated the facility, which
might otherwise have been required to be runoff, reducing the facility size by
$25 million to $290 million. In the absence of any event of default, the
facility size will remain at $290 million, unless and until our debt is
downgraded to or below BB by Standard and Poors and Ba2 by Moody's. In this
event, the facility could go into wind-down mode and cease to be a source of
liquidity, as new receivables would not be purchased under the facility unless
the Company were to successfully renegotiate its terms. Given the nature of the
facility, no repayment obligations would be imposed on the Company.
  In the fourth quarter 2000, Xerox Canada Limited securitized certain accounts
receivable in Canada, generating gross proceeds of $38 million. This revolving
facility was accounted for as a sale of receivables and the related amounts
were removed from our balance sheet. The debt downgrade in December 2000 could
also have required the runoff of this facility, however, this requirement was
waived by the counterparty until and unless the counterparty delivers further
notice. The timing of delivery of such further notice, if any, remains entirely
at the option of the counterparty. As long as this downgrade condition
continues to exist, such notice, if given, could cause the facility to go into
wind-down mode, with consequences similar to the Xerox Corporation facility
described above.
  In 1999, XCC and Xerox Canada Limited securitized certain finance receivables
in the United States and

                                                                              13


<PAGE>

Canada, generating gross proceeds of $1,150 million and $345 million,
respectively. These amortizing facilities were accounted for as sales of
receivables, and the related amounts were removed from the respective balance
sheets.
  In December 1999, primarily to provide additional liquidity in advance of
Y2K, Xerox Corporation and certain of its subsidiaries factored accounts
receivable, generating aggregate gross proceeds of $288 million. These
short-term transactions were accounted for as sales of receivables, and the
related amounts were removed from the respective balance sheets.
  In 1998, Xerox Canada Limited and Xerox France securitized accounts
receivable, generating aggregate gross proceeds of $20 million and $36 million,
respec-tively. These short-term transactions were accounted
for as sales of receivables, and the related amounts were removed from the
respective balance sheets.
  During 2000, 1999, and 1998, we sold 7.5 million, 0.8 million and 1.0 million
equity put options, respectively, for proceeds of $24 million, $0.4 million,
and $5.8 million, respectively. Equity put options give the counterparty the
right to sell our common shares back to us at a specified strike price. In the
fourth quarter 2000, we were required to pay $92 million to settle the put
options that we issued in 2000. In 1999, we paid $5 million to settle the put
options that we issued in 1998. As of December 31, 2000, the put options we
issued in 1999 remained outstanding, at a strike price of approximately $41 per
share. In January 2001, we paid $28 million to settle these put options, which
we funded by issuing 5.9 million unregistered common shares.
  During the first five months of 2001, we retired $128 million of long-term
debt through the exchange of 16 million shares of common stock of the Company,
which increased CTNW by approximately $117 million.
  On May 10, 2001, a European affiliate of Xerox Corporation convened a meeting
of holders of its (Pounds)125 million 8 3/4 percent Guaranteed Bonds, issued in
1993 and maturing in 2003 (the "Bonds"), which are guaranteed by Xerox Limited,
in order to consider a proposal to repay the Bonds early at par plus accrued
interest. Repaying the Bonds early would reduce outstanding indebtedness and
interest costs, and would eliminate certain restrictive covenants in the Bonds
and related documents, thereby providing additional flexibility to Xerox and
its subsidiaries and affiliates in connection with their cash management
systems and practices. At the May 10 meeting, the Bondholders rejected the
proposal to repay the Bonds early. Therefore, the Bonds remain outstanding and
are scheduled to mature in 2003. Relating to these bonds, we are maintaining a
cash position of $194 million in a trust account repre-senting the par value
and one year's interest on these bonds. This cash is withdrawable upon 21 days
written notice to the Trustee.

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 historically entered into certain derivative contracts to manage
interest rate and foreign currency exposures. These instruments are held solely
for hedging purposes. As described above, our ability to currently enter into
new derivative contracts is severely constrained. Therefore, while the
following paragraphs describe our overall risk management strategy, our ability
to employ that strategy effectively has been severely limited. Any future
downgrades of our debt could further limit our ability to execute this risk
management strategy effectively. The derivative instruments we utilize 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 we employ long-standing policies prescribing that
derivative instruments are only to be used 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, we would purchase an option to buy foreign currency
to settle the importation of goods from foreign suppliers denominated in that
same currency, or a forward exchange contract to fix the dollar value of a
foreign currency-denominated loan.
  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 economic hedges of such foreign currency exchange contracts,
associated unrealized gains or losses would be offset by corresponding changes
in the value of the underlying asset or liability being hedged.

14


<PAGE>

  Assuming a 10 percent appreciation or depreciation in foreign currency
exchange rates from the quoted foreign currency exchange rates at December 31,
2000, the potential change in the fair value of foreign currency-denominated
assets and liabilities in each entity would aggregate approximately $43
million, and a 10 percent appreciation or depreciation of the U.S. dollar
against all currencies from the quoted foreign currency exchange rates at
December 31, 2000, would have a $664 million impact on our Cumulative
Translation Adjustment portion of equity. 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 $6.6 billion at December 31, 2000, net of foreign currency-denominated
liabilities designated as a hedge of our net investment.
  Virtually all customer-financing assets earn fixed rates of interest.
Therefore, within industrialized economies, we have historically "locked in" an
interest rate spread by arranging fixed-rate liabilities with similar
maturities as the underlying assets, and we have funded the assets with
liabilities in the same currency. We refer to the effect of these 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/receive-variable-rate interest-rate swaps are often used in
place of more expensive fixed-rate debt. Additionally,
pay-variable-rate/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 risks
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.
  On a consolidated basis, including the impact of our hedging activities,
weighted-average interest rates for 2000, 1999 and 1998 approximated 6.2
percent, 5.6 percent and 6.1 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, 2000, the fair value of our interest rate swaps would
increase or decrease by approximately $16 million. Because the fair value of
our debt instruments has been severely constrained by our current debt ratings,
normal changes in interest rates will not materially affect the fair value of
our debt instruments.
  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.
  As described above, the downgrades of our debt during 2000 significantly
reduced our access to capital markets. Furthermore, the specific downgrade of
our debt on December 1, 2000 triggered the repurchase of a number of derivative
contracts which were in place at that time, and further downgrades could
require the Company to repurchase additional outstanding contracts. Therefore,
the Company's ability to continue to effectively manage the risks associated
with interest rate and foreign currency fluctuations, including our ability to
continue effectively employing our match funding strategy, is severely
constrained, and we anticipate increased volatility in our results of
operations due to market changes in interest rates and foreign currency rates.

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 2000 10-K filed with
the SEC on June 7, 2001. We do not intend to update these forward-looking
statements.

                                                                              15


<PAGE>

Consolidated Statements of Operations


<TABLE>
<CAPTION>
Year ended December 31 (in millions, except per-share data)                 2000   1999*    1998*
-------------------------------------------------------------------------------------------------
<S>                                                                     <C>      <C>     <C>
Revenues
Sales                                                                   $10,059  $10,441 $10,668
Service, outsourcing, and rentals                                         7,718    8,045   7,783
Finance income                                                              924    1,081   1,142
-------------------------------------------------------------------------------------------------
Total Revenues                                                           18,701   19,567  19,593
-------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales                                                             6,197    5,944   5,880
Inventory charges                                                            90        -     113
Cost of service, outsourcing, and rentals                                 4,813    4,599   4,323
Equipment financing interest                                                605      547     570
Research and development expenses                                         1,044      992   1,035
Selling, administrative and general expenses                              5,649    5,292   5,343
Restructuring charge and asset impairments                                  540        -   1,531
Gain on affiliate's sale of stock                                           (21)       -       -
Purchased in-process research and development                                27        -       -
Gain on sale of China operations                                           (200)       -       -
Other, net                                                                  341      285     219
-------------------------------------------------------------------------------------------------
Total Costs and Expenses                                                 19,085   17,659  19,014
-------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations before Income Taxes (Benefits)
   Equity Income and Minorities' Interests                                 (384)   1,908     579
Income taxes (benefits)                                                    (109)     588     145
-------------------------------------------------------------------------------------------------
Income (loss) from Continuing Operations after Income Taxes (Benefits)
   before Equity Income and Minorities' Interests                          (275)   1,320     434
Equity in net income of unconsolidated affiliates                            61       68      74
Minorities' interests in earnings of subsidiaries                            43       49      45
-------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations                                   (257)   1,339     463
Discontinued operations                                                       -        -    (190)
-------------------------------------------------------------------------------------------------
Net Income (Loss)                                                       $  (257) $ 1,339 $   273
-------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
Continuing operations                                                   $ (0.44) $  1.96 $  0.63
Discontinued operations                                                       -        -   (0.29)
-------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share                                         $ (0.44) $  1.96 $  0.34
-------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share
Continuing operations                                                   $ (0.44) $  1.85 $  0.62
Discontinued operations                                                       -        -   (0.28)
-------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share                                       $ (0.44) $  1.85 $  0.34
-------------------------------------------------------------------------------------------------
</TABLE>


The accompanying notes on pages 20 to 47 are an integral part of the
consolidated financial statements.
* As restated, see Note 2.

16


<PAGE>

Consolidated Balance Sheets


<TABLE>
<CAPTION>
December 31 (in millions)                                                              2000    1999*
----------------------------------------------------------------------------------------------------
<S>                                                                                <C>      <C>
Assets
Cash and cash equivalents                                                          $ 1,741  $   126
Accounts receivable, net                                                             2,281    2,633
Finance receivables, net                                                             5,097    4,961
Inventories, net                                                                     1,932    2,290
Equipment on operating leases, net                                                     724      695
Deferred taxes and other current assets                                              1,247    1,230
----------------------------------------------------------------------------------------------------
Total Current Assets                                                                13,022   11,935
Finance receivables due after one year, net                                          7,957    8,058
Land, buildings and equipment, net                                                   2,495    2,456
Investments in affiliates, at equity                                                 1,362    1,615
Intangible and other assets, net                                                     3,061    2,810
Goodwill, net                                                                        1,578    1,657
----------------------------------------------------------------------------------------------------
Total Assets                                                                       $29,475  $28,531
----------------------------------------------------------------------------------------------------
Liabilities and Equity
Short-term debt and current portion of long-term debt                              $ 2,693  $ 3,957
Accounts payable                                                                     1,033    1,016
Accrued compensation and benefits costs                                                662      715
Unearned income                                                                        250      186
Other current liabilities                                                            1,630    2,176
----------------------------------------------------------------------------------------------------
Total Current Liabilities                                                            6,268    8,050
Long-term debt                                                                      15,404   11,044
Postretirement medical benefits                                                      1,197    1,133
Deferred taxes and other liabilities                                                 1,876    2,521
Deferred ESOP benefits                                                                (221)    (299)
Minorities' interests in equity of subsidiaries                                        141      127
Obligation for equity put options                                                       32        -
Company-obligated, mandatorily redeemable preferred securities of subsidiary trust
  holding solely subordinated debentures of the Company                                638      638
Preferred stock                                                                        647      669
Common shareholders' equity                                                          3,493    4,648
----------------------------------------------------------------------------------------------------
Total Liabilities and Equity                                                       $29,475  $28,531
----------------------------------------------------------------------------------------------------
</TABLE>


Shares of common stock issued and outstanding at December 31, 2000 were (in
thousands) 668,576. Shares of common stock issued and outstanding at December
31, 1999 were (in thousands) 665,156.
The accompanying notes on pages 20 to 47 are an integral part of the
consolidated financial statements.
* As restated, see Note 2.

                                                                              17


<PAGE>

Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
Year ended December 31 (in millions)                                              2000    1999*    1998*
--------------------------------------------------------------------------------------------------------
<S>                                                                           <C>      <C>      <C>
Cash Flows from Operating Activities
Income (loss) from continuing operations                                      $  (257) $ 1,339  $   463
Adjustments required to reconcile income (loss) from continuing operations to
cash flows from operating activities, net of effects of acquisitions:
    Depreciation and amortization                                                 948      779      727
    Provision for doubtful accounts                                               647      406      303
    Restructuring and other charges                                               646        -    1,644
    Gains on sales of businesses and assets                                      (295)     (97)     (36)
    Cash payments for restructurings                                             (372)    (437)    (332)
    Minorities' interests in earnings of subsidiaries                              43       49       45
    Undistributed equity in income of affiliated companies                        (20)     (68)     (27)
    Decrease (increase) in inventories                                            279       67     (558)
    Increase in on-lease equipment                                               (519)    (238)    (387)
    Increase in finance receivables                                            (1,058)  (1,854)  (1,975)
    Proceeds from securitization of finance receivables                             -    1,495        -
    Increase in accounts receivable                                              (270)    (400)    (596)
    Proceeds from securitization of accounts receivable                           328      288       56
    (Decrease) increase in accounts payable and accrued compensation and
       benefit costs                                                               (3)     (94)     127
    Net change in current and deferred income taxes                              (534)     234     (254)
    Change in other current and non-current liabilities                            22      126      100
    Other, net                                                                   (248)    (301)    (256)
--------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities                              (663)   1,294     (956)
--------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment                               (452)    (594)    (566)
Proceeds from sales of land, buildings and equipment                               44       99       74
Proceeds from sale of China operations                                            550        -        -
Proceeds from sales of other businesses                                            90       65        -
Acquisitions, net of cash acquired                                               (856)    (107)    (380)
Other, net                                                                        (20)     (25)       5
--------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                            (644)    (562)    (867)
--------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in debt                                                              3,573     (183)   2,437
Dividends on common and preferred stock                                          (587)    (586)    (531)
Proceeds from sales of common stock                                                 -      128      126
Settlements of equity put options, net                                            (68)      (5)       -
Repurchase of preferred and common stock                                            -        -     (172)
Dividends to minority shareholders                                                 (7)     (30)      (4)
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                             2,911     (676)   1,856
--------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents                       11       (9)     (29)
--------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents                                           1,615       47        4
Cash and cash equivalents at beginning of year                                    126       79       75
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                      $ 1,741  $   126  $    79
--------------------------------------------------------------------------------------------------------
</TABLE>


The accompanying notes on pages 20 to 47 are an integral part of the
consolidated financial statements.
* As restated, see Note 2.

18


<PAGE>

Consolidated Statements of Shareholders' Equity


<TABLE>
<CAPTION>
                                                                       Accumulated
                                   Common Common Additional                  Other Treasury Treasury
                                    Stock  Stock    Paid-In Retained Comprehensive    Stock    Stock
(In millions, except share data)   Shares Amount    Capital Earnings     Income/1/   Shares   Amount   Total
------------------------------------------------------------------------------------------------------------
<S>                               <C>     <C>    <C>        <C>      <C>           <C>      <C>      <C>
Balance at December 31, 1997*     652,482   $655    $1,075   $3,852       $  (705)       -    $   -  $4,877
------------------------------------------------------------------------------------------------------------
Net income                                                      273                                     273
Net loss during stub period                                      (6)                                     (6)
Translation adjustments                                                                                 (50)
                                                                              (50)                   ------
   Comprehensive income                                                                                 217
Purchase of treasury stock                                                          (3,683)    (172)   (172)
Stock option and incentive plans    3,899      4        69      (65)                 2,364      111     119
Xerox Canada exchangeable stock       350                                               12
Convertible securities                465      1        28      (51)                   898       42      20
Cash dividends declared
   Common stock ($0.72 per
    share)                                                     (475)                                   (475)
   Preferred stock ($6.25 per
    share)                                                      (56)                                    (56)
Premiums from sale of put options                        5                                                5
Tax benefits on benefit plans                           88       10                                      98
------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998*     657,196   $660    $1,265   $3,482       $  (755)    (409)   $ (19) $4,633
------------------------------------------------------------------------------------------------------------
Net income                                                    1,339                                   1,339
Translation adjustments                                                      (957)                     (957)
Minimum pension liability                                                                               (32)
                                                                              (32)                   ------
   Comprehensive income                                                                                 350
Stock option and incentive plans    5,331      6       136       (5)                   270       12     149
Xerox Canada exchangeable stock     1,362
Convertible securities              1,267      1        63      (52)                   139        7      19
Cash dividends declared
   Common stock ($0.80 per
    share)                                                     (532)                                   (532)
   Preferred stock ($6.25 per
    share)                                                      (54)                                    (54)
Settlement of put options                               (5)                                              (5)
Tax benefits on benefit plans                           80        8                                      88
------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999*     665,156   $667    $1,539   $4,186       $(1,744)       -    $   -  $4,648
------------------------------------------------------------------------------------------------------------
Net loss                                                       (257)                                   (257)
Translation adjustments                                                      (430)                     (430)
Minimum pension liability                                                       5                         5
Unrealized loss on securities                                                                            (5)
                                                                               (5)                   ------
   Comprehensive loss                                                                                  (687)
Stock option and incentive plans      940      1        93                                               94
Xerox Canada exchangeable stock        29
Convertible securities              2,451      2        23       (8)                                     17
Cash dividends declared
   Common stock ($0.65 per
    share)                                                     (434)                                   (434)
   Preferred stock ($6.25 per
    share)                                                      (53)                                    (53)
Put options, net                                      (100)                                            (100)
Tax benefits on benefit plans                            1        7                                       8
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000      668,576   $670    $1,556   $3,441       $(2,174)       -    $   -  $3,493
------------------------------------------------------------------------------------------------------------
</TABLE>


/1/ At December 31, 2000 Accumulated Other Comprehensive Income is composed of
    cumulative translation of $(2,142), minimum pension liability of $(27) and
    unrealized loss on securities of $(5).
    The accompanying notes on pages 20 to 47 are an integral part of the
    consolidated financial statements.
*   As restated, see Note 2.

                                                                              19


<PAGE>


Notes to Consolidated Financial Statements
(Dollars in millions, except per-share data and unless otherwise indicated)

  1. Summary of Significant Accounting Policies

Description of Business. Xerox Corporation is The Document Company and a leader
in the global document market, selling equipment and providing document
solutions including hardware, services and software that enhance productivity
and knowledge sharing. Our activities encompass developing, manufacturing,
marketing, servicing, and financing a complete range of document processing
products and solutions.

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 in our
consolidated statement of operations equal to our proportionate share of the
increase or decrease in the subsidiary's equity.
  For acquisitions accounted for by the purchase method, operating results are
included in the consolidated statements of operations from the date of
acquisition. See Note 4 on page 25.

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 later of the beginning
of the year or date of issuance, unless they are antidilutive.

Income (loss) from Continuing Operations before Income Taxes (Benefits), Equity
Income and Minorities' Interests. Throughout these notes to consolidated
financial statements, we refer to the effects of certain changes in estimates
and other adjustments on Income (loss) from Continuing Operations before Income
Taxes (Benefits), Equity Income and Minorities' Interests. For convenience and
ease of reference, that financial statement caption is hereafter referred to as
"pre-tax income (loss)."

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. Estimates are used for, but not limited to: accounting
for residual values; allocation of revenues and fair values in multiple element
arrangements; allowance for doubtful accounts; inventory valuation; merger,
restructuring and other related charges; asset impairments; depreciable lives
of assets; useful lives of intangible assets and goodwill; pension assumptions;
and tax valuation allowances. Future events and their effects can not be
perceived with certainty. Accordingly our accounting estimates require the
exercise of judgment. The accounting estimates used in the preparation of our
Consolidated Financial Statements will change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company's operating environment changes. Actual results could differ from those
estimates.

Changes in Estimates. In the ordinary course of accounting for items such as
revenue allocations and related estimated fair values in multiple element
arrangements, allowances for doubtful accounts, inventory valuation, and
residual values, among others, we make changes in estimates as appropriate in
the circumstances. Such changes and refinements in estimation methodologies are
reflected in reported results of operations and, if material, the approximate
effects of changes in estimates are disclosed in the Notes to our Consolidated
Financial Statements.

Accounting Changes-Accounting for Derivative Instruments. In 1998, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting

20


<PAGE>

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 fair value of
derivatives would be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, depending on the type of hedge
transaction. SFAS No. 133, as amended, is effective for the Company as of
January 1, 2001.
  With the adoption of SFAS No. 133, we will record a net cumulative after-tax
charge of $2 in our statements of operations and a net cumulative after-tax
loss of $19 in Accumulated Other Comprehensive Income. Further, as a result of
recognizing all derivatives at fair value, including the differences between
the carrying values and fair values of related hedged assets, liabilities and
firm commitments, we will recognize a $403 increase in Total Assets and a $424
increase in Total Liabilities.
  We expect that the adoption of SFAS 133 will increase the future volatility
of reported earnings and other comprehensive income. In general, the amount of
volatility will vary with the level of derivative and hedging activities and
the market volatility during any period.

Reclassifications. The FASB Emerging Issues Task Force (EITF) issued a
pronouncement that requires a change in the way we classify shipping and
handling costs billed to customers. Commencing in the fourth quarter of 2000,
the EITF required that all amounts billed to a third party customer related to
product shipping and handling must be classified as revenue, and costs incurred
must be classified as an expense. Shipping and handling amounts billed to
customers have historically been recorded as a reduction of cost of goods sold.
  Prior period financial statements have been reclassified to conform with the
2000 presentation.

Revenue Recognition. In the normal course of business the Company generates
revenue through the sale of equipment, services, and supplies and income
associated with the financing of its equipment sales. Revenue is recognized
when earned. More specifically revenue related to the Company's sales of its
products and services are as follows:

Equipment:
Revenues from the sale of equipment under installment arrangements, from
sales-type leases or on credit are recognized at the time of sale or at the
inception of the lease, respectively. For equipment sales which require the
Company to install the product at the customer location, revenue is recognized
when the equipment has been delivered to and installed at the customer
location. Sales of customer installable and retail channels type products are
recognized upon shipment. Revenues from equipment under other leases and
similar arrangements are accounted for by the operating lease method and are
recognized over the lease term.
  Sales of equipment subject to the Company's operating leases to third party
finance companies (the counter-party) or through structured financings with
third parties are recorded as sales at the time the equipment is accepted by
the counter-party. The counter-party accepts the risks of ownership of the
equipment. Remanufacturing and remarketing of off-lease equipment belonging to
the counter-party is performed by the Company for a fee on a non-discriminatory
basis. In North America these transactions are structured to provide cash
proceeds up front from the counter-party versus collection over time. In Latin
America the counter-party pays the Company a fixed amount each month,
mitigating risk and variability from the cash flow stream.

Services:
Service revenues are derived primarily from maintenance contracts on our
equipment sold to custom-ers and are recognized over the term of the contracts.

Supplies:
Supplies revenue generally is recognized upon shipment.

Financing:
Finance income is earned on an accrual basis under an effective annual yield
method.

  The Company sells its equipment and services on a stand-alone basis and also
enters into bundled arrangements which contain multiple deliverable elements.
These multiple element arrangements typically include equipment, services,
supplies and financing components for which the customer pays a single defined
price for all elements. These arrangements typically also include a variable
service component for copy volumes in excess of stated minimums. When separate
prices are listed in these multiple element arrangements with our customers
they may not be representative of the fair values of those elements because the
prices of the different components of the arrangement may be altered in
customer negotiations,

                                                                              21


<PAGE>

although the aggregate consideration may remain the same. Therefore, revenues
under these arrangements are allocated based upon estimated fair values of each
element, in accordance with Generally Accepted Accounting Principles (GAAP).
The fair value of each element is estimated based on a review of a number of
factors including average selling prices for the elements when they are sold on
a stand-alone basis. The average selling prices are based on management's best
estimates of market conditions and competitive pricing considerations.
  The principal change in estimate relating to such revenue allocations among
multiple elements is made with respect to the estimated fair value of those
elements and their related margins. This is a significant factor considered in
our revenue allocation process along with other factors, such as pricing
changes and customer discounts, which also affect the overall allocation
process. The effect of such changes in estimates of fair values and related
margins in the years 2000, 1999 and 1998 was $193, $202, and $141,
respectively, which generally resulted in increases of sales revenues and
decreases to deferred elements of those arrangements. The net effects of such
allocations when offset by corresponding decreases in the amortization of
deferred revenues was to increase pre-tax income in 2000, 1999 and 1998 by $44,
$102, and $101, respectively.
  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
We conducted a review of our revenue recognition policies during the fourth
quarter of our fiscal year ended December 31, 2000. We have determined that our
policies are in conformance with SAB 101 in all material respects.

Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand
and investments with original maturities of three months or less.

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 realizable
values.

Buildings and Equipment and Equipment on Operating Leases. Our fixed assets are
depreciated over their estimated useful lives. Equipment on operating leases is
depreciated to its estimated residual value. Depreciation is computed using
principally the straight-line method. Significant improvements are capitalized;
maintenance and repairs are expensed. See Notes 7 and 8 on page 28.

Goodwill. Goodwill represents the cost of acquired businesses in excess of the
fair value of identifiable 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, 2000 and 1999 was $220 and $176, respectively.

Classification of Commercial Paper and Bank Notes Payable. As of December 31,
2000, all indebtedness is classified as a short-term or long-term liability
based upon its contractual maturity date. In prior years, it was our policy to
classify as long-term debt that portion of commercial paper and notes payable
that was intended to match fund finance receivables due after one year to the
extent that we had the ability under our revolving credit agreement to
refinance such commercial paper and notes payable on a long-term basis. See
Note 12 on page 32.

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 gains/(losses) were $99, $(1)
and $(29) in 2000, 1999 and 1998, respectively, and are included in Other, net
in the consolidated statements of operations.

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

22


<PAGE>

 2.  Restatement

We have restated our Consolidated Financial Statements for the fiscal years
ended December 31, 1999 and 1998 as a result of two separate investigations
conducted by the Audit Committee of the Board of Directors. These
investigations involved previously disclosed issues in our Mexico operations
and a review of our accounting policies and procedures and application thereof.
As a result of these investigations, it was determined that certain accounting
practices and the application thereof misapplied GAAP and certain accounting
errors and irregularities were identified. The Company has corrected the
accounting errors and irregularities in its Consolidated Financial Statements.
The Consolidated Financial Statements have been adjusted as follows:
  In fiscal 2000 the Company had initially recorded charges totaling $170 ($120
after taxes) which arose from imprudent and improper business practices in
Mexico that resulted in certain accounting errors and irregularities. Over a
period of years, several senior managers in Mexico had collaborated to
circumvent certain of Xerox's accounting policies and administrative
procedures. The charges related to provisions for uncollectible long-term
receivables, the recording of liabilities for amounts due to concessionaires
and, to a lesser extent, for contracts that did not fully meet the requirements
to be recorded as sales-type leases. The investigation of the accounting issues
discovered in Mexico has been completed. The Company has restated its prior
year Consolidated Financial Statements to reflect reductions to pre-tax income
of $53 and $13 in 1999 and 1998, respectively. It is not practical to determine
what portion, if any, of the approximate remaining $101 of the Mexican charge
reflected in adjusted 2000 results of operations relates to prior years.
  In connection with our acquisition of the remaining 20 percent of Xerox
Limited from Rank Group, Plc in 1997, we recorded a liability of $100 for
contingencies identified at the date of acquisition. During 1998, we determined
that the liability was no longer required. During 1998 and 1999, we charged to
the liability certain expenses incurred as part of the consolidation of our
European back-office operations. This reversal should have been recorded as a
reduction of Goodwill and Deferred tax assets. Therefore, we have restated our
previously reported Consolidated Financial Statements to reflect decreases of
$67 to Goodwill and $33 of Deferred tax assets and increases in Selling,
administrative and general expenses of $76 in 1999 and $24 in 1998.
  In addition to the above items, we have made adjustments in connection with
certain misapplications of GAAP under SFAS No. 13, "Accounting for Leases."
These adjustments primarily relate to the accounting for lease modifications
and residual values as well as certain other items.
  The following table presents the effects of all of the aforementioned
adjustments on pre-tax income (loss).


<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                              2000     1999    1998
             ------------------------------------------------------
             <S>                            <C>    <C>      <C>
             Increase (decrease) to pre-tax
             income (loss):
               Mexico                         $ 69   $ (53)  $ (13)
               Rank Group acquisition            6     (76)    (24)
               Lease issues, net                87      83    (165)
               Other, net                       10     (82)     18
             ------------------------------------------------------
             Total                            $172   $(128)  $(184)
             ------------------------------------------------------
</TABLE>


  These adjustments resulted in the cumulative net reduction of Common
shareholders' equity and Consolidated Tangible Net Worth (as defined in our $7
Billion Revolving Credit Agreement) of $137 and $76, respectively, as of
December 31, 2000.
  Retained earnings at December 31, 1997 was restated from $3,960 to $3,852 as
a result of the effect of these aforementioned adjustments on years prior to
1998.
  The following tables present the impact of the adjustments and restatements
on a condensed basis.


<TABLE>
<CAPTION>
                                                           Amount
                                                       Previously       As
                                                         Reported Adjusted
                                                       ---------  -------
      (in millions, except per share amounts)
      Year ended December 31, 2000:*
      <S>                                              <C>        <C>
      Statement of operations:
         Revenues                                        $18,632  $18,701
         Costs and expenses                               19,188   19,085
         Income (loss) from continuing operations           (384)    (257)
         Basic loss per share                            $ (0.63) $ (0.44)
         Diluted loss per share                          $ (0.63) $ (0.44)
      Balance Sheet:
         Current finance receivables, net                $ 5,141  $ 5,097
         Inventories, net                                  1,930    1,932
        Equipment and operating leases, net                  717      724
         Deferred taxes and
          other current assets                             1,284    1,247
         Finance receivables due after one year, net       8,035    7,957
         Intangible and other assets, net                  3,062    3,061
         Goodwill, net                                     1,639    1,578
         Other current liabilities                         1,648    1,630
         Deferred taxes and other liabilities              1,933    1,876
         Common shareholders' equity                       3,630    3,493
</TABLE>


                                                                              23


<PAGE>


<TABLE>
<CAPTION>
                                                        Amount
                                                       Previously      As
                                                       Reported   Restated
                                                          -------  -------
      (in millions, except per share amounts)
      <S>                                              <C>        <C>
      Year ended December 31, 1999:**
      Statement of operations:
         Revenues                                      $19,548    $19,567
         Costs and expenses                             17,512     17,659
         Income (loss) from continuing operations        1,424      1,339
         Basic earnings per share                      $  2.09    $  1.96
         Diluted earnings per share                    $  1.96    $  1.85
      Balance Sheet:
         Accounts receivable, net                      $ 2,622    $ 2,633
         Current finance receivables, net                5,115      4,961
         Inventories, net                                2,285      2,290
         Equipment and operating leases, net               676        695
         Finance receivables due after one year, net     8,203      8,058
         Intangible and other assets, net                2,831      2,810
         Goodwill, net                                   1,724      1,657
         Other current liabilities                       2,163      2,176
         Deferred taxes and other liabilities            2,623      2,521
         Common shareholders' equity                     4,911      4,648
      Year ended December 31, 1998:**
      Statement of operations:
         Revenues                                      $19,747    $19,593
         Costs and expenses                             18,984     19,014
         Income (loss) from continuing operations          585        463
         Basic earnings per share                      $  0.82    $  0.63
         Diluted earnings per share                    $  0.80    $  0.62
</TABLE>


 * As reported in the Company's unaudited financial statements included in its
   report on Form 8-K dated April 19, 2001.
** Revenues and costs and expenses have been reclassified to reflect the Change
   in classification of shipping and handling costs as discussed in Note 1.

  3. Restructuring

March 2000 Restructuring. In March 2000, we announced details of a worldwide
restructuring program. In connection with this program, we initially recorded a
pre-tax provision of $596 ($423 after taxes, including our $18 share of a
restructuring provision recorded by Fuji Xerox, an unconsolidated affiliate).
The $596 pre-tax charge included severance costs related to the elimination of
5,200 positions worldwide. Approximately 65 percent of the positions to be
eliminated are in the U.S., 20 percent are in Europe, and the remainder are
predominantly in Latin America. The employment reductions primarily affected
employees in manufacturing, logistics, customer service and back office support
functions. For facility fixed assets to be disposed of, the impairment loss
recognized is based on the fair value less cost to sell, with fair value based
on estimates of existing market prices for similar assets. The inventory
charges relate primarily to the consolidation of distribution centers and
warehouses and the exit from certain product lines.
  Included in the original provision were reserves related to the incurrence of
liabilities due to various third parties and several asset impairment charges.
Liabilities recorded for lease cancellation and other costs originally
aggregated $51 and included $32 for various contractual commitments, other than
facility occupancy leases, that will be terminated early as a result of the
restructuring. The commitments include cancellation of supply contracts and
outsourced vendor contracts. Included in the asset impairment charge of $71
was: $44 for machinery and tooling for products that were discontinued or will
be alternatively sourced; $7 for leasehold improvements at facilities that will
be closed; and $20 of sundry surplus assets, individually insignificant, from
various parts of our business. These impaired assets were primarily located in
the U.S. and the related product lines generated an immaterial amount of
revenue. Approximately $71 of the $90 of inventory charges related to excess
inventory in many product lines created by the consolidation of distribution
centers and warehouses. The remainder was primarily related to the transition
to inkjet technology in our wide format printing business.
  Weakening business conditions and operating results during 2000 required a
re-evaluation of the initiatives announced in March 2000. As a result, we were
unable to, and do not expect to, complete certain actions originally
contemplated at the time that the March 2000 restructuring provision was
recorded. Accordingly, during the fourth quarter of 2000, and in connection
with the turnaround program discussed below, $71 ($47 after taxes), $59 related
to severance costs for 1,000 positions and $12 related to lease cancellation
and other costs, of the original $596 provision, was reversed. The reversals
primarily relate to delays in the consolidation and outsourcing of certain of
our warehousing and logistics operations and the cancellation of certain
European initiatives no longer necessary as a result of higher than expected
attrition.
  As of December 31, 2000, approximately 2,400 employees have left the Company
under the March 2000 restructuring program.

Turnaround Program. During 2000, the significant business challenges that we
began to experience in the second half of 1999 continued to adversely affect
our financial performance. These challenges include: the ineffective execution
of a major sales force realignment, the ineffective consolidation of our U.S.
customer administrative centers, increased competition and adverse economic
conditions.
  These operational challenges, exacerbated by significant technology and
acquisition investments, have led to a net loss in 2000, credit rating agency
downgrades, limited access to capital markets and market-place concerns
regarding our liquidity. In response to these challenges, in October 2000, we
announced a

24


<PAGE>

turnaround program which includes a wide-ranging plan to sell assets, cut costs
and strengthen core operations. Additionally, we are exploring alternatives to
provide financing for customers in a manner that does not involve the Xerox
balance sheet, and over time will provide financing for customers using third
parties. As more fully discussed in Note 5 on page 26, in December 2000, we
sold our operations in China to Fuji Xerox for $550. We are engaged in other
activities which will enhance our liquidity. These activities include asset
sales, strategic alliances, and the sale or outsourcing of certain
manufacturing operations. It is expected that in most cases asset sales will
result in a gain.
  Regarding the cost reductions, we are in the process of finalizing plans
designed to reduce costs by at least $1.0 billion annually. In connection
therewith, during the fourth quarter of 2000, we recorded an additional pre-tax
restructuring provision totaling $105 ($87 after taxes, including our $19 share
of an additional provision recorded by Fuji Xerox) in connection with finalized
initiatives under the turnaround program. This charge included estimated costs
of $71 for severance costs associated with work force reductions related to the
elimination of 2,300 positions worldwide and $34 of asset impairments
associated with the disposition of a non-core business. The severance costs
relate to further streamlining of existing work processes, elimination of
redundant resources and the consolidation of existing activities into other
existing operations.
  The following table summarizes the status of the March 2000 restructuring
reserve and the turnaround program:


<TABLE>
<CAPTION>
                                                   Charges
                                Original           Against 12/31/00
                                 Reserve Reversals Reserve  Balance
             ------------------------------------------------------
             <S>                <C>      <C>       <C>     <C>
             March 2000 restructuring:
             Cash charges
             Severance and
                related costs       $384     $(59)  $(130)    $195
             Lease cancellation
                and other costs       51      (12)    (19)      20
             ------------------------------------------------------
                Subtotal             435      (71)   (149)     215
             Non-cash charges
             Asset impairment         71        -     (71)       -
             Inventory charges        90        -     (90)       -
             ------------------------------------------------------
                Subtotal             161        -    (161)       -
             Currency changes          -        -      (6)      (6)
             ------------------------------------------------------
             Subtotal                596      (71)   (316)     209
             ------------------------------------------------------
             Turnaround Program:
             Severance and
                related costs         71        -       -       71
             Asset impairment         34        -     (34)       -
             ------------------------------------------------------
                Subtotal             105        -     (34)      71
             ------------------------------------------------------
             Total                  $701     $(71)  $(350)    $280
             ------------------------------------------------------
</TABLE>


  With respect to the March 2000 restructuring program as of March 31, 2001,
the remaining liability is $131. All remaining liabilities represent committed
obligations of the Company to be paid primarily during 2001 and are included in
the caption Other current liabilities in the consolidated balance sheet.

  1998 Restructuring. In 1998, we announced a worldwide restructuring program.
In connection with this program, we recorded a pre-tax provision of $1,644.
  As of December 31, 2000, this program has been substantially completed and
the remaining liability balance is $107 after fourth quarter reversals of $11.
The remaining liability is for salary continuance payments and the runoff of
lease cancellation payments. There were no material changes to the program
since its announcement in April 1998. The remaining liability is fully
committed and the majority will be utilized throughout 2001.

 4.  Acquisitions

In January 2000, we and Fuji Xerox completed the acquisition of the Color
Printing and Imaging Division of Tektronix, Inc. (CPID). The aggregate
consideration paid of $925 in cash, which includes $73 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 in accordance with the purchase method of accounting.
  The excess of cash paid over the fair value of net assets acquired has been
allocated to identifiable intangible assets and goodwill using a discounted
cash flow approach by an independent appraiser. The value of the identifiable
intangible assets includes $27 for purchased in-process research and
development which was written off in 2000. This charge represents the fair
value of certain acquired research and development projects that were
determined not to have reached technological feasibility as of the date of the
acquisition and was determined based on a methodology that focused on the
after-tax cash flows of the in-process products and the stage of completion of
the individual research and development projects. Other identifiable intangible
assets are exclusive of intangible assets acquired by Fuji Xerox, and include
the installed customer base ($209), the distribution network ($123), the
existing technology ($103), the workforce ($71), and trademarks ($23). These
identifiable assets are included in Intangibles and other assets in the
Consolidated Balance Sheets.

                                                                              25


<PAGE>

The remaining excess has been assigned to Goodwill, however such amount may be
affected by any post-closing adjustments which could potentially reduce the
purchase price.
  Other identifiable intangible assets and Goodwill are being amortized on a
straight-line basis over their estimated useful lives which range from 7 to 25
years.
  In connection with the CPID acquisition we recorded approximately $45 for
anticipated costs associated with exiting certain activities of the acquired
operations. These activities include: the consolidation of duplicate
distribution facilities; the rationalization of
the service organization; and the exiting of certain lines of the CPID
business. The costs associated with these activities include inventory
write-offs, severance charges, contract cancellation costs and fixed asset
impairment charges. We expect these actions to be completed in 2001.
  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 $22 (including
transaction costs), which is being amortized over 15 years.
  Also during 1999, we paid $62 to increase our ownership in our India
operations from approximately 40 percent to 68 percent. This transaction
resulted in additional goodwill of $48, which is being amortized over 40 years.
  In May 1998, we acquired XLConnect Solutions, Inc., an information technology
services company, and its parent company, Intelligent Electronics, Inc., for
$413 in cash. The transaction resulted in goodwill of $395, which is being
amortized over 25 years. The Company is continuing to integrate XLConnect
Solutions Inc. with its Industry Solutions business segment. This integration
is designed to increase the revenue of our industry solutions operations, and
to achieve cost savings and synergies. While this integration is taking longer
than originally anticipated, the Company believes that events and changes in
circumstances since the acquisition do not presently indicate an impairment of
goodwill. However, the Company intends to continue the integration efforts and
will perform an assessment of the recoverability of goodwill should
circumstances change.

 5.  Divestitures

In December 2000 we sold our China operations to Fuji Xerox for $550. In
connection with the sale, Fuji Xerox assumed $118 of indebtedness. The pre-tax
gain recorded in the fourth quarter of 2000, was $200.
  In June 2000, we sold the U.S. and Canadian commodity paper business,
including an exclusive license for the Xerox brand, to Georgia Pacific and
recorded a pre-tax gain of approximately $40 which is included in Other, net.
In addition to the proceeds from the sale of the business, the Company will
receive royalty payments on future sales of Xerox branded commodity paper by
Georgia Pacific and will earn commissions on Xerox originated sales of
commodity paper as an agent for Georgia Pacific.
  In April 2000, we sold a 25 percent ownership interest in our wholly owned
subsidiary, ContentGuard, to Microsoft, Inc. for $50 and recognized a pre-tax
gain of $23, which is included in Other, net. An additional pre-tax gain of $27
was deferred, pending the resolution of certain performance criteria, and is
included in Unearned income in the Consolidated Balance Sheets. In connection
with the sale, ContentGuard also received $40 from Microsoft for a
non-exclusive license of its patents and other intellectual property and a $25
advance against future royalty income from Microsoft on sales of products
incorporating ContentGuard's technology. The license payment is being amortized
over the life of the license agreement of 10 years and the royalty advance will
be recognized in income as earned.

 6.  Receivables, Net

Finance Receivables. Finance receivables result from installment arrangements
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, 2000, 1999 and 1998
follow:


<TABLE>
<CAPTION>
                                             2000     1999     1998
             ------------------------------------------------------
             <S>                         <C>      <C>      <C>
             Gross receivables           $14,556  $14,478  $15,957
             Unearned income              (1,733)  (1,733)  (2,185)
             Unguaranteed residual
                values                       681      697      617
             Allowance for doubtful
                accounts                    (450)    (423)    (441)
             ------------------------------------------------------
             Finance receivables, net     13,054   13,019   13,948
             Less current portion          5,097    4,961    5,055
             ------------------------------------------------------
             Amounts due after one year,
                net                      $ 7,957  $ 8,058  $ 8,893
             ------------------------------------------------------
</TABLE>


  Contractual maturities of our gross finance receivables subsequent to
December 31, 2000 follow:


<TABLE>
<CAPTION>
                    2001   2002   2003   2004 2005 Thereafter
                  -------------------------------------------
                  <S>    <C>    <C>    <C>    <C>  <C>
                  $5,654 $3,980 $2,706 $1,580 $540        $96
                  -------------------------------------------
</TABLE>


26


<PAGE>

  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.
  Unguaranteed residual values are assigned primarily to our high volume
copying, printing and production publishing products. The assigned values are
generally established in order to result in a normal profit margin in the
subsequent transaction.
  In September 2000, we transferred $457 of finance receivables to a special
purpose entity for cash proceeds of $411 and a retained interest of $46. The
transfer agreement includes a repurchase option; accordingly the proceeds were
accounted for as a secured borrowing. At December 31, 2000 the balance of
receivables transferred was $411 and is included in Finance receivables, net in
the Consolidated Balance Sheets. The remaining secured borrowing balance of
$325 is included in Debt.
  In 1999, we sold $1,495 of finance receivables and recorded a net increase in
finance income of approximately $17 which includes the unfavorable flow-through
impacts. The retained interests remaining from these sales were not material at
December 31, 2000.
  Beginning in 1999 several Latin American affiliates entered into certain
structured transactions involving contractual arrangements which transferred
the risks of ownership of equipment subject to operating leases to third party
finance companies, who are obligated to pay the Company a fixed amount each
month. The Company accounts for these transactions similar to its sales-type
leases. These transactions resulted in sales of $126 and $280 in 2000 and 1999,
respectively. The contribution to Pre-tax income resulting from these
transactions was $92 and $155 in 2000 and 1999, respectively.

Finance Interest Rates
  Financing income is determined by the discount rate applied to minimum
contract payments, excluding service and supplies, used in the estimation of
the fair value of the equipment. Finance interest rates include the
aforementioned discount rates in customer arrangements, as well as related
sources of income. Over the years, the Company's finance interest rates have
changed as a result of a number of factors including money market conditions;
the economic environment; debt coverage; return on equity; debt to equity
ratios and other external factors which are particularly relevant to our
financing business. During the period of 1998 to 2000 such finance interest
rates as a percentage of the average finance receivables portfolio and the
Company's average cost of funds used in our customer financing activities were:


<TABLE>
<CAPTION>
                                                2000 1999 1998
                 ---------------------------------------------
                 <S>                            <C>  <C>  <C>
                 Average Finance Interest Rates 8.3% 9.2% 9.3%
                 ---------------------------------------------
                 Average Cost of Funds          5.4% 4.7% 5.1%
                 ---------------------------------------------
</TABLE>


  In line with market comparables, the Company's financing operations are
targeted to achieve a 15 percent return on equity. The Company periodically
reviews, and may change, the discount rates in order to be consistent with this
objective and to reflect the estimated fair value of the financing component in
its lease arrangements. Changes in the rate applied to a bundled arrangement
may affect one or more elements of the arrangement. In general, the following
changes in discount rates are reflected as reciprocal changes in equipment
revenues, partially offset by the resulting change in customer finance income.
  Such changes in accounting estimate had the following approximate effects on
pre-tax income (loss):


<TABLE>
<CAPTION>
                  Increase/(Decrease)           2000 1999 1998
                  --------------------------------------------
                  <S>                           <C>  <C>  <C>
                  Effect of changes in discount
                     rates/1/                    $24 $101 $128
                  --------------------------------------------
</TABLE>

1 Represents the impact of changes in customer finance rate estimates net of
  amortization of the related cumulative unearned income effects.

Accounts Receivable. In 2000, we entered into agreements to sell, on an ongoing
basis, a defined pool of accounts receivable to special purpose entities. At
December 31, 2000, the total pool of accounts receivable transferred was
approximately $900. The special purpose entities, in turn, sell participating
interests in such accounts receivable to investors up to a maximum amount of
$330. Under the terms of the agreement, new receivables are added to the pool
as collections reduce previously sold accounts receivable. Investors have a
priority collection interest in the entire pool of receivables, and as a
result, we have retained credit risk to the extent the pool exceeds the amount
sold to investors. We continue to service the receivables on behalf of the
special purpose entities and receive a servicing fee adequate to compensate for
our responsibilities.
  At December 31, 2000, $328 in net proceeds were received from sales of
participating interests to investors and were recorded as a reduction in
Accounts receivable, net in the Consolidated Balance Sheets. The earnings
impact related to the receivables sold under these agreements was not material.

                                                                              27


<PAGE>

  Our retained interests, which are included in Accounts receivable, net, are
recorded at fair value using estimates of dilution based on historical
experience. These estimates are adjusted regularly based on actual experience
with the pool, including defaults and credit deterioration.
  If historical dilution percentages were to increase one percentage point, the
value of the Company's retained interest would be reduced by approximately $9.
  Allowances for doubtful accounts on our accounts receivable balances at
December 31, 2000, 1999 and 1998 amounted to $282, $137 and $102, respectively.

 7.  Inventories and Equipment on Operating Leases, Net

The components of inventories at December 31, 2000, 1999 and 1998 follow:


<TABLE>
<CAPTION>
                  2000   1999   1998
------------------------------------
<S>             <C>    <C>    <C>
Finished goods  $1,439 $1,805 $1,929
Work in process    147    122    111
Raw materials      346    363    464
------------------------------------
Inventories     $1,932 $2,290 $2,504
------------------------------------
</TABLE>


  Equipment on operating leases and similar arrangements consists of our
business equipment products that are rented to customers and are depreciated to
estimated residual value. Equipment on operating leases and the related
accumulated depreciation at December 31, 2000, 1999 and 1998 follow:


<TABLE>
<CAPTION>
                                 2000   1999   1998
---------------------------------------------------
<S>                            <C>    <C>    <C>
Equipment on operating leases  $2,124 $1,777 $2,057
Less: Accumulated depreciation  1,400  1,082  1,260
---------------------------------------------------
Equipment on operating leases,
   net                         $  724 $  695 $  797
---------------------------------------------------
</TABLE>


  We sold equipment subject to operating leases and similar arrangements to
third party finance companies for cash in the amounts of $22, $120 and $74 in
2000, 1999 and 1998, respectively. The contribution to Pre-tax income resulting
from these transactions was $9, $65 and $24 in 2000, 1999 and 1998,
respectively.
  Depreciable lives vary from two to four years. Our business equipment
operating lease terms vary, generally from 12 to 36 months. Scheduled minimum
future rental revenues on operating leases with original terms of one year or
longer are:



<TABLE>
<CAPTION>
 2001   2002 2003 Thereafter
----------------------------
<C>     <C>  <C>  <C>
   $320 $151  $71        $43
----------------------------
</TABLE>


  Total contingent rentals, principally usage charges in excess of minimum
allowances relating to operating leases, for the years ended December 31, 2000,
1999 and 1998 amounted to $120, $163 and $161, respectively.

 8.  Land, Buildings and Equipment, Net

The components of land, buildings and equipment, net at December 31, 2000, 1999
and 1998 follow:


<TABLE>
<CAPTION>
                        Estimated
                           Useful
                            Lives
                          (Years)   2000   1999   1998
------------------------------------------------------
<S>                    <C>        <C>    <C>    <C>
Land                              $   70 $   66 $   80
Buildings and building
   equipment             25 to 50  1,064  1,087    973
Leasehold
   improvements        Lease term    426    434    425
Plant machinery           4 to 12  1,981  1,897  1,926
Office furniture
   and equipment          3 to 15  1,304  1,339  1,299
Other                     3 to 20    199    235    260
Construction in
   progress                          295    328    283
------------------------------------------------------
Subtotal                           5,339  5,386  5,246
------------------------------------------------------
Less accumulated
   depreciation                    2,844  2,930  2,880
------------------------------------------------------
Land, buildings and
   equipment, net                 $2,495 $2,456 $2,366
------------------------------------------------------
</TABLE>


  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, 2000, 1999 and 1998 amounted to $344,
$397 and $436, respectively. Future minimum operating lease commitments that
have remaining non-cancelable lease terms in excess of one year at December 31,
2000 follow:


<TABLE>
<CAPTION>
 2001   2002 2003 2004 2005 Thereafter
--------------------------------------
<S>     <C>  <C>  <C>  <C>  <C>
   $290 $238 $193 $155 $132       $426
--------------------------------------
</TABLE>


  In certain circumstances, we sublease space not currently required in
operations. Future minimum -sub-lease income under leases with non-cancelable
terms in excess of one year amounted to $50 at December 31, 2000.
  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. Xerox has the right to terminate this agreement with six months'
notice to EDS. Minimum payments due EDS under the contract follow:


<TABLE>
<CAPTION>
 2001   2002 2003 2004
----------------------
<S>     <C>  <C>  <C>
   $217 $198 $183  $95
----------------------
</TABLE>


28


<PAGE>

  9. 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, 2000, 1999
and 1998 follow:


<TABLE>
<CAPTION>
                             2000   1999   1998
------------------------------------------------
<S>                        <C>    <C>    <C>
Fuji Xerox                 $1,259 $1,513 $1,354
Other investments             103    102    102
------------------------------------------------
Investments in affiliates,
   at equity               $1,362 $1,615 $1,456
------------------------------------------------
</TABLE>


  Xerox Limited owned 50 percent of the outstanding stock of Fuji Xerox, a
corporate joint venture with Fuji Photo Film Co., Ltd. (Fujifilm) at December
31, 2000. See Note 20 on page 46. Fuji Xerox is headquartered in Tokyo and
operates in Japan and other areas of the Pacific Rim, Australia and New
Zealand. Condensed financial data of Fuji Xerox for its last three fiscal years
follow:


<TABLE>
<CAPTION>
                                      2000   1999   1998
---------------------------------------------------------
<S>                                 <C>    <C>    <C>
Summary of Operations
Revenues                            $8,401 $7,751 $6,809
Costs and expenses                   8,115  7,440  6,506
---------------------------------------------------------
Income before income taxes             286    311    303
Income taxes                           146    201    195
---------------------------------------------------------
Net income                          $  140 $  110 $  108
---------------------------------------------------------
Balance Sheet Data
Assets
Current assets                      $3,162 $3,521 $2,760
Non-current assets                   3,851  3,521  3,519
---------------------------------------------------------
Total assets                        $7,013 $7,042 $6,279
---------------------------------------------------------
Liabilities and Shareholders'
   Equity
Current liabilities                 $3,150 $2,951 $2,628
Long-term debt                         445    297    234
Other non-current liabilities          852    951    895
Shareholders' equity                 2,566  2,843  2,522
---------------------------------------------------------
Total liabilities and shareholders'
   equity                           $7,013 $7,042 $6,279
---------------------------------------------------------
</TABLE>


 10. Segment Reporting

In the first quarter of 2000, we completed the realignment of our operations to
better align the Company to serve its diverse customers/distribution channels
and to provide an industry-oriented focus for global document services and
solutions. As a result of this realignment, our reportable segments have been
revised accordingly and are as follows: Industry Solutions, General Markets,
Developing Markets and Other businesses.
  The Industry Solutions operating segment (ISO) covers the direct sales and
service organizations in North America and Europe. It is 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.
  The General Markets operating segment (GMO) includes sales agents in North
America, concessionaires in Europe and our Channels Group which includes
retailers and resellers. It is 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, it has
responsibility for product development and acquisition for its markets,
providing customer and channel-ready products and solutions.
  The Developing Markets operating segment (DMO) includes operations in Latin
America, Russia, India, the Middle East and Africa. It 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.
  Other businesses includes several units, none of which met the thresholds for
separate segment reporting. The revenues included in this group are primarily
from Xerox Supplies Group (XSG) and Xerox Engineering Systems (XES) and
corporate inter-segment eliminations.
  All corporate and shared service unit expenses, including interest and
depreciation, have been allocated to the operating segments.
  Other businesses' total assets include XES, XSG, deferred tax assets, which
have not been allocated, the investment in Fuji Xerox and the remaining
investments in discontinued operations. The accounting policies of the
operating segments are the same as those described in the summary of
significant accounting policies.
  It is not practicable to discern the segment information for 1998 for the
above segments due to internal reorganizations. Accordingly, 1998 realigned
segment amounts have not been presented.

                                                                              29


<PAGE>

Operating segment profit or loss information for the years ended December 31,
2000 and 1999 for our realigned segments is as follows:


<TABLE>
<CAPTION>
                                                        Industry General Developing      Other
                                                       Solutions Markets    Markets Businesses   Total
------------------------------------------------------------------------------------------------------
<S>                                                    <C>       <C>     <C>        <C>        <C>
2000
Information about profit or loss
   Revenues from external customers                     $ 8,619  $4,827     $2,533     $1,798  $17,777
   Finance income                                           529     238        157          -      924
   Intercompany revenues                                     38     215          -       (253)       -
      Total segment revenues                              9,186   5,280      2,690      1,545   18,701
   Depreciation and amortization                            584     227        132          5      948
   Interest expense                                         584     272        165         10    1,031
   Segment profit (loss)/1/                                 110    (126)      (116)       194       62
   Earnings (loss) of non-consolidated affiliates/2/         (1)      -          -         99       98
Information about assets
   Investments in non-consolidated affiliates                16       -          7      1,339    1,362
   Total assets                                          18,662   3,129      4,470      3,214   29,475
   Capital expenditures                                     184     137         79         52      452
1999/3/
Information about profit or loss
   Revenues from external customers                     $ 9,463  $4,489     $2,542     $1,992  $18,486
   Finance income                                           622     249        210          -    1,081
   Intercompany revenues                                     60     132          -       (192)       -
      Total segment revenues                             10,145   4,870      2,752      1,800   19,567
   Depreciation and amortization                            486     182        106          5      779
   Interest expense                                         488     189        120          6      803
   Segment profit                                         1,328     162        214        204    1,908
   Earnings (loss) of non-consolidated affiliates             4       -         (5)        69       68
Information about assets
   Investments in non-consolidated affiliates                25       -          8      1,582    1,615
   Total assets                                          18,487   1,703      4,636      3,705   28,531
   Capital expenditures                                     300     153         94         47      594
------------------------------------------------------------------------------------------------------
</TABLE>


/1/ Segment profit (loss) excludes the impact of the 2000 restructuring charge
    $(619), the purchased in-process research and development $(27), and the
    gain on sale of our China operations $200.
/2/ Excludes our $37 share of a restructuring charge recorded by Fuji Xerox.
/3/ 1999 amounts as restated, see Note 2.

Products and services and geographic area data follow:


<TABLE>
<CAPTION>
                                                                       Revenues
---------------------------------------------------------------------------------------
                                                                   2000    1999    1998
---------------------------------------------------------------------------------------
<S>                                                             <C>     <C>     <C>
Information about products and services
   Black and white office and small office/home office (SOHO)   $ 7,410 $ 8,150 $ 8,384
   Black and white production                                     4,940   5,904   5,954
   Color copying and printing                                     2,897   1,851   1,726
   Other products and services                                    3,454   3,662   3,529
---------------------------------------------------------------------------------------
Total                                                           $18,701 $19,567 $19,593
---------------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
                                          Revenues          Long-Lived Assets
-------------------------------------------------------------------------------
                                      2000    1999    1998   2000   1999   1998
-------------------------------------------------------------------------------
<S>                                <C>     <C>     <C>     <C>    <C>    <C>
Information about Geographic Areas
United States                      $10,397 $10,585 $10,211 $2,282 $2,228 $2,085
Europe                               4,870   5,414   5,237    968    616    503
Other Areas                          3,434   3,568   4,145    600    751    804
-------------------------------------------------------------------------------
Total                              $18,701 $19,567 $19,593 $3,850 $3,595 $3,392
-------------------------------------------------------------------------------
</TABLE>


30


<PAGE>

Operating segment profit or loss information, using the prior years' basis of
presentation, for the years ended December 31, 2000, 1999, and 1998 is as
follows:


<TABLE>
<CAPTION>
                                                                        Paper
                                                           Core   Fuji    and
                                                       Business  Xerox  Media   Other   Total
---------------------------------------------------------------------------------------------
<S>                                                    <C>      <C>    <C>    <C>     <C>
2000
Information about profit or loss
   Revenues from external customers                    $14,493       - $1,156 $2,128  $17,777
   Finance income                                          918       -      -      6      924
   Intercompany revenues                                  (294)      -      -    294        -
                                                       --------------------------------------
      Total segment revenues                            15,117       -  1,156  2,428   18,701
   Depreciation and amortization                           943       -      -      5      948
   Interest expense                                      1,031       -      -      -    1,031
   Segment profit (loss)/1/                                352       -     85   (375)      62
   Earnings (loss) of non-consolidated affiliates/2/         4  $  107      -    (13)      98
Information about assets
   Investments in non-consolidated affiliates               71   1,259      -     32    1,362
   Total assets                                         26,224   1,259     69  1,923   29,475
   Capital expenditures                                    430       -      -     22      452
---------------------------------------------------------------------------------------------
1999/4/
Information about profit or loss
   Revenues from external customers                    $15,501       - $1,148 $1,837  $18,486
   Finance income                                        1,071       -      -     10    1,081
   Intercompany revenues                                  (206)      -      -    206        -
                                                       --------------------------------------
      Total segment revenues                            16,366       -  1,148  2,053   19,567
   Depreciation and amortization                           774       -      -      5      779
   Interest expense                                        803       -      -      -      803
   Segment profit (loss)                                 1,886       -     62    (40)   1,908
   Earnings of non-consolidated affiliates                  13  $   55      -      -       68
Information about assets
   Investments in non-consolidated affiliates              102   1,513      -      -    1,615
   Total assets                                         25,036   1,513     86  1,896   28,531
   Capital expenditures                                    580       -      -     14      594
---------------------------------------------------------------------------------------------
1998/4/
Information about profit or loss
   Revenues from external customers                    $15,623       - $1,162 $1,666  $18,451
   Finance income                                        1,133       -      -      9    1,142
   Intercompany revenues                                  (326)      -      -    326        -
                                                       --------------------------------------
      Total segment revenues                            16,430       -  1,162  2,001   19,593
   Depreciation and amortization                           709       -      -     18      727
   Interest expense                                        749       -      -      -      749
   Segment profit (loss)/3/                              2,240       -     58    (75)   2,223
   Earnings of non-consolidated affiliates/2/               19  $   72      -      1       92
Information about assets
   Investments in non-consolidated affiliates               81   1,354      -     21    1,456
   Total assets                                         25,842   1,354     84  2,348   29,628
   Capital expenditures                                    539       -      -     27      566
---------------------------------------------------------------------------------------------
</TABLE>


/1/ Segment profit (loss) excludes the impact of the 2000 restructuring charge
    $(619), the purchased in-process research and development $(27), and the
    gain on sale of our China operations $200.
/2/ Excludes our $37 and $18 share of a restructuring charge recorded by Fuji
    Xerox in 2000 and 1998, respectively.
/3/ Segment profit (loss) excludes the impact of the 1998 restructuring charge
    of $1,644.
/4/ 1999 and 1998 amounts as restated, see Note 2.

                                                                              31


<PAGE>

 11. Discontinued Operations

Our remaining investment in our Insurance and Other Financial Services (IOFS)
and Third-Party Financing and Real Estate discontinued businesses is included
in the Consolidated Balance Sheets at December 31, 2000 and 1999 as follows:


<TABLE>
<CAPTION>
                Balance Sheet Caption                2000   1999
                ------------------------------------------------
                <S>                                  <C>  <C>
                Intangible and other assets          $534 $1,130
                Long-term debt                          -     50
                Deferred taxes and other liabilities    -    378
                ------------------------------------------------
                Net investment                       $534 $  702
                ------------------------------------------------
</TABLE>


The majority of the remaining investment relates to a $462 performance-based
instrument received from the sale of one of the Talegen Holdings, Inc.
(Talegen) insurance companies, The Resolution Group, Inc. (TRG). The instrument
is Class 2 preferred stock of TRG. TRG has two classes of stock outstanding.
The Class 1 shares are 100 percent owned by Fairfax Financial Holdings Limited,
one of the largest insurers in North America. We own substantially all of the
Class 2 shares. The terms of the performance criteria relate to TRG's available
cash flow as defined. Commencing in January 2001, the Class 2 shareholders are
entitled to receive 72.5 percent of the available cash and the Class 1 holder
receives the remaining 27.5 percent. An initial distribution of $4 was received
by us in January 2001. Current projections indicate that we expect to fully
recover the remaining $458 by 2018.
  Xerox Financial Services, Inc. (XFSI), a wholly owned subsidiary, continues
to provide aggregate excess of loss reinsurance coverage (the Reinsurance
Agreements) to one of the former Talegen units and TRG through Ridge
Reinsurance Limited (Ridge Re), a wholly owned subsidiary of XFSI. The coverage
limits for these two remaining Reinsurance Agreements total $578.
  Both the Company and XFSI have guaranteed that Ridge Re will meet all of its
financial obligations under the two remaining Reinsurance Agreements. In April
2001 we replaced $660 of letters of credit, which supported Ridge Re ceded
reinsurance obligations, with trusts which include the Ridge Re investment
portfolio of $405 plus approximately $255 in cash. These trusts are required to
provide security with respect to aggregate excess of loss reinsurance
obligations under the two remaining Reinsurance Agreements.

 12. Debt

Short-Term Debt. Short-term borrowings data at December 31, 2000 and 1999
follow:


<TABLE>
<CAPTION>
                                    Weighted Average
                                   Interest Rates at
                                            12/31/00   2000   1999
             -----------------------------------------------------
             <S>                   <C>               <C>    <C>
             Notes payable                    10.20% $  169 $    -
             Commercial paper                  7.01     141      -
             -----------------------------------------------------
             Total short-term debt                      310      -
             Current maturities of
                long-term debt                        2,383  3,957
             -----------------------------------------------------
             Total                                   $2,693 $3,957
             -----------------------------------------------------
</TABLE>


Debt classification. Prior to the year 2000 we had employed a match funding
policy for customer financing assets and related liabilities. Under this
policy, the interest and currency characteristics of the indebtedness were, in
most cases, matched to the interest and currency characteristics of the finance
receivables. At December 31, 1999, our debt was classified based on the
expected date of repayment of such indebtedness in accordance with our match
funding policy. Further, at December 31, 1999, certain other short-term
obligations were classified as long-term based on management's intent to
refinance certain of these obligations on a long term basis and the ability to
do so with credit available under the Revolving Credit Agreement (Revolver).
  The full utilization of our Revolver and our recent credit downgrades
significantly changed the nature of our indebtedness and impacted our ability
to continue with our historical match funding policy. We no longer match fund
our indebtedness with cash collections expected to be generated from finance
receivables. We expect to pay down our outstanding obligations as they mature.
Accordingly, at December 31, 2000, our debt has been classified in the
Consolidated Balance Sheets, based on the contractual maturity dates of the
underlying debt instruments. Prior years' balances have not been reclassified.
  The Company believes its liquidity is presently sufficient to meet current
and anticipated needs going forward, subject to the timely implementation and
execution of various business initiatives as discussed in Note 3 on Page 24.

32


<PAGE>

Long-Term Debt. A summary of long-term debt by final maturity date at December
31, 2000 and 1999 follows:


<TABLE>
<CAPTION>
                                          Weighted
                                           Average
                                          Interest
                                          Rates at
                                          12/31/00    2000   1999
              ---------------------------------------------------
              <S>                         <C>      <C>     <C>
              U.S. Operations
              Xerox Corporation
                 (parent company)
              Guaranteed ESOP
                 notes due 2000-2003        7.53%  $   221 $  299
              Notes due 2000                   -         -  2,041
              Notes due 2001                6.50       737    721
              Notes due 2002                7.59       330    230
              Notes due 2003                5.61     1,313  1,398
              Notes due 2004                5.01       483    502
              Notes due 2006                7.25        25      -
              Notes due 2007                7.38        25      -
              Notes due 2011                7.01        50      -
              Notes due 2016                7.20       250    250
              Convertible notes due 2018    3.63       617    601
              Notes due 2038                5.96        25     25
              Revolving credit agreement,
                 maturing in 2002           6.93     4,400      -
              Capital leases and other
                 debt due 2000-2018         8.17        91    120
              ---------------------------------------------------
              Subtotal                               8,567  6,187
              ---------------------------------------------------
              Xerox Credit Corporation
              Notes due 2000                   -         -  2,026
              Notes due 2001                6.66       326    401
              Notes due 2002               2.80/1/     666    668
              Notes due 2003                6.61       460    200
              Notes due 2005               1.50/1/     904      -
              Notes due 2007               2.00/1/     270      -
              Notes due 2008                6.30        25      -
              Notes due 2012                7.09       125      -
              Notes due 2013                6.50        60      -
              Notes due 2014                6.06        50      -
              Notes due 2018                7.00        25      -
              Secured borrowings/2/
                 due 2001-2003              6.70       325      -
              Revolving credit agreement,
                 maturing in 2002           6.94     1,020      -
              Floating rate notes due
                 2048                       6.44        60     60
              ---------------------------------------------------
              Subtotal                               4,316  3,355
              ---------------------------------------------------
              Total U.S. operations                $12,883 $9,542
              ---------------------------------------------------
</TABLE>


1 Weighted average interest rates include Japanese yen bonds of $1,174 and $488
  issued by Xerox Credit Corporation in 2000 and 1999, respectively, with
  interest rates ranging from 1.50-2.00% and 0.80%, respectively.
2 Refer to Note 6 on page 26 for further discussion of secured borrowings.


<TABLE>
<CAPTION>
                                            Weighted
                                             Average
                                            Interest
                                            Rates at
                                            12/31/00    2000    1999
           ---------------------------------------------------------
           <S>                              <C>      <C>     <C>
           International Operations
           Xerox Capital (Europe) plc
           Various obligations, payable in:
           Euros
              due 2000-2008                    5.50% $   698 $   755
           Japanese yen
              due 2001-2005                    0.53      950       -
           U.S. dollars
              due 2000-2008                    6.10    1,025   1,991
           Revolving credit agreement,
              maturing in 2002
              (U.S. Dollars)                   6.96    1,080       -
           ---------------------------------------------------------
           Subtotal                                    3,753   2,746
           ---------------------------------------------------------
           Other International
           Operations
           Various obligations, payable in:
           Canadian dollars
              due 2000-2007                   11.74       55      88
           Pounds sterling
              due 2000-2003                    9.00      187     202
           Italian lire
              due 2000-2001                    4.72      117     133
           Euros
              due 2000-2008                    7.90      159     194
           U.S. dollars
              due 2000-2008                    7.67      128     249
           Revolving credit agreement,
              maturing in 2002
              (U.S. dollars)                   6.83      500       -
           Capital leases and other debt
              due 2000-2004                    6.23        5      20
           ---------------------------------------------------------
           Subtotal                                    1,151     886
           ---------------------------------------------------------
           Total international operations              4,904   3,632
           ---------------------------------------------------------
           Other borrowings deemed
              long-term                                    -   1,827
           ---------------------------------------------------------
           Subtotal                                   17,787  15,001
           Less current maturities                     2,383   3,957
           ---------------------------------------------------------
           Total long-term debt                      $15,404 $11,044
           ---------------------------------------------------------
</TABLE>


Consolidated Long-Term Debt Maturities.
Payments due on long-term debt for the next five years and thereafter follow:


<TABLE>
<CAPTION>
                   2001   2002   2003   2004   2005 Thereafter
                 ---------------------------------------------
                 <S>    <C>    <C>    <C>    <C>    <C>
                 $2,383 $8,994 $2,630 $1,718 $1,010     $1,052
                 ---------------------------------------------
</TABLE>


  Certain of our debt agreements allow us to redeem outstanding debt prior to
scheduled maturity. Outstanding debt issues with call features are classified
in the preceding five-year maturity table in accordance

                                                                              33


<PAGE>

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 liquidity, prevailing economic and business
conditions, and the relative costs of new borrowing.

Convertible Debt. In 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. This
debt contains a put option which requires us to purchase any debenture, at the
option of the holder, on April 21, 2003, for a price of $649 per $1,000
principal. We may elect to settle the obligation in cash, shares of common
stock, or any combination thereof.

Lines of Credit. We have a $7 billion revolving credit agreement with a group
of banks, which matures in October 2002. This revolver is also accessible by
the following wholly owned subsidiaries: Xerox Credit Corporation (up to a $7
billion limit) and Xerox Canada Capital Ltd. and Xerox Capital (Europe) plc (up
to a $4 billion limit) with our guarantee. Amounts borrowed under this facility
are at rates based, at the borrower's option, on spreads above certain
reference rates such as LIBOR. This agreement contains certain covenants the
most restrictive of which require that we maintain a minimum level of tangible
net worth and limit the amounts of outstanding secured borrowings, as
defined in the agreement. We are in compliance with these covenants at December
31, 2000. The balance outstanding under this line of credit was $7 billion at
December 31, 2000. In addition, our foreign subsidiaries had unused committed
long-term lines of credit used to back short-term indebtedness that aggregate
$43 in various currencies at prevailing interest rates.

Guarantees. At December 31, 2000, we have guaranteed the borrowings of our ESOP
and $4,710 of
indebtedness of our foreign subsidiaries.

Interest. Interest paid by us on our short- and long-term debt, amounted to
$1,024, $787 and $859 for the years ended December 31, 2000, 1999 and 1998,
respectively.

  A summary of the cash related changes in
consolidated indebtedness for the three years ended December 31, 2000 follows:


<TABLE>
<CAPTION>
                                        2000       1999       1998
           ---------------------------------------------------------
           <S>                       <C>        <C>         <C>
           Cash proceeds from
              (payments of)
              short-term debt, net    $(1,234)   $(4,140)   $   553
           Cash proceeds from
              long-term debt           10,520      5,446      3,464
           Principal payments on
              long-term debt          (5,713)    (1,489)     (1,580)
           ---------------------------------------------------------
           Total net cash changes in
              debt                   $ 3,573/1/ $  (183)/2/ $ 2,437
           ---------------------------------------------------------
</TABLE>

/1/ Excludes debt of $118, which was assumed by Fuji Xerox in connection with
    the divestiture of our China operations, and accretion of $16 on
    convertible debt.
/2/ Excludes debt of $51 assumed with the increased ownership in our India
    joint venture and accretion of $26 on convertible debt.

 13. 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 credit- worthiness, we consider the risk of 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.
  During 2000 the agencies that assign ratings to our debt downgraded our debt.
These downgrades significantly reduced our access to capital markets.
Furthermore, the specific downgrade of our debt on December 1, 2000 triggered
the repurchases of a number of derivative contracts, which were in place at

34


<PAGE>

that time, and further downgrades could require that we repurchase additional
outstanding contracts. Therefore, our ability to continue to effectively manage
the risks associated with interest rate and foreign currency fluctuations,
including our ability to employ our match funding strategy, has been severely
constrained. These derivative contract repurchases resulted in un-hedged
foreign currency denominated assets and liabilities. We recorded mark-to-market
gains during December 2000 of $69 as a direct result of these un-hedged
exposures.
  None of our hedging activities involves exchange-traded instruments.

Interest Rate Swaps. We enter into interest rate swap agreements to manage
interest rate exposure, although the recent downgrades of our indebtedness have
limited our ability to manage this 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.
As previously disclosed, our credit ratings have been downgraded during 2000.
These downgrades have severely limited our current ability to manage our
exposure to interest rate changes which has historically been managed through
the practice of match funding our finance receivables.
  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. The
transactions performed within each of these three categories enable the
cost-effective management of interest rate exposures. During 2000, the average
notional amount of an interest rate swap agreement was $25.
  The total notional amounts of these transactions at December 31, 2000 and
1999, based on contract maturity, follow:


<TABLE>
<CAPTION>
                                                    2000    1999
                ------------------------------------------------
                <S>                              <C>     <C>
                Commercial paper/bank borrowings $ 4,538 $ 5,352
                Medium-term debt                   8,666  10,493
                Long-term debt                     2,267   4,238
                ------------------------------------------------
                Total                            $15,471 $20,083
                ------------------------------------------------
</TABLE>


  The aggregate notional amounts of interest rate swaps by maturity date and
type at December 31, 2000 and 1999 follow:


<TABLE>
<CAPTION>
    <S>                           <C>     <C>     <C>      <C>     <C>
                                                     2002-   2005-
                                    2000    2001     2004    2018    Total
    -----------------------------------------------------------------------
    2000
    Pay fixed/receive variable    $    -  $1,321  $ 4,490  $1,319  $ 7,130
    Pay variable/receive variable      -   1,677        1       -    1,678
    Pay variable/receive fixed         -   1,540    4,175     948    6,663
    -----------------------------------------------------------------------
    Total                         $    -  $4,538  $ 8,666  $2,267  $15,471
    -----------------------------------------------------------------------
    Memo:
    Interest rate paid                 -    5.74%    5.95%   7.01%    6.04%
    Interest rate received             -    5.08%    5.85%   5.36%    5.55%
    -----------------------------------------------------------------------
    1999
    Pay fixed/receive variable    $2,699  $2,202  $ 6,742  $  340  $11,983
    Pay variable/receive variable    443     550        -       -      993
    Pay variable/receive fixed     2,210     718    3,544     635    7,107
    -----------------------------------------------------------------------
    Total                         $5,352  $3,470  $10,286  $  975  $20,083
    -----------------------------------------------------------------------
    Memo:
    Interest rate paid              5.94%   4.39%    5.41%   6.25%    5.42%
    Interest rate received          5.48%   5.18%    5.38%   6.75%    5.44%
    -----------------------------------------------------------------------
</TABLE>



                                                                              35


<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, 2000 and 1999, we had outstanding forward exchange contracts of $1,788 and
$3,838, respectively. Of the outstanding contracts at December 31, 2000, the
largest single currency represented was the Euro. Contracts denominated in
Euros, Canadian dollars, U.S. dollars, Brazilian reais and Japanese yen
accounted for over 90 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 Operations. 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, 2000, we had a net deferred loss of
$8. 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 Operations. During 2000, the
average notional amount of a forward exchange contract amounted to $14.

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
Operations. At December 31, 2000 and 1999, we had outstanding cross-currency
interest rate swap agreements with aggregate notional amounts of $4,222 and
$3,968, respectively. Of the outstanding agreements at December 31, 2000, the
largest single currency represented was the U.S. dollar. Contracts denominated
in U.S. dollars, British pounds sterling, 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
i
nstruments at December 31, 2000 and 1999 follow:


<TABLE>
<CAPTION>
                                       2000             1999
            -------------------------------------------------------
                                 Carrying    Fair Carrying     Fair
                                   Amount   Value   Amount    Value
            -------------------------------------------------------
            <S>                  <C>      <C>     <C>      <C>
            Cash and cash
               equivalents        $ 1,741 $1,741   $   126 $   126
            Accounts receivable,
               net                  2,281  2,281     2,633   2,633
            Short-term debt         2,693  2,356     3,957   3,957
            Long-term debt         15,404  9,433    11,044  10,882
            Interest rate and
               currency swap
               agreements               -    129         -     (40)
            Forward exchange
               contracts                -    (59)        -     131
            -------------------------------------------------------
</TABLE>


  The fair value amounts for Cash and cash equivalents and Accounts receivable,
net approximate carrying amounts due to the short maturities of these
instruments.
  The fair value of Short and 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 debt prior to scheduled maturity. We are not
required to determine the fair value of our finance receivables.
  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.

36


<PAGE>

 14. 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
----------------------------------------------------------------------------------------------------
                                                                      2000    1999     2000     1999
----------------------------------------------------------------------------------------------------
<S>                                                               <C>      <C>     <C>      <C>
Change in Benefit Obligation
Benefit obligation, January 1                                      $8,418  $8,040  $ 1,060  $ 1,095
Service cost                                                          167     191       24       27
Interest cost                                                         453   1,009       85       77
Plan participants' contributions                                       19      14        -        -
Plan amendments                                                         1       -        -        -
Actuarial (gain)/loss                                                  48     (79)     218      (78)
Currency exchange rate changes                                       (197)   (139)      (2)       2
Divestitures                                                          (15)      -        -        -
Curtailments                                                          (10)     (3)       -        -
Settlements                                                             -       2        -        -
Special termination benefits                                           34      11        4        2
Benefits paid                                                        (663)   (628)     (75)     (65)
----------------------------------------------------------------------------------------------------
Benefit obligation, December 31                                     8,255   8,418    1,314    1,060
----------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets, January 1                                8,771   7,958        -        -
Actual return on plan assets                                          651   1,422        -        -
Employer contribution                                                  84      96       75       65
Plan participants' contributions                                       19      14        -        -
Currency exchange rate changes                                       (218)    (91)       -        -
Divestitures                                                          (18)      -        -        -
Benefits paid                                                        (663)   (628)     (75)     (65)
----------------------------------------------------------------------------------------------------
Fair value of plan assets, December 31                              8,626   8,771        -        -
----------------------------------------------------------------------------------------------------
Funded status (including under-funded and non-funded plans)           371     353   (1,314)  (1,060)
Unamortized transition assets                                         (15)    (36)       -        -
Unrecognized prior service cost                                        17      21       (3)      (4)
Unrecognized net actuarial (gain) loss                               (433)   (381)     120      (69)
----------------------------------------------------------------------------------------------------
Net amount recognized                                              $  (60) $  (43) $(1,197) $(1,133)
----------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated balance sheets consist of:
   Prepaid benefit cost                                            $  378  $  377  $     -  $     -
   Accrued benefit liability                                         (468)   (456)  (1,197)  (1,133)
   Intangible asset                                                     3       4        -        -
   Accumulated other comprehensive income                              27      32        -        -
----------------------------------------------------------------------------------------------------
Net amount recognized                                              $  (60) $  (43) $(1,197) $(1,133)
----------------------------------------------------------------------------------------------------
Under-funded or non-funded plans
   Aggregate benefit obligation                                    $  348  $  497  $ 1,314  $ 1,060
   Aggregate fair value of plan assets                             $  180  $  174  $     -  $     -
----------------------------------------------------------------------------------------------------
Weighted average assumptions as of December 31
Discount rate                                                         7.0%    7.4%     7.5%     8.0%
Expected return on plan assets                                        8.9     8.9
Rate of compensation increase                                         3.8     4.2
----------------------------------------------------------------------------------------------------
</TABLE>


                                                                              37


<PAGE>


<TABLE>
<CAPTION>
                                            Pension Benefits     Other Benefits
-------------------------------------------------------------------------------
                                          2000     1999     1998 2000 1999 1998
-------------------------------------------------------------------------------
<S>                                     <C>    <C>      <C>      <C>  <C>  <C>
Components of Net Periodic Benefit Cost
Defined benefit plans
Service cost                            $ 167  $   191  $   172  $ 24 $ 27  $26
Interest cost                             453    1,009      916    85   77   72
Expected return on plan assets           (522)  (1,090)  (1,010)    -    -    -
Recognized net actuarial (gain)/loss        4       11       10     -    1    -
Amortization of prior service cost          4        8        6     -    -    -
Recognized net transition asset           (16)     (18)     (19)    -    2    -
Recognized curtailment/settlement gain    (46)      (9)     (60)    -    -    -
-------------------------------------------------------------------------------
   Net periodic benefit cost               44      102       15   109  107   98
Defined contribution plans                 14       28       32     -    -    -
-------------------------------------------------------------------------------
Total                                   $  58  $   130  $    47  $109 $107  $98
-------------------------------------------------------------------------------
</TABLE>


  Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. For measurement purposes, an 8.5 percent
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 2000. The rate was assumed to decrease to 5.25 percent in 2005
and thereafter.
  A one-percentage-point change in assumed health care cost trend rates would
have the following effects:


<TABLE>
<CAPTION>
                                            One-        One-
                                     percentage- percentage-
                                           point       point
                                        increase    decrease
------------------------------------------------------------
<S>                                  <C>         <C>
Effect on total service and interest
   cost components                           $ 4       $(3)
Effect on postretirement benefit
   obligation                                $75       $(60)
------------------------------------------------------------
</TABLE>


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 contri-butions. 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, 2000
follows:


<TABLE>
<CAPTION>
                                  2000 1999 1998
------------------------------------------------
<S>                               <C>  <C>  <C>
Interest on ESOP Borrowings        $24  $28  $33
------------------------------------------------
Dividends declared on Convertible
   Preferred Stock                 $53  $54  $56
------------------------------------------------
Cash contribution to the ESOP      $49  $44  $41
------------------------------------------------
Compensation expense               $48  $46  $44
------------------------------------------------
</TABLE>


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

 15. Income and Other 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 (loss) before income taxes from continuing operations for the three
years ended December 31, 2000 consists of the following:


<TABLE>
<CAPTION>
                        2000   1999  1998
-----------------------------------------
<S>                   <C>    <C>    <C>
Domestic income       $  49  $1,176 $616
Foreign income (loss)  (433)    732  (37)
-----------------------------------------
Income (loss) before
   income taxes       $(384) $1,908 $579
-----------------------------------------
</TABLE>


38


<PAGE>

  Provisions (benefits) for income taxes from continuing operations for the
three years ended December 31, 2000 consist of the following:


<TABLE>
<CAPTION>
                                           2000 1999   1998
                    ---------------------------------------
                    <S>                  <C>    <C>  <C>
                    Federal income taxes
                       Current           $   8  $168 $ 265
                       Deferred           (131)  166  (152)
                    Foreign income taxes
                       Current              76   124   178
                       Deferred            (77)   51  (201)
                    State income taxes
                       Current              23    52    70
                       Deferred             (8)   27   (15)
                    ---------------------------------------
                    Income taxes         $(109) $588 $ 145
                    ---------------------------------------
</TABLE>


  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, 2000 follows:


<TABLE>
<CAPTION>
                                                 2000  1999  1998
               --------------------------------------------------
               <S>                            <C>     <C>   <C>
               U.S. federal statutory income
                  tax rate                    (35.0)% 35.0% 35.0%
               Foreign earnings and dividends
                  taxed at different rates     40.7   (7.0) (9.0)
               Goodwill amortization            3.0     .7   1.0
               Tax-exempt income               (4.1)  (1.0) (3.0)
               State taxes                      1.6    2.7   6.2
               Audit resolutions              (32.6)     -     -
               Other                           (2.0)    .4  (5.2)
               --------------------------------------------------
               Effective income tax rate      (28.4)% 30.8% 25.0%
               --------------------------------------------------
</TABLE>


  The 2000 effective tax rate of (28.4) percent
includes a tax benefit for the 2000 restructuring, the CPID in-process research
and development write-off, and the tax provision for the gain on sale of the
China operations. Excluding these items, the 2000 effective tax rate is 32.1
percent which is 1.3 percentage points higher than 1999. The increase in the
effective tax rate is due primarily to losses in a low-tax rate jurisdiction
offset by favorable resolution of tax audits.
  The 1999 effective tax rate of 30.8 percent is 0.7 percentage points lower
than 1998 after excluding the 1998 worldwide restructuring program from the
1998 effective tax rate.
  On a consolidated basis, we paid a total of $354, $238 and $217 in income
taxes to federal, foreign and state income-taxing authorities in 2000, 1999 and
1998, respectively.
  Total income tax expense (benefit) for the three years ended December 31,
2000 was allocated as follows:


<TABLE>
<CAPTION>
                                              2000   1999   1998
                ------------------------------------------------
                <S>                         <C>    <C>    <C>
                Income taxes (benefits) on
                   income (loss) from
                   continuing operations    $(109) $ 588  $ 145
                Tax benefit included in
                   minorities' interests/1/   (20)   (20)   (20)
                Discontinued operations         -    (26)   (54)
                Goodwill                      (42)     -      -
                Common shareholders'
                   equity/2/                   39   (106)  (140)
                ------------------------------------------------
                Total                       $(132) $ 436  $ (69)
                ------------------------------------------------
</TABLE>


/1/ Benefit relates to preferred securities as more fully described in Note 17
    on page 43.
/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, 2000 was approximately $5.0 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, except for any actions contemplated by the
Company's turnaround program which are disclosed in Note 3 on page 24. 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, 2000 and 1999 follow:


<TABLE>
<CAPTION>
                                                      2000     1999
             ------------------------------------------------------
             <S>                                  <C>      <C>
             Tax effect of future tax deductions
                Depreciation                      $   386  $   385
                Postretirement medical benefits       448      438
                Restructuring reserves                143      175
                Other operating reserves              162      199
                Allowance for doubtful accounts       170      111
                Deferred compensation                 149      159
                Tax credit carryforwards              159      116
                Research and development              866      641
                Other                                 270      283
                                                  $ 2,753  $ 2,507
             ------------------------------------------------------
                Valuation allowance                   (51)     (49)
             Total                                $ 2,702  $ 2,458
             ------------------------------------------------------
             Tax effect of future taxable income
                Installment sales and leases      $  (872) $  (962)
                Deferred income                    (1,017)    (846)
                Other                                (298)    (348)
             ------------------------------------------------------
             Total                                $(2,187) $(2,156)
</TABLE>


  The valuation allowance for deferred tax assets as of January 1, 1999 was
$53. The net change in the

                                                                              39


<PAGE>

total valuation allowance for the years ended December 31, 2000 and 1999 was an
increase of $2 and a decrease of $4, respectively. The valuation allowance
relates to foreign credit carryforwards and foreign net operating loss
carryforwards for which the Company has concluded it is more likely than not
that these tax credits and net operating loss carryforwards will not be
realized in the ordinary course of operations.
  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, 2000 and 1999 amounted to $450 and
$478, respectively.
  Although realization is not assured, we have concluded that it is more likely
than not that the deferred tax assets for which a valuation allowance was
determined to be unnecessary, will be realized in the ordinary course of
operations based on scheduling of deferred tax liabilities and income from
operating activities. The amount of the net deferred tax assets considered
realizable, however, could be reduced in the near term if actual future income
taxes are lower than estimated, or if there are differences in the timing or
amount of future reversals of existing taxable temporary differences. A
substantial portion of our net deferred tax assets are in jurisdictions where
the net operating loss carryforward periods are either unlimited (net deferred
tax asset of $64) or 20 years (net deferred tax asset of $1.2 billion).
  At December 31, 2000, we have tax credit carryforwards for income tax
purposes of $159 available to offset future income taxes, of which $136 is
available to carryforward indefinitely. We also have net operating loss
carryforwards for income tax purposes of $157 that are available to offset
future taxable income through 2007 and $1.0 billion available to offset future
taxable income indefinitely.
  The Company incurs indirect taxes such as property and payroll taxes in the
various countries in which it operates. Changes in estimates for these taxes
occur in the ordinary course of accounting for such items. Changes resulting
from, but not limited to, refinements of tax computations, systems and other
procedural changes as well as other factors amounted to an increase in pre-tax
income (loss) of $17, $35 and $21 in the years 2000, 1999 and 1998,
respectively.
  The Company is also subject to sales and consumption taxes in the various
countries in which it operates. Changes in estimates for these taxes resulting
from structural realignments or other factors amounted to an increase in
pre-tax income (loss) of $11 and $51 in the years 2000 and 1998, respectively.
  Xerox's Brazilian operations have received assessments for indirect taxes
totaling approximately $400 million related principally to the internal
transfer of inventory. We do not agree with these assessments and intend to
vigorously defend our position. We, as supported by the opinion of legal
counsel, do not believe that the ultimate resolution of these assessments will
materially impact the consolidated financial statements.

 16. Litigation

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's motion to set aside the verdict
or, in the alternative, to grant a new trial was denied by the court. The
Company is appealing to the Court of Appeals for the Federal Circuit. Accuscan
is appealing the new trial grant which reduced the verdict from $40 and seeking
a reversal of the jury's finding of no willful infringement. Briefing at the
Court of Appeals for the Federal Circuit is complete and oral argument took
place on May 9, 2001.
  On June 24, 1999, the Company 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 the Company's alleged disposal and/or release of hazardous
substances into the soil, air and groundwater. On July 22, 1999, April 12,
2000, November 30, 2000, and March 31, 2001 respectively, four additional
complaints were filed in the same court on behalf of an additional 79, 141, 76,
and 51 plaintiffs, respectively, with the same claims for damages as the June
1999 action. Three of the four additional cases have been served on the
Company.
  Plaintiffs in all five 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

40


<PAGE>

the municipal drinking water supplied by the City of Pomona and the Southern
California Water Company. Plaintiffs' claims against Registrant include
personal injury, 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.
  The Company denies any liability for the plaintiffs' alleged damages and
intends to vigorously defend these actions. The Company has not answered or
appeared in any of the cases because of an agreement among the parties and the
court to stay these cases pending resolution of several similar cases currently
pending before the California Supreme Court. However, the court recently
directed that the five cases against the Company be coordinated with a number
of other unrelated groundwater cases pending in Southern California.
  A consolidated securities law action entitled In re Xerox Corporation
Securities Litigation is pending in the United States District Court for the
District of Connecticut. Defendants are Registrant, Barry Romeril, Paul Allaire
and G. Richard Thoman, former Chief Executive Officer, and purports to be a
class action on behalf of the named plaintiffs and all other purchasers of
Common Stock of the Company during the period between October 22, 1998 through
October 7, 1999 (Class Period). The amended consolidated complaint in the
action alleges that in violation of Section 10(b) and/or 20(a) of the
Securities Exchange Act of 1934, as amended (34 Act), and Securities and
Exchange Commission Rule 10b-5 thereunder, 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 the 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 consolidated complaint seeks unspecified compensatory
damages in favor of the plaintiffs and the other members of the purported class
against all defend
ants, 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. The defendants' motion for dismissal of the complaint is
pending. The named individual defendants and the Company deny any wrongdoing
and intend to vigorously defend the action.
  Two putative shareholder derivative actions are pending in the Supreme Court
of the State of New York, County of New York on behalf of the Company against
all current members of the Board of Directors (with the exception of Anne M.
Mulcahy) and G. Richard Thoman (in one of the actions) and the Company, as a
nominal defendant. Another, now dismissed, putative shareholder derivative
action was pending in the United States District Court for the District of
Connecticut. Plaintiffs claim breach of fiduciary duties and/or gross
mismanagement related to certain of the alleged accounting practices of the
Company's operations in Mexico. The complaints in all three actions alleged
that the individual named defendants breached their fiduciary duties and/or
mismanaged the Company by, among other things, permitting wrongful
business/accounting practices to occur and inadequately supervising and failing
to instruct employees and managers of the Company. In one of the New York
actions it is claimed that the individual defendants disseminated or permitted
the dissemination of misleading information. In the other New York action it is
also alleged that the individual defendants failed to vigorously investigate
potential and known problems relating to accounting, auditing and financial
functions and to take affirmative steps in good faith to remediate the alleged
problems. In the federal action in Connecticut it was also alleged that the
individual defendants failed to take steps to institute appropriate legal
action against those responsible for unspecified wrongful conduct. Plaintiffs
claim that the Company has suffered unspecified damages. Among other things,
the pending complaints seek unspecified monetary damages, removal and
replacement of the individuals as directors of the Company and/or institution
and enforcement of appropriate procedural safeguards to prevent the alleged
wrongdoing. Defendants filed a motion to dismiss in one of the New York
actions. Subsequently, the parties to the federal action in Connecticut agreed
to dismiss that action without prejudice in favor of the earlier-filed New York
action. The parties also agreed, subject to court approval, to seek
consolidation of the New York actions and a withdrawal, without prejudice, of
the

                                                                              41


<PAGE>

motion to dismiss. On May 10, 2001 the court entered an order which, among
other things, approved that agreement. The individual defendants deny the
wrongdoing alleged in the complaints and intend to vigorously defend the
actions.
  Twelve purported class actions had been pending in the United States District
Court for the District of Connecticut against Registrant, KPMG LLP (KPMG), and
Paul A. Allaire, G. Richard Thoman, Anne M. Mulcahy and Barry D. Romeril. A
court order consolidated these twelve actions and established a procedure for
consolidating any subsequently filed related actions. The consolidated action
purports to be a class action on behalf of the named plaintiffs and all
purchasers of securities of, and bonds issued by, Registrant during the period
between February 15, 1998 through February 6, 2001 (Class). Among other things,
the consolidated complaint generally alleges that each of the Company, KPMG,
the individuals and additional defendants Philip Fishbach and Gregory Tayler
violated Sections 10(b) and/or 20(a) of the 34 Act and Securities and Exchange
Commission Rule 10b-5 thereunder, by participating in a fraudulent scheme that
operated as a fraud and deceit on purchasers of the Company's Common Stock by
disseminating materially false and misleading statements and/or concealing
material adverse facts relating to the Company's Mexican operations and other
matters relating to the Company's financial condition beyond the Company's
Mexican operations. The amended complaint generally alleges that this scheme
deceived the investing public regarding the true state of the Company's
financial condition and caused the named plaintiff and other members of the
alleged Class to purchase the Company's Common Stock and Bonds at artificially
inflated prices. The amended complaint seeks unspecified compensatory damages
in favor of the named plaintiff and the other members of the alleged Class
against the Company, KPMG and the individual defendants, jointly and severally,
including interest thereon, together with reasonable costs and expenses,
including counsel fees and expert fees. Following the entry of the order of
consolidation, at least five additional related class action complaints were
filed in the same Court. In each of these cases, the plaintiffs defined a class
consisting of persons who purchased the Common Stock of the Company during the
period February 15, 1998 through and including February 6, 2001. Some of these
plaintiffs filed objections to the consolidation order, challenging the
appointment of lead plaintiffs and lead and liaison counsel and have separately
moved for the appointment of lead plaintiff and lead counsel. The court has not
rendered a decision with regard to the objections. The individual defendants
and the Company deny any wrongdoing alleged in the complaints and intend to
vigorously defend the actions.
  A lawsuit has been instituted in the Superior Court, Judicial District of
Stamford/Norwalk, Connecticut, by James F. Bingham, a former employee of the
Company against the Company, Barry D. Romeril, Eunice M. Filter and Paul
Allaire. The complaint alleges that he was wrongfully terminated in violation
of public policy because he attempted to disclose to senior management and to
remedy alleged accounting fraud and reporting irregularities. He further claims
that the Company and the individual defendants violated the Company's
policies/commitments to refrain from retaliating against employees who report
ethics issues. The plaintiff also asserts claims of defamation and tortious
interference with a contract. He seeks: (a) unspecified compensatory damages in
excess of $15 thousand, (b) punitive damages, and (c) the cost of bringing the
action and other relief as deemed appropriate by the court. The individuals and
the Company deny any wrongdoing alleged in the complaint and intend to
vigorously defend the action.
  A putative shareholder derivative action is pending in the Supreme Court of
the State of New York, Monroe County against certain current and former members
of the Board of Directors, namely G. Richard Thoman, Paul A. Allaire, B. R.
Inman, Antonia Ax:son Johnson, Vernon E. Jordan Jr., Yotaro Kobayashi, Ralph S.
Larsen, Hilmar Kopper, John D. Macomber, George J. Mitchell, N. J. Nicholas,
Jr., John E. Pepper, Patricia L. Russo, Martha R. Seger and Thomas C. Theobald
(collectively, the "Individual Defendants"), and the Company, as a nominal
defendant. Plaintiff claims the Individual Defendants breached their fiduciary
duties of care and loyalty to the Company and engaged in gross mismanagement by
allegedly awarding former CEO, G. Richard Thoman, compensation including
elements that were unrelated in any reasonable way to his tenure with the
Company, his job performance, or the Company's financial performance. The
complaint further specifically alleges that the Individual Defendants failed to
exercise business judgment in granting Thoman lifetime compensation, a special
bonus award, termination payments, early vesting of stock compensation, and
certain transportation perquisites, all which allegedly constituted gross,
wanton and reckless waste of corporate assets of the Company and its
shareholders. Plaintiff claims that the Company has suffered damages and seeks
judgment against the Individual Defendants in an

42


<PAGE>

amount equal to the sum of the special bonus, the present value of the $800
thousand per year lifetime compensation, the valuation of all options
unexercised upon termination, the cost of transportation to and from France,
and/or an amount equal to costs already incurred under the various compensation
programs, cancellation of unpaid balances of these obligations, and/or
cancellation of unexercised options and other deferred compensation at the time
of his resignation, plus the cost and expenses of the litigation, including
reasonable attorneys', accountants' and experts' fees and other costs and
disbursements. The Individual Defendants deny the wrongdoing alleged in the
complaint and intend to vigorously defend the action.
  A class was recently certified in an action originally filed in the United
States District Court for the Southern District of Illinois last August.
Plaintiffs bring this action on behalf of themselves and an alleged class of
over 25,000 persons who received lump sum distributions from the Company's
Retirement Income Guarantee Plan after January 1, 1990. Plaintiffs assert
violations of ERISA, claiming that the lump sum distributions were improperly
calculated. The damages sought are not specified. The Company has asked the
court to reconsider its certification of the class. The Company denies any
wrongdoing and intends to vigorously defend the action.
  In 2000, the Company was advised that the Securities and Exchange Commission
(SEC) had entered an order of a formal, non-public investigation into our
accounting and financial reporting practices in Mexico and other areas. We are
cooperating fully with the SEC. The Company cannot predict when the SEC will
conclude its investigation or its outcome.

 17. Preferred Securities

As of December 31, 2000, 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 14 on page 37, 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, 2000 and 1999
follows (shares in thousands):


<TABLE>
<CAPTION>
                          2000          1999
-------------------------------------------------
                      Shares Amount Shares Amount
-------------------------------------------------
<S>                   <C>    <C>    <C>    <C>
Convertible Preferred
   Stock               8,260   $647  8,551   $669
-------------------------------------------------
</TABLE>


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. 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.
  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 Operations. We have guaranteed
the redemption value.

Company-obligated, mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures of the Company. In 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

                                                                              43


<PAGE>

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.

 18. Common Stock

We have 1.05 billion authorized shares of common stock, $1 par value. At
December 31, 2000 and 1999, 98.1 and 84.3 million shares, respectively, were
reserved for issuance under our incentive compensation plans. In addition, at
December 31, 2000, 13.2 million common shares were reserved for the conversion
of $670 of convertible debt, and 48.9 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 may be repurchased from time to time on
the open market depending on market and other conditions. No shares were
repurchased during 2000 or 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.

Put Options. In connection with the share repurchase program, during 2000, 1999
and 1998, we sold 7.5 million, 0.8 million and 1.0 million put options,
respectively, that entitle the holder to sell one share of our common stock to
us at maturity at a specified price. These put options can be settled in cash
at our option. The put options had original maturities ranging from six months
to two years.
  In 2000, we recorded the receipt of a premium of approximately $24 on the
sale of equity put options. This premium was recorded as an addition to Common
shareholders' equity. In October 2000, the holder of these equity put options
exercised their option for early termination and settlement. The cost of this
settlement to the Company was approximately $92 for 7.5 million shares with an
average strike price of $18.98 per share. This transaction was recorded as a
reduction of Common shareholders' equity.
  At December 31, 2000, 0.8 million put options remain outstanding with a
strike price of $40.56 per share. Under the terms of this contract we had the
option of physical or net cash settlement. Accordingly, this amount is
classified as temporary equity in the consolidated balance sheets at December
31, 2000. In January 2001 these put options were net cash settled for $28.
Funds for this net cash settlement were obtained by selling 5.9 million
unregistered shares of our common stock for proceeds of $28.
  In 1999, put options on 1.0 million shares of common stock were exercised and
settled for a net cash payment of $5.

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. Beginning in 1998 and subject to vesting and other
requirements, performance unit rights are typically paid in our common stock.
The value of each performance unit is based on

44


<PAGE>

the growth in earnings per share during the year in which granted. Performance
units ratably vest in the three years after the year awarded.
  Stock options and rights are settled with newly issued or, if available,
treasury shares of our common stock. Stock options 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, 2000 and 1999, 36.0 million and 36.2 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          2000            1999            1998
   --------------------------------------------------------------------------
                                      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   43,388      $42 30,344      $33 27,134      $26
   Granted                    19,338       22 19,059       51  8,980       47
   Cancelled                  (4,423)      38   (870)      47   (199)      37
   Exercised                     (70)      22 (5,145)      23 (5,571)      20
   --------------------------------------------------------------------------
   Outstanding at December 31 58,233       35 43,388       42 30,344       33
   --------------------------------------------------------------------------
   Exercisable at end of year 23,346          13,467           9,622
   --------------------------------------------------------------------------
</TABLE>


Options outstanding and exercisable at December 31, 2000 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>
$10.94 to $16.38                319              8.25           $14.59           -           $    -
 16.91 to 23.25              22,694              7.34            21.47       5,780            20.59
 25.38 to 36.70              13,799              5.67            31.43       7,794            33.04
 41.72 to 60.95              21,421              6.33            53.26       9,772            51.45
---------------------------------------------------------------------------------------------------
$10.94 to $60.95             58,233              6.58           $35.48      23,346           $37.66
---------------------------------------------------------------------------------------------------
</TABLE>

We do not recognize compensation expense relating to employee stock options
because the excercise price of the option equals the fair value of the stock on
the effective date of grant. If we had determined the compensation based on the
value as determined by the modified Black-Scholes option pricing model, the pro
forma net income (loss) and earnings (loss) per share woud be as follows:


<TABLE>
<CAPTION>
                                                 2000   1999  1998
              ----------------------------------------------------
              <S>                             <C>     <C>    <C>
              Net income (loss) - as reported $ (257) $1,339 $ 273
              Net income (loss) - pro forma     (359)  1,238   228
              Basic EPS - as reported          (0.44)   1.96  0.34
              Basic EPS - pro forma            (0.59)   1.81  0.27
              Diluted EPS  - as reported       (0.44)   1.85  0.34
              Diluted EPS - pro forma          (0.59)   1.71  0.27
              ----------------------------------------------------
</TABLE>

These pro forma disclosures are not necessarily indicative of future amounts.
  As reflected in the pro forma amounts in the previous table, the fair value
of each option granted in 2000, 1999 and 1998 was $7.50, $15.83 and $13.31,
respectively. The fair value of each option granted was estimated on the date
of grant using the following weighted average assumptions:


<TABLE>
<CAPTION>
                                            2000  1999  1998
                   -----------------------------------------
                   <S>                     <C>   <C>   <C>
                   Risk-free interest       6.7%  5.1%  5.2%
                   Expected life in years   7.1   6.2   5.3
                   Expected volatility     37.0% 28.0% 24.9%
                   Expected dividend yield  3.7%  1.8%  1.4%
                   -----------------------------------------
</TABLE>


                                                                              45


<PAGE>

 19. Earnings per Share

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


<TABLE>
<CAPTION>
                                       2000                    1999                   1998
-------------------------------------------------------------------------------------------------
                             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 (loss) from
    continuing operations    $(257)                 $1,339                   $463
   Accrued dividends
    on preferred stock,
    net                        (35)                    (38)                   (46)
Basic EPS                    $(292) 667,581 $(0.44) $1,301  663,493  $1.96   $417  658,956  $0.63
-------------------------------------------------------------------------------------------------
Diluted EPS
   Stock options and
    other incentives                                          8,727                  9,811
   ESOP Adjustment,
    net of tax                                          43   51,989
   Convertible debt, net
    of tax                                              17   13,191             3    5,287
Diluted EPS                  $(292) 667,581 $(0.44) $1,361  737,400  $1.85   $420  674,054  $0.62
-------------------------------------------------------------------------------------------------
</TABLE>


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

 20. Subsequent Events

In January 2001, we transferred $898 of finance receivables to a special
purpose entity for cash proceeds of $435, received from an affiliate of General
Electric Capital Corporation (GE Capital), and a retained interest of $474. The
proceeds were accounted for as a secured borrowing. At March 31, 2001 the
balance of receivables transferred was $734 and is included in Finance
receivables, net in the Consolidated Balance Sheets. The remaining secured
borrowing balance of $340 is included in Debt. The total proceeds of $435 are
included in the Net change in debt in the Consolidated Statements of Cash
Flows. The borrowing will be repaid over 18 months and bears interest at the
rate of 8.98 percent.
  In the first five months of 2001, we retired $128 of long-term debt through
the exchange of 16 million shares of common stock valued at $100. The
retirements resulted in a pre-tax extraordinary gain of $28 ($17 after taxes or
$0.02 per share) for a net equity increase of approximately $117.
  In March 2001, we completed the sale of half of our ownership interest in
Fuji Xerox to Fujifilm for $1,283, in cash. The sale resulted in a pre-tax gain
of $769 ($300 after taxes). Under the agreement, Fujifilm's ownership interest
in Fuji Xerox increased from 50 percent to 75 percent. While Xerox's ownership
interest decreased to 25 percent, we retain rights as a minority shareholder.
All product and technology agreements between us and Fuji Xerox will continue,
ensuring that the two companies retain uninterrupted access to each others
portfolio of patents.
  We maintain a cash position of approximately $194 in a trust account
representing the par value and one years interest relating to the bonds issued
by our subsidiary Xerox Finance (Nederland) BV. This cash is withdrawable upon
21 days written notice to the Trustee.
  During the first quarter of 2001, and in connection with the turnaround
program, we recorded an additional pre-tax restructuring provision totaling
$108 ($73 after taxes), in connection with finalized initiatives under the
turnaround program. This charge includes estimated costs of $97 for severance
costs associated with work force reductions related to the elimination of 1,000
positions worldwide and $11 of asset impairments. The severance costs relate to
continued streamlining of existing work processes, elimination of redundant
resources and the consolidation of existing activities into other existing
operations.
  In April 2001, we announced the sale of our leasing businesses in four
European countries to Resonia Leasing AB (Resonia) for approximately $370 in
cash. The assets were sold for approximately book value and include the leasing
portfolios in the respective countries, title to the underlying equipment
included

46


<PAGE>

in the lease portfolios and certain employees and systems used in the
operations of the businesses. Under the terms of the agreement Resonia will
provide on-going exclusive equipment financing to Xerox customers in those
countries.
  The Company's Audit Committee, in cooperation with our independent auditors,
undertook an investigation of certain of the Company's accounting policies and
procedures. This investigation began in April 2001 and was substantially
completed by the end of May 2001, resulting in the accounting adjustments and
restatements described in Note 2.
  A number of securities and other litigation is pending against the Company.
See Note 16 for a description of those items including disclosure of certain
related subsequent events.

                                                                              47


<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>
2000/2,3/
Revenues                                             $4,540   $4,778 $4,552  $4,831  $18,701
Costs and Expenses                                    4,884    4,531  4,706   4,964   19,085
---------------------------------------------------------------------------------------------
Income (Loss) before Income Taxes (Benefits), Equity
   Income and Minorities' Interests                    (344)     247   (154)   (133)    (384)
Income Taxes (Benefits)                                (112)      73    (17)    (53)    (109)
Equity in Net Income of Unconsolidated Affiliates         4       46     10       1       61
Minorities' Interests in Earnings of Subsidiaries        11       12     10      10       43
---------------------------------------------------------------------------------------------
Net Income (Loss)                                    $ (239)  $  208 $ (137) $  (89) $  (257)
---------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share                      $(0.38)  $ 0.30 $(0.22) $(0.15) $ (0.44)
---------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share/1/                 $(0.38)  $ 0.28 $(0.22) $(0.15) $ (0.44)
---------------------------------------------------------------------------------------------
1999/2,3/
Revenues                                             $4,327   $4,902 $4,733  $5,605  $19,567
Costs and Expenses                                    3,933    4,368  4,235   5,123   17,659
---------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and
   Minorities' Interests                                394      534    498     482    1,908
Income Taxes                                            120      160    154     154      588
Equity in Net Income of Unconsolidated Affiliates        10       24      5      29       68
Minorities' Interests in Earnings of Subsidiaries         8       13     14      14       49
---------------------------------------------------------------------------------------------
Net Income                                           $  276   $  385 $  335  $  343  $ 1,339
---------------------------------------------------------------------------------------------
Basic Earnings per Share                             $ 0.40   $ 0.56 $ 0.49  $ 0.50  $  1.96
---------------------------------------------------------------------------------------------
Diluted Earnings per Share/1/                        $ 0.38   $ 0.53 $ 0.46  $ 0.47  $  1.85
---------------------------------------------------------------------------------------------
</TABLE>


/1/ The sum of 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/ As restated. See footnote No. 2. The above restated quarterly financial
    statements may be subject to additional adjustment, among quarters within
    years.
/3/ The above data has not been reviewed by our independent auditors in
    accordance with standards etablished by the American Institute of Certified
    Public Accountants.

48


<PAGE>

Report of Independent Auditors



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, 2000 and 1999, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the three year period ended December 31, 2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 16
through 47 present fairly, in all material respects, the financial position of
Xerox Corporation and consolidated subsidiaries as of December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the three year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
  As discussed in Note 2 to the consolidated financial statements, the
accompanying consolidated balance sheet as of December 31, 1999, and the
related consolidated statements of operations, cash flows, and shareholders'
equity for the years ended December 31, 1999 and December 31, 1998 have been
restated.
  The supplementary quarterly financial information on page 48 of the Company's
Annual Report contains information that we did not audit, and accordingly, we
do not express an opinion on that information. We did not have an adequate
basis to complete reviews of the quarterly information in accordance with
standards established by the American Institute of Certified Public
Accountants, due to the matters related to the restatement issues as described
in Note 2 to the consolidated financial statements.


/s/ KPMG LLP
KPMG LLP
Stamford, Connecticut
May 30, 2001


                                                                              49


<PAGE>

Five Years in Review


<TABLE>
<CAPTION>
(Dollars in millions, except per-share data)                           2000*    1999*    1998*    1997*    1996*
-----------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>      <C>      <C>      <C>      <C>
Per-Share Data
Earnings (loss) from continuing operations
   Basic                                                            $ (0.44) $  1.96  $  0.63  $  2.01  $  1.75
   Diluted                                                            (0.44)    1.85     0.62     1.89     1.64
Dividends declared                                                     0.65     0.80     0.72     0.64     0.58
-----------------------------------------------------------------------------------------------------------------
Operations
Revenues/1/                                                         $18,701  $19,567  $19,593  $18,225  $17,609
Research and development expenses                                     1,044      992    1,035    1,065    1,044
Income (loss) from continuing operations                               (257)   1,339      463    1,359    1,191
Net income (loss)                                                      (257)   1,339      273    1,359    1,191
-----------------------------------------------------------------------------------------------------------------
Financial Position
Accounts and finance receivables, net                               $15,335  $15,652  $16,618  $14,323  $13,395
Inventories, net                                                      1,932    2,290    2,504    2,058    1,972
Equipment on operating leases, net                                      724      695      797      760      704
Land, buildings and equipment, net                                    2,495    2,456    2,366    2,377    2,256
Investment in discontinued operations                                   534      702    1,670    3,025    4,398
Total assets                                                         29,475   28,531   29,628   27,582   26,819
Consolidated capitalization
   Short-term debt                                                    2,693    3,957    4,104    3,707    3,536
   Long-term debt                                                    15,404   11,044   11,003    8,946    8,697
-----------------------------------------------------------------------------------------------------------------
      Total debt                                                     18,097   15,001   15,107   12,653   12,233
  Deferred ESOP benefits                                               (221)    (299)    (370)    (434)    (494)
  Minorities' interests in equity of subsidiaries                       141      127      124      127      843
  Obligation for equity put options                                      32        -        -        -        -
  Company-obligated, mandatorily redeemable preferred securities of
     subsidiary trust holding solely subordinated debentures of the
     Company                                                            638      638      638      637        -
  Preferred stock                                                       647      669      687      705      721
  Common shareholders' equity                                         3,493    4,648    4,633    4,877    4,352
  Total capitalization/3/                                            22,827   20,784   20,819   18,565   17,655
-----------------------------------------------------------------------------------------------------------------
Selected Data and Ratios
Common shareholders of record at year-end                            59,874   55,297   52,048   54,689   55,908
Book value per common share/2/                                      $  5.20  $  6.96  $  7.01  $  7.43  $  6.69
Year-end common stock market price                                  $  4.63  $ 22.69  $ 59.00  $ 36.94  $ 26.31
Employees at year-end                                                92,500   94,600   92,700   91,500   86,700
Working capital                                                     $ 6,754  $ 3,885  $ 3,932  $ 3,026  $ 2,925
Current ratio                                                           2.1      1.5      1.5      1.4      1.4
Additions to land, buildings and equipment                          $   452  $   594  $   566  $   520  $   510
Depreciation on buildings and equipment                             $   417  $   416  $   362  $   400  $   372
-----------------------------------------------------------------------------------------------------------------
</TABLE>


1 Revenues for 1996 through 2000 have been restated to include shipping and
  handling charges billed to customers as revenues. These amounts were
  historically reported as a reduction of cost of goods sold.
2 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.
3 In 1997, $100 of liabilities were recorded and which were reversed in 1998
  and 1999. The effects of such reversal on pre-tax income have been restated
  (see Note 2 to the Consolidated Financial Statements). The $100 represents .5
  percent of both total liabilities and total capitalization.
* Amounts as adjusted or restated.

50


<PAGE>

Officers

Paul A. Allaire
Chairman of the Board and
Chief Executive Officer
Chairman of the Executive Committee

Anne M. Mulcahy
President and
Chief Operating Officer

Barry D. Romeril
Vice Chairman and
Chief Financial Officer

Allan E. Dugan
Executive Vice President
President, Worldwide Business Services

Carlos Pascual
Executive Vice President
President, Developing Markets Operations

Ursula M. Burns
Senior Vice President
Corporate Strategic Services
Worldwide Business Services

Thomas J. Dolan
Senior Vice President
President, Global Solutions Group

James A. Firestone
Senior Vice President
Corporate Strategy and
Marketing Group

Herve J. Gallaire
Senior Vice President
Xerox Research and Technology and Chief Technical Officer

Anshoo S. Gupta
Senior Vice President
President, Production
Solutions Group
Global Solutions Group

Gilbert J. Hatch
Senior Vice President
President, Office Systems Group

Michael C. Mac Donald
Senior Vice President
President, North American Solutions Group

Hector J. Motroni
Senior Vice President and
Chief Staff Officer

Gerald K. Perkel
Senior Vice President
President, Office Printing Business

Brian E. Stern
Senior Vice President
President, Xerox Technology Enterprises

Guilherme M.N. Bettencourt
Vice President
Presidente, Xerox do Brasil, Ltda.
Developing Markets Operations

John Seely Brown
Vice President and Chief Scientist

Christina E. Clayton
Vice President and General Counsel

Patricia A. Cusick
Vice President and
Chief Information Officer
Worldwide Business Services

J. Michael Farren
Vice President
External Affairs

Anthony M. Federico
Vice President
General Manager, Production Solutions Business Team
Global Solutions Group

Eunice M. Filter
Vice President, Treasurer and Secretary

Emerson U. Fullwood
Vice President
President, Regional Operations
Developing Markets Operations

William R. Goode
Vice President
Deputy Managing Director, European Solutions Group

James H. Lesko
Vice President
President, Xerox Supplies Group
Worldwide Business Services

Rafik O. Loutfy
Vice President and Center Manager
Xerox Canada Research Centre

Jean-Noel Machon
Vice President
President, European Solutions Group

Diane E. McGarry
Vice President
Operations Support,
Office of the President and
Chief Operating Officer

James J. Miller
Vice President
General Manager, Small Office / Home Office Business Group

Patricia M. Nazemetz
Vice President
Human Resources

Russell Y. Okasako
Vice President
Taxes

Ronald E. Rider
Vice President
Digital Imaging Technology Center
Xerox Research and Technology

                                                                              51


<PAGE>

                           Directors

Frank D. Steenburgh
Vice President
Senior Vice President/General Manager, e-Services
Global Solutions Group

Gregory B. Tayler
Vice President and Controller

Joseph M. Valenti
Vice President
Senior Vice President, North American Solutions Group Services

Armando Zagalo de Lima
Vice President
Senior Vice President and
Chief Operating Officer
European Solutions Group

Myra R. Drucker
Assistant Treasurer and
Chief Investment Officer

Gary R. Kabureck
Assistant Controller

Richard Ragazzo
Assistant Treasurer

Martin S. Wagner
Assistant Secretary
Associate General Counsel, Corporate Finance and Ventures

Paul A. Allaire /1/
Chairman of the Board and
Chief Executive Officer
Chairman of the Executive Committee
Xerox Corporation
Stamford, Connecticut

Antonia Ax:son Johnson /2, 3/
Chairman
Axel Johnson Group
Stockholm, Sweden

Vernon E. Jordan, Jr. /1, 4, 5/
Senior Managing Director
Lazard Freres & Co., LLC
New York, New York
Of Counsel
Akin, Gump, Strauss,
Hauer & Feld, LLP
Attorneys-at-Law
Washington, DC

Yotaro Kobayashi
Chairman of the Board
Fuji Xerox Co., Ltd.
Tokyo, Japan

Hilmar Kopper /2, 5/
Chairman of the Supervisory Board
Deutsche Bank AG
Frankfurt, Germany

Ralph S. Larsen /1, 3, 5/
Chairman and
Chief Executive Officer
Johnson & Johnson
New Brunswick, New Jersey

George J. Mitchell /4, 5/
Special Counsel
Verner, Liipfert, Bernhard, McPherson & Hand
Washington, DC

Anne M. Mulcahy /1/
President and
Chief Operating Officer
Xerox Corporation
Stamford, Connecticut

N. J. Nicholas, Jr. /2, 4/
Investor
New York, New York

John E. Pepper /2, 3/
Chairman of the Board and
Chairman, Executive Committee
of the Board
The Procter & Gamble Company
Cincinnati, Ohio

Barry D. Romeril
Vice Chairman and
Chief Financial Officer
Xerox Corporation
Stamford, Connecticut

Martha R. Seger /2, 4/
Principal
Martha R. Seger Financial Group, Inc.
Birmingham, Michigan

Thomas C. Theobald /2, 3/
Managing Director
William Blair Capital Partners, LLC
Chicago, Illinois

/1/ Member of the Executive Committee
/2/ Member of the Audit Committee
/3/ Member of the Executive Compensation and Benefits Committee
/4/ Member of the Finance Committee
/5/ Member of the Nominating Committee

52


<PAGE>

 How to Reach Us


<TABLE>
<CAPTION>
<S>                 <C>            <C>
Xerox Corporation   Xerox Europe   Fuji Xerox Co., Ltd.
800 Long Ridge Road Riverview      2-17-22 Akasaka
P.O. Box 1600       Oxford Road    Minato-ku, Tokyo 107
Stamford, CT 06904  Uxbridge       Japan
203 968-3000        Middlesex      81 3 3585-3211
                    United Kingdom
                    UB8 1HS
                    44 1895 251133

</TABLE>



 Shareholder Information

 For Shareholder Services, call 800-828-6396 (TDD: 800-368-0328)

 For Investor Information, including comprehensive earnings releases:
 www.xerox.com/investor or www.xerox.com and select "investor information".
 Earnings releases also available by mail:
 800-828-6396

 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

. 877 362-6567 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:
 E-mail: Nancy.Dempsey@usa.xerox.com

Dividends Paid to Shareholders
At its February 5, 2001, meeting, the Company's Board of Directors declared the
regular quarterly dividend of $.05 per share on the common stock and a
quarterly dividend of $1.5625 per share on the preferred stock. Previously, at
its October meeting, the Board voted to decrease the dividend to $.05 per
share, from the $.20 per share in prior quarters, payable January 1, 2001. The
Series B Convertible Preferred stock was issued in July 1989 in connection with
the formation of a Xerox Employee Stock Ownership Plan.

Xerox Common Stock Prices and Dividends


<TABLE>
<CAPTION>
                New York Stock Exchange composite prices

                                   First  Second   Third  Fourth
                2000             Quarter Quarter Quarter Quarter
                ------------------------------------------------
                <S>             <C>      <C>     <C>     <C>
                High              $29.75  $29.31  $20.38  $15.31
                Low                20.13   17.75   14.75    4.44
                Dividends Paid    $ 0.20  $ 0.20  $ 0.20  $ 0.20
                ------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
                                  First  Second   Third  Fourth
                 1999           Quarter Quarter Quarter Quarter
                 ----------------------------------------------
                 <S>            <C>     <C>     <C>     <C>
                 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
                 ----------------------------------------------
</TABLE>


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.

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

Copyright(R) Xerox Corporation 2001. All rights reserved. Xerox(R), The
Document Company(R) and the stylized X(R) are trademarks of Xerox Corporation,
as are ColorSeries, Document Centre(R), DocuPrint(R), DocuShare(R), DocuTech(R)
and Phaser(R).
DocuColor(R) is a trademark of Identix Inc., licensed to Xerox Corporation.

                                                                              53



<PAGE>

                                                                      EXHIBIT 21

Subsidiaries of Xerox Corporation

The following companies are subsidiaries of Xerox Corporation as of May 1, 2001.
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
RNTS, Inc.                                              Colorado
Xerox Connect, Inc.                                     Pennsylvania
Kapwell, Ltd                                            Bermuda
Proyectos Inverdoco, C.A.                               Venezuela
Goodkap, Ltd.                                           Bermuda
Kapskew, Ltd.                                           Bermuda
Xerox de Venezuela, C.A.                                Venezuela
Pacific Services and Development Corporation            Delaware
Inversiones San Simon, S.A.                             Venezuela
Estacionamiento Bajada III, C.A.                        Venezuela
Xerox Argentina, I.C.S.A.                               Argentina
Xerox Canada Capital Ltd.                               Ontario
Xerox Canada Inc.                                       Ontario
Xerox Canada Acceptance Inc.                            Canada
Xerox Canada Facilities Management Ltd.                 Ontario
Xerox Canada Finance Inc.                               Ontario
Xerox Canada Ltd.                                       Canada
Xerox Canada Manufacturing & Research Inc.              Ontario
Xerox de Chile S.A.                                     Chile
Xerox Financial Services, Inc.                          Delaware
OakRe Life Insurance Company                            Missouri
Ridge Reinsurance Limited                               Bermuda
Talegen Holdings, Inc.                                  Delaware
VRN Inc.                                                Delaware
Xerox
 Credit Corporation                                Delaware
XFS Merchant Partner, Inc.                              Delaware
Xerox Foreign Sales Corporation                         Barbados
Xerox Investments (Europe) BV                           Netherlands
Xerox Holdings (Ireland) Limited                        Ireland
Xerox (Europe) Limited                                  Ireland
Xerox XF Holdings (Ireland) Limited                     Ireland
Xerox Israel Ltd.                                       Israel
Xerox UK Holdings Limited                               United Kingdom
Triton Business Finance Limited                         United Kingdom
Xerox Engineering Systems Europe Limited                United Kingdom
Xerox Research (UK) Limited (in liquidation)            United Kingdom
Xerox Trading Enterprises Limited                       United Kingdom
Xerox Overseas Holdings Limited                         United Kingdom
Xerox Holding (Nederland) B.V.                          Netherlands
Xerox XHB Limited                                       Bermuda
Xerox XIB Limited                                       Bermuda



                                    Page 85


<PAGE>

Xerox Limited                                           United Kingdom
Fuji Xerox Co., Ltd. *                                  Japan
Xerox (Hong Kong) Limited                               Hong Kong
NV Xerox Credit S.A.                                    Belgium
NV Xerox Management Services S.A.                       Belgium
N.V. Xerox S.A.                                         Belgium
The Limited Liability Company Xerox(Ukraine)Limited     Ukraine
Xerox AB                                                Sweden
Xerox AG                                                Switzerland
Xerox A/S                                               Denmark
Xerox AS                                                Norway
Xerox Austria GmbH                                      Austria
Xerox Beograd d.o.o.                                    Yugoslavia
Xerox Bulgaria                                          Bulgaria
Xerox Buro Araciari Ticaret ve Servis A.S.              Turkey
Xerox (C.I.S.) LLC                                      Russia
Xerox Czech Republic s r.o.                             Czech Republic
Xerox Direct Nord GmbH                                  Germany
Xerox Direct Ost GmbH                                   Germany
Xerox Direct Rhein-Main GmbH                            Germany
Xerox Direct Sud GmbH                                   Germany
Xerox Direct Sud-West GmbH                              Germany
Xerox Espana-The Document Company, S.A.U.               Spain
Xerox (Nigeria) Limited                                 Nigeria
Xerox Oy                                                Finland
Xerox Polska Sp.zo.o                                    Poland
Xerox Portugal Equipamentos de Escritorio, Limitada     Portugal
Xerox (Romania) Echipmante Si Servici S.A.              Romania
Xerox (Romania) SRL                                     Romania
Xerox Slovenia d.o.o.                                   Slovenia
Xerox South Africa (Proprietary) Limited                South Africa
Xerox S.p.A.                                            Italy
Xerox - THE DOCUMENT COMPANY S.A.S.                     France
Xerox Hellas AEE                                        Greece
Xerox Hungary Trading Company Ltd.                      Hungary
Xerox Kenya Limited                                     Kenya
Xerox Mexicana, S.A. de C.V                             Mexico
Xerox Middle East Investments (Bermuda) Limited         Bermuda
Bessemer Insurance Limited                              Bermuda
Investissements Xerographiques Marocains S.A.           Morocco
Reprographics Egypt Limited                             Egypt
Xerox Egypt S.A.E.                                      Egypt
Xerox Finance Leasing S.A.E.                            Egypt
Xerox Participacoes Ltda.                               Brazil
Xerox do Brasil Ltda.                                   Brazil
Xerox Comercio e Industria Ltda                         Brazil
Xerox Desenvolvimento de Sistemas e de Technologia Ltda Brazil
Xerox Real Estate Services, Inc.                        New York
Xerox Realty Corporation                                Delaware
Xerox Servicios Tecnicos, C.A.                          Venezuela
XESystems, Inc.                                         Delaware

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

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



                                    Page 86




<PAGE>

                                                                      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, 333-59355 and 333-73173) of our report
dated May 30, 2001 relating to the consolidated balance sheets of Xerox
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, cash flows, and shareholders' equity and
related financial statement schedule for each of the years in the three-year
period ended December 31, 2000, which report appears in the 2000 Annual Report
on Form 10-K of Xerox Corporation.

Our report dated May 30, 2001 indicates that the Company's consolidated balance
sheet as of December 31, 1999, and the related consolidated statements of
operations, cash flows, and shareholder's equity for the years ended December
31, 1999 and December 1998, have been restated.

Our audit report also indicates that the supplementary quarterly financial
information included in the Company's consolidated
 financial statements
contains information that we did not audit, and accordingly, we do not express
an opinion on that information. We did not have an adequate basis to complete
reviews of the quarterly information in accordance with standards established
by the American Institute of Certified Public Accountants due to the matters
related to the restatement issues as described in Note 2 to the consolidated
financial statements.

                                                                  /s/ KPMG LLP

Stamford, Connecticut
June 7, 2001




<PAGE>

                                                                      EXHIBIT 99

                      DIRECTORS AND OFFICERS INFORMATION

Directors Of Xerox

Shareholders annually elect directors to serve for one year and until their
successors have been elected and shall have qualified.

Summary of Director Annual Compensation


<TABLE>
<C>              <S>
Cash............ $40,000
Restricted Stock $25,000 (number of shares based upon market value at time fee is payable-quarterly)
Options......... 5,000 shares
Expenses........ Out-of-pocket expenses in connection with service
</TABLE>


Eligibility: Directors who are our employees receive no compensation for
service as a director. Directors who are employees of subsidiary companies are
not eligible to receive stock option awards.

Options: Issued at the fair market value on date of grant (generally on the
date of the annual meeting of shareholders). The options vest over a three year
period. Upon the occurrence of a change in control, as defined, all outstanding
options become exercisable.

Restricted Stock: The number of shares issued is based on the market value at
the time the fee is payable, which is in quarterly installments. The shares
held by directors under this Plan are included in the Xerox securities owned
shown in the biographies of the directors. The shares may not be sold or
transferred
 except upon death, retirement, disability, change in control or
termination as a director with the consent of the majority of the Board.

Terms Used in Biographies

Certain terms used in the biographies may be unfamiliar to you, so we are
defining them here.

Xerox securities owned means the Company's Common Stock, including restricted
shares of Common Stock issued under the Restricted Stock Plan For Directors,
and Series B Convertible Preferred Stock. Series B shares are owned through the
individual's account in the Xerox Employee Stock Ownership Plan. None of the
nominees owns any of the Company's other securities.

Options/Rights is the number of the Company's shares of Common Stock subject to
stock options and incentive stock rights held by a nominee.

Immediate family means the spouse, the minor children and any relatives sharing
the same home as the nominee.

Unless otherwise noted, all Xerox securities held are owned beneficially by the
nominee. This means he or she has or shares voting power and/or investment
power with respect to the securities, even though another name--that of a
broker, for example--appears in the Company's records. All ownership figures
are as of March 30, 2001.

Paul A. Allaire
Age: 62  Director since: 1986

Xerox securities owned: 390,083 common shares; 381 Series B Convertible
Preferred shares

Options/Rights: 3,563,144 common shares

Occupation: Chairman of the Board and Chief Executive Officer, Xerox
Corporation

Other Directorships: Lucent Technologies Inc.; priceline.com, Incorporated;
Sara Lee Corporation; and SmithKline Beecham plc

Other Background: Joined Xerox in 1966. Stepped down as Chief Executive Officer
in April 1999 and returned to the position in May 2000.

                                      1


<PAGE>

Antonia Ax:son Johnson
Age: 57  Director since: 1996

Xerox securities owned: 4,707 common shares and an indirect interest in
approximately 8,664 common shares through the Deferred Compensation Plan

Options/Rights: 25,000 common shares

Occupation: Chairman, Axel Johnson Group

Other Directorships: Axel Johnson AB; Axel Johnson Inc.; Axel Johnson
International; Ahlens AB; Axfood AB; Nordstjernan AB; NCC AB

Vernon E. Jordan, Jr.
Age: 65  Director since: 1974

Xerox securities owned: 30,745 common shares and an indirect interest in
approximately 6,960 common shares through the Deferred Compensation Plan

Options/Rights: 25,000 common shares

Occupation: Senior Managing Director, Lazared Freres & Co. LLC; Of Counsel,
Akin, Gump, Strauss, Hauer & Feld, LLP

Other Directorships: America Online Latin America, Inc.; American Express
Company; Callaway Golf Company; Clear Channel Communications, Inc.; Dow Jones &
Co., Inc.; FirstMark Communications International, LLC; J.C. Penney Company,
Inc.; Revlon Group; Ryder System, Inc.; Sara Lee Corporation; Shinsei Bank,
Ltd; and Union Carbide Corporation

Other Background: Joined Lazard Freres & Co. LLC in January 2000. Became a
partner in the law firm of Akin, Gump, Strauss, Hauer & Feld in 1982.

Yotaro Kobayashi
Age: 67  Director since: 1987

Xerox securities owned: 30,622 common shares

Options/Rights: 16,700 common shares

Occupation: Chairman of the Board, Fuji Xerox Co., Ltd.

Other Directorships: Fuji Xerox Co., Ltd.; Callaway Golf Company; Nippon
Telegraph and Telephone Corporation; and American Productivity & Quality
Center.

Other Background: Joined Fuji Photo Film Co., Ltd. in 1958, was assigned to
Fuji Xerox Co., Ltd. in 1963, named President and Chief Executive Officer in
1978 and Chairman and Chief Executive Officer in 1992.

Hilmar Kopper
Age: 66  Director since: 1991

Xerox securities owned: 21,328 common shares

Options/Rights: 20,050 common shares

Occupation: Chairman of the Supervisory Board, Deutsche BankAG

Other Directorships: Akzo Nobel NV; Bayer AG; DaimlerChrysler AG; Solvay SA;
Unilever NV

                                      2


<PAGE>

Ralph S. Larsen
Age: 62  Director since: 1990

Xerox securities owned: 24,490 common shares and an indirect interest in
approximately 26,871 common shares through the Deferred Compensation Plan

Options/Rights: 25,000 common shares

Occupation: Chairman and Chief Executive Officer, Johnson & Johnson

Other Directorships: Johnson & Johnson; AT&T

George J. Mitchell
Age: 67  Director since: 1996

Xerox securities owned: 6,749 common shares and an indirect interest in
approximately 5,286 common shares through the Deferred Compensation Plan

Options/Rights: 25,000 common shares

Occupation: Special Counsel, Verner, Liipfert, Bernhard, McPherson and Hand,
Chartered

Other Directorships: Federal Express Corporation; Starwood Hotels & Resorts;
UNUM Provident Corporation; The Walt Disney Company; Casella Waste Systems,
Inc.; Unilever; Staples, Inc.

Anne M. Mulcahy
Age: 48  Director since: 2000

Xerox securities owned: 80,371 common shares; 569 Series B Convertible
Preferred shares

Options/Rights: 1,796,848 common shares

Occupation: President and Chief Operating Officer, Xerox Corporation

Other Directorships: Target Corporation; Axel Johnson Inc.; Catalyst; Fannie
Mae; Fuji Xerox Co., Ltd; Xerox (Europe) Limited

Other Background: Joined Xerox in 1976 as a sales representative and held
various sales and senior management positions. Named Vice President for Human
Resources in 1992; Senior Vice President in 1998; and Executive Vice President
in 1999. Elected President and Chief Operating Officer in May 2000.

N. J. Nicholas, Jr.
Age: 61  Director since: 1987

Xerox securities owned: 22,703 common shares and an indirect interest in
approximately 26,497 common shares through the Deferred Compensation Plan

Options/Rights: 25,000 common shares

Occupation: Investor

Other Directorships: Boston Scientific Corporation; priceline.com, Incorporated

                                      3


<PAGE>

John E. Pepper
Age: 62  Director since: 1990

Xerox securities owned: 57,001 common shares and an indirect interest in
approximately 6,047 common shares through the Deferred Compensation Plan:
immediate family owns 16,000 shares

Options/Rights: 25,000 common shares

Occupation: Chairman of the Board and Chairman of the Executive Committee, The
Procter & Gamble Company

Other Directorships: Motorola, Inc.; The Procter & Gamble Company; Boston
Scientific Corporation

Other Background: Joined Procter & Gamble in 1963. Named Executive Vice
President and elected to the Board of Directors in 1984, named President in
1986, Chairman and Chief Executive in 1995, Chairman in 1999, retired as an
active employee in September 1999, and re-elected Chairman of the Board in June
2000.

Barry D. Romeril
Age: 57  Director since: 1999

Xerox securities owned: 144,021 common shares; 227 Series B Convertible
Preferred shares and an indirect interest in approximately 31,154 shares
through the Deferred Compensation Plan

Options/Rights: 1,193,548 common shares

Occupation: Vice Chairman and Chief Financial Officer, Xerox Corporation

Other Directorships: Billiton plc; The Concours Group Inc; Booktec.com; Fuji
Xerox Co., Ltd.; Xerox (Europe) Limited; Xerox Investments (Nederland) BV

Other Background: Joined Xerox in 1993 as Executive Vice President and Chief
Financial Officer. Elected Vice Chairman of the Board of Directors in 1999.

Martha R. Seger
Age: 69  Director since: 1991

Xerox securities owned: 14,006 common shares and an indirect interest in
approximately 10,949 common shares through the Deferred Compensation Plan

Options/Rights: 25,000 common shares

Occupation: Financial economist and Former Governor, Federal Reserve System;
currently Distinguished Visiting Professor of Finance, Arizona State University

Other Directorships: Fluor Corporation; Michigan Mutual and the Amerisure
Companies; The Kroger Co.; Tucson Electric Power Co. and its holding company,
Unisouce Energy; Massey Energy

Thomas C. Theobald
Age: 63  Director since: 1983

Xerox securities owned: 24,115 common shares and an indirect interest in
approximately 10,415 common shares through the Deferred Compensation Plan

Options/Rights: 25,000 common shares

Occupation: Managing Director, William Blair Capital Partners, LLC

Other Directorships: Anixter International; Jefferson Wells International;
LaSalle U.S. Realty Income and Growth Fund; Jones, Lane, LaSalle Inc.; The MONY
Group; Liberty Funds

                                      4


<PAGE>

Ownership of Company Securities

We do not know of any person who, or group which, owns beneficially more than
5% of any class of its equity securities as of December 31, 2000, except as set
forth below/(1)/.


<TABLE>
<CAPTION>


---------------------------------------------------------------------------------------------
                                                                      Amount
                                                                   Beneficially    Percent
    Title of Class        Name and Address of Beneficial Owner    Owned of Class   of Class
---------------------------------------------------------------------------------------------
<C>                    <S>                                        <C>             <C>
Series B Convertible   State Street Bank and Trust Company, as     8,256,791       100%
  Preferred Stock/(2)/ Trustee,
                       225 Franklin Street, Boston, MA 02110/(3)/

Common Stock           State Street Bank and Trust Company, as    90,912,742/(4)/ 12.7%/(5)/
                       Trustee under other plans and accounts
                       225 Franklin Street, Boston, MA 02110

Common Stock           Capital Research and Management Company    36,095,700/(6)/  5.4%
                       333 South Hope Street
                       Los Angeles, CA 90071

Common Stock           Dodge & Cox                                53,176,018/(7)/  8.0%
                       One Sansome Street
                       San Francisco, CA 94104
---------------------------------------------------------------------------------------------
</TABLE>

(1) The words "group" and "beneficial" are as defined in regulations issued by
    the Securities and Exchange Commission (SEC). Beneficial ownership under
    such definition means possession of sole voting power, shared voting power,
    sole dispositive power or shared dispositive power. The information
    provided in this table is based solely upon the information contained in
    the Form 13G filed by the named entity with the SEC.
(2) These shares have equal voting rights with the Common Stock except that
    each share of Preferred Stock has six votes per share.
(3) Held as Trustee under the Xerox Employee Stock Ownership Plan. Each
    participant may direct the Trustee as to the manner in which shares
    allocated to his or her account shall be voted. The Trust Agreement
    provides that the Trustee shall vote any shares allocated to participants'
    accounts as to which it has not received voting instructions in the same
    proportions as shares in participants' accounts as to which voting
    instructions are received. Shares which have not been allocated are voted
    in the same proportion. The power to dispose of shares is governed by the
    terms of the Plan and elections made by participants.
(4) Within this total as to certain of the shares, State Street Bank and Trust
    Company has sole voting power for 10,972,321 shares, shared voting power
    for 78,552,915 shares, sole dispositive power for 12,489,357 shares and
    shared dispositive power for 78,423,385 shares.
(5) Percentage based upon assumption that all Series B Convertible Preferred
    Stock were converted into 49,540,746 shares of Common Stock.
(6) Capital Research has sole dispositive power over all of the shares and no
    voting power.
(7) Within this total as to certain of the shares, Dodge & Cox has sole voting
    power for 49,638,318 shares, shared voting power for 469,300 shares, sole
    dispositive power for 53,176,018 shares and no shared dispositive power for
    any of the shares.

                                      5


<PAGE>

Shares of Common Stock and Series B Convertible Preferred Stock (converted to
Common Stock at a ratio of six to one) of the Company owned beneficially by its
current (as of May 30, 2001) directors, each of the executive officers named in
the Summary Compensation Table below and directors and all officers as a group,
as of March 30, 2001, were as follows:


<TABLE>
<CAPTION>
                                                Amount        Total
         Name of                               Beneficially   Stock
         Beneficial Owner                        Owned       Interest
         --------------------------------------------------------------
         <S>                                   <C>          <C>

         Paul A. Allaire...................... 3,031,790     3,955,514
         Allan E. Dugan.......................   475,111       917,998
         Antonia Ax:son Johnson...............    24,706        38,371
         Vernon E. Jordan, Jr.................    50,744        62,705
         Yotaro Kobayashi.....................    42,321        47,322
         Hilmar Kopper........................    36,377        41,378
         Ralph S. Larsen......................    44,489        76,361
         George J. Mitchell...................    26,748        37,035
         Anne M. Mulcahy......................   393,183     1,917,732
         N. J. Nicholas, Jr...................    42,702        74,200
         John E. Pepper.......................    77,000        88,047
         Barry D. Romeril.....................   549,666     1,370,888
         Martha R. Seger......................    34,005        49,955
         Thomas C. Theobald...................    44,114        59,530
         Directors and All Officers as a group 8,171,448    17,534,623
         --------------------------------------------------------------
</TABLE>


Note: B.R. Inman and Patricia F. Russo resigned as directors of the Company on
May 17, 2001 and April 6, 2001, respectively, and are not included in the table
above.

Percent Owned by Directors and Officers: Less than 1% of the aggregate number
of shares of Common Stock and Series B Stock outstanding at March 30, 2001 is
owned by each director and officer. The amount beneficially owned by all
directors and officers as a group amounted to approximately 1%.

Amount Beneficially Owned: The numbers shown are the shares of Common Stock
considered owned by the directors and officers in accordance with SEC rules.
Shares of Common Stock which officers and directors had a right, within 60
days, to acquire upon the exercise of options or rights are included. All these
are counted as outstanding for purposes of computing the percentage of Common
Stock and Series B Stock outstanding and beneficially owned.

Total Stock Interest: The numbers shown include the amount shown in the Amount
Beneficially Owned column plus options held by officers not exercisable within
60 days, incentive stock units and restricted shares. The numbers also include
the interests of officers and directors in the Xerox Stock Fund under the
Profit Sharing and Savings Plan and the Deferred Compensation Plans.

                                      6


<PAGE>

Executive Compensation

Report of the Executive Compensation and Benefits
Committee of the Board of Directors

Executive Officer Compensation

The Executive Compensation and Benefits Committee (Committee) of the Board of
Directors determines the compensation paid to the Company's executive officers.
The Committee's members are all independent, non-employee directors of the
Company. The Committee does the following:

. establishes the policies that govern the compensation paid to Xerox executive
  officers;

. determines overall and individual compensation goals and objectives;

. makes awards; and

. certifies achievement of performance under the Company's various annual and
  long-term incentive plans and approves actual compensation payments.

Under the Committee's established policy, compensation and benefits provided
executive officers are targeted at levels equal to or better than the
compensation paid by a peer group of companies for equivalent skills and
competencies for positions of similar responsibilities and desired levels of
performance. The Company's executive compensation policies, plans and programs
are designed to provide competitive levels of compensation that align pay with
the Company's annual and long-term performance objectives. They also recognize
corporate and individual achievement while supporting the Company objectives of
attracting, motivating and retaining high-performing executives.

In determining compensation levels to meet compensation policy objectives, the
Committee annually reviews, evaluates and compares Xerox executive officer
compensation to relevant external competitive compensation data. During the
year, the Committee reviewed the reported compensation data of firms that were
part of the Business Week Computers and Peripherals Industry Group (included in
the data shown on the performance graph below). The Committee also reviewed a
broader group of organizations with which the Company is likely to compete for
executive expertise and which are of similar size and scope. The latter group
includes large capitalization, global companies in technology, office equipment
and other industries.

The Committee sets base salaries taking into account the competitive data
referenced above. In addition, a substantial portion, generally two-thirds or
more of targeted total compensation, of each executive officer's total
compensation is at risk and variable from year to year because it is linked to
specific performance measures of the business.

The principal variable pay programs used in 2000 to align executive officer pay
with Company and individual performance are briefly described below:

   Executive Performance Incentive Plan (EPIP): Approved by shareholders at the
   Company's Annual Meeting on May 18, 1995, EPIP provides the Committee with
   an incentive vehicle to compensate eligible executives for significant
   contributions to the performance of the Company. By design, EPIP permits the
   tax deductibility of payments made under EPIP even if an executive's
   compensation exceeds $1,000,000 in any year. Under federal tax law under
   certain circumstances such excess would not be deductible.

   Under EPIP the Committee established a pool of 2% of the Company's Document
   Processing profit before tax (PBT) for the 2000 one-year performance period.
   For the three-year period commencing in 1998, a pool of 1 1/2% of cumulative
   PBT was established. Ten percent (10%) of the resulting PBT pool was made
   payable to Mr. Allaire. Five percent (5%) of the pool was made payable to
   each of the other participants in EPIP.

   EPIP gives the Committee discretion to reduce the amount otherwise payable
   under an award to any participant to any amount, including zero, except in
   the case of a change in control as defined. The Committee cannot increase
   the amount determined by the above formula.

   For the full year 2000, Mr. Allaire and 15 other executive officers
   participated in EPIP.

   For 2000, the PBT pool amounted to $3,960,000 and because of the Company's
   failure to meet its performance goals, the Committee exercised its
   discretion by reducing total amounts payable to participating executive
   officers from the pool from $3,366,000 to $595,050.

                                      7


<PAGE>

   Annual Performance Incentive Plan (APIP): Under APIP, executive officers of
   the Company may be entitled to receive performance-related cash payments.
   Payments are only made if Committee-established annual performance
   objectives are met.

   The Committee approved an annual incentive target and maximum opportunity,
   expressed as a percentage of 2000 base salary, for each participating
   officer. At its meeting held on February 7, 2000, the Committee also
   established overall Document Processing threshold, target and maximum
   measures of performance and associated payment schedules.

   The performance measures and weightings for 2000 were earnings per share
   (35%), revenue growth (25%), cash conversion cycle (20%), and customer
   satisfaction (20%). Additional goals were also established for each officer
   that included 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.

   For 2000, the performance against established measures was a significant
   disappointment. EPS was below threshold levels, revenue growth was negative,
   and both cash conversion and customer satisfaction were below threshold
   levels. As a result, no officers received a payment under APIP. The named
   officers did not receive a merit salary increase. Certain executive officers
   received an adjustment to their base salary levels as a result of new
   responsibilities and/or to reflect competitive market levels.

   Leveraged Executive Equity Plan (LEEP): Under the terms of the 1991
   Long-Term Incentive Plan, the Committee implemented a three-year plan
   beginning in 1998 for key management executives, including most executive
   officers. The plan focuses on the achievement of performance objectives of
   the Document Processing business of the Company. When the objectives of the
   plan are achieved, shareholder value is enhanced and the plan provides for
   an opportunity to realize long-term financial rewards. The 1998-2000
   performance cycle of LEEP required each executive participant to maintain,
   directly or indirectly, an investment in shares of common stock of the
   Company having a value as of December 31, 1997 of either 100%, 200%, 300% or
   400% of a participant's annual base salary (investment shares).

   In 1998 the Committee granted awards under LEEP to approximately 40 key
   executives that provided for non-qualified stock options for shares of
   common stock and incentive stock units. The award to each participant was
   based on the ratio of ten option shares and two incentive stock units for
   each investment share. The options became exercisable in three annual
   cumulative installments beginning in the year following the award. The
   incentive stock rights are payable in shares of common stock and vest in
   three annual installments beginning in the year following the award,
   provided specific Document Processing earnings per share (EPS) goals were
   achieved for each preceding year.

   Thirty-three percent (33%) of the non-qualified stock options granted under
   the 1998 cycle became exercisable on January 1, 1999, January 1, 2000 and
   January 1, 2001, respectively.

   For 2000, the EPS goal was not achieved and none of the incentive stock
   units vested.

   At its meeting on December 4, 2000, the Committee approved a new three-year
   (2001-2003) performance cycle of LEEP (New LEEP). New LEEP is intended to
   deliver highly competitive compensation opportunities linked to the
   successful implementation of the Company's turnaround plan and to provide
   significant retention incentives for participating executives.

   New LEEP consists primarily of three equal annual grants of stock options
   and restricted stock. Award levels are determined to provide competitive
   long-term incentive opportunities if the business turnaround plan is
   successfully implemented. Stock options under New LEEP vest fully after
   three years and remain exercisable for ten years following their date of
   grant. Restricted stock awarded under New LEEP vests 100% after one year.
   All executive officers and select other senior executives are eligible for
   New LEEP. The first annual grant under New LEEP was made on January 1, 2001.
   There is no requirement for investment shares under New LEEP.

   CEO Challenge Bonus: At its February 7, 2000 meeting, the Committee
   established the CEO Challenge Bonus program for the calendar years 2000 and
   2001. The goals of the CEO Challenge Bonus program are to support the
   Company's need to retain key executives and provide additional incentives to
   improve the financial performance of the Company. Participants in LEEP,
   including the executive officers, are eligible to participate in the CEO
   Challenge Bonus. The CEO Challenge bonus provides an annual opportunity
   equal to one-half of each executive's annual bonus target amount payable
   over a period of four quarters if performance targets are met. For 2000, the
   CEO Challenge Bonus was based on quarterly EPS targets. The EPS target for
   the first quarter was achieved and bonus amounts were paid accordingly. For
   the remaining quarters of 2000, EPS targets were not achieved and bonus
   opportunities were forfeited. For 2001, the CEO Challenge bonus will also be
   based on quarterly EPS targets.

                                      8


<PAGE>

In its effort to retain key executives and to provide incentives that focus on
shareholder value, the Committee awarded retention stock options to select key
executives, including the executive officers other than the Chairman and CEO.
The retention stock options vest over two years if EPS targets are met; and
vest 100% on December 31, 2004 if EPS targets are not met. The retention stock
options provide for dividend equivalents paid in cash until the stock options
vest.

Select executive officers also were awarded incentive stock rights that fully
vest on January 1, 2002. Beginning with the third quarter of 2000, the
incentive stock rights also provide for the payment of dividend equivalents.
Incentive stock rights were awarded to a select group of officers who are
critical for the Company to retain in order for the Company to implement its
turnaround plan.

Chief Executive Officer Compensation

The compensation paid to G. Richard Thoman, President and Chief Executive
Officer from January 1, 2000 until May 11, 2000, when he resigned, was
established by the Committee at its December 6, 1999 and February 7, 2000
meetings. The Committee's actions are described below as they relate to Mr.
Thoman's compensation as reported in the charts and tables that accompany this
report.

   Base Salary: Mr. Thoman's annualized base salary remained at $900,000.

   2000 Bonus: Mr. Thoman's annual target bonus remained at 100% and his
   quarterly CEO Challenge bonus target was established at 13%.

   Long-Term Incentive: Mr. Thoman was granted a stock option award for 100,000
   shares that was scheduled to vest over two years if EPS targets were met and
   vest 100% on December 31, 2004, if EPS targets were not met.

At its meeting on February 7, 2000, the Committee awarded Paul A. Allaire a
stock option award for 200,000 shares that vested on January 1, 2001. The stock
option award was made to retain Mr. Allaire in his role as Chairman of the
Board of the Company.

Upon the resignation of Mr. Thoman on May 11, 2000, the Board of Directors
requested Mr. Allaire to assume the additional role of Chief Executive Officer
of the Company. In recognition of Mr. Allaire's additional role, and after
reviewing the compensation levels provided to the Chairmen and Chief Executive
Officers of other companies, the Committee authorized the following
compensation:

   Base Salary: Mr. Allaire's base salary was increased to $1,200,000 per year.

   2000 Bonus: Mr. Allaire's annual bonus target percentage and quarterly CEO
   Challenge Bonus target remained at 100% and 13% respectively.

   Long-Term Incentive: Mr. Allaire was granted a stock option award for
   250,000 shares, one-half of which vested on January 1, 2001 with the balance
   vesting on January 1, 2002; and incentive stock rights for 100,000 shares,
   one-half of which vested on January 1, 2001, with the balance vesting on
   January 1, 2002. Mr. Allaire received an award under the New LEEP program as
   described earlier in the section summarizing Executive Officer Compensation.
   Under New LEEP, on January 1, 2001, Mr. Allaire received a stock option
   grant for 350,000 shares that will vest on January 1, 2002, and a restricted
   stock award of 350,000 shares that will also vest on January 1, 2002. In
   addition, effective January 1, 2001, Mr. Allaire was awarded participation
   in a cash long-term incentive program that would pay Mr. Allaire $3,000,000
   at target levels of Company performance (maximum of $5,000,000), subject to
   negative discretion by the Committee, for the performance cycle ending
   December 31, 2001.

The Committee made these awards to provide the incentives necessary to retain
and motivate Mr. Allaire to take the actions necessary to implement the
turnaround plan, focus Mr. Allaire on the development of his potential
successor and provide compensation competitive with the Chairmen and Chief
Executive Officers of other companies.

Detailed information concerning Mr. Allaire's compensation as well as that of
other highly compensated executives is displayed on the accompanying charts and
tables.

                                          Ralph S. Larsen, Chairman
                                          B. R. Inman
                                          Antonia Ax:son Johnson
                                          John E. Pepper
                                          Thomas C. Theobald

February 5, 2001

                                      9


<PAGE>

Compensation Committee Interlocks and Insider Participation

Paul A. Allaire, Chairman and Chief Executive Officer of the Company, serves on
the compensation committee of Lucent Technologies, Inc. Until May 18, 2000
Patricia F. Russo, a director of the Company until she resigned on April 6,
2001, served on the Executive Compensation and Benefits Committee of the
Company and, at the same time, was an Executive Vice President of Lucent.

Summary Compensation Table

The Summary Compensation Table below provides certain compensation information
for the Chief Executive Officer and the most highly compensated key executive
officers (Named Officers) serving at the end of the fiscal year ended December
31, 2000 and for G. Richard Thoman who served as Chief Executive Officer until
May 11, 2000 for services rendered in all capacities during the fiscal years
ended December 31, 2000, 1999, and 1998. The table includes the dollar value of
base salary, bonus earned, option awards (shown in number of shares) and
certain other compensation, whether paid or deferred.

                          SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                             Long-Term
                                        Annual Compensation                             Compensation Awards
                      --------------------------------------------------------- ------------------------------------
                                             Annual Bonus
                                     -----------------------------
                                                           Total
                                                          Annual    Other
                                       Cash                Bonus   Annual       Restricted Underlying   All Other
      Name and              Salary     Bonus    91 Plan   ($) (C)  Compensation   Stock    Options/SARs Compensation
 Principal Position   Year    ($)     ($) (A)   ($) (B)   (= A+B)  ($) (D)       ($) (E)   (#) (F)       ($) (G)

---------------------------------------------------------------------------------------------------------------------
<S>                   <C>  <C>       <C>       <C>       <C>       <C>          <C>        <C>          <C>
Paul A. Allaire...... 2000 1,125,000   121,875         0   121,875 162,881      2,681,250  450,000         17,055
  Chairman and Chief  1999   975,000         0         0         0 118,644              0   54,764         16,290
  Executive Officer   1998   975,000 1,600,000 2,924,133 4,524,133 177,310              0  239,082        318,455

Anne M. Mulcahy...... 2000   721,667    45,063         0    45,063 107,659      2,681,250  310,000         34,642
  Chief Operating     1999   425,000         0         0         0  88,647              0   15,328         13,578
  Officer             1998   312,500   263,000   599,804   862,804  62,791              0   49,044         53,929

Barry D. Romeril..... 2000   641,667    57,500         0    57,500 114,894        804,375  150,000         27,729
  Vice Chairman       1999   575,000         0         0         0 170,047              0   24,415         27,141
                      1998   513,333   488,000   909,740 1,397,740 138,049      1,145,903  178,822        114,853

William F. Buehler... 2000   641,667    57,500         0    57,500 136,102        804,375  150,000         14,828
  Vice Chairman       1999   575,000         0         0         0 100,575              0   23,717         14,374
                      1998   464,833   450,000   857,704 1,307,704  91,953      1,145,903  174,568         98,868

Allan E. Dugan....... 2000   462,500    37,188         0    37,188  91,746              0   50,000         29,702
  Executive           1999   425,000         0         0         0 109,414              0   16,066         29,085
  Vice President      1998   359,000   306,000   717,719 1,023,719  81,092              0   58,686         95,955

G. Richard Thoman.... 2000   326,087   487,500         0   487,500 107,971              0  100,000      3,950,000
  Chief Executive     1999   900,000         0         0         0 189,642              0  293,562      3,827,580
  Officer (H)         1998   700,000   930,000 2,099,341 3,029,341 374,636      1,793,683  335,128      3,960,560

</TABLE>


--------------------------------------------------------------------------------
(A) This column reflects annual cash bonuses earned during the years indicated
    under EPIP and for the year 2000, the CEO Challenge Bonus. In addition, the
    amount shown for G.R. Thoman for 2000 includes a prorated 2000 bonus that
    was agreed to be paid in 2001 under the Letter Agreement entered into with
    Company in May 2000 in connection with his separation.
(B) This column reflects amounts earned under the Company's 1991 Long-Term
    Incentive Plan (1991 Plan). Under the 1991 Plan, awards of incentive stock
    units were made in 1998 to each of the Named Officers which become payable
    as to one-third of the total if the Company's Document Processing earnings
    per share reach a specified level in 1998, 1999 and 2000. The 2000 level
    was not reached and the final one-third of the units did not vest. The
    value of one-third of the incentive stock units, is reported in the column
    above for the year 1998 in which the earnings per share objective was
    reached. The Company and the Executive Compensation and Benefits Committee
    view these amounts as long-term incentive compensation.
(C) Total Annual Bonus is the sum of the amounts under the EPIP, CEO Challenge
    Award and 1991 Plan.
(D) Other Annual Compensation includes executive expense allowance, dividend
    equivalents paid on outstanding incentive stock rights, perquisite
    compensation and above market interest on deferred compensation. Included
    in Other Annual Compensation for 2000 is $55,275 of perquisite compensation
    for William F. Buehler, $29,949 of which relates to personal use of
    corporate aircraft. Also included in Other Annual Compensation for 1998 is
    $50,337 of perquisite compensation for G. Richard Thoman, $34,881 of which
    relates to personal use of corporate aircraft.

                                      10


<PAGE>

(E) This column reflects incentive stock unit awarded under the 1991 Plan or a
    predecessor plan where each unit represents one share of stock to be issued
    upon vesting at the attainment of a specific retention period. Each unit is
    entitled to the payment of dividend equivalents at the same time and in the
    same amount declared on one share of the Company's common stock. The number
    of units held by the Named Officers and their value as of December 31, 2000
    (based upon the closing market price on that date of $4.625 was as follows:
    P.A. Allaire -- 100,000 ($462,500), A.M. Mulcahy -- 153,440 ($709,660),
    B.D. Romeril -- 114,453 ($529,345), W.F. Buehler -- 50,000 ($231,250), and
    A.E. Dugan -- 63,456 ($293,484) G. R. Thoman -- 80,000 ($370,000). Excludes
    grants of restricted stock made on January 1, 2001 under New LEEP (as
    described in the Report of the Executive Compensation and Benefits
    Committee) as follows: P.A. Allaire -- 350,000 ($1,662,500), A.M. Mulcahy
    -- 250,000 ($1,187,500), B.D. Romeril -- 125,000 ($593,750), A.E. Dugan --
    75,000 ($326,250).
(F) The Company no longer grants stock appreciation rights (SARs) in tandem
    with stock options. All stock options were awarded under the 1991 Plan. As
    discussed under the report of the Executive Compensation and Benefits
    Committee, stock options were awarded under a three-year performance cycle
    of LEEP that ended on December 31, 2000. Excludes grants of stock options
    made on January 1, 2001 under New LEEP (as described in the Report of the
    Executive Compensation and Benefits Committee as follows: P.A. Allaire --
    350,000, A.M. Mulcahy -- 934,600, B.D. Romeril -- 467,300, A.E. Dugan --
    280,400.
(G) The total amounts shown in this column consist of the Company's profit
    sharing contribution, whether under the Profit Sharing and Savings Plan or
    its policy of paying directly to the officer the amount which cannot be
    made under the Plan by reason of the Employee Retirement Income Security
    Act of 1974, and the estimated dollar value of the benefit to the officer
    from the Company's portion of insurance premium payments under the
    Company's Contributory Life Insurance Plan on an actuarial basis. The
    Company will recover all of its premium payments at the end of the term of
    the policy, generally at age 65. For 2000 the amounts were: P.A. Allaire:
    $0 profit sharing; $17,055 life insurance; A.M. Mulcahy: $0 profit sharing;
    $34,642 life insurance; B.D. Romeril: $0 profit sharing; $27,729 life
    insurance; W.F. Buehler: $0 profit sharing; $14,828 life insurance; and
    A.E. Dugan: $0 profit sharing; $29,702 life insurance. In addition, the
    amount shown for G.R. Thoman includes a payment of $3.75 million, which was
    agreed to be paid in 1998, 1999 and 2000 under the Letter Agreement entered
    into with Company in June 1997 in connection with his joining the Company.
    The payments were intended to replace the value of forfeited in-the-money
    vested stock options from his former employer. Also included in the amount
    shown for G.R. Thoman is a $200,000 payment in lieu of continuation of life
    insurance benefits agreed to under the Letter Agreement entered into with
    Company in May 2000 in connection with his separation.
(H) Resigned effective May 11, 2000.

Option Grants

The following table sets forth information concerning awards of stock options
to the Named Officers under the Company's 1991 Plan during the fiscal year
ended December 31, 2000. The amounts shown for potential realizable values are
based upon arbitrarily assumed annualized rates of stock price appreciation of
five and ten percent over the full ten-year term of the options, pursuant to
SEC regulations. Based upon a ten-year option term, this would result in stock
price increases of 63% and 159% respectively or $35.479 and $56.495 for the
options with the $21.7812 exercise price and $43.980 and $70.031 for the
options with the $27.0000 exercise price. The amounts shown as potential
realizable values for all shareholders represent the corresponding increases in
the market value of 668,576,389 shares outstanding held by all shareholders as
of December 31, 2000. Any gains to the Named Officers and the shareholders will
depend upon future performance of the common stock of the Company as well as
overall market conditions.

                                      11


<PAGE>

                       OPTION GRANTS IN LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                                                       Potential Realizable Value at Assumed
                                                                            Annual Rates of Stock Price
                               Individual Grants (1) (2)                   Appreciation for Option Term
                   ---------------------------------------------------     -----------------------------
                    Number of
                    Securities  % of Total
                    Underlying  Options Granted Exercise or
                     Options    to Employees in Base Price  Expiration
Name                Granted(#)  Fiscal Year     ($ /Sh)       Date         5%($)                  10%($)
-------------------------------------------------------------------------------------------------------------
<S>                <C>          <C>             <C>         <C>        <C>                    <C>
Paul A. Allaire... 200,000/(3)/ 2.28%           $21.7812    12/31/09   $    2,739,616         $    6,942,725
                   250,000/(5)/                 $27.0000    12/31/09   $    4,245,039         $   10,757,762

Anne M. Mulcahy...  60,000/(4)/ 1.57%           $21.7812    12/31/09   $      821,885         $    2,082,817
                   250,000/(5)/                 $27.0000    12/31/09   $    4,245,049         $   10,757.762

Barry D. Romeril..  50,000/(4)/ 0.76%           $21.7812    12/31/09   $      684,904         $    1,735,681
                   100,000/(5)/                 $27.0000    12/31/09   $    1,698,015         $    4,303,105

William F. Buehler  50,000/(4)/ 0.76%           $21.7812    12/31/09   $      684,904         $    1,735,681
                   100,000/(5)/                 $27.0000    12/31/09   $    1,698,015         $    4,303,105

Allan E. Dugan....  50,000/(4)/ 0.25%           $21.7812    12/31/09   $      684,904         $    1,735,681

G. Richard Thoman. 100,000/(4)/ 0.51%           $21.7812    12/31/09   $    1,369,808         $    3,471,362

-------------------------------------------------------------------------------------------------------------
All Shareholders..     N/A       N/A                 N/A         N/A   $1,944,646,456         $4,928,115,928
-------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Exercise price is based upon fair market value on the effective date of the
    award. Excludes grants of stock options made on January 1, 2001 under New
    LEEP as described in the Report of the Executive Compensation and Benefits
    Committee as follows: P.A. Allaire -- 350,000, A.M. Mulcahy -- 934,600,
    B.D. Romeril -- 467,300, A.E. Dugan -- 280,400.
(2) Options may be accelerated as a result of a change in control as described
    under "Option Surrender Rights".
(3) Exercisable 100% on January 1, 2001
(4) Exercisable 100% of January 1, 2005
(5) Exercisable 1/2 on January 1, 2001 and 1/2 on January 1, 2002

Option Exercises/Year-End Values

The following table sets forth for each of the Named Officers the number of
shares underlying options and SARs exercised during the fiscal year ended
December 31, 2000, the value realized upon exercise, the number of options/SARs
unexercised at year-end and the value of unexercised in-the-money options/SARs
at year-end.

          AGGREGATE OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND
                       FISCAL YEAR-END OPTION/SAR VALUE


<TABLE>
<CAPTION>
                                                   Number of Shares      Value of Unexercised In-
                                                Underlying Unexercised    the-Money Options /SARs
                   Value of                         Options/SARs at              at
                   Shares                              FY-End(#)               FY End($)(B)
                   Underlying                  ------------------------- -------------------------
Name               Options/SARs Value          Exercisable Unexercisable Exercisable Unexercisable
                   Exercised(#) Realized($)(A)
---------------------------------------------------------------------------------------------------
<S>                <C>          <C>            <C>         <C>           <C>         <C>
Paul A. Allaire... 0            $0             2,042,033     771,111     $0          $0
Anne M. Mulcahy... 0            $0               128,682     380,126     $0          $0
Barry D. Romeril.. 0            $0               217,305     309,490     $0          $0
William F. Buehler 0            $0               153,687     304,232     $0          $0
Allan E. Dugan.... 0            $0               283,445     131,481     $0          $0
G. Richard Thoman. 0            $0               777,170   1,052,060     $0          $0

</TABLE>

--------
(A) The value realized is based upon the difference between the exercise price
    and the average of the high and low prices on the date of exercise.
(B) Excludes grants of stock options made on January 1, 2001 under New LEEP (as
    described in the Report of the Executive Compensation and Benefits
    Committee as follows: P.A. Allaire -- 350,000, A.M. Mulcahy -- 934,600,
    B.D. Romeril -- 467,300, A.E. Dugan -- 280,400.
(C) The value of unexercised options/SARs is based upon the difference between
    the exercise price and the average of the high and low prices on December
    29, 2000 of $4.75. Option/SARs may be accelerated as a result of a change
    in control as described under "Option Surrender Rights".

                                      12


<PAGE>

Retirement Plans

Retirement benefits are provided to the executive officers of the Company
including the Named Officers primarily under unfunded executive supplemental
plans and, due to Internal Revenue Code limitations, to a much lesser extent
under the Company's Retirement Income Guarantee Plan. The table below shows,
under the plans, the approximate annual retirement benefit which would accrue
for the number of years of credited service at the respective salary rates. The
earliest retirement age for benefit commencement is age 60. In the event of a
change in control (as defined in the plans) there is no age requirement for
eligibility. The benefit accrues generally at the rate of 1 2/3% per year of
credited service, but for certain mid-career hire executives the rate is
accelerated to 2 1/2%, including Barry D. Romeril, William F. Buehler and Allan
E. Dugan. No additional benefits are payable for participation in excess of 30
years for those accruing benefits at the rate of 1 2/3% per year and 20 years
for those accruing benefits at 2 1/2% per year.

<TABLE>
<CAPTION>
                      Annual benefits for years of credited service indicated
                              --------------------------------------
Average annual
compensation for five 15 years                  20 years  25 years  30 years
highest years
------------------------------------------------------------------------------
<S>                   <C>                       <C>       <C>       <C>
  400,000............  96,000                     128,000   161,000   192,000
  600,000............ 146,000                     195,000   243,000   242,000
  800,000............ 196,000                     261,000   327,000   392,000
1,000,000............ 246,000                     328,000   410,000   492,000
1,200,000............ 296,000                     395,000   493,000   592,000
1,400,000............ 346,000                     461,000   577,000   692,000
1,600,000............ 396,000                     528,000   660,000   792,000
1,800,000............ 446,000                     595,000   743,000   892,000
2,000,000............ 496,000                     661,000   827,000   992,000
2,200,000............ 546,000                     728,000   910,000 1,092,000
2,400,000............ 596,000                     795,000   993,000 1,192,000
2,600,000............ 646,000                     861,000 1,077,000 1,292,000
2,800,000............ 696,000                     928,000 1,160,000 1,392,000
3,000,000............ 746,000                     995,000 1,243,000 1,492,000
3,200,000............ 796,000                   1,061,000 1,327,000 1,592,000
3,400,000............ 846,000                   1,128,000 1,410,000 1,692,000
3,600,000............ 896,000                   1,195,000 1,493,000 1,792,000
3,800,000............ 946,000                   1,261,000 1,577,000 1,892,000
------------------------------------------------------------------------------
</TABLE>


The maximum benefit is 50% of the five highest years' average annual
compensation reduced by 50% of the primary social security benefit payable at
age 65. The benefits shown are payable on the basis of a straight life annuity
and a 50% survivor annuity for a surviving spouse. The plans provide a minimum
benefit of 25% of defined compensation reduced by such social security benefit
other than for the key executives accruing benefits at the accelerated rate.

The following individuals have the years of credited service for purposes of
the plans as follows:


<TABLE>
<CAPTION>
                       Years of
                       Credited
Name                   Service (A)
-----------------------------------
<S>                    <C>
Paul A. Allaire (B)... 30
Anne M. Mulcahy....... 24
Barry D. Romeril...... 11
William F. Buehler (C) 14
Allan E. Dugan........ 16

</TABLE>

--------
(A) Thirty years is the maximum permitted credited service under the plans.
    Credited service shown reflects the accelerated accrual for mid-career hire
    executives. The years credited service reflected can be applied to the
    annual benefit table above to determine the annual benefit. Under the
    agreement with the Company in connection with his resignation, G. Richard
    Thoman became entitled to a retirement benefit of $800,000 per year
    beginning in May 2000.
(B) Upon Mr. Allaire's death, Mr. Allaire's alternate payee will receive a full
    and unreduced 50% survivor benefit based on Mr. Allaire's accrued benefits
    under the plans.
(C) In connection with his retirement, William F. Buehler became eligible for a
    retirement supplement payable in three equal installments of $280,746
    commencing January 1, 2002, or in a single lump sum of $842,238 if he
    elects prior to December 31, 2001.

                                      13


<PAGE>

Compensation under the plans includes the amounts shown in the salary and bonus
columns under the Summary Compensation Table other than payments under the 1991
Plan to the extent included in the bonus column.

The five highest years average compensation for purposes of the plans as of the
end of the last fiscal year for the Named Officers is P. A. Allaire $2,377,485;
A. M. Mulcahy $550,336; B. D. Romeril $875,100; W. F. Buehler $817,451; and A.
E. Dugan $673,651.

Certain Transactions

Severance Agreements

In October, 2000, with the approval of the Executive Compensation and Benefits
Committee and the Board, the Company entered into agreements with five of its
executive officers, including Paul A. Allaire, Anne M. Mulcahy, Barry D.
Romeril, and William F. Buehler, which provide severance benefits in the event
of termination of employment under certain circumstances following a change in
control of the Company (as defined). The circumstances are termination by the
Company, other than because of death or disability, commencing prior to a
potential change in control (as defined), or for cause (as defined), or by the
officers for good reason (as defined). The officer would be entitled to receive
a lump sum severance payment equal to three times the sum of:

 .     the greater of (1) the officer's annual rate of base salary on the date
       notice of termination is given and (2) his/her annual rate of base
       salary in effect immediately prior to the change in control and

 .     the greater of (1) the annual target bonus applicable to such officer
       for the year in which such notice is given and (2) the annual target
       bonus applicable to such officer for the year in which the change in
       control occurs.

   "Cause" for termination by the Company is the:

    (i)   willful and continued failure of the officer to substantially perform
          his/her duties,

    (ii)  willful engagement by the officer in materially injurious conduct to
          the Company, or

    (iii) conviction of any crime which constitutes a felony.

   "Good reason" for termination by the officer includes, among other things:

    (i)   the assignment of duties inconsistent with the individual's status as
          an executive or a substantial alteration in responsibilities
          (including ceasing to be an executive officer of a public company),

    (ii)  a reduction in base salary and/or annual bonus,

    (iii) the relocation of the officer's principal place of business, and

    (iv)  the failure of the Company to maintain compensation plans in which
          the officer participates or to continue providing certain other
          existing employment benefits.

The agreements provide for the continuation of certain welfare benefits for a
period of 36 months following termination of employment and contain a gross-up
payment (as defined) if the total payments (as defined) are subject to excise
tax imposed under Section 4999 of the Internal Revenue Code of 1986, as
amended.

The agreements also provide that in the event of a potential change in control
(as defined) each officer, subject to the terms of the agreements, will remain
in the employ of the Company for nine months following the occurrence of any
such potential change in control.

The agreements are automatically renewed annually unless the Company gives
notice that it does not wish to extend them. In addition, the agreements will
continue in effect for two years after a change in control of the Company.

The Company has also entered into agreements with 40 other officers or other
key executives, including Allan E. Dugan, that provide identical benefits
described above, except that these officers and key executives would be
entitled to receive a lump-sum severance payment equal to two times their
annual compensation and they would receive welfare benefits continuance for a
period of 24 months.

Termination Arrangements

In connection with his resignation as President and Chief Executive Officer and
as a Director of the Company in May, 2000, G. Richard Thoman received certain
benefits that had been approved by the Committee. These included payment of
prorated 2000

                                      14


<PAGE>

bonus, a cash payment in lieu of continuation of life insurance (which are
reflected in the Summary Compensation Table above) and approved an annual
retirement benefit (see note to the table under Retirement Plans above). All of
Mr. Thoman's outstanding options were amended to be exercisable for the life of
the options (see "Aggregate Options/SAR Exercises in the Last Fiscal Year and
Fiscal Year-End Options/SAR Value" above) subject to Mr. Thoman not making any
derogatory remarks about the Company and not disclosing confidential
information. The Company also agreed to provide Mr. Thoman with an office and
administrative support until May 14, 2002.

In connection with his retirement and consistent with prior practice, the
Company entered into an agreement with William F. Buehler, Vice Chairman of the
Board and a director. The agreement was approved by the Executive Compensation
and Benefits Committee. Among other things, the agreement provides for salary
continuance for twelve months commencing January 15, 2001 at the rate of
$56,250 per month and a retirement supplement payable in three equal
installments of $280,746 commencing on January 1, 2002, or in a single lump sum
of $842,238, if he elects prior to December 31, 2001.

Employment Arrangement

In connection with his continued employment, the Company entered into an
agreement with Carlos Pascual, Executive Vice President. The agreement was
authorized by the Executive Compensation and Benefits Committee. The agreement
arises out of changes made to Xerox Spain's pension plans consistent with
proposed Spanish law requirements. It is designed to mitigate the potential
impact of U.S. income tax on Mr. Pascual's retirement benefit, if any, as a
result of the change in Spanish law. Subject to certain conditions in the
Agreement, the Company has agreed to indemnify Mr. Pascual for U.S. income tax
on his Spanish pension, if necessary. The Agreement also provides that for a
period of three years following Mr. Pascual's employment with the Company he
will be provided with salary continuance at a rate of Spanish Pesetas 4,389,600
per month (approximately $23,100 at current exchange rates) as he serves in the
capacity of Chairman of Xerox Espana, S.A. at the discretion of the CEO of the
Company. He will also be provided with relocation assistance in an amount not
to exceed $100,000. A copy of the Agreement is filed as Exhibit 10(s) to this
Form 10-K Report.

Option Surrender Rights

All non-qualified options under the 1991 and the 1998 Plans are accompanied by
option surrender rights. If there is a change in control, as defined in the
plans, all such rights which are in the money become payable in cash based upon
a change in control price as defined in the plans. The 1991 Plan also provides
that upon the occurrence of such an event, all incentive stock rights and
performance unit rights become payable in cash. In the case of rights payable
in shares, the amount of cash is based upon such change in control price and in
the case of rights payable in cash, the cash value of such rights. Rights
payable in cash but which have not been valued at the time of such an event are
payable at the maximum value as determined by the Executive Compensation and
Benefits Committee at the time of the award. Upon accelerated payment, such
rights and any related non-qualified stock options will be canceled.

Grantor Trusts

The Company has established grantor trusts with a bank for the purpose of
paying amounts due under the deferred compensation plan and the severance
agreements described above, and the unfunded supplemental retirement plans
described above. The trusts are presently unfunded, but the Company would be
required to fund the trusts upon the occurrence of certain events.

Legal Services

The law firm of Akin, Gump, Strauss, Hauer & Feld, of which Vernon E. Jordan,
Jr. is of counsel, was retained by and rendered services to the Company in
2000.

                                      15


<PAGE>

Ten-Year Performance Comparison

The graph below provides a comparison of Xerox cumulative total shareholder
return with the Standard & Poor's 500 Composite Stock Index and the Business
Week Computers and Peripherals Industry Group, excluding Xerox (Peer Group).

[CHART]

<TABLE>
<CAPTION>
                                  Base
                                 Period
Company/Index Name               Dec 90  Dec 91  Dec 92  Dec 93  Dec 94
                                 ------  ------  ------  ------  ------
<S>                             <C>     <C>     <C>     <C>     <C>
XEROX CORPORATION                 $100    $203    $244    $286    $326
S&P 500                            100     131     141     155     157
BUSINESS WEEK COMPUTERS
& PERIPHERALS                      100      97      83      92     118

Company/Index Name       Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00
                         ------ ------ ------ ------ ------ ------
<S>                      <C>    <C>    <C>    <C>    <C>    <C>
XEROX CORPORATION         $463   $546   $781  $1286   %550   $105
S&P 500                    215    265    353    454    496    499
BUSINESS WEEK COMPUTERS
& PERIPHERALS              161    226    304    554    805    570
                                   </TABLE>



The Peer Group consists of the following companies as of December 31, 2000:
Apple Computer, Compaq Computer, Data General, Dell Computer, EMC, Gateway,
Hewlett-Packard, International Business Machines, Iomega, Lexmark International
Group, Micron Electronics, NCR, Quantum, Seagate Technology, Sequent, Silicon
Graphics, Storage Technology, Sun Microsystems, Unisys and Western Digital.

This graph assumes the investment of $100 on December 31, 1990 in Xerox Common
Stock, the S&P 500 Index and the Peer Group Common Stock, and reinvestment of
quarterly dividends at the monthly closing stock prices. The returns of each
company have been weighted annually for their respective stock market
capitalizations in computing the S&P 500 and Peer Group indices.

Section 16(a) Beneficial Ownership Reporting Compliance

There was a failure to file Form 3, Beneficial Ownership Report, on a timely
basis with the SEC as required under Section 16(a) of the Securities Exchange
Act of 1934 on behalf of Herve J. Gallaire and Rafik O. Loutfy with respect to
Incentive Stock Rights which were part of each of their respective initial
holdings, and on behalf of Thomas J. Dolan with respect to his initial position
in the Xerox Stock Fund. An amended Form 3 was filed as soon as the omissions
were discovered; for Mr. Gallaire and Mr. Loutfy on March 8, 2000 and for Mr.
Dolan on August 9, 2000.

                                      16