<PAGE>


                                  SCHEDULE 14A

                     INFORMATION REQUIRED IN PROXY STATEMENT

                            SCHEDULE 14A INFORMATION

                Proxy Statement Pursuant to Section 14(a) of the
                         Securities Exchange Act of 1934

Filed by the Registrant                     [X]
Filed by a Party other than the Registrant  [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement      [ ] Confidential, For Use of the Commission
[ ] Definitive Proxy Statement           Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12

                                   ----------

                               XEROX CORPORATION
                (Name of Registrant as Specified in its Charter)

                                   ----------

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

    (1) Title of each class of securities to which transaction applies:
    (2) Aggregate number of securities to which transaction applies:
    (3) Per unit price or other underlying value of transaction computed
        pursuant to Exchange Act Rule 0-11:
    (4) Proposed maximum aggregate value of transaction:
    (5) Total fee paid:

[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
    Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
    paid previously. Identify the previous filing by registration statement
    number, or the form or schedule and the date of its filing.

    (1) Amount Previously Paid:
    (2) Form, Schedule or Registration Statement No.:
    (3) Filing Party:
    (4) Date Filed:



<PAGE>



                              THE DOCUMENT COMPANY
                               XEROX (Registered)
 
Xerox Corporation
800 Long Ridge Road
P.O. Box 1600
Stamford, Connecticut 06904



July x, 2002


Dear Shareholders:


You are cordially invited to attend the Annual Meeting of Shareholders of Xerox
Corporation to be held Monday September 9, 2002 at the Sheraton Stamford Hotel,
2701 Summer Street, Stamford, Connecticut. As you know it was delayed in order
to give us time to comply with the terms of a settlement we reached with the
Securities and Exchange Commission in April. As part of the settlement we
agreed to restate our results delaying the issuance of our 2001 Annual Report.
Your Board of Directors and Management look forward to greeting in person those
shareholders able to attend.


At the Annual Meeting you will be asked to vote upon the election of eight
Directors, to elect PricewaterhouseCoopers LLP as auditors for 2002 and to
approve an increase in the authorized shares of Common Stock of the Company.
The Board of Directors unanimously recommends that you vote in favor of each of
these proposals.


Three of our current directors will not be standing for reelection for the
coming year. We are deeply grateful for their many contributions to our
Company. Dr. Martha R. Seger, who having attained her 70th birthday since the
last annual meeting, is retiring from the Board under the Board's retirement
policy. Dr. Seger has served 11 years as a member of your Board of Directors.
Thomas C. Theobald, after nearly two decades of service on your Board is also
leaving. Due to an increase in the time and travel commitments that his other
responsibilities require, George J. Mitchell is not standing for reelection.


It is important that your shares be represented and voted at the Annual
Meeting, regardless of whether or not you plan to attend in person. You are
therefore urged to vote your shares using one of the methods described in the
following pages. Voting instructions are set forth in the accompanying voting
instruction and proxy card.



For the Board of Directors,



/s/ Anne M. Mulcahy
Anne M. Mulcahy
Chairman and Chief Executive Officer


 

<PAGE>


Notice of Annual Shareholders' Meeting




<TABLE>
<S>                   <C>
Date and Time:        Monday, September 9, 2002 at 10:00 a.m.

Location:             Sheraton Stamford Hotel
                      2701 Summer Street
                      Stamford, Connecticut

Purpose:              Election of 8 Directors
                      Election of PricewaterhouseCoopers LLP as independent auditors for the year 2002
                      Approve an increase in the authorized shares of Common Stock

Record Date:          July 15, 2002--You are eligible to vote if you were a shareholder of record on
                      this date.

Proxy Voting:         (1) Telephone
                      (2) Internet
                      (3) Proxy
                      Please review the accompanying proxy card for voting instructions.

Importance of Vote:   Whether or not you plan to attend, please submit a proxy as soon as possible to
                      insure that your shares are represented.
</TABLE>


By order of the Board of Directors,


 
/s/ Leslie F. Varon
Leslie F. Varon
Secretary


July x, 2002



<PAGE>

                               TABLE OF CONTENTS



<TABLE>
<S>                                                                              <C>
GENERAL ........................................................................   3
 The Meeting ...................................................................   3
 Shares Entitled to Vote .......................................................   3
 Proxy Voting and Quorum .......................................................   3
 Choices in Voting .............................................................   3
 ESOP Voting Instruction .......................................................   3
 Required Vote .................................................................   4
PROPOSAL 1 -- ELECTION OF DIRECTORS ............................................   4
 Committee Functions, Membership and Meetings ..................................   4
   Audit Committee .............................................................   4
   Nominating Committee ........................................................   5
   Executive Compensation and Benefits Committee ...............................   5
   Finance Committee ...........................................................   5
   Executive Committee .........................................................   5
 Attendance and Compensation of Directors ......................................   6
   Attendance ..................................................................   6
 Summary of Director Annual Compensation .......................................   6
 Terms Used in Biographies .....................................................   6
 Biographies ...................................................................   7
 Ownership of Company Securities ...............................................  10
 Executive Compensation ........................................................  12
   Report of the Executive Compensation and Benefits Committee of the Board ....  12
   Summary Compensation Table ..................................................  16
   Option Grants ...............................................................  17
   Option Exercises/Year-End Values ............................................  18
   Retirement Plans ............................................................  19
 Certain Transactions ..........................................................  20
 Litigation ....................................................................  22
 Ten-Year Performance Comparison ...............................................  24
 Directors and Officers Liability Insurance and Indemnity ......................  25
 Section 16(a) Beneficial Ownership Reporting Compliance .......................  25
PROPOSAL 2 -- ELECTION OF INDEPENDENT AUDITORS .................................  25
 Fees Billed by PricewaterhouseCoopers LLP .....................................  25
 Change in the Company's Certifying Accountant .................................  26
 Audit Committee Report ........................................................  27
PROPOSAL 3 -- SHAREHOLDER APPROVAL OF INCREASE IN AUTHORIZED SHARES OF
 COMMON STOCK OF THE COMPANY ...................................................  28
OTHER MATTERS ..................................................................  29
 Other Actions at Meeting ......................................................  29
 Information about this Solicitation of Proxies ................................  29
 Confidential Voting ...........................................................  29
 Multiple Shareholders Having the Same Address .................................  29
 Availability of Additional Information ........................................  30
REQUIREMENTS FOR SUBMISSION OF PROXY PROPOSALS, NOMINATION OF DIRECTORS
 AND OTHER BUSINESS ............................................................  30
 Shareholder Proposals for 2003 Meeting ........................................  30
 Recommendations to Nominating Committee of Director Candidates ................  30
</TABLE>


                                       2

<PAGE>

                                PROXY STATEMENT


GENERAL


The Meeting

The Board of Directors of Xerox Corporation (Xerox, the Company, we or us) is
requesting your proxy for the Annual Meeting of Shareholders on September 9,
2002 beginning at 10:00 a.m., and any adjournments thereof. The meeting will be
held at the Sheraton Stamford Hotel, 2701 Summer Street, Stamford, Connecticut.


Shares Entitled to Vote

Holders of record of the Company's Common Stock, par value $1 per share (Common
Stock) and Series B Convertible Preferred Stock (Preferred Stock) as of the
close of business on July 15, 2002 are entitled to vote. On that date there
were xxx,xxx,xxx shares of Common Stock and x,xxx,xxx shares of Preferred Stock
outstanding. At the meeting each share of Common Stock is entitled to one vote
on each proposal and each share of Preferred Stock is entitled to six votes on
each proposal.


Proxy Voting and Quorum

Shareholders of record may vote their proxies by telephone, internet or mail.
By using your proxy to vote in one of these ways, you authorize the three
directors whose names are listed on the front of the proxy card accompanying
this Proxy Statement to represent you and vote your shares. Holders of a
majority of the shares entitled to vote at the meeting must be present in
person or represented by proxy to constitute a quorum.


If you attend the meeting, you may of course vote by ballot. But if you are not
present, your shares can be voted only when represented by a properly submitted
proxy.


You may revoke or change your proxy at any time before it is exercised, either
in writing to the Secretary of the Company, or through the internet or by
telephone voting.

Choices in Voting


You have several choices in completing your voting.


o   You may vote on each proposal, in which case your shares will be voted in
    accordance with your choices.


o   In voting on directors, you can either vote FOR all the directors or
    withhold your vote on all or certain of the directors.


o   You may indicate a preference to abstain on any other proposal, in which
    case no vote will be recorded.


o   You may submit a proxy without indicating your voting preferences, in which
    case the proxies will vote your shares:


    --  for election of the directors nominated by the Board of Directors,


    --  for election of PricewaterhouseCoopers LLP as the Company's independent
        auditors for the year 2002, and


    --  for approval of an increase in the authorized shares of Common Stock of
        the Company.


ESOP Voting Instruction


Participants in the Company's Employee Stock Ownership Plan can instruct State
Street Bank and Trust Company as Trustee of the Plan by telephone, internet or
mail how to vote. No matter which method is used, the instructions are
confidential and will not be disclosed to the Company. By using the voting
instruction in one of these ways, you instruct the Trustee to vote the shares
allocated to your Stock Account. You also authorize the Trustee to vote a
proportion of the shares held in the ESOP Trust which have not yet been
allocated, as well as shares for which no instructions have been received.


                                       3

<PAGE>


Required Vote

A plurality of the votes cast is required for the election of directors. The
affirmative vote of a majority of the votes cast is required to approve the
election of PricewaterhouseCoopers LLP (PWC) as independent auditors for the
year 2002. Approval of an increase in the authorized shares of Common Stock
requires a vote "for" by the holders of a majority of all shares of Common
Stock and Series B Convertible Preferred Stock outstanding on July 15, 2002.

Under the law of New York, the Company's state of incorporation, only votes
cast "for" the election of directors or those cast "for" or "against" any other
proposal will be counted in determining whether a nominee for director has been
elected or whether PWC has been elected. Abstentions, broker non-votes and
votes withheld are not treated as votes cast at the meeting for such purpose.
Since approval of the proposal to increase the authorized shares requires a
vote of the holders of a majority of the outstanding shares, both a "negative"
vote and an abstention or non-vote have the affect of being votes against the
proposal.


PROPOSAL 1 -- ELECTION OF DIRECTORS

Shareholders annually elect directors to serve for one year and until their
successors have been elected and shall have qualified. The eight persons whose
biographies appear on pages 7 through 9 have been proposed by the Board of
Directors based on a recommendation by the Nominating Committee of the Board of
Directors, none of whose members is an officer of the Company.

Six of the eight nominees are neither employees nor former employees of Xerox,
its subsidiaries or associated companies. These Board members bring to us
valuable experience from a variety of fields.

If for any reason, which the Board of Directors does not expect, a nominee is
unable to serve, the proxies may use their discretion to vote for a substitute
proposed by the Board of Directors.

Committee Functions, Membership and Meetings

Our Board of Directors has several standing committees: the Audit, Nominating,
Executive Compensation and Benefits, Finance and Executive Committees. Here is
a description of each Committee, the number of meetings held during 2001 and
its membership during 2001:

Audit Committee (13 meetings)

Responsibility:

o   annually recommend to the Board for its nomination, for submission to the
    shareholders for their election, a firm of independent certified public
    accountants (Auditor);

o   review periodically the independence of the Auditor;

o   review the annual fees of the Auditor;

o   review the annual audited consolidated financial statements, changes in
    accounting policies, financial reporting practices and significant reporting
    issues and judgments made in connection with the preparation of such audited
    consolidated financial statements;

o   review with the Auditor the matters required to be discussed by relevant
    guidance in the AICPA Statements on Auditing Standards relating to
    communications with audit committees;

o   review the comments and recommendations contained in the Auditor's and
    Director of Internal Audit's annual summary audit management reports and
    executive management's responses to those reports;

o   review with the management, Auditor and Director of Internal Audit the
    adequacy of internal controls that could significantly affect the Company's
    consolidated financial statements;

o   make a recommendation to the Board with respect to the audited consolidated
    financial statements to be included in the Company's Annual Report to
    Shareholders and the Form 10-K to be filed with the Securities and Exchange
    Commission;

o   examine and make recommendations, if any, with respect to the plans for and
    the results of the annual audit conducted by the Auditor and the Director of
    Internal Audit;


                                       4

<PAGE>

o   discuss with management and the Auditor the Company's quarterly financial
    results prior to the release of earnings and/or the filing of the Company's
    quarterly report on Form 10-Q; and


o   review at least annually with the Company's Ethics Compliance Officer the
    status and results of the annual ethics compliance program.


A Report of the Audit Committee appears below on Page xx under "Report of the
Audit Committee."


Members: Antonia Ax:son Johnson, Hilmar Kopper, N. J. Nicholas, Jr., John E.
Pepper, Martha R. Seger and Thomas C. Theobald, all non-employee directors.


Chairman: Mr. Theobald


All of the members of the Audit Committee are independent as defined in the
listing standards of the New York Stock Exchange, Inc.


Nominating Committee (one meeting)


Responsibility: recommends to the Board of Directors nominees for election as
directors of the Company. The Committee considers the performance of incumbent
directors in determining whether to recommend their nomination.


Members: Vernon E. Jordan, Jr., Hilmar Kopper, Ralph S. Larsen and George J.
Mitchell


Chairman: Mr. Jordan


Executive Compensation and Benefits Committee (seven meetings)


Responsibility:


o   recommends to the Board of Directors the remuneration arrangements for
    senior management of the Company, including the adoption of compensation
    plans in which senior management is eligible to participate and the granting
    of benefits under any such plans; and


o   consults with the Chief Executive Officer and advises the Board with respect
    to senior management succession planning.


Members: Antonia Ax:son Johnson, Ralph S. Larsen, John E. Pepper and Thomas C.
Theobald, all non-employee directors.


Chairman: Mr. Larsen


Finance Committee (four meetings)


Responsibility:


o   oversees the investment management of the Company's employee savings and
    retirement plans; and


o   reviews the Company's asset mix, capital structure and strategies, financing
    strategies, insurance coverage and dividend policy.


Members: Vernon E. Jordan, Jr., George J. Mitchell, N. J. Nicholas, Jr. and
Martha R. Seger, all non-employee directors.


Chairman: Mr. Nicholas


Executive Committee (one meeting)














The Executive Committee has all the authority of the Board of Directors, except
with respect to certain matters that by statute may not be delegated by the
Board of Directors. The committee acts only in the intervals between meetings
of the full Board of Directors. It acts usually in those cases where it is not
feasible to convene a special meeting or where the agenda is the technical
completion of undertakings already approved in principle by the full Board.


Members: Paul A. Allaire, Vernon E. Jordan, Jr., Ralph S. Larsen and Anne M.
Mulcahy.


Chairman: Mr. Allaire

                                       5

<PAGE>


Attendance and Compensation of Directors

Attendance: 17 meetings of the Board of Directors and 26 meetings of the Board
committees were held in 2001. All incumbent directors other than Hilmar Kopper
and John E. Pepper attended at least 75 percent of the total number of meetings
of the Board of Directors and Board committees on which they served.

We believe that attendance at meetings is only one means by which directors may
contribute to the effective management of the Company and that the
contributions of all directors have been substantial and are highly valued.

Summary of Director Annual Compensation

The compensation of directors during 2001 was as follows:



<TABLE>
<S>                            <C>
Cash .......................   $40,000
Committee Meetings .........   $1,500 (for each meeting attended which is not held in connection with a regular
                               Board meeting)
Commitment of Time
 Outside Meetings ..........   $1,500 per activity*
Committee Chairmen .........   $10,000 (per year for non-employee Chairmen of Board Committees)
Restricted Stock ...........   $25,000 (number of shares based upon market value at time fee is
                               payable-quarterly)
Options ....................   5,000 options
Expenses ...................   Out-of-pocket expenses in connection with service
</TABLE>


*   Applies only to commitment of a significant amount of time on substantive
    matters including informal meetings of the Board or a Committee on days when
    there is no formal meeting of the Board or such Committee. Payment of such
    fees are subject to prior approval by the Chairman of the Executive
    Compensation and Benefits Committee except in the case of the Chairman of
    such Committee which must be approved by a majority of the members of such
    Committee.

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 beginning on page 7. 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

To help you consider the nominees, we use a biographical format that provides a
ready reference on their backgrounds. 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 May 31, 2002.

For information on compensation for officers, see the compensation section
starting on page 12.

                                       6

<PAGE>

                      Antonia Ax:son Johnson
[GRAPHIC OMITTED] 

                      Age: 58   Director since: 1996

                      Xerox securities owned: 8,394 common shares and an
                      indirect interest in approximately 15,484 common shares
                      through the Deferred Compensation Plan

                      Options/Rights: 30,000 common shares

 
                      Occupation: Chairman, Axel Johnson Group

                      Education: BA, MA, University of Stockholm, Sweden

                      Other Directorships: Axel Johnson AB; Axel Johnson Inc.;
                      Axel Johnson International; \AhlensAB; Axfood AB;
                      Nordstjernan AB; NCC AB; Axel and Margaret Ax:son Johnson
                      Foundation


Other Background: In 1971 joined the Axel Johnson Group; became primary
stockholder in 1975 and Owner and Chairman in 1982. Chairman of the City
Mission of Stockholm. Board Member, Royal Swedish Academy of Engineering
Sciences and The World Childhood Foundation. Member of the Audit and Executive
Compensation and Benefits Committees of Xerox.


                      Vernon E. Jordan, Jr.
[GRAPHIC OMITTED]     Age: 66   Director since: 1974

                      Xerox securities owned: 34,709 common shares and an
                      indirect interest in approximately 6,809 common shares
                      through the Deferred Compensation Plan

                      Options/Rights: 30,000 common shares

 
                      Occupation: Senior Managing Director, Lazard Freres & Co.
                      LLC; Of Counsel, Akin, Gump, Strauss, Hauer & Feld, LLP

                      Education: BA, DePauw University; JD, Howard University
                      Law School

                      Other Directorships: America Online Latin America, Inc.;
                      American Express Company; Asbury Automotive Group,
                      Callaway Golf Company; Clear Channel Communications,
                      Inc.; Dow Jones & Co., Inc.; Howard University; J.C.
                      Penney Company, Inc.; Revlon Group; Sara Lee Corporation;
                      Shinsei Bank, Ltd (Senior Advisor) and LBJ Foundation.


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, following
ten years as President of the National Urban League, Inc. Member of the Bar of
Arkansas, Georgia and the District of Columbia as well as the U.S. Supreme
Court Bar. Co-Chair of the Ad Council's Advisory Committee on Public Issues.
Member of the Council on Foreign Relations, The American Law Institute, the
American Bar Association, the National Bar Association and the Bilderberg
Meetings. Member of the International Advisory Board of DaimlerChrysler; Fuji
Bank and Barrick Gold. Former Member of the National Advisory Commission on
Selective Service, the American Revolution Bicentennial Commission, the
Presidential Clemency Board, the Advisory Council on Social Security, the
Secretary of State's Advisory Committee on South Africa, the President's
Advisory Committee of the Points of Light Foundation and the Council of the
White House Conference "To Fulfill These Rights." Chairman of the Nominating
Committee and member of the Executive and Finance Committees of Xerox.


                                       7

<PAGE>

                      Yotaro Kobayashi
[GRAPHIC OMITTED]
 
                      Age: 69    Director since: 1987

                      Xerox securities owned: 40,203 common shares

                      Options/Rights: 21,700 common shares

                      Occupation: Chairman of the Board, Fuji Xerox Co., Ltd.
 
                      Education: BA, Keio University; MBA, Wharton Graduate
                      School, University of Pennsylvania

                      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 and was assigned to
Fuji Xerox Co., Ltd. in 1963. Named President and Chief Executive Officer in
1978, Chairman and Chief Executive Officer in 1992 and Chairman of the Board in
1999. Chairman, Keizai Doyukai (Japan Association of Corporate Executives),
Pacific Asia Chairman of the Trilateral Commission and Chairman of the Aspen
Institute Japan. Member, the International Council of JP Morgan; the
International Advisory Board of Booz Allen & Hamilton Inc.; the International
Advisory Board of the Council on Foreign Relations; International Advisory
Panel member for Singapore Technologies; the Advisory Council of the Institute
for International Studies, Stanford University; the Board of Trustees,
University of Pennsylvania and Keio University.





                      Hilmar Kopper
[GRAPHIC OMITTED]     Age: 67    Director since: 1991

                      Xerox securities owned: 27,786 common shares

                      Options/Rights: 25,050 common shares

                      Occupation: Former Chairman of the Supervisory Board,
                      Deutsche BankAG

 
                      Education: High school diploma

                      Other Directorships: Akzo Nobel NV; DaimlerChrysler AG;
                      Solvay SA; Unilever NV

Other Background: Apprenticeship with Rheinisch-Westfalischen Bank AG in
Cologne, 1954. Management trainee at J. Henry Schroder Banking Corporation, New
York. Foreign Department, Deutsche Bank's Central Office in Dusseldorf and
Manager, Leverkusen branch, 1969. Appointed to the Board of Managing Directors
of Deutsche Bank subsidiary European Asian Bank AG in Hamburg, 1972. Executive
Vice President, Deutsche Bank AG, 1975; and Member of the Board of Managing
Directors, Deutsche Bank AG, 1977. Spokesman of the Board of Managing
Directors, December 1989 to May 1997. Member of the Audit and Nominating
Committees of Xerox.

                      Ralph S. Larsen
[GRAPHIC OMITTED]     Age: 63   Director since: 1990

                      Xerox securities owned: 28,379 common shares and an
                      indirect interest in approximately 35,505 common shares
                      through the Deferred Compensation Plan

                      Options/Rights: 30,000 common shares

                      Occupation: Former Chairman and Chief Executive Officer,
                      Johnson & Johnson
 
                      Education: BBA, Hofstra University

                      Other Directorships: Johnson & Johnson; AT&T Wireless

Other Background: Joined Johnson & Johnson in 1962, was named Vice President of
Marketing, McNeil Consumer Products Company in 1980. President of Becton
Dickinson's Consumer Products Division, 1981 to 1983. Returned to Johnson &
Johnson as President of its Chicopee subsidiary in 1983. Named a company Group
Chairman in 1986, and Chairman of the Board and Chief Executive Officer in
1989. Retired in 2002. Former Chairman and a member of the Executive Committee
of The Business Council and member of the Policy Committee of The Business
Roundtable. Fellow, American Academy of Arts and Sciences. Served two years in
the U.S. Navy. Chairman of the Executive Compensation and Benefits Committee
and member of the Executive and Nominating Committees of Xerox.


                                       8

<PAGE>

                      Anne M. Mulcahy
[GRAPHIC OMITTED]
                      Age: 49   Director since: 2000

                      Xerox securities owned: 291,012 common shares; 631 Series
                      B Convertible Preferred shares and an indirect interest
                      in approximately 36,298 shares through the Deferred
                      Compensation Plan

                      Options/Rights: 3,681,448 common shares
 
                      Occupation: Chairman and Chief Executive Officer, Xerox
                      Corporation

                      Education: BA, Marymount College

                      Other Directorships: Target Corporation; Axel Johnson
                      Inc.; Catalyst; Fannie Mae; Fuji Xerox Company, Ltd.

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, Chief
Executive Officer in August 2001 and assumed the additional role of Chairman on
January 1, 2002. Member of The Business Council. Chairman of the Executive
Committee of Xerox.

                      N. J. Nicholas, Jr.
[GRAPHIC OMITTED]     Age: 62   Director since: 1987

                      Xerox securities owned: 26,390 common shares and an
                      indirect interest in approximately 37,135 common shares
                      through the Deferred Compensation Plan

                      Options/Rights: 30,000 common shares

                      Occupation: Investor
 
                      Education: BA, Princeton University; MBA, Harvard
                      University Graduate School of Business Administration

                      Other Directorships: Boston Scientific Corporation;
                      priceline.com, Incorporated; DB CapitalPartners

Other Background: President and Co-Chief Executive Officer, Time-Warner Inc.,
1990 to 1992. Former member of the President's Advisory Committee on Trade
Policy and Negotiations and the President's Commission on Environmental
Quality. Chairman of the Advisory Board of Columbia University Graduate School
of Journalism, Chairman of the Board of Trustees of Environmental Defense and a
member of the Council on Foreign Relations. Chairman of the Finance Committee
and member of the Audit Committee of Xerox.


                      John E. Pepper
[GRAPHIC OMITTED]     Age: 63   Director since: 1990

                      Xerox securities owned: 66,929 common shares and an
                      indirect interest in approximately 5,915 common shares
                      through the Deferred Compensation Plan: immediate family
                      owns 21,000 shares

                      Options/Rights: 30,000 common shares
 
                      Occupation: Chairman of the Executive Committee, The
                      Procter & Gamble Company

                      Education: BA, Yale University

                      Other Directorships: Motorola, Inc.; The Procter & Gamble
                      Company

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. Co-Chair, Development Campaign and Member, Executive Committee, National
Underground Railroad Freedom Center. Senior Fellow, Yale Corporation. Trustee,
Christ Church Endowment Fund. Member of Executive Committee, Cincinnati Youth
Collaborative. Member, American Society of Corporate Executives and Partnership
for Drug Free America. Served three years in the U.S. Navy. Member of the Audit
and Executive Compensation and Benefits Committees of Xerox.


                                       9

<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 the Company's equity securities as of December 31, 2001,
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
--------------------------------------------------------------------------------------------------------------------
<S>                      <C>                                                 <C>                   <C>
Series B Convertible     State Street Bank and Trust Company, as Trustee           7,729,617               100%
 Preferred Stock(2)      225 Franklin Street
                         Boston, MA 02110(3)

Common Stock             State Street Bank and Trust Company, as Trustee          93,614,897(4)           12.2%(5)
                         under other plans and accounts
                         225 Franklin Street
                         Boston, MA 02110

Common Stock             Brandes Investment Partners, L.P.                        76,001,506(6)           10.6%
                         11988 El Camino Real, Suite 500
                         San Diego, CA 92130

Common Stock             Dodge & Cox                                              71,899,723(7)           10.0%
                         One Sansome Street, 35th Floor
                         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 12,978,872 shares, shared voting
      power for 78,674,296 shares, sole dispositive power for 15,076,657 shares
      and shared dispositive power for 78,538,240 shares.

(5)   Percentage based upon assumption that all Series B Convertible Preferred
      Stock were converted into 46,377,702 shares of Common Stock.

(6)   Brandes Investment Partners, L.P. and its affiliate companies and
      partners own these shares in aggregate and have shared voting power for
      61,946,980 and shared dispositive power for 76,001,506.

(7)   Information is as of February 28, 2002. Within the total reported, as to
      certain of the shares, Dodge & Cox has sole voting power for 67,725,423
      shares, shared voting power for 695,700 shares, sole dispositive power
      for 71,899,723 shares and no shared dispositive power for any of the
      shares.


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
directors and nominees for director, each of the current executive officers
named in the Summary Compensation Table below and directors and all current
officers as a group, as of May 31, 2002, were as follows:


                                       10

<PAGE>



<TABLE>
<CAPTION>
                                                      Amount           Total
Name of                                            Beneficially        Stock
Beneficial Owner                                       Owned         Interest
-------------------------------------------------------------------------------
<S>                                               <C>              <C>
Ursula M. Burns ...............................        175,623         591,756
Allan E. Dugan ................................        617,291       1,245,910
James A. Firestone ............................        488,146         773,917
Antonia Ax:son Johnson ........................         33,393          53,878
Vernon E. Jordan, Jr. .........................         59,708          71,518
Yotaro Kobayashi ..............................         56,902          61,903
Hilmar Kopper .................................         47,835          52,836
Ralph S. Larsen ...............................         53,378          93,884
Michael C. Mac Donald .........................        110,506         372,533
George J. Mitchell ............................         35,483          45,656
Anne M. Mulcahy ...............................      1,041,190       4,012,541
N. J. Nicholas, Jr. ...........................         51,389          93,525
John E. Pepper ................................         91,928         102,845
Martha R. Seger ...............................         43,392          59,104
Thomas C. Theobald ............................         52,801          67,991
Directors and All Officers as a group .........      6,175,736      17,179,482
</TABLE>


Percent Owned by Directors and Officers: Less than 1% of the aggregate number
of shares of Common Stock and Series B Stock outstanding at May 31, 2002 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.


                                       11

<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:


o   establishes the policies that govern the compensation paid to Xerox
    executive officers,


o   determines overall and individual compensation goals and objectives,


o   makes awards; and


o   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 on page 24 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 year 2001 presented the Company with many unique challenges. Foremost among
these challenges was the need to retain the senior leadership team in order to
successfully design and implement the Company's Turnaround Program. The
principal retention and variable pay programs used by the Committee in 2001 to
achieve the Company's leadership retention objectives and alignment with the
Company's turnaround efforts are briefly described below:


2001 Cash Retention Awards: At its February 5, 2001 meeting, the Committee
approved cash retention awards totaling approximately $2.8 million to be
payable to 31 corporate officers, including James A. Firestone (awards totaling
$157,900), Ursula M. Burns (awards totaling $211,000) and Michael C. Mac Donald
(awards totaling $152,500), assuming they remained employed by the Company
through the designated payment dates.


Annual Performance Incentive Plan (APIP): Under APIP, executive officers of the
Company may be eligible to receive performance-related cash payments. Payments
are, in general, 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 2001 base salary, for each participating officer.
At its meeting held on February 5, 2001, the Committee established overall
threshold, target and maximum measures of performance and associated payment
schedules.


                                       12

<PAGE>

The performance measures and weightings for 2001 were cash management (40%),
performance profit (40%), and revenue (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 2001, the performance against the measures established at the February 5,
2001 meeting was as follows: cash management was above targeted levels, revenue
growth was negative, and performance profit was below threshold level. In view
of significant concerns with respect to executive retention and the need to
continue progress on the Company's Turnaround Program, at its April 2, 2001
meeting, the Committee approved the payment of amounts equal to annual APIP
target awards to participating executives, including all executive officers. As
approved by the Committee, annual target award amounts were paid over four
quarterly payments. Based on performance against business metrics, no
additional APIP payouts were made for 2001 in relation to overall business
performance. However, four officers, including Michael C. Mac Donald, received
an additional payment under APIP reflecting their organizational performance.

Base Salary Adjustments: At its meeting on February 5, 2001, following a review
of competitive information, the Committee approved base salary adjustments for
select officers. The approved adjustments averaged 2.3% on an annualized basis.
 
Certain executive officers received an additional adjustment to their base
salary level during 2001 as a result of new responsibilities, to reflect
competitive market levels, and/or to address unique retention concerns.

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 such excess
would not be deductible in certain circumstances.

Under EPIP the Committee established a pool of 2% of the Company's Document
Processing profit before tax (PBT) for the 2001 one-year performance period.
For the three-year period commencing in 1999, 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 2001, Paul A. Allaire, Anne M. Mulcahy and other executive
officers participated in EPIP.

For 2001, the PBT pool amounted to zero because of the Company's failure to
achieve positive PBT for the year.

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.


                                       13

<PAGE>


For 2001, 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 Program 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 Program 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. The second annual grant was
made on January 1, 2002. 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 were 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, were eligible to participate in the CEO Challenge Bonus. The CEO
Challenge bonus provided 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 were met. For 2001, the CEO Challenge Bonus was based on
quarterly EPS targets. The EPS targets for two quarters were achieved and bonus
amounts were paid accordingly. For the remaining quarters of 2001, EPS targets
were not achieved and bonus opportunities were forfeited. The CEO Challenge
Bonus Program was terminated on December 31, 2001.

Chief Executive Officer Compensation

The compensation paid to Paul A. Allaire, Chairman and Chief Executive Officer
from January 1, 2001 until July 31, 2001, and Chairman from August 1, 2001
through December 31, 2001 when he retired, was established by the Committee at
its December 4, 2000, February 5, 2001 and April 2, 2001 meetings. The
Committee's actions are described below as they relate to Mr. Allaire's
compensation as reported in the charts and tables that accompany this report.

    Base Salary: Mr. Allaire's annualized base salary remained at $1,200,000.

    2001 Bonus: Mr. Allaire's annual target bonus remained at 100% of base
    salary and quarterly CEO Challenge bonus target remained at 13% of base
    salary. Target bonus payments were made pursuant to the Committee's action
    on April 2, 2001. The CEO Challenge bonus was paid for two quarters of 2001.
   

    Long-Term Incentive: As previously disclosed, 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 vested on
    January 1, 2002, and a restricted stock award of 350,000 shares that vested
    on January 1, 2002. In addition, effective January 1, 2001, Mr. Allaire was
    awarded participation in a cash long-term incentive program that would have
    paid 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. Because the Company's
    performance was below threshold on the measures established under the cash
    long-term incentive program, no payments were made to Mr. Allaire under this
    program.

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 Program, focus Mr. Allaire on the development of his successor and
provide compensation competitive with the Chairmen and Chief Executive Officers
of other companies. Mr. Allaire received no additional separation benefits in
connection with his retirement.

Effective August 1, 2001, Anne M. Mulcahy was elected Chief Executive Officer
of the Company. Effective January 1, 2002, she was elected to the additional
role of Chairman, upon the retirement of Mr. Allaire.

During the year, the Committee took the following actions with respect to the
compensation paid to Mrs. Mulcahy.

    Base Salary: Mrs. Mulcahy's annualized base salary remained at $1,000,000.
 

                                       14

<PAGE>

    2001 Bonus: Mrs. Mulcahy's annual target bonus remained at 100% of base
    salary and her quarterly CEO Challenge Bonus target remained at 13% of base
    salary. Target bonus payments were made pursuant to the Committee's action
    on April 2, 2001. The CEO Challenge Bonus was paid for two quarters of 2001.
   

    Long-Term Incentive: Mrs. Mulcahy received an award under the New LEEP
    program as described earlier in the section summarizing executive officer
    compensation. On January 1, 2001, Mrs. Mulcahy received a stock option grant
    for 934,600 shares that will vest one-third each January 1st following the
    grant effective date, and a restricted stock award for 250,000 shares that
    vested on January 1, 2002. At its meeting on August 28, 2001, following Mrs.
    Mulcahy's election as Chief Executive Officer, the Committee awarded Mrs.
    Mulcahy a stock option grant for 1,000,000 shares that will vest five years
    from the grant effective date.


    Pursuant to New LEEP, effective on January 1, 2002, Mrs. Mulcahy received a
    stock option grant for 934,600 shares that will vest one-third each January
    1st following the grant effective date, and a restricted stock award for
    250,000 shares that will vest on January 1, 2003.


    Retirement arrangement: At its meeting on August 28, 2001, following Mrs.
    Mulcahy's election as Chief Executive Officer, the Committee approved an
    enhanced retirement benefit for Mrs. Mulcahy that will pay a benefit
    beginning at age 55.


The Committee made these awards to provide the incentives necessary to retain
Mrs. Mulcahy and to motivate her to take the actions necessary to implement the
Turnaround Program and to restore shareholder value.


Detailed information concerning Mrs. Mulcahy's compensation as well as that of
other highly compensated executives is displayed on the accompanying charts and
tables.

                                  Ralph S. Larsen, Chairman
                                  Antonia Ax:son Johnson
                                  John E. Pepper
                                  Thomas C. Theobald


                                       15

<PAGE>


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, 2001, and for Paul A. Allaire who served as Chief Executive Officer through
July 31, 2001, for services rendered in all capacities during the fiscal years
ended December 31, 2001, 2000, and 1999. 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
                                                                                      Compensation Awards
                                                                               ---------------------------------
                                                                 Other Annual                       Underlying     All Other
Name and                                            Cash Bonus   Compensation   Restricted Stock   Options/SARs   Compensation
Principal Position               Year   Salary($)     ($) (A)       ($) (B)          ($) (C)          (#) (D)       ($) (E)
-------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>    <C>         <C>          <C>            <C>                <C>            <C>
Anne M. Mulcahy ............... 2001    1,000,000   1,250,000        45,616         1,156,250       1,934,600    42,063
Chief Executive Officer         2000      721,667      45,063       115,023         2,681,250         310,000    34,642
                                1999      425,000           0        88,647                 0          15,328    13,578

Paul A. Allaire ............... 2001    1,200,000   1,500,000        50,954         1,618,750         350,000    16,849
Chairman and Chief              2000    1,125,000     121,875       162,881         2,681,250         450,000    17,055
Executive Officer (F)           1999      975,000           0       118,644                 0          54,764    16,290

Barry D. Romeril .............. 2001      675,000   1,175,000        49,089           963,125         467,300    27,708
Vice Chairman                   2000      641,667      57,500       132,515           804,375         150,000    27,729
                                1999      575,000           0       175,351                 0          24,415    27,141

Allan E. Dugan ................ 2001      500,000     437,500        34,876           346,875         280,400    29,657
Executive Vice President        2000      462,500      37,188        99,471                 0          50,000    29,702
                                1999      425,000           0       112,044                 0          16,066    29,085

James A. Firestone ............ 2001      400,750     463,975        22,179           115,625          93,500    17,853
Senior Vice President           2000      386,000      28,950        39,577           268,125          50,000    18,409
                                1999      384,167           0        31,283           274,024          10,857    18,436

Ursula M. Burns ............... 2001      386,500     507,475        25,892           370,000         149,600    17,250
Senior Vice President           2000      326,667      15,000        53,863           268,125          40,000    17,650
                                1999      240,000           0       172,200                 0           6,255    12,274

Michael C. Mac Donald ......... 2001      355,500     495,775        41,489           115,625          93,500    18,537
Senior Vice President           2000      321,939      18,750        53,319                 0          30,000    19,133
                                1999      265,000           0        73,080                 0           7,466    10,501
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(A) This column reflects annual cash bonuses earned during the years indicated
    under EPIP and for the years 2001 and 2000 includes the CEO Challenge Bonus.
    For 2001, the amount also includes payment of the annual target bonus to all
    covered officers and the payment of cash retention awards as discussed in
    the "Report of the Executive Compensation and Benefits Committee of the
    Board of Directors" as follows: Anne M. Mulcahy -- $0, Paul A. Allaire --
    $0, Allan E. Dugan -- $0, James A. Firestone -- $157,900, Ursula M. Burns --
    $211,000, and Michael C. Mac Donald -- $152,500. Included in the 2001 amount
    for Barry D. Romeril is a special bonus payment of $500,000 as described
    under the section, "Termination Agreements."

(B) Other Annual Compensation includes executive expense allowance, dividend
    equivalents paid on outstanding incentive stock rights and restricted stock
    awards, perquisite compensation, tax-related reimbursements arising from
    relocation and/or international assignments and above-market interest.

(C) As discussed in the report of the Executive Compensation and Benefits
    Committee, for 2001 this column reflects restricted stock awarded under New
    LEEP which is a three-year performance cycle that began on January 1, 2001.
    Restricted stock awarded vests one year from the date of the grant and
    provides the payment


                                       16

<PAGE>

    of dividend equivalents at the same time and in the same amount declared on
    one share of the Company's common stock. For 2000 and 1999, this column
    reflects incentive stock units 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
    restricted shares and units held by the Named Officers and their value as of
    December 31, 2001 (based upon the closing market price on that date of
    $10.42) was as follows: Anne M. Mulcahy -- 353,440 ($3,682,845), Paul A.
    Allaire -- 400,000 ($4,168,000), Barry D. Romeril -- 244,650 ($2,549,253),
    Allan E. Dugan -- 75,000 ($781,500), James A. Firestone -- 38,580
    ($402,004), Ursula M. Burns -- 123,800 ($1,289,996), and Michael C. Mac
    Donald -- 65,188 ($679,259). Excludes the second installment of grants of
    restricted stock made on January 1, 2002 under New LEEP as follows: Anne M.
    Mulcahy -- 250,000 ($2,591,250), Paul A. Allaire -- 0 ($0), Barry D. Romeril
    -- 0 ($0), Allan E. Dugan -- 75,000 ($777,375), James A. Firestone -- 32,500
    ($336,863), Ursula M. Burns -- 80,000 ($829,200), and Michael C. Mac Donald
    -- 25,000 ($259,125).

(D) All stock options were awarded under the 1991 Plan. Stock options were
    awarded under New LEEP on January 1, 2001. Excludes the second installment
    of grants of stock options made on January 1, 2002 under New LEEP as
    follows: Anne M. Mulcahy -- 934,600, Paul A. Allaire -- 0, Barry D. Romeril
    -- 0, Allan E. Dugan -- 280,400, James A. Firestone -- 121,500, Ursula M.
    Burns -- 149,600, and Michael C. Mac Donald -- 93,500.

(E) The amount shown in this column consists of 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.

(F) Retired effective January 1, 2002.


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, 2001. 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 $7.7372 and $12.3203 for the
options with the $4.75 exercise price and $15.0673 and $23.9921 for the options
with the $9.25 exercise price. The amounts shown as potential realizable values
for all shareholders represent the corresponding increases in the market value
of 722,314,289 shares outstanding held by all shareholders as of December 31,
2001. 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.


                                       17

<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>
Anne M. Mulcahy ...............    934,600 (3)        12.72%        $  4.75      12/31/10     $    2,791,883    $     7,075,181
                                 1,000,000 (4)                         9.25      12/31/11          5,817,275         14,742,118
Paul A. Allaire ...............    350,000 (5)         2.30%           4.75      12/31/10          1,045,537          2,649,597
Barry D. Romeril ..............    467,300 (3)         3.07%           4.75      12/31/10          1,395,942          3,537,590
Allan E. Dugan ................    280,400 (3)         1.84%           4.75      12/31/10            837,625          2,122,706
James A. Firestone ............     93,500 (3)         0.61%           4.75      12/31/10            279,308            707,821
Ursula M. Burns ...............    149,600 (3)         0.98%           4.75      12/31/10            446,893          1,132,513
Michael C. Mac Donald .........     93,500 (3)         0.61%           4.75      12/31/10            279,308            707,821
-------------------------------------------------------------------------------------------------------------------------------
All Shareholders ..............        N/A             N/A             N/A          N/A       $4,708,400,497    $11,766,819,891
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


1. Exercise price is based upon fair market value on the effective date of the
   award. Excludes the second installment of grants of stock options made on
   January 1, 2002 under New LEEP as follows: Anne M. Mulcahy -- 934,600, Paul
   A. Allaire -- 0, Barry D. Romeril -- 0, Allan E. Dugan -- 280,400, James A.
   Firestone -- 121,500, Ursula M. Burns -- 149,600, and Michael C. Mac Donald
   -- 93,500.

2. Options may be accelerated as a result of a change in control as described
   under "Option Surrender Rights".

3. Exercisable 33% on each of the following dates: January 1, 2002; January 1,
   2003; and January 1, 2004.

4. Exercisable 100% on August 28, 2006.

5. Exercisable 100% 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, 2001, 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
                                 Value of                       Underlying Unexercised                In-the-Money
                                  Shares                           Options/SARs at                    Options/SARs
                                Underlying                            FY-End(#)                     at FY End($)(A)
                              Options/ SARs       Value     ------------------------------  --------------------------------
Name                           Exercised(#)    Realized($)   Exercisable    Unexercisable    Exercisable    Unexercisable(B)
----------------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>           <C>            <C>              <C>            <C>
Anne M. Mulcahy ...........        0              $0           309,401       2,134,007           $0         $6,362,779
Paul A. Allaire ...........        0              $0         2,171,910         523,724           $0         $1,965,250
Barry D. Romeril ..........        0              $0           404,281         589,814           $0         $2,623,890
Allan E. Dugan ............        0              $0           350,273         345,053           $0         $1,574,446
James A. Firestone ........        0              $0           362,000         154,357           $0         $  525,003
Ursula M. Burns ...........        0              $0            51,360         195,435           $0         $  840,004
Michael C. Mac Donald .....        0              $0            54,009         130,177           $0         $  525,003
----------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       18

<PAGE>

(A) Excludes the second installment of grants of stock options made on January
    1, 2002 under New LEEP as follows: Anne M. Mulcahy -- 934,600, Paul A.
    Allaire -- 0, Barry D. Romeril -- 0, Allan E. Dugan -- 280,400, James A.
    Firestone -- 121,500, Ursula M. Burns -- 149,600, and Michael C. Mac Donald
    -- 93,500.

(B) 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
    31, 2001 of $10.365. Option/SARs may be accelerated as a result of a change
    in control as described under "Option Surrender Rights."


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 that would accrue
for the number of years of credited service at the respective average annual
compensation levels. The earliest retirement age for benefit commencement
generally 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 and Allan E. Dugan. An accelerated benefit accrual also applies to
Officers who were designated as Grandfathered Officers with twice the 1 2/3%
accrual for 15 years and these participants are permitted to retire as early as
age 55 (this group includes both Paul A. Allaire and Anne M. Mulcahy). 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, 20 years for those
accruing benefits at the rate of 2 1/2% per year and 15 years for the
Grandfathered Officers.





<TABLE>
<CAPTION>
                       
Average annual           Annual age 65 benefits for years of credited service indicated
compensation for five    --------------------------------------------------------------
highest years                 15 years       20 years      25 years        30 years
---------------------------------------------------------------------------------------
<S>                         <C>          <C>            <C>            <C>
      300,000 .............     70,000         93,000        117,000        140,000
      400,000 .............     95,000        127,000        158,000        190,000
      600,000 .............    145,000        193,000        242,000        290,000
      800,000 .............    195,000        260,000        325,000        390,000
    1,000,000 .............    245,000        327,000        408,000        490,000
    1,200,000 .............    295,000        393,000        492,000        590,000
    1,400,000 .............    345,000        460,000        575,000        690,000
    1,600,000 .............    395,000        527,000        658,000        790,000
    1,800,000 .............    445,000        593,000        742,000        890,000
    2,000,000 .............    495,000        660,000        825,000        990,000
    2,200,000 .............    545,000        727,000        908,000      1,090,000
    2,400,000 .............    595,000        793,000        992,000      1,190,000
    2,600,000 .............    645,000        860,000      1,075,000      1,290,000
    2,800,000 .............    695,000        927,000      1,158,000      1,390,000
    3,000,000 .............    745,000        993,000      1,242,000      1,490,000
    3,200,000 .............    795,000      1,060,000      1,325,000      1,590,000
    3,400,000 .............    845,000      1,127,000      1,408,000      1,690,000
    3,600,000 .............    895,000      1,193,000      1,492,000      1,790,000
    3,800,000 .............    945,000      1,260,000      1,575,000      1,890,000
---------------------------------------------------------------------------------------
</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.


                                       19

<PAGE>

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 ...............        30
      Barry D. Romeril ..............        13
      Allan E. Dugan ................        18
      James A. Firestone ............         4
      Ursula M. Burns ...............        21
      Michael C. Mac Donald .........        25
----------------------------------------------------
</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 and Grandfathered Officers. The years of credited service
    reflected can be applied to the annual benefit table above to determine the
    annual benefit.

(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.

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: Paul A. Allaire
$2,480,485; Anne M. Mulcahy $868,862; Barry D. Romeril $967,567; Allan E. Dugan
$722,243; James A. Firestone $574,781; Ursula M. Burns $381,861; and Michael C.
Mac Donald $402,235.


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, and Barry D.
Romeril, 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:

    o   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

    o   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


                                       20

<PAGE>

     (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 Ursula M. Burns, Allan E. Dugan, James A. Firestone
and Michael C. Mac Donald, 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

On April 9, 2001, the Executive Compensation and Benefits Committee adopted a
policy consistent with an existing practice, which authorizes the Chairman of
the Board and CEO to enter into salary continuance agreements with selected
officers who are nearing retirement. The purpose of the policy is to serve as a
retention device. The salary continuance period can range between 12 and 24
months and would commence on a date as determined by the CEO. Salary is based
upon the monthly salary in effect when the salary continuance begins. The
current form of agreement provides that engagement by the officer in any
"Detrimental Activity", as defined, would result in forfeiture of salary
continuance, unfunded retirement benefits and bonuses and the cancellation of
outstanding options. The Company has entered into such agreements with certain
officers, including Barry D. Romeril.

In connection with his retirement from the Company, a revised compensation
continuance agreement dated October 3, 2001, with Barry D. Romeril was entered
into by the Company which had been approved by the Committee at its meeting on
September 26, 2001. Among other things, the revised agreement with Barry D.
Romeril provided for:

     o    Compensation continuance at the rate of $101,250 per month for 24
          months, commencing in January 2002;

     o    Award of 50,000 Incentive Stock Rights, effective on September 26,
          2001, that will vest on January 1, 2004,

     o    Payment of target bonus in two quarterly installments of $135,000, and

     o    Payment of an additional bonus amount of $500,000.

The additional compensation was provided to secure Barry D. Romeril's
consulting services of up to 100 days during the period of compensation
continuance in connection with financial transactions of strategic importance
to the Company and to ensure a smooth transition to a new chief financial
officer of the Company.

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 $26,071 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.


                                       21

<PAGE>

In connection with Lawrence A. Zimmerman joining the Company as Senior Vice
President and Chief Financial Officer, the Company and Mr. Zimmerman entered
into a Letter Agreement dated May 20, 2002. Under the terms of the Letter
Agreement, which was presented to and approved by the Executive Compensation
and Benefits Committee, Mr. Zimmerman's initial annual base salary was fixed at
$450,000 and his target bonus of 70% of base salary was established. The actual
bonus amount will depend upon Company performance and Mr. Zimmerman's
performance against specified personal objectives during 2002. He was also
awarded options with respect to 271,500 shares at an option price of $8.975 per
share, the fair market value per share on the effective date of his election.
Of these, 150,000 were issued as a signing bonus and fully vest on January 1,
2005, while the balance of 121,500 were issued as part of his initial New LEEP
award and vest in annual installments of one-third commencing on January 1,
2003. The New LEEP award also included an award of 32,500 restricted shares of
Common Stock vesting on January 1, 2003. Under the Letter Agreement, Mr.
Zimmerman will participate in the Supplemental Executive Retirement Plan with a
minimum retirement benefit of 12.5% of his average eligible compensation after
2.5 years of service. The Company has also entered into a Severance Agreement
with Mr. Zimmerman of the kind described above under "Severance Agreements".
The Severance Agreement would provide a lump-sum severance payment equal to two
times his annual compensation. The Letter Agreement also provides for a lump
sum payment by the Company of $90,000, less applicable withholding taxes, in
lieu of expenses related to his relocation from Boulder, Colorado.

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 restricted stock and incentive
stock 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 LLP, of which Vernon E.
Jordan, Jr. is of counsel, was retained by and rendered services to the Company
in 2001.

Litigation

In re Xerox Derivative Actions: A consolidated putative shareholder derivative
action is pending in the Supreme Court of the State of New York, County of New
York against several current and former members of the Board of Directors
including William F. Buehler, B.R. Inman, Antonia Ax:son Johnson, Vernon E.
Jordan, Jr., Yotaro Kobayashi, Hilmar Kopper, Ralph Larsen, George J. Mitchell,
N.J. Nicolas, Jr., John E. Pepper, Patricia Russo, Martha Seger, Thomas C.
Theobald, Paul Allaire, G. Richard Thoman, Anne Mulcahy and Barry Romeril, and
KPMG, LLP. The plaintiffs purportedly brought this action in the name of and
for the benefit of the Company, which is named as a nominal defendant, and its
public shareholders. The second consolidated amended complaint alleges that
each of the director defendants breached their fiduciary duties to the Company
and its shareholders by, among other things, ignoring indications of a lack of
oversight at the Company and the existence of flawed business and accounting
practices within the Company's Mexican and other operations; failing to have in
place sufficient controls and procedures to monitor the Company's accounting
practices; knowingly and recklessly disseminating and permitting to be
disseminated, misleading information to shareholders and the investing public;
and permitting the Company to engage in improper accounting practices. The
plaintiffs further allege that each of the director defendants breached their
duties of due care and diligence in the management and administration of the
Company's affairs and grossly mismanaged or aided and abetted the gross
mismanagement of the Company and its assets. The


                                       22

<PAGE>

second amended complaint also asserts claims of negligence, negligent
misrepresentation, breach of contract and breach of fiduciary duty against
KPMG. Additionally, plaintiffs claim that KPMG is liable to Xerox for
contribution, based on KPMG's share of the responsibility for any injuries or
damages for which Xerox is held liable to plaintiffs in related pending
securities class action litigation. On behalf of the Company, the plaintiffs
seek a judgment declaring that the director defendants violated and/or aided
and abetted the breach of their fiduciary duties to the Company and its
shareholders; awarding the Company unspecified compensatory damages against the
director defendants, individually and severally, together with pre-judgment and
post-judgment interest at the maximum rate allowable by law; awarding the
Company punitive damages against the director defendants; awarding the Company
compensatory damages against KPMG; and awarding plaintiffs the costs and
disbursements of this action, including reasonable attorneys' and experts'
fees. The individual defendants deny the wrongdoing alleged and intend to
vigorously defend the litigation.

     Pall v. Buehler, et al.: On May 16, 2002, a shareholder commenced a
derivative action in the United States District Court for the District of
Connecticut against KPMG Peat Marwick (KPMG). The Company was named as a
nominal defendant. Plaintiff purported to bring this action derivatively in the
right, and for the benefit, of the Company. He contended that he is excused
from complying with the prerequisite to make a demand on the Xerox Board of
Directors, and that such demand would be futile, because the directors are
disabled from making a disinterested, independent decision about whether to
prosecute this action. In the original complaint, plaintiff alleged that KPMG,
the Company's former outside auditor, breached its duties of loyalty and due
care owed to Xerox by repeatedly acquiescing in, permitting and aiding and
abetting the manipulation of Xerox's accounting and financial records in order
to improve the Company's publicly reported financial results. He further
claimed that KPMG committed malpractice and breached its duty to use such
skill, prudence and diligence as other members of the accounting profession
commonly possess and exercise. Plaintiff claimed that as a result of KPMG's
breaches of duties, the Company has suffered loss and damage. On May 29, 2002,
plaintiff amended the complaint to add as defendants the present and certain
former directors of the Company. He added claims against each of them for
breach of fiduciary duty, and separate additional claims against the directors
who are or were members of the Audit Committee of the Board of Directors, based
upon the alleged failure, inter alia, to implement, supervise and maintain
proper accounting systems, controls and practices. The amended derivative
complaint demands a judgment declaring that the defendants have violated and/or
aided and abetted the breach of fiduciary and professional duties to the
Company and its shareholders; awarding the Company unspecified compensatory
damages, together with pre-judgment and post-judgment interest at the maximum
rate allowable by law; awarding the Company punitive damages; awarding the
plaintiff the costs and disbursements of the action, including reasonable
attorneys' and experts' fees; and granting such other or further relief as may
be just and proper under the circumstances. The individual defendants deny the
wrongdoing alleged and intend to vigorously defend the litigation.

     Lerner v. Allaire, et al.: On June 6, 2002, a shareholder, Stanley Lerner,
commenced a derivative action in the United States District Court for the
District of Connecticut against Paul A. Allaire, William F. Buehler, Barry D.
Romeril, Anne M. Mulcahy and G. Richard Thoman. The plaintiff purports to bring
the action derivatively, on behalf of the Company, which is named as a nominal
defendant. Previously, on June 19, 2001, Lerner made a demand on the Board of
Directors to commence suit against certain officers and directors to recover
unspecified damages and compensation paid to these officers and directors. In
his demand, Lerner contended, inter alia, that management was aware since 1998
of material accounting irregularities and failed to take action and that the
Company has been mismanaged. At its September 26, 2001 meeting, the Board of
Directors appointed a special committee to consider, investigate and respond to
the demand. The special committee is still deliberating. In this action,
plaintiff alleges that the individual defendants breached their fiduciary
duties of care and loyalty by disguising the true operating performance of the
Company through improper undisclosed accounting mechanisms between 1997 and
2000. The complaint alleges that the defendants benefited personally, through
compensation and the sale of company stock, and either participated in or
approved the accounting procedures or failed to supervise adequately the
accounting activities of the Company. The plaintiff demands a judgment
declaring that defendants intentionally breached their fiduciary duties to the
Company and its shareholders; awarding unspecified compensatory damages to the
Company against the defendants, individually and severally, together with
pre-judgment and post-judgment interest; awarding the Company punitive damages;
awarding the plaintiff the costs and disbursements of the action, including
reasonable attorneys' and experts' fees, and granting such other or further
relief as may be just and proper. The individual defendants deny the wrongdoing
alleged and intend to vigorously defend the litigation.


                                       23

<PAGE>

Acting pursuant to the Company's By-Laws and consistent with the BCL the Board
of Directors has authorized the Company to advance all reasonable fees and
expenses, including attorneys' fees actually and necessarily incurred by the
individuals named as defendants in the foregoing Pall v Buehler, et al. and
Lerner v. Allaire, et al. in the defense of such actions. These individuals
have, in accordance with the requirements of the BCL, executed an undertaking
to repay such expenses if they are finally found not be entitled to
indemnification under the Company's By-Laws and the BCL. To date, the Company
has advanced approximately $13,000 in expenses on behalf of the individuals in
both of such actions. Similar action by the Board of Directors with respect to
the predecessor cases to the In re Xerox Derivative Actions has been previously
reported to shareholders.


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).


                               [GRAPHIC OMITTED]


                        
 


<TABLE>
<CAPTION>
                             Base
                            Period
Company Name/Index          Dec 91     Dec 92       Dec 93       Dec 94       Dec 95
-------------------------- -------- ------------ ------------ ------------ ------------
<S>                        <C>      <C>          <C>          <C>          <C>
  XEROX CORP                 $100    $  120.48    $  141.13    $  161.05    $  228.50
--------------------------   ----    ---------    ---------    ---------    ---------
  S&P 500 INDEX               100       107.62       118.46       120.03       165.13
--------------------------   ----    ---------    ---------    ---------    ---------
  BUSINESS WEEK COMPUTERS
  & PERIPHERALS               100        83.26        94.22       121.15       165.16



<CAPTION>
Company Name/Index            Dec 96       Dec 97       Dec 98       Dec 99       Dec 00      Dec 01
-------------------------- ------------ ------------ ------------ ------------ ----------- ------------
<S>                        <C>          <C>          <C>          <C>          <C>         <C>
  XEROX CORP                $  269.43    $  385.01    $  623.77    $  244.87    $  51.67    $  117.38
--------------------------  ---------    ---------    ---------    ---------    --------    ---------
  S&P 500 INDEX                203.05       270.79       348.18       421.44      383.07       337.54
--------------------------  ---------    ---------    ---------    ---------    --------    ---------
  BUSINESS WEEK COMPUTERS
  & PERIPHERALS                238.28       332.15       598.73       903.60      627.54       495.68
</TABLE>


The Peer Group consists of the following companies as of December 31, 2001:
Apple Computer, Compaq Computer, Dell Computer, EMC, Gateway, Hewlett-Packard,
International Business Machines, Lexmark International, Maxtor, Palm, Quantum
DLT and Storage Systems, Silicon Graphics, Storage Technology, Sun
Microsystems, Unisys and Western Digital.


This graph assumes the investment of $100 on December 31, 1991 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.


                                       24

<PAGE>


Directors and Officers Liability Insurance and Indemnity

On June 21, 2002 the Company extended its policies for directors and officers
liability insurance covering all directors and officers of the Company and its
subsidiaries. The policies are issued by Executive Risk Specialty Indemnity,
Inc., Gulf Insurance Company, XL Specialty Insurance Company, Twin City Fire
Insurance Company, Houston Casualty Company, Rock River Insurance Company and
Allied World Assurance Company. The policies have a one-year term from June 25,
2002 to June 25, 2003 and a total annual premium of $4,902,607.

The company has received a payment under previously issued policies of $244,870
for reimbursement of investigation cost in connection with a shareholder
derivative suit filed in the New York State Supreme Court, County of Monroe
titled James M. Hartman vs. G. Richard Thoman et. al. The case has since been
dismissed by the court and the time for appeal has expired.

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 James A. Firestone and Jean-Noel Machon who purchased
shares of the Company's common stock. The purchases were reported as soon as
the omissions were discovered; for Mr. Firestone on September 27, 2001 and for
Mr. Machon on January 10, 2002.

PROPOSAL 2 -- ELECTION OF INDEPENDENT AUDITORS

The Board of Directors recommends that PricewaterhouseCoopers LLP (PWC),
independent certified public accountants, be elected independent auditors of
the Company for 2002. The recommendation is made on the advice of the Audit
Committee composed of non-employee directors (see page 5). PWC is a member of
the SEC Practice Section of the American Institute of Certified Public
Accountants. Representatives of the firm are expected to be at the meeting to
respond to appropriate questions and to make a statement, if they wish.

Fees Billed by PWC

Audit Fees

The aggregate PWC fees for audit services for the year ended December 31, 2001,
including for reviews of the financial statements included in the Company's
Quarterly Reports on Form 10-Q for such year, were $10.4 million. Additionally,
fees of $21.2 million were incurred related to the reaudit of the financial
statements for the years ended December 31, 1999 and 2000. As of December 31,
2001, $2.9 million of the total fees for audit services had been billed.

Financial Information Systems Design And Implementation Fees

The aggregate fees billed by PWC for services related to financial information
systems design and implementation for the year ended December 31, 2001, were
$19.6 million.

All Other Fees

Aggregate fees billed for all other services rendered by PWC for the year ended
December 31, 2001 were $20.4 million. The services included fees arising from
the engagement of PWC by Akin, Gump, Strauss, Hauer & Feld and Paul, Weiss,
Rifkind, Wharton & Garrison and Skadden, Arps, Slate, Meagher & Flom,
respectively, in connection with the independent investigations on behalf of
the Audit Committee with respect to accounting matters conducted during 2001.
In addition, the fees included services to the Company in connection with the
non-public investigation by the Division of Enforcement of the SEC into
accounting matters and the review by the Division of Corporation Finance and
the Office of Chief Accountant of the SEC concerning our method of accounting
for sales-type leases. The fees also included certain statutory audits,
services with respect to securities offerings, internal audit services (which
have since been terminated), tax advisory services and advisory services with
respect to process and control improvement.

The above fees for non-audit services include amounts billed during 2001 prior
to PWC's appointment as the Company's independent auditors on October 4, 2001.

The Audit Committee has reviewed the above fees for non-audit services and
believes such fees are compatible with the independent accountants'
independence.

                                       25

<PAGE>

Change in the Company's Certifying Accountant.

On October 4, 2001, we ended the engagement of KPMG LLP and retained
PricewaterhouseCoopers LLP as our independent auditors. At that time, we filed
a Current Report on Form 8-K dated September 28, 2001. The text of the Form 8-K
Report that we filed is as follows:

"On October 4, 2001, Xerox Corporation ("Company") determined to change the
Company's independent accountants, and, accordingly, ended the engagement of
KPMG LLP ("KPMG") in that role and retained PricewaterhouseCoopers LLP as its
independent accountants for the fiscal year ending December 31, 2001. The Audit
Committee of the Board of Directors (the "Audit Committee") and the Board of
Directors of the Company approved the decision to change independent
accountants.

The reports of KPMG on the financial statements of the Company for each of the
fiscal years ended December 31, 2000 and December 31, 1999 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. Except to the extent
discussed below, for the fiscal years ended December 31, 2000 and December 31,
1999 and through the date of the 8-K, there were no disagreements with KPMG on
any matter of accounting principles or practices, financial statement
disclosure or audit scope or procedure which, if not resolved to the
satisfaction of KPMG, would have caused it to make reference to the subject
matter of such disagreement in its reports on the financial statements for such
fiscal years. Nor, except to the extent discussed below, were there any
reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K for
the fiscal years ended December 31, 2000 and December 31, 1999 and through the
date of the 8-K. With respect to the matters discussed below, the Audit
Committee discussed them with KPMG and authorized KPMG to respond fully to
inquiries of PWC concerning them.

In March 2001, KPMG informed management and the Audit Committee that it wished
to expand significantly the scope of its audit work in connection with the
audit of the Company's 2000 financial statements. KPMG proposed that certain
additional procedures be performed, including that the Audit Committee appoint
Special Counsel to conduct an inquiry into certain issues, which procedures
were performed in March, April and May, 2001.

While the expanded procedures were being performed, KPMG informed the Audit
Committee and management that KPMG was unwilling to rely on representations by
two employees in one of the Company's geographic operating units. Management
removed those employees from responsibility in connection with the Company's
system of financial reporting.

As a result of observations during its 2000 audit, and other information
discussed with the Audit Committee, KPMG reported certain material weaknesses
in the Company's internal control systems and made recommendations concerning
certain components of the Company's business:

o   KPMG emphasized the importance for internal control of the tone set by the
    Company's top management. KPMG noted that, as a result of its audit and
    information reported by Special Counsel, it believed there was evidence that
    management was not successful in setting the appropriate tone with respect
    to financial reporting. It recommended that the Company take steps to
    remediate appropriately those issues. Certain personnel changes were made
    based in part on KPMG views offered to the Audit Committee and management.

o   Customer Business Operations in the Company's North American Solutions
    Group. KPMG noted issues with regard to CBO's ability to bill customers
    accurately for services, and noted that difficulties in that area had
    resulted in unfavorable billing adjustments during 2000. Although KPMG
    recognized that the Company had initiated several steps to address this
    issue, it concluded that it remained unclear when those changes would result
    in sustained improvement in reducing non-cash resolution adjustments of
    billing differences. It acknowledged that this weakness did not suggest that
    the net trade receivable account balance is unreasonably stated at December
    31, 2000, but that proper reporting required extensive evaluation of billing
    adjustments during the fourth quarter. KPMG suggested various business and
    operational changes to address this issue.

o   Communication of Accounting and Control Policies. KPMG noted that policy
    documents need to be updated, among other things to address issues
    identified by the Company's worldwide audit function, Special Counsel and
    KPMG, and recommended that the Company also provide increased formal
    training to ensure that its personnel understand the accounting and control
    guidance in its policies.


                                       26

<PAGE>

o   Consolidation and Corporate-Level Entries. KPMG observed that the Company's
    quarterly consolidation process is manually intensive, requiring numerous
    adjustments at corporate financial reporting levels. It recommended that the
    Company's Consolidated Financial Information System be augmented to enhance
    the monitoring and review of corporate-level and manual entries, and further
    that the Company ensure adequate segregation of duties in the preparation
    and approval of such entries.

o   Appropriateness of the Concessionaire Business Model in Latin American
    Countries. KPMG noted that during 2000, analysis by the Company's worldwide
    audit function indicated that certain issues existed with respect to this
    business model, including that certain concessionaires may lack economic
    substance independent of the Company, and that certain business practices
    involving concessionaires resulted in allowances with respect to receivables
    in 2000. KPMG suggested periodic assessment of the financial position of
    prospective and existing concessionaires, and that the Company monitor its
    business relationship with them to ensure that they are substantive
    independent distributors of the Company's products.

In addition to those items, KPMG noted that organizational changes, including
the Company's Turnaround Program and associated reductions in headcount, had
and would continue to stress the Company's internal control structure. KPMG
recommended that the Company take steps to ensure that issues likely to impact
the control environment receive appropriate management attention. KPMG also
recommended improved balance sheet account reconciliation and analysis on a
global basis, in particular with respect to intercompany balances.

The foregoing matters were considered by KPMG in connection with their 2000
audit and did not result in any adverse opinion or disclaimer of opinion or any
qualification or modification as to uncertainty, audit scope or accounting
principles. KPMG's auditor's report dated May 30, 2001 contained a separate
paragraph stating that the Company's 1999 and 1998 consolidated financial
statements had been restated.

The Company commenced actions in fiscal 2000 and expanded actions in fiscal
2001 which, collectively, it believes have effectively addressed the
above-discussed matters.

The Company has provided KPMG a copy of the 8-K and requested KPMG to furnish
it with a letter addressed to the Securities and Exchange Commission stating
whether it agrees with the statements made herein." A copy of such letter,
dated October 4, 2001, was filed as an Exhibit to the 8-K.

Audit Committee Report

The responsibilities of the Audit Committee are discussed under "Committee
Functions, Membership and Meetings" on page 4.

Management is responsible for the Company's internal controls and the financial
reporting process. The independent accountants are responsible for performing
an independent audit of the Company's consolidated financial statements in
accordance with generally accepted auditing standards and to issue a report
thereon. The Committee's responsibility is to monitor and oversee these
processes.

Consistent with the foregoing the Audit Committee:

o   Reviewed and discussed the audited consolidated financial statements of the
    Company for the year ended December 31, 2001 and the restated financial
    statements for the two years ended December 31, 2000 with the management of
    the Company and PWC including the Company's key accounting policies and use
    of estimates;

o   Discussed with PWC the matters required to be discussed by relevant AICPA
    guidance in Statements on Auditing Standards (Communication With Audit
    Committees); and

o   Received and reviewed the written disclosures and the letter from PWC
    required by Independence Standards Board Standard No. 1 (Independence
    Discussions With Audit Committees) and discussed with PWC that firms
    independence.

o   In the second quarter 2001, engaged the law firm of Paul, Weiss, Rifkind,
    Wharton & Garrison as Special Counsel to conduct an independent review of
    the Company's accounting policies and practices.

o   Conducted periodic reviews of progress to implement recommendations received
    from Special Counsel and to address the issues raised by KPMG in connection
    with its 2000 audit described above.


                                       27

<PAGE>

Based upon the foregoing review and discussions, the Audit Committee
recommended to the Board of Directors that the audited consolidated financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 for filing by the Company with the SEC.



                                                 Thomas C. Theobald, Chairman
                                                 Antonia Ax:son Johnson
                                                 Hilmar Kopper
                                                 N. J. Nicholas
                                                 John E. Pepper
                                                 Martha R. Seger

PROPOSAL 3 -- SHAREHOLDER APPROVAL OF INCREASE IN AUTHORIZED SHARES OF COMMON
STOCK OF THE COMPANY

On June 26, 2002, the Board of Directors recommended that action be taken by
shareholders to amend the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock, $1 par value, from
1,050,000,000 to 1,750,000,000 shares. As of June 26, 2002 there were
727,678,553 shares issued and outstanding, and 133,769,577 were reserved for
issuance in connection with (i) conversion of notes due in 2014, (ii) exchange
of non-voting exchangeable Class B shares of Xerox of Canada, Inc. (XCI), (iii)
equity for debt exchanges, (iv) conversion of convertible subordinated
debentures due 2018, and (v) 7 1/2% Convertible Junior Subordinated Debentures
due 2021. In addition, as of June 26, 2002 there were 164,601,469 shares
reserved for issuance in connection with the following equity based
compensation plans: (i) employee's stock option and similar plans, (ii) upon
exercise of Rights under Executive Rights Plans of affiliated companies, (iii)
conversion of Series B Convertible Preferred Stock held by the Xerox Employee
Stock Ownership Plan and (iv) Non-Employee Director Stock Option. Thus, as of
June 26, 2002 the maximum number of unreserved shares which may be issued was
23,950,401.

Adoption of the proposed amendment would provide 750,000,000 additional shares
for future issuance. Although these additional unreserved shares would provide
future flexibility, there are no specific present plans or proposed
transactions for their use.

The holders of the Company's Common Stock have no preemptive rights as to
additional issues of Common Stock or securities convertible into or entitling
the holder to purchase Common Stock.

The additional shares of Common Stock sought by the amendment will be available
for issuance without further action by shareholders, unless such action is
required by applicable law or the rules of any stock exchange on which the
Company's securities may then be listed. The New York Stock Exchange currently
requires specific shareholder approval as a prerequisite to listing shares in
several instances, including an acquisition transaction where the present or
potential issuance of shares could result in an increase of 20% or more in the
number of shares of Common Stock outstanding.

The Board of Directors is of the opinion that the proposed increase in the
number of authorized shares of Common Stock is in the best interest of the
Company and its shareholders. The Board of Directors believes that the Company
should have sufficient authorized but unissued shares for issuance in order to
access the capital markets by offering shares of Common Stock or other
securities exchangeable or convertible into shares of Common Stock for cash.
Although no specific transactions have been arranged, management intends to
access the capital markets opportunistically and as soon as practicable for the
purpose of funding debt maturities. In addition the Board believes that the
Company should have sufficient but unissued shares for issuance in connection
with equity for debt exchanges, implementation of employee benefit plans,
mergers and acquisitions, stock splits and stock dividends, and other proper
business purposes. In many such situations prompt action may be required which
would not permit seeking shareholder approval to authorize additional shares
for the specific transaction on a timely basis. The Board of Directors believes
that it is important to have the flexibility to act promptly in the best
interests of shareholders.

Although the purpose of seeking an increase in the number of authorized shares
of Common Stock is not intended for anti-takeover purposes, SEC rules require
disclosure of charter and by-law provisions that could have an anti-takeover
effect. These include: (i) Board authority under its Certificate of
Incorporation to issue one or more series of preferred stock up to a maximum of
approximately 12 million shares presently available; (ii) under the By-Laws a
special meeting of shareholders may only be called by the Chairman of the Board
or the Board of


                                       28

<PAGE>

Directors; (iii) the Series B Convertible Preferred Stock, which votes with the
Common Stock and represents approximately 6% of the entire voting stock of the
Company, is held by the Xerox Employee Stock Ownership Plan and the trustee for
said Plan votes all such shares in all matters as directed by the employees of
the Company on whose behalf such shares are held by the trustee; and (iv) a
shareholder rights plan under the Rights Agreement, dated as of April 7, 1997,
between Xerox and BankBoston, N.A., as amended, (rights agreement) which could
have a deterrent effect against a takeover of the Company. Each new share of
Common Stock authorized under the proposal will represent one-half of a
purchase right under the rights agreement which will trade automatically with
the Common Stock and become exercisable only upon the occurrence of certain
events which are fully described in the rights agreement.

It is proposed to amend the lead-in paragraph of Article FOURTH of the Restated

Certificate of Incorporation of the Company to read as follows to effect the
increase in authorized shares of Common Stock.

"FOURTH: The aggregate number of shares which the Corporation shall have the
authority to issue is 1,750,000,000 shares of Common Stock, of the par value of
$1.00 each (hereinafter referred to as "Common Stock") and 22,543,067 shares of
Cumulative Preferred Stock, of the par value of $1.00 each (hereinafter
referred to as "Cumulative Preferred Stock")."

To be adopted, the amendment to the Certificate of Incorporation to increase
the number of authorized shares of Common Stock must be approved by the holders
of a majority of all shares of Common Stock and Series B Convertible Preferred
Stock outstanding on July 15, 2002.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE AMENDMENT.

OTHER MATTERS

Other Actions at Meeting

The Board of Directors does not intend to present any other matters at this
meeting. The Board has not been informed that any other person intends to
present any other matter for action at this meeting. If any other matters
properly come before the meeting, the persons named in the accompanying proxy
intend to vote the proxies in accordance with their best judgment.

Information About this Solicitation of Proxies

In addition to the solicitation of proxies by mail, certain of our employees
may solicit proxies without extra remuneration. We also will request brokerage
houses, nominees, custodians and fiduciaries to forward soliciting material to
the beneficial owners of stock held of record and will reimburse such person
for the cost of forwarding the material. We have engaged D.F. King & Co., Inc.
to handle the distribution of soliciting material to, and the collection of
proxies from, such entities. We will pay D.F. King & Co., Inc. a fee of $10,000
plus reimbursement of out-of-pocket expenses for this service. We will bear the
cost of all proxy solicitation.

Confidential Voting

As a matter of policy, we keep confidential proxies, ballots and voting
tabulations that identify individual shareholders. Such documents are available
for examination only by the inspector of election and certain of our employees
and our transfer agent who are associated with processing proxy cards and
tabulating the vote. The vote of any shareholder is not disclosed except in a
contested proxy solicitation or as may be necessary to meet legal requirements.
 

Multiple Shareholders Having the Same Address

If you and other residents at your mailing address own shares of Common Stock
through a broker, you may have received a notice from the broker notifying you
that your household will be sent only one Annual Report and Proxy Statement. If
you did not return the "opt-out" card attached to such notice you were deemed
to have consented to such process. The broker or other holder of record will
send at least one copy of the Annual Report and Proxy Statement to your
address. You may revoke your consent at any time upon written request with your
name, the name of your brokerage firm and your account number to Householding
Department, 51 Mercedes Way, Edgewood, NY 11717. The revocation will be
effective 30 days following its receipt. In any event, the Company will send a
copy of the Annual Report and Proxy Statement to you if you address your
written request to Xerox Corporation,


                                       29

<PAGE>

Shareholder Services, P.O. Box 1600, Stamford, CT 06904 or call Shareholder
Services at (203) 968-3034. If you are receiving multiple copies of annual
reports and proxy statements at your address and would like to receive only one
copy in your household, please contact us at the foregoing address and
telephone number.


Availability of Additional Information


Copies of the 2001 annual report of the Company have been distributed to
shareholders (unless you have consented to electronic delivery). Additional
copies and additional information, including the annual report (Form 10-K)
filed with the SEC and the consolidated statistical data contained in the EEO-1
annual report to the U.S. Equal Employment Opportunity Commission are available
without charge from Investor Relations, Xerox Corporation, P.O. Box 1600,
Stamford, Connecticut 06904. The annual report, proxy statement and Form 10-K
are also available on the Company's website at www.xerox.com/investor.


REQUIREMENTS FOR SUBMISSION OF PROXY PROPOSALS, NOMINATION OF DIRECTORS AND
OTHER BUSINESS


Shareholder Proposals for 2003 Meeting


We expect to hold our 2003 Annual Meeting during the second half of May and to
issue our proxy statement for that meeting during the first half of April.


Under the SEC proxy rules if a shareholder wants us to include a proposal in
our proxy statement and form of proxy for the 2003 Annual Meeting of
Shareholders, the proposal must be received by us at P.O. Box 1600, Stamford,
Connecticut 06904, Attention: Secretary-no later than December 13, 2002.


Under our By-Laws any shareholder wishing to make a nomination for director, or
wishing to introduce any business, at the 2003 Annual Meeting of Shareholders
must give the Company advance notice as described in the By-Laws. To be timely,
we must receive your notice for the 2003 Annual Meeting at our offices
mentioned above no earlier than November 13, 2002 or later than December 13,
2002. Nominations for director must be accompanied by written consent to being
named in the proxy statement as a nominee and to serving as director if
elected.


Recommendations to Nominating Committee of Director Candidates


Shareholders who wish to recommend individuals for consideration by the
Nominating Committee may do so by submitting a written recommendation to the
Secretary of the Company, P.O. Box 1600, Stamford, Connecticut 06904.
Submissions must include sufficient biographical information concerning the
recommended individual, including age, employment and board memberships (if
any), for the committee to consider. The submission must be accompanied by a
written consent by the nominee to stand for election if nominated by the Board
of Directors and to serve if elected by the shareholders. Recommendations
received by December 31, 2002 will be considered for nomination at the 2003
Annual Meeting of Shareholders. Recommendations received after December 31,
2002 will be considered for nomination at the 2004 Annual Meeting of
Shareholders.


By Order of the Board of Directors,



Leslie F. Varon
Secretary
July x, 2002

                                       30

<PAGE>











                                                                      2980-PS-02


<PAGE>


                                XEROX CORPORATION
                       ELECTION TO OBTAIN PROXY MATERIALS
                        ELECTRONICALLY INSTEAD OF BY MAIL

     Xerox Corporation shareholders may elect to receive the Company's future
     annual reports and proxy statements and to vote their shares through the
     Internet instead of receiving copies through the mail: Xerox is offering
     this service to provide added convenience to its shareholders and to reduce
     annual report printing and mailing costs.

     To take advantage of this option, shareholders must subscribe to one of the
     various commercial services that offer access to the Internet World Wide
     Web. Costs normally associated with electronic access, such as usage and
     telephone charges, will be borne by the shareholder.

     To elect this option, go to website http://www.econsent.com/xrx.
     Shareholders who elect this option will be notified each year by e-mail how
     to access the proxy materials and how to vote their shares on the Internet.

     If you consent to receive the Company's future proxy materials
     electronically, your consent will remain in effect unless it is withdrawn
     by calling, writing, or e-mailing our Transfer Agent, EquiServe Trust
     Company, N.A., at: 1-800-828-6396; P.O. Box 43010: Providence, RI
     02940-3010; http://www.equiserve.com. Also, if while this consent is in
     effect you decide you would like to receive a hard copy of the proxy
     materials, you may call, write or e-mail our Transfer Agent.


   YOU MAY ACCESS THE XEROX CORPORATION ANNUAL REPORT AND PROXY STATEMENT AT:
                          http://www.xerox.com/investor


   IF YOU VOTE BY PHONE OR INTERNET. PLEASE DO NOT MAIL BACK YOUR PROXY CARD.
                            DETACH HERE IF MAILING.



                        VOTING INSTRUCTION AND PROXY CARD

                                XEROX CORPORATION
                         ANNUAL MEETING OF SHAREHOLDERS
                      10:00 A.M. TUESDAY, September 9, 2002
                             SHERATON STAMFORD HOTEL
                    2701 SUMMER STREET, STAMFORD, CONNECTICUT

           THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
                        FROM SHAREHOLDERS OF COMMON STOCK

     The undersigned appoints VERNON E. JORDAN, JR., RALPH S. LARSEN AND ANNE M.
MULCAHY, and each of them (or, if more than one are present, a majority of those
present), as proxies for the undersigned, with full power of substitution, to
represent the undersigned and to vote the shares of Common Stock of the Company
which the undersigned is entitled to vote at the above annual meeting and at all
adjournments thereof, (a) in accordance with the following ballot, and (b) in
accordance with their best judgment in connection with such other business as
may come before the meeting.


           NOTICE TO PARTICIPANTS IN THE EMPLOYEE STOCK OWNERSHIP PLAN

     This card also constitutes voting instructions for participants in the
Xerox Corporation Employee Stock Ownership Plan. A Participant who signs below
hereby instructs State Street Bank & Trust Company, Trustee, to vote the shares
of stock allocated to his or her Stock Account and a proportion of the shares
held in the ESOP Trust which have not yet been allocated, as well as shares for
which no instructions have been received in accordance with the following
direction.



-----------                                                         -----------
SEE REVERSE   IMPORTANT - TO BE SIGNED AND DATED ON REVERSE SIDE    SEE REVERSE
   SIDE                                                                 SIDE
-----------                                                         -----------




<PAGE>


XEROX CORPORATION
c/o EquiServe
P.O. Box 43068
Providence, RI 02940-3068



NOW YOU CAN VOTE YOUR SHARES BY TELEPHONE OR INTERNET!

QUICK * EASY * IMMEDIATE * AVAILABLE 24 HOURS A DAY * 7 DAYS A WEEK

   Your telephone or Internet vote authorizes the named proxies or Trustee to
   vote your shares in the same manner as if YOU marked, signed, and returned
   your card. To vote by phone or Internet, read the accompanying proxy
   statement and ballot and then follow these easy steps:


----------------------
  Vote by Telephone
----------------------
It's fast, convenient, and immediate! 
Call Toll-Free on a Touch-Tone Phone

Follow these four easy steps:

--------------------------------------------------------------------------------
1.   Read the accompanying Proxy Statement and Proxy Card.

2.   Call the toll-free number
     1-877-PRX-VOTE (1-877-779-8683). For shareholders residing outside the
     United States, call collect on a touch-tone phone 1-201-536-8073. 
     There is NO CHARGE for this call.

3.   Enter your 14-digit Voter Control Number located on your Proxy Card above
     your name.

4.   Follow the recorded instructions.
--------------------------------------------------------------------------------

Your vote is important!
Call 1-877-PRX-VOTE anytime!


----------------------
  Vote by Internet
----------------------
It's fast, convenient, and your vote is immediately 
confirmed and posted. 

Follow these four easy steps:

--------------------------------------------------------------------------------
1.   Read the accompanying Proxy Statement and Proxy Card.

2.   Go to the Website
     http://www.eproxyvote.com/xrx

3.   Enter your 14-digit Voter Control Number located on your Proxy Card above
     your name.

4.   Follow the instructions provided.
--------------------------------------------------------------------------------

Your vote is important!
Go to http://www.eproxyvote.com/xrx anytime!


    Do not return your Proxy Card if you are voting by telephone or Internet


                    RECEIVE FUTURE MATERIALS VIA THE INTERNET

          You may elect to receive future proxy and other materials over the
          Internet if you have an e-mail account and access to the Internet. 
          To take advantage of this offer, please access
          http://www.econsent.com/xrx and then simply follow the instructions.

                             YOUR VOTE IS IMPORTANT!

   IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL BACK YOUR PROXY CARD.
                             DETACH HERE IF MAILING

[X]   Please mark
      votes as in
      this example.

Unless marked otherwise, this voting instruction and proxy card will be voted
FOR the election of Directors, FOR the election of independent auditors and FOR
approval of an increase in Authorized Shares of Common Stock.



1.   Election of Directors nominated by the Board (Pages X to X)
Nominees: (01) Antonia Ax:son Johnson, (02) Vernon E. Jordan, Jr.,
(03) Yotaro Kobayashi, (04) Hilmar Kopper, (05) Ralph S. Larsen,
(06) Anne M. Mulcahy, (07) N.J. Nicholas, Jr., (08) John E. Pepper.


   FOR                          WITHHELD
   ALL     [ ]             [ ]  FROM ALL
 NOMINEES                       NOMINEES

[ ]
   --------------------------------------
   For all nominees except as noted above
   

                                             FOR       AGAINST        ABSTAIN

2.   Election of Independent Auditors.       [ ]         [ ]            [ ]



3.   Approval of an Increase in Authorized   [ ]         [ ]            [ ]
     Shares of Common Stock


I PLAN TO ATTEND THE ANNUAL MEETING                                     [ ]
    (A ticket will be sent to you.)


MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT                           [ ]

PLEASE SIGN AS IMPRINTED HEREON AND RETURN PROMPTLY. WHEN SIGNING 
IN A REPRESENTATIVE CAPACITY, PLEASE PROVIDE TITLE.



Signature:                                  Date:                    
           -------------------------------       ---------------


Signature:                                  Date:                    
           -------------------------------       ---------------