FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
(Mark One)
(X)  Annual Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
     For the fiscal year ended:  December 31, 1994 
( )  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 For the transition period from: ______ to ______
 
XEROX CORPORATION
(Exact name of registrant as specified in its charter)
 
1-4471
(Commission file number)
 
New York                                                            16-0468020
(State of incorporation)                  (I.R.S. Employer Identification No.)

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

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

Common Stock, $1 par value                             New York Stock Exchange
                                                       Chicago Stock Exchange
$3.6875 Ten-Year Sinking Fund Preferred Stock          New York Stock Exchange


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

The aggregate market value of the voting stock of the registrant held by non-
affiliates as of February 28, 1995 was:                $12,737,543,642.


(Cover Page Continued)


Indicate the number of shares outstanding of each of the registrant's classes 
of common stock, as of the latest practicable date:
 
Class                                         Outstanding at February 28, 1995

Common Stock, $1 Par Value                                 106,491,150 Shares
Class B Stock, $1 Par Value                                      1,000 Shares


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

Xerox Corporation 1994 Annual Report to Shareholders          I & II

Xerox Corporation Notice of 1995 Annual Meeting of            III
Shareholders and Proxy Statement (to be filed not later
than 120 days after the close of the fiscal year covered
by this report on Form 10-K).



PART I


Item 1. Business

Overview

Xerox Corporation (Xerox or the Company) is a global company serving the 
worldwide document processing markets.  The Company distributes its products 
in the Western Hemisphere through divisions and wholly-owned subsidiaries, in 
Europe and Africa through companies in which the Company has an 80 percent 
financial interest and The Rank Organisation Plc (RO) has a 20 percent 
financial interest as of February 28, 1995, and in Japan and other areas of 
the Pacific Rim, Australia and New Zealand by Fuji Xerox Co. Ltd. (Fuji 
Xerox), an unconsolidated joint venture, which is equally owned by Fuji Photo 
Film Company, Ltd. of Japan and Rank Xerox Limited (Rank Xerox).  On February 
28, 1995, Xerox paid RO 620 million pounds sterling, or approximately $970 
million, to increase the Xerox financial interest in Rank Xerox to about 80 
percent from 67 percent.

The Company's Document Processing activities encompass developing, 
manufacturing, marketing, servicing and financing a complete range of document 
processing products and services designed to make offices around the world 
more productive.  The Company believes that documents will play a central role 
in business, government and educational organizations far into the future and 
that efficient processing of documents offers significant opportunities for 
productivity improvements.  The financing of Xerox equipment is generally 
carried out by Xerox Credit Corporation (XCC) in the United States and 
internationally by foreign financing subsidiaries and divisions in most 
countries that the Company operates.  Document Processing operations employed 
87,600 people worldwide at year-end 1994.

In December 1993, the Company announced a worldwide Document Processing 
restructuring program with the objectives of continuing to significantly 
reduce the cost base and to improve productivity. As a result of the program, 
the Company expects to reduce its worldwide Document Processing work force by 
more than 10,000 employees by early 1996.  In addition, the Company identified 
specific facilities to be closed, which are publicly announced as local 
implementation plans are finalized.

During 1994, actual savings of the restructuring program approximated $350 
million.  The cost savings resulting from the program are estimated to be 
approximately $700 million in 1995 and at higher amounts thereafter.  Some of 
these savings are being reinvested to reengineer various business processes, 
to support the Company's expansion into emerging markets, and to mitigate 
anticipated effects of continuing pressure on gross margins.

In January 1993, the Company announced its decision to concentrate on the core 
Document Processing business and disengage from the Insurance and Other 
Financial Services (IOFS) businesses.  Consistent with this objective, The Van 
Kampen Merritt Companies, Inc. (VKM), an investment advisory organization, and 
Furman Selz Holding Corporation (Furman Selz), an institutional brokerage, 
investment banking and management firm, were sold in 1993.  In 1994, Shields 
Asset Management, Inc. (Shields), a Furman Selz subsidiary, and Regent 
Investor Services, Incorporated (Regent), a subsidiary of Shields were sold.  
Contracts were also signed in 1994 to sell Constitution Re Corporation (CRC) 
and in 1995 to sell Xerox Financial Services Life Insurance Company and 
related companies (Xerox Life).  Both sales will close after regulatory 
approvals.

The only continuing Financial Services business is the Insurance segment, 
which includes Talegen Holdings, Inc. (Talegen), a holding company of seven 
property and casualty insurance operating groups and three insurance related 
service companies, Ridge Reinsurance Limited (Ridge Re) and that portion of 
the Xerox Financial Services, Inc. (XFSI) headquarters costs and interest 
expense associated with the continuing business activities.  The Company will 
continue to implement its strategy for divesting the remaining insurance 
businesses in an orderly and disciplined way.


The ongoing operations of XCC and the international financing companies that 
finance the purchase of Xerox equipment are unaffected by the decision to 
disengage from IOFS.

A detailed discussion of the Company's major businesses follows.

Document Processing

The Document Processing Strategy

The Company believes that documents represent the knowledge base of an 
organization and will play a dynamic and central role in business, government, 
education and other organizations far into the future:

-  Increasingly, documents are being created and stored in digital electronic 
form.
-  The use of electronically created paper documents will continue to 
increase.

The Company's focus is on improving its customers' operational efficiency and 
creating customer value by providing innovative document technologies, 
products, systems, services and solutions that allow its customers to:

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

-  Scan, store, retrieve, view, revise and distribute documents electronically 
anywhere in an organization.

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

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

Consistent with this focus, in 1994 the Company launched open document 
services initiatives for the production publishing and printing industries to 
provide customers with:

-  A single, seamless and user-friendly network that allows people anywhere to 
print documents on demand, where they are needed, without technology acting as 
a barrier.

-  Open systems that are flexible, scalable, modular and configurable.

- Advanced equipment and software that capture cost and productivity 
advantages.

The Company has formed alliances to bring together the diverse infrastructures 
that currently exist and to nurture the development of open standards for 
production publishing and printing.

Market Overview

Based on its extensive research and analysis, the Company believes that the 
worldwide markets, excluding Japan and the Pacific Rim, for document 
processing products and services exceeded $200 billion in 1994. Xerox' 
worldwide document processing revenues were $15.1 billion in 1994, of which 52 
percent were generated in the United States, 31 percent in Europe, and 17 
percent in the remainder of the world (excluding the unconsolidated revenues 
of Fuji Xerox which operates in Japan and much of the Pacific Rim).

The Company is focused on market segments (Target Markets) which it believes 
represent about half of the document processing markets.  Within the Target 
Markets, the Company has traditionally had a strong position in the black-and-
white copying market, which is expected to grow at a rate approximating real 
economic growth in North America and Western Europe, and at a faster rate in 
the developing countries.  The remaining market segments, which include 
digital publishing, electronic printing, and color copying and printing, are 
expected to grow at a substantially higher rate.  With the Company's many new 
product introductions over the past four years, its participation in the 
Target Markets has been considerably broadened and is expected to increase.  
This growth will be driven by the transfer of document production from offset 
printing to digital publishing, increasing customer requirements for network 
and distributed printing, and accelerating demand for color documents.

Xerox Focus

The Company believes it is well positioned with a broad, competitive product 
line to participate fully in the anticipated growth in the market segments in 
which it competes.

Black-and-White Copying

The Company estimates that the black-and-white copying market was 
approximately $32 billion in 1994.

The Company's future growth in the black-and-white copier market will largely 
be a function of maintaining a broad, competitive product line which addresses 
changing customer requirements, offering a consistently high level of service, 
building new marketing initiatives from its strong relationship with major 
accounts, expanding sales coverage through indirect channels, and extending 
its leadership position in the rapidly growing markets for facilities 
management and in developing countries.

The Company has a strong position with major accounts who demand a 
consistently high level of service worldwide.  The response times to customer 
calls are uniformly short, the diagnostic equipment is state-of-the-art and 
twenty-four-hour-a-day, seven-day-a-week service is available.

The Company has extended its successful major account marketing initiatives to 
major associations, like the American Medical Association, which represent 
more than two million current and prospective customers.  In addition, the 
Company has significantly increased the number of independent agents selling 
Xerox equipment to these association accounts.

The market for commercial copiers is expanding rapidly in developing countries 
in Latin America, Eastern Europe, the Commonwealth of Independent States, 
Africa, China and India.  The Company's 1994 revenues in all of these markets 
grew faster than the growth in the developed markets.

Digital Products

The Company's digital products fall into three broad categories:  Digital 
Publishing, Electronic Printing, and Color Copying and Printing.  Each is 
discussed below:

Digital Publishing

In 1990, the era of digital publishing was launched and the Company announced 
the DocuTech family which represents a transformation in the technical 
foundation of the Company's traditional copier business.

Digital publishing technology is increasingly replacing older, traditional 
offset printing as customers seek improved productivity and cost savings, 
faster turnaround of document preparation, and the ability to print documents 
"on demand".  As electronics costs continue to decline and the technology 
improves, the Company estimates that the potential industry market for digital 
publishing will reach $5 billion by 1997.

Electronic Printing

The Company estimates that the electronic printing market was approximately 
$20 billion in 1994 and is growing modestly.

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

The Company has had a strong position in the high-end electronic printing 
market segment since 1977, particularly in data centers with high-volume 
printing requirements.  The Company is well positioned to capitalize on the 
growth in the electronic printing market because of both its innovative 
technologies and its understanding of customer requirements for distributed 
printing from desktop and host computers.

Color Printing and Copying

The Company estimates that the color copying and printing market was $5 
billion in 1994 and is expected to grow to $11 billion in 1997.

The use of color originals in the office is accelerating.  Independent studies 
have concluded that color documents are more effective in communicating 
information.  The vast majority of industry shipments of workstations and 
personal computers have color monitors, creating the need for economical, 
convenient and reliable, high-quality color copying and printing.

Facilities Management

Another growth opportunity is the Xerox facilities management business which 
provides printing, publishing, duplicating and related services to 
approximately 1,500 customers, including legal firms, financial institutions, 
insurance agencies and manufacturing companies.  The Company's revenues from 
these services, which are largely in the U.S., had excellent growth in 1994.  
The Company is also aggressively building this business in Europe, Canada and 
Latin America.

Xerox Products

The Company believes that its success is due to its ability to continually 
improve the features and performance of its products based on meeting 
demonstrated customer needs, competitive pricing levels, and its excellent 
reputation for performance and service.

Black-and-White Copying

Xerox markets a broad line of black-and-white office copiers and duplicators.  
The products range from a three-copy-per-minute personal copier to a 135-copy-
per-minute fully-featured duplicator to copiers designed for engineering and 
architectural drawings up to 3 feet by 4 feet in size.  Over the past three 
years, the Company has introduced 28 new copiers and duplicators across the 
entire spectrum of its product line.  These products have improved ease of 
use, reliability, copy quality, job recovery and ergonomics.  Productivity-
enhancing features allow the preparation of completed sets of booklets:  
printed on both sides of the paper, collated, covers and tabs inserted, and 
stapled or bound; all accomplished in-line, without manual operations.  Many 
of the higher-volume products are equipped with modems which allow the Company 
to remotely monitor copy quality and wear and tear, and schedule service 
calls, frequently before the customers are aware of any deviation in product 
performance.

Digital Publishing

The DocuTech family of digital publishers scans hard copy and converts it to 
digital documents, or accepts digital documents directly from networked 
personal computers or workstations.  A user-friendly electronic cut-and-paste 
workstation allows the manipulation of images or the creation of new 
documents.  For example, in only a few minutes, a page of word-processed text, 
received over a network, can be combined with a photograph which is scanned 
from hard copy and enhanced electronically:  cropped, positioned precisely, 
rotated, brightened or sharpened.  Digital masters can be prepared in a 
fraction of the time necessary to prepare offset plates, thereby allowing fast 
turnaround time.  DocuTech prints high-resolution (600 dots per inch) pages on 
both sides of a sheet of paper at up to 135 impressions per minute.  The in-
line finisher staples completed sets or finishes booklets with covers and 
thermal-adhesive bindings.  Because the finished document can be stored as a 
digital document, hard copy documents can be printed on demand, or only as 
required, thus avoiding the long production runs and high storage and 
obsolescence costs associated with offset printing.

Electronic Printing

Xerox pioneered and continues to be a worldwide leader in electronic laser 
printing, which combines computer, laser, communications and xerographic 
technologies.  The Company markets a broad line of robust printers with speeds 
that range from eight pages per minute (ppm) to the industry's fastest cut-
sheet printer at 135 ppm.  Many of these printers have simultaneous interfaces 
that can be connected to multiple host computers as well as local area 
networks.

Breakthrough technology allows printing, in a single pass through the 
Company's highlight color printers, black-and-white plus one customer-
changeable color (as well as shades, textures and mixtures of each) at 
production speeds up to 92 ppm.  Other manufacturers' highlight color printers 
require additional passes to add variable color, which increase cost, reduce 
speed and reliability and introduce the possibility of color misalignment.

Productivity-enhancing features include printing collated multiple sets on 
both sides of the paper, inserting covers and tabs, printing checks with 
magnetic ink character recognition (MICR), and stapling; all on cut sheet 
plain paper, with sizes up to 11 by 17 inches.

Color Copying and Printing

Xerox entered the digital color market in 1991 with the introduction of the 
Xerox 5775 digital copier which is targeted at the production market segment.  
The 5775 copies high resolution full color at 7.5 ppm, black-and-white at 30 
ppm, and allows the colorizing of black-and-white documents.  The Xerox 4700 
is a highly cost-efficient, full-color 7.5 ppm electronic printer that also 
prints black-and-white at 30 ppm.  The 4700 prints complete collated documents 
incorporating both black-and-white and color pages in a single step and at 
optimum speeds.  It offers a broad array of connectivity options for both the 
office network and host computer environments.  The MajestiK color copier 
series, introduced in 1993, offers benchmark copy quality and 
price/performance, and prints full color at 6 ppm and black-and-white at 36 
ppm.  The MajestiK series is targeted at the expanding market for color in the 
office.  In 1994, the Company introduced the Xerox 4900 color laser printer 
for networked office groups printing at up to 1200 by 300 dpi resolution and 
three ppm for full color and 12 ppm for black-and-white.

Other Products

Xerox also offers a wide range of other document processing products including 
engineering copiers, ink-jet and electrostatic printers, facsimile products, 
scanners, personal computer and workstation software, and integrated systems 
solutions.

The Company also sells cut-sheet paper to its customers for use in their 
Document Processing products.

Summary of Revenues by Product Category

The following table summarizes the Company's revenues by major product 
category.  The revenues for black-and-white copiers, digital products and 
other products include equipment and supply sales, service and rental 
revenues, and finance income.  These revenues and the revenues from paper
sales exclude the impact of foreign currency exchange rate fluctuations which 
are shown separately.

     Year ended December 31 (in billions)   1994       1993       1992
     Black-and-white copiers               $ 9.4      $ 9.0      $ 8.9
     Digital products                        3.3        2.8        2.4
     Other products                          1.5        1.5        1.4
     Paper                                   0.8        0.7        0.8
     Foreign currency translation            0.1        0.2        0.8
     Total revenues                        $15.1      $14.2      $14.3

Xerox Competitive Advantages

Although the document processing industry is highly competitive, the Company 
believes that it enjoys significant competitive advantages because of its 
dedication to customer satisfaction, its total quality management processes, 
its substantial on-going investment in research and development, its large and 
highly-skilled direct sales and service forces, and the creativity and 
accountability of its business divisions.

Customer Satisfaction

The Company's highest priority is customer satisfaction.  The Company's 
research shows that satisfied customers are far more likely to repurchase 
products and that the cost of selling a replacement product to a satisfied 
customer is far less than selling to a "new" customer.  The Company regularly 
surveys customers on their satisfaction, measures the results, analyzes the 
root causes of dissatisfaction, and takes steps to correct any problems.  
Based on these surveys, customer satisfaction in the United States was over 90 
percent in 1994.  Similar results have been achieved in other important 
markets.

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

Quality

The Company was an early pioneer in total quality management and is the only 
company to have won all three of the following prestigious quality awards:  
the Malcolm Baldrige National Quality Award in the United States in 1989, the 
European Quality Award in 1992 and the Deming Prize in Japan, won by Fuji 
Xerox in 1980.  In addition, the Company has won top quality awards in 
Australia, Belgium, Brazil, Canada, Colombia, France, Hong Kong, India, 
Ireland, Mexico, the Netherlands and the United Kingdom.  The Company's 
"Leadership Through Quality" program has enabled the Company to significantly 
reduce its costs, accelerate the introduction of new products, improve 
customer satisfaction and increase market share.  Xerox products have been 
consistently rated among the world's best by independent testing 
organizations.

Research and Development

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

In 1994, R&D expense was $895 million compared with $883 million in 1993 and 
$922 million in 1992. The Company expects to increase its investment in 
technological development in 1995 and over the longer term to maintain its 
premier position in the rapidly changing document processing market.  The 
Company's R&D spending is strategically coordinated with Fuji Xerox. The R&D 
investment by Fuji Xerox was approximately $500 million in 1994, bringing the 
total to almost $1.4 billion.

Marketing

Xerox document processing products are principally sold directly to users by 
its worldwide sales force of approximately 13,000 employees.  The Company also 
markets through a network of independent agents, dealers, distributors and 
value-added resellers and has arrangements with U.S. retail marketing 
channels, including Sears, Office Depot, Office Max, Service Merchandise, 
Staples, Wal-Mart, Costco, The Wiz, Price Club and MicroAge, to market low-end 
products not generally suited for distribution through the Company's direct 
sales force.  These products are now sold through approximately 3,000 retail 
stores.

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

Service

The Company has a worldwide service force of approximately 28,000 employees.  
In the opinion of the Company, this direct service force is a significant 
competitive advantage:  the response times to customer calls are uniformly 
low, the service force is continually trained on the Company's new products, 
and the diagnostic equipment is state-of-the-art.  Many of the Company's 
products are equipped with modems which allow the Company to remotely monitor 
copy quality and wear and tear, and schedule service calls, frequently before 
the customers are aware of any deviation in product performance.  Twenty-four-
hour-a-day, seven-day-a-week service is available in most metropolitan areas 
in the United States.  The Company is able to guarantee a consistent level of 
service nationwide and worldwide because its service force is not focused 
exclusively on metropolitan areas and it does not rely on independent local 
dealers for service.

Organization

In 1992, the Company implemented a major change in the way it manages the 
Document Processing business by establishing business divisions which work in 
partnership with the geographically-based customer operations divisions:  
United States Customer Operations, Rank Xerox in Europe, Americas Customer 
Operations in Latin America, and Xerox of Canada.

The Company's business divisions have end-to-end responsibility for designing, 
engineering, and marketing their products and services.

The customer operations divisions are responsible for all of the activities 
relating to the customer, including sales, service, administration and support 
for most of the Xerox products and services.

The Company believes that this organizational architecture combines the speed, 
creativity, accountability and flexibility of a small company with the 
economies of scale, resources and strategic vision of a large corporation.

Non-equipment Revenues

Non-equipment revenues from supplies, paper, service, rentals, facilities 
management and other revenues, and income from customer financing, which 
represented 65 percent of total revenues in 1994, are less volatile than 
equipment sales revenues, and therefore provide significant stability to 
overall revenues.  Growth in these revenues is primarily a function of the 
growth in the Company's installed population of equipment, usage and pricing. 
The balance of the Company's revenues is derived from equipment sales.  These 
sales, which drive the non-equipment revenues, depend on the flow of new 
products and are more affected by economic cycles.

Most Xerox customers have their equipment serviced by and use supplies sold by 
the Company.  The market for cut-sheet paper is highly competitive and revenue 
growth is significantly affected by pricing.  The Company's strategy is to 
charge a spread over mill wholesale prices. Rental revenues have declined for 
a number of years, reflecting customer trends toward outright purchase of 
equipment, in part due to the attractive financing options offered by the 
Company.

The Company offers its document processing customers financing of their 
purchases of Xerox equipment primarily through XCC in the United States, 
largely by wholly-owned financing subsidiaries in Europe, and through 
divisions in Canada and Latin America.  The Company's financing operations 
have expanded over the past several years in recognition of customer demand 
and the associated profit opportunities.

While competition for this business from banks and other finance companies 
remains extensive, the Company actively markets its equipment financing 
services on the basis of customer service, convenience and competitive rates.  
Approximately 80 percent of U.S. equipment sales and 70 percent of European 
equipment sales are financed through the Company.  Over time, the growth rate 
of financing income is expected to correspond to the growth rate of equipment 
sales and trends in interest rates.

International Operations

The Company's international operations account for 48 percent of Document 
Processing revenues.  Xerox' largest interest outside the United States is the 
"Rank Xerox Companies" in which the Company has an 80 percent financial 
interest and The Rank Organisation Plc (RO) has a 20 percent financial 
interest as of February 28, 1995.  On February 28, 1995, Xerox paid RO 620 
million pounds sterling, or approximately $970 million, to increase the Xerox 
financial interest in Rank Xerox to about 80 percent from 67 percent.  
Marketing and manufacturing operations are also conducted through joint 
ventures in India and China.  Marketing and manufacturing in the Americas 
Customer Operations organization are conducted through subsidiaries or 
distributors in 40 countries.  Marketing and manufacturing in Japan and other 
areas of the Pacific Rim, Australia and New Zealand are conducted by Fuji 
Xerox.

Xerox' financial results by geographical area for 1994, 1993 and 1992, which 
are presented on pages 34 and 62 of the Company's 1994 Annual Report to 
Shareholders, are incorporated by reference in this document.

Insurance and Other Financial Services

In January 1993, the Company announced its decision to concentrate its 
resources on its core document processing business and to disengage from IOFS, 
which at that time included Talegen Holdings, Inc.(Talegen),Ridge Reinsurance 
Limited (Ridge Re), The Van Kampen Merritt Companies, Inc. (VKM), Xerox 
Financial Services Life Insurance Company (Xerox Life) and Furman Selz Holding 
Corporation (Furman Selz).  As the disengagement plan developed in 1993, Other 
Financial Services (OFS) which included VKM, Xerox Life and Furman Selz 
qualified as discontinued operations and are accounted for as such.

Contracts were signed to sell Constitution Re Corporation (CRC) to EXOR 
America Inc. in 1994 and Xerox Financial Services Life Insurance Company 
(Xerox Life) to a subsidiary of General American Life Insurance Company in 
1995. Both sales will close after regulatory approvals.  The Company will 
continue to implement its strategy for divesting the remaining insurance 
businesses in an orderly and disciplined way.

At December 1994, the Company's investment in Insurance amounted to $3,645 
million, which excludes the effect of unrealized losses on investment 
securities.  The ultimate exit from the insurance businesses and the recovery 
of the investment could take several years.  During the disengagement process, 
the Company will continue to be exposed to all the business risks of its 
insurance businesses.  The Company anticipates that future income or losses 
from its insurance businesses may vary widely as the disengagement strategy is 
implemented, due to, among other reasons, the recognition of proceeds of sales 
or other forms of disengagement and the results from operations of the 
remaining insurance businesses.  No assurances can be given as to the timing 
of the disengagement process, the amount and timing of proceeds of sales or 
other forms of disengagement from insurance units or the impact the remaining 
insurance businesses will have on the Company's total results from operations 
during the disengagement process.

Status of Insurance

The Insurance segment includes Talegen, a holding company of seven property 
and casualty insurance operating groups and three insurance related service 
companies, Ridge Re and that portion of the Xerox Financial Services, Inc. 
(XFSI) headquarters costs and interest expense associated with the continuing 
business activities.  In 1993, Talegen established and capitalized seven 
insurance operating groups, each of which includes one or more legal insurance 
entities (the "Insurance Companies").  Each of the Insurance Companies 
maintains its own investment portfolio, loss reserves and capital.  The 
insurance department in every state was sent information and given the 
opportunity to comment on the plan of recapitalization and legal 
restructuring.  Additionally, the recapitalization and legal restructuring was 
approved by the insurance departments of all states in which Talegen's 
Insurance Companies are domiciled.  The objective of the Talegen restructuring 
was to strengthen the insurance operating groups and facilitate the 
realization of shareholder value.

The seven insurance operating groups and their areas of specialization are:

- Constitution Reinsurance is a New York-based treaty and facultative 
reinsurer and had gross written premiums in 1994 of $545 million.

- Coregis is a Chicago based writer of tailored professional liability and 
other property/casualty programs, programs for non-profit organizations and 
public officials, and specialty coverages for schools and industry groups.  
This insurance operating group has 1994 gross written premiums of $371 
million.

- Crum & Forster Insurance is New Jersey based and is a national writer of 
commercial property and casualty insurance through a select retail network of 
independent custom agents.  Gross written premiums in 1994 were $1,022 
million.

- Industrial Indemnity is based in San Francisco and focuses on workers 
compensation coverage and services primarily in western states.  Gross written 
premiums in 1994 were $370 million.

- The Resolution Group is based in Chicago and manages those Talegen 
operations that no longer write new business and provides reinsurance 
collection services.

- Viking is a non-standard personal automobile insurer with gross written 
premiums of $152 million in 1994.

- Westchester Specialty Group, a wholesale commercial umbrella, excess 
casualty and specialty property company based in Atlanta, had 1994 gross 
written premiums of $334 million.

In connection with the 1993 restructuring and the regulatory approvals, XFSI 
agreed to provide various forms of capital support to ensure that statutory 
capital requirements of the newly established legal entities were met.  The 
capital contributions consisted of $235 million in cash, which was used to 
purchase portfolio investments, and $100 million of XFSI promissory notes 
(guaranteed by the Company).  In connection with actions taken to strengthen 
the Talegen balance sheet at the end of 1992, XFSI also provided support in 
the form of $200 million in notes guaranteed by the Company.

XFSI also agreed that support would be provided in the form of excess of loss 
reinsurance protection issued by Ridge Re, XFSI's wholly-owned Bermuda 
reinsurance company established in 1992.  XFSI is obligated to pay annual 
premium installments of $49 million in the aggregate each year, plus finance 
charges, payable for up to ten years, for coverage totaling $1,245 million, 
which is net of 15 percent coinsurance.  A total of eight years annual premium 
installments remain to be paid as of December 31, 1994.  The Company has 
guaranteed the payment by XFSI of all such premiums.

In addition to XFSI's original contribution of $25 million to the 
capitalization of Ridge Re, XFSI may be required, under certain circumstances, 
to purchase over time additional redeemable preferred shares up to a maximum 
of $301 million.

XFSI has guaranteed to the Talegen insurance companies that Ridge Re will meet 
all of its financial obligations under all of the foregoing excess of loss 
reinsurance issued to them.

In December 1994, a stock purchase agreement was signed with EXOR America Inc. 
for its purchase of Constitution Re Corporation, a Talegen subsidiary, for 
approximately $410 million subject to closing adjustments, which is 
approximately the same as book value.  The closing of the sale is subject to 
customary closing conditions and regulatory approvals and is expected to close 
during the first half of 1995.

Property and Casualty Reserves

Overview

Losses from claims and related loss adjustment expenses comprise the majority 
of costs from providing insurance products and, therefore, reserves for unpaid 
losses and loss expenses are the largest liabilities on a property and 
casualty insurer's balance sheet.  However, because insurance coverage is 
provided for situations in which the certainty of loss cannot be predicted, 
ultimate losses which will be incurred on policies issued are difficult to 
estimate and are subject to constant reevaluation as new information becomes 
available.  Insurance companies utilize a variety of loss trending and 
analysis techniques to estimate anticipated ultimate losses and the time 
frames when claims are likely to be reported and paid.  These patterns vary 
significantly by type of insurance coverage and are affected by the economic, 
social, judicial and weather-related/geological conditions in different 
geographic areas.

In order to moderate the potential impact of unusually severe or frequent 
losses, insurers often cede (i.e., transfer) a portion of their gross policy 
premiums to reinsurers in exchange for the reinsurer's agreement to share 
covered losses with the insurer.  Although the ceding of insurance risk does 
not discharge the original insurer from its primary liability to its 
policyholder, the reinsurance company that accepts the risk assumes an 
obligation to the original insurer.  A contingent liability exists, however, 
with respect to reinsurance ceded to the extent that any reinsuring company 
might not be able to meet its obligations.

The net liability retained on individual risks varies by product and by the 
nature of the risk.  Insured liabilities in excess of retained limits are 
reinsured either by treaty, wherein reinsurers agree in advance to provide 
coverage above retained limits for specific products, or by facultative 
arrangements, wherein reinsurance is provided for the individual risks based 
on individual negotiations.

Over the policy period, as premiums are earned, a portion of the premiums are 
set aside as gross reserves and charged to income for incurred but not 
reported ("IBNR") losses in anticipation of claims which will be incurred, net 
of anticipated salvage and subrogation.  IBNR reserves also include amounts to 
supplement case reserves, when established, to provide for potential further 
loss development.  In addition, gross reserves are also established for 
internal and external loss adjustment expenses ("LAE") associated with 
handling the claims inventory.  These expenses are characterized as "allocated 
LAE" when they are attributable to a specific claim or series of claims and 
"unallocated LAE" when not similarly attributable.  When a claim is reported, 
case reserves are established on the basis of claim adjusters' evaluations and 
other pertinent information available at the time.  Legal defense costs that 
can be assigned to a related claim file and can be included as part of the 
loss under the contract are generally established as part of the gross case 
reserve.  Reinsurance recoverables on gross reserves are recorded for amounts 
that are anticipated to be recovered from reinsurers and are determined in a 
manner consistent with the liabilities associated with the reinsured policies.  
Net reserves are gross reserves less anticipated reinsurance recoverables on 
those reserves.

The effect of inflation on gross reserves is considered implicitly when 
estimating the liability for unpaid losses and loss expenses.  The effect of 
inflation on individual case basis reserves implicitly reflects the direction 
of economic price levels as they affect the individual claims being reserved.  

Estimates of the ultimate value of unpaid claims are based in part on 
historical data that reflect past inflation, as well as management's 
assessment of severity and frequency, industry trends and related costs.

Ridge Re Coverage

Under the terms of the Ridge Re reinsurance coverage and subject to the limits 
established for each insurance operating group, Ridge Re will reimburse the 
Insurance Companies within their respective insurance operating group for 85% 
of net increases, if any, to ultimate net unpaid loss and loss expenses and 
uncollectible reinsurance reserves which may develop on its 1992 and prior 
accident years as carried at December 31, 1992 (net of all salvage, 
subrogation and other recoverables).  The Ridge Re coverage is guaranteed by 
XFSI, and, subject to certain commutation provisions, remains in effect until 
all 1992 and prior accident year claims are paid.  The following table 
identifies the retention amount (i.e., the amount of carried net unpaid loss 
and loss expenses and uncollectible reinsurance reserves at December 31, 1992 
retained by the Insurance Companies within the insurance operating groups) and 
the remaining reinsurance coverage at December 31, 1994 under the respective 
Ridge Re contract.  Cessions to Ridge Re, while beneficial to Talegen, do not 
result in a benefit to the Insurance segment or consolidated Xerox accounts.

Ridge Re Information

December 31, 1994         Retention Contractual    Cumulative      Remaining
(in millions)             Amount[1] Coverage[2]  Ceded Losses[2]  Coverage[2]

Constitution Reinsurance   $  591     $   43         $    -         $   43
Coregis                    $  585     $  119         $    -         $  119
Crum & Forster Insurance   $2,263     $  234         $    5         $  229
Industrial Indemnity       $1,157     $  127         $    -         $  127
The Resolution Group       $1,199     $  578         $   28         $  550
Viking                     $  134     $   17         $    -         $   17
Westchester Specialty 
 Group                     $  755     $  127         $   20         $  107

[1] Retention amounts equal the carried net unpaid losses and loss expenses
    and uncollectible reinsurance reserves as of December 31, 1992.
[2] Coverage and ceded amounts are net of 15% insurance operating group
    coinsurance amounts (i.e., for every dollar of covered loss in excess of
    the retention amount, the affected insurance company will  be able to cede
    (recover) eighty-five cents from Ridge Re)

The following sections of this discussion provide further details related to 
the reserving practices and the specific reserve levels of the Insurance 
Companies within Talegen's insurance operating groups.  Due to the unique 
complexities and uncertainties related to asbestos-related, hazardous waste 
and other latent or long-tail claims, information regarding these claim 
categories is separately discussed, although it is the policy of Talegen not 
to disclose established case reserves on specific claims.

Overall Reserves

The following table sets forth gross unpaid losses and loss expenses, 
reinsurance recoverables on unpaid losses and loss expenses and the resultant 
net unpaid losses and loss expenses for the Insurance Companies included in 
each insurance operating group at December 31, 1994 and 1993:

Unpaid Losses and Loss Expenses

                               1994                           1993
                    Gross   Reinsurance    Net    Gross   Reinsurance   Net
(in millions)      Reserves Recoverable Reserves Reserves Recoverable Reserves
Constitution 
 Reinsurance       $  881    $  200     $  681    $  883    $  202    $  681
Coregis               995       271        724       992       330       662
Crum & Forster
 Insurance          2,941       768      2,173     3,171       872     2,299
Industrial
 Indemnity          1,445       188      1,257     1,586       213     1,373
The Resolution
 Group              1,680       983        697     2,576     1,720       856
Viking                 97         -         97       124         6       118
Westchester
 Specialty Group    1,225       485        740     1,272       512       760
Ceded balances to
 affiliates          (451)     (451)         -      (920)     (920)        -
  Total            $8,813[1] $2,444     $6,369[1] $9,684    $2,935    $6,749

[1] Balance excludes cessions to Ridge Re of $53 million.

The overall decrease in gross reserves is primarily the result of actions 
taken over the past several years to reduce exposures in underperforming and 
non-strategic business segments.  Reinsurance recoverables have decreased due 
to the underlying reduction in gross reserves, increased collection of 
recoverable balances and an increase in business retained by the Insurance 
Companies.  Gross and net reserves at December 31, 1992 were $10,657 million 
and $6,869 million, respectively.  Due to its mission of managing run-off 
business, the most significant decrease in overall gross and net reserves has 
occurred within The Resolution Group.  In 1994, Insurance Companies within the 
Westchester Specialty Group, The Resolution Group and the Crum & Forster 
Insurance operating groups strengthened net reserves by approximately $40 
million, $33 million and $8 million, respectively, for development on 1993 and 
prior accident year reserves.  Of these amounts, $20 million, $28 million and 
$5 million, respectively, were ceded to Ridge Re.  No material adjustments 
were made to net reserves in 1993.

Monitoring of Insurance Reserves

The insurance operating groups continually monitor the gross and net reserves 
of their Insurance Companies for business written in both current and prior 
years, and Talegen senior management reviews these reserves on a periodic 
basis.  In addition, these reserves are reviewed and certified on an annual 
basis by an outside actuary appointed by the Insurance Companies.  Overall 
reserve levels are impacted primarily by the types and amounts of insurance 
coverage currently being written and the trends developing from newly reported 
claims and claims which have been paid and closed.  Adjustments are made to 
reserves in the period they can be reasonably estimated to reflect evolving 
changes in loss development patterns and various other factors that affect 
ultimate claim settlement costs.  Such factors include increased damage awards 
by the courts, changes in judicial interpretations of legal liability for 
asbestos-related, hazardous waste and other latent or long-tail claims, 
changes in judicial interpretation of the scope of coverage provided by 
general liability and umbrella policies for "advertising injury," particularly 
in the area of "unfair competition," and other recently advanced new theories 
of liability.  Many of these judicial interpretations are still evolving.  
Generally, the greater the projected time to settlement, the greater the 
complexity of estimating ultimate claim costs and the more likely that such 
estimates will change as new information becomes available.

Use of Reinsurance and Management of Reinsurance Collection

Most of the Insurance Companies made significant use of reinsurance during the 
1970's and early 1980's.  Since that time, the Insurance Companies have 
generally increased the portion of business they retain while reducing the 
number of reinsurers used for their reinsurance contracts.  Accordingly, in 
the aggregate, net reserves as a percent of gross reserves increased from 65% 
at December 31, 1992 to 72% at December 31, 1994, and the percent of written 
premiums ceded to reinsurers to gross written premiums decreased from 21% in 
1992 to 16% in 1994.  Additionally, at December 31, 1994 the Insurance 
Companies had current and future reinsurance recoverables due from 
approximately 700 reinsurers for all policy years.  However, in 1994 more than 
70% of premiums ceded were placed with approximately 30 reinsurers.

Talegen has a reinsurance security committee composed of senior management who 
approve those reinsurers with whom Talegen will do business.  Based upon the 
review of financial condition and assessment of other available information, 
the Insurance Companies maintain an allowance for uncollectible amounts due 
from troubled reinsurers as reported in Note 13 on page 68 of the Company's 
1994 Annual Report to Shareholders.  The balance of reinsurance recoverable is 
considered to be valid and collectible.  

The potential uncollectibility of ceded reinsurance is an industry-wide issue.  
With respect to the management of recoveries due from reinsurers, the 
Insurance Companies operate within common guidelines on the early 
identification of potential collection problems and assign these cases to a 
specialized unit with The Resolution Group staffed by "work-out" experts.  
This unit aggressively pursues collection of reinsurance recoverables through 
mediation, arbitration and, where necessary, litigation to enforce a 
contractual right against reinsurers.  Nevertheless, periodically, it becomes 
necessary for management to adjust reserves for potential losses to reflect 
their ongoing evaluation of developments which affect recoverability, 
including increased damage awards and the severe financial difficulties that 
some reinsurers are experiencing.

Effects of Restructuring on Reserves

In 1992, as part of the announced Talegen restructuring plan and related 
balance sheet strengthening actions, reserves were strengthened by $880 
million on a pre-tax basis.  Talegen, after completing a detailed review of 
its outstanding reinsurance recoverables, in the fourth quarter of 1992 wrote-
off $516 million in reinsurance recoverables due from approximately 600 
reinsurers against the allowance for doubtful reinsurance accounts (including 
$174 million for paid reinsurance recoverables).  Adjustments to the reserves 
in 1993 pursuant to the restructuring were not material.

Statutory and GAAP Reporting of Net Unpaid Losses and Loss Expenses

The liability for loss and loss expense reserves required by generally 
accepted accounting principles ("GAAP") includes various adjustments from the 
liability reported in accordance with Statutory Accounting Practices ("SAP").  
Because not all GAAP adjustments can be associated with subsequent 
developments of the liabilities on other than an arbitrary basis, developments 
on the loss and loss expense reserve development table are prepared in 
accordance with SAP.

Loss Development Data

In Note 13 on page 68 of the Company's 1994 Annual Report to Shareholders, the 
net liability for unpaid losses and loss expenses is reconciled for each of 
the years in the three-year period ended December 31, 1994.  Included therein 
are current year and prior year development data.

As a result of claim activity during 1994 and after reflection of prior 
experience, it is management's judgment that the total liability for unpaid 
losses and loss expenses at December 31, 1994 is reasonably stated.

The loss and loss expense reserve development table illustrates the 
development of statutory balance sheet liabilities for 1984 through 1994.  The 
first line of the table is the estimated liability for unpaid losses and loss 
expenses, net of reinsurance recoverable on unpaid losses, recorded at the 
balance sheet date for each year.  The lower section of the table shows the 
updated amount of the previously recorded liability based on experience as of 
the close of each succeeding year.  The estimate is increased or decreased as 
more information becomes known about the claims until all claims are settled.  
Deficiencies or redundancies represent aggregate changes in estimates for all 
prior calendar years.  The effect on income for the latest three years is 
shown in Note 13 on page 68 of the Company's 1994 Annual Report to 
Shareholders.  These changes in estimates have been reflected in Talegen's 
calendar year operating results.  As the Insurance Companies recognize 
adjustments to reserves for changes in loss development patterns and various 
other factors, such as social and economic trends and known changes in 
judicial interpretation of legal liability, in the period in which they become 
known, it is not appropriate to extrapolate future redundancies or 
deficiencies based solely on this table.

Talegen Holdings, Inc.
Loss and Loss Expense Reserve Development

Year ended December 31 (in millions)     1984      1985      1986      1987
Liability for unpaid losses and loss
  expenses - GAAP (net of reinsurance) $ 2,729   $ 3,589   $ 4,276   $ 5,139

Increase (decrease) for GAAP adj.            8      (148)     (256)     (241)

Liability for unpaid losses and loss
  expense - SAP (net of reinsurance)     2,737     3,441     4,020     4,898

Paid (cumulative) as of:
End of year                                  -         -         -         -
One year later                             931     1,133     1,132     1,365
Two years later                          1,611     1,946     2,039     2,483
Three years later                        2,182     2,594     2,854     3,258
Four years later                         2,598     3,197     3,391     3,824
Five years later                         2,979     3,601     3,798     4,493
Six years later                          3,238     3,892     4,360     4,659
Seven years later                        3,391     4,380     4,470     4,927
Eight years later                        3,793     4,450     4,675
Nine years later                         3,828     4,624
Ten years later                          3,987

Liability estimated as of: 
End of year                              2,737     3,441     4,020     4,898
One year later                           3,072     3,798     4,383     4,974
Two years later                          3,387     4,158     4,416     5,365
Three years later                        3,582     4,125     4,797     5,670
Four years later                         3,555     4,515     5,207     5,577
Five years later                         3,828     4,896     5,087     6,332
Six years later                          4,125     4,863     5,786     6,357
Seven years later                        4,055     5,490     5,841     6,476
Eight years later                        4,550     5,587     5,991
Nine years later                         4,687     5,772
Ten years later                          4,872

(Deficiency) redundancy                $(2,135)  $(2,331)  $(1,971)  $(1,578)

Gross liability - end of year
Reinsurance recoverable
Net liability - end of year

Gross re-estimated liability - one
  year later
Re-estimated recoverable - one
  year later
Net re-estimated liability - one
  year later

Gross re-estimated liability - two
  years later
Re-estimated recoverable - two
  years later
Net re-estimated liability - two
  years later

Gross cumulative deficiency




  1988      1989      1990      1991      1992      1993      1994

$ 5,613   $ 6,119   $ 6,429   $ 6,379   $ 6,874   $ 6,753   $ 6,369

   (208)     (215)     (287)     (299)     (370)     (254)     (190)


  5,405     5,904     6,142     6,080     6,504     6,499     6,179


      -         -         -         -         -         -         -
  1,588     1,675     1,707     1,830     1,294     1,542
  2,667     2,827     3,085     2,730     2,488
  3,484     3,879     3,663     3,657
  4,284     4,228     4,354
  4,486     4,746
  4,885






  5,405     5,904     6,142     6,080     6,504     6,499     6,179
  5,709     6,110     6,255     6,972     6,492     6,491
  5,908     6,090     7,082     6,904     6,528
  5,830     6,903     6,968     6,954
  6,604     6,825     7,022
  6,556     6,910
  6,684





$(1,279)  $(1,006)  $  (880)  $  (874)  $   (24)  $     8   $     -

                                        $10,475   $ 9,515   $ 8,828
                                          3,971     3,016     2,649
                                          6,504     6,499     6,179


                                         10,454     9,569

                                          3,962     3,078

                                          6,492     6,491


                                         10,483

                                          3,955

                                          6,528

                                        $    (8)  $   (54)  $     -


Asbestos-Related, Hazardous Waste and Other Latent or Long-Tail Claims

Claims resulting from asbestos-related, hazardous waste and other latent or 
long-tail losses have provided unique challenges to the insurance industry.  
The possibility that these claims would emerge was often not recognized or 
contemplated at the time the policies were written, and traditional actuarial 
reserving methodologies have not always been useful in accurately estimating 
ultimate losses.  Asbestos-related claims were the first type of such 
exposures to cause significant losses to the insurance industry.  Because case 
law for asbestos-related injuries is now reasonably developed and the number 
of open claims has been declining, the remaining exposure and related 
uncertainty to the Insurance Companies are also decreasing.  Hazardous waste 
claims have been the second major type of such claims to emerge and 
significantly impact the insurance industry.  Inconsistent Federal and State 
case law related to hazardous waste claims has compounded the industry's 
difficulties in adequately understanding and reserving for these complex 
exposures.  Other latent or long-tail exposures such as repetitive stress, 
lead paint and surgical breast implants are the latest type of such liability 
to emerge.  These claim types also are not suitable for traditional actuarial 
reserving techniques due to significant uncertainties as to how legal issues 
will develop.  As judicial patterns emerge through the appellate process and 
remove uncertainties related to asbestos-related, hazardous waste and other 
latent or long-tail claims, additional liabilities and reinsurance 
recoverables could arise.  In the aggregate, reserves for asbestos-related, 
hazardous waste and other latent or long-tail claims comprise 10% and 5% of 
total gross and net reserves, respectively, of the Insurance Companies at 
December 31, 1994.

Total reserves for asbestos bodily injury, asbestos-in-building, hazardous 
waste and other latent or long-tail claims at December 31, 1994 are as 
follows:

Total Reserves[1] by Claim Category

                           Asbestos  Asbestos             Other
                            Bodily     -in-   Hazardous Latent or
                            Injury   Building   Waste   Long-Tail   Total
(in millions)             Gross Net Gross Net Gross Net Gross Net Gross Net
Constitution Reinsurance  $ 66 $ 20 $  - $  - $ 79 $ 32 $  - $  - $145 $ 52
Crum & Forster Insurance    58   40    -    -   79   61  110   57  247  158
Coregis                      -    -    -    -    2    2    -    -    2    2
Industrial Indemnity         -    -    -    -    -    -    -    -    -    -
The Resolution Group       170   17   21    2  101   36   48    2  340   57
Viking                       -    -    -    -    -    -    -    -    -    -
Westchester Specialty
 Group                      38   11   45    1   34   21    9    1  126   34
  Total                   $332 $ 88 $ 66 $  3 $295 $152 $167 $ 60 $860 $303

[1] Included are case, IBNR and allocated loss adjustment expense reserves.

The vast majority of claims in the above areas have resulted from policies 
covering corporate property and casualty insurance, thus insurance operating 
groups whose Insurance Companies have not underwritten (or reinsured) this 
type of business generally do not have these types of claims.  Although 
Insurance Companies within Coregis are currently underwriting certain 
commercial property and casualty business, these companies did not underwrite 
any significant volume of business prior to 1986 and thus have not had many 
asbestos bodily injury or hazardous waste claims as most such claims for the 
insurance industry have originated from accident years prior to 1986.

In 1985, Talegen established a stand-alone unit to centrally handle asbestos-
related, hazardous waste and certain other latent or long-tail  claims.  This 
unit was established as a separate service company of Talegen and has been 
recently named Envision Claims Management Corporation ("Envision").  Envision 
is currently engaged in working on claims for the Insurance Companies within 
the Crum & Forster Insurance, Coregis, The Resolution Group and Westchester 
Specialty Group insurance operating groups.  The objectives of Envision are to 
bring expertise to this highly specialized area, promote consistency in claim 
administration and reserving practices and judiciously work through and close 
such claims on behalf of the Insurance Companies.  Since January 1, 1993, 
nearly twice as many claims have been closed by Envision as have been opened, 
causing an overall 33% reduction in total applicable claims outstanding for 
the Insurance Companies during that period.

Following is an expanded discussion of historical reserve development with 
respect to asbestos-related, hazardous waste and other latent or long-tail 
claims.  Included in the discussion of hazardous waste and other latent or 
long-tail claims is information pertaining to policy limits on open claims, or 
the theoretical aggregate of potential indemnity loss on all policies where 
the Insurance Company has been notified of a possible claim.  However, policy 
limit information has not been, and management of Talegen and the Insurance 
Companies does not believe it will be, a useful predictor of future claim 
payments for asbestos-related, hazardous waste and other latent or long tail 
claims.

Generally, a claim is reported to the Insurance Company after the insured has 
been notified by a third party of a potential loss situation.  For hazardous 
waste claims, many of the reported claims are from insureds who have been 
notified of a possible loss, no matter how minor a role the insured played in 
the act leading to the loss.  It has been the experience of the Insurance 
Companies (and industry experience in general) that in such instances the 
insured will often pay only minimal losses or no loss.

Assuming that the insured has paid a loss, the Insurance Company then makes 
the determination as to whether the loss is covered.  If there is a dispute on 
the loss coverage, the Insurance Companies or policyholder generally seeks a 
declaratory judgment ruling, asking a court to determine whether or not the 
policy covers the loss in question.  From a historical perspective, only a 
relatively small percentage of declaratory judgment actions have resulted in 
the Insurance Companies being required to pay the claim, although this pattern 
is not meant to be representative of past or future aggregate payment amounts 
resulting from declaratory judgments.

Assuming that the claimed loss is covered, any payment is generally only a 
small amount of the total available policy limits because many of the related 
policies written by the Insurance Companies are high excess policies where the 
loss needs to exceed a high dollar amount before their respective "layer" of 
coverage is impacted.

Asbestos Bodily Injury Claims

Claims began to emerge alleging bodily injury due to asbestos exposure in the 
1970's, and the insurance industry became involved in litigation over 
insurance coverage issues with manufacturers, distributors, suppliers, and 
indirect users of asbestos containing products at that time.  The judicial and 
legislative interpretations of coverage tended to expand the definition of 
covered losses beyond what insurers commonly believed to be the intent of the 
policies.  However, over time, case law in this area has become fairly well 
established.  The Insurance Companies believe that most of the litigation over 
asbestos bodily injury coverage issues has now been resolved and appropriate 
reserves have been established for these known exposures.  Although it is 
difficult to estimate when the pending asbestos bodily injury claims will be 
paid and closed, the overall inventory of such claims has been declining.  
From a historical perspective, of the total open claims at the end of 1991, 
approximately 48% had been closed at December 31, 1994.

The following table sets forth gross and net unpaid losses and allocated LAE 
related to asbestos bodily injury claims of the Insurance Companies:

Asbestos Bodily Injury Reserve Information

                                                1994              1993
Year ended December 31 (in millions)       Gross    Net      Gross    Net
Beginning case reserves                   $  250  $   40    $  485  $ (128)
Claim payments (recoveries) - Owens
  Corning Fiberglass ("OCF" claims)            -       -       183    (133)[1]
Other claim payments (recoveries)             47       -        61      (2)
Case incurred losses                          21       1         9      33 [1]
Ending case reserves                         224      41    $  250  $   40 [1]
1994 IBNR/Allocated LAE reserves [2]         108      47       N/A     N/A
1994 total reserves [2]                   $  332  $   88       N/A     N/A
Allocated LAE payments (recoveries)       $   10  $   19    $   (6) $  (29)

                                                            1991 and Prior
                                                1992            Periods
                                           Gross    Net      Gross    Net
Beginning case reserves                   $  741  $   21    $    -  $    -
Claim payments (recoveries) - Owens
  Corning Fiberglass ("OCF" claims)          243     139       288       4
Other claim payments (recoveries)             34       8       160      42
Case incurred losses                          21      (2)[1] 1,189      67
Ending case reserves                      $  485  $ (128)[1]$  741  $   21
1994 IBNR/Allocated LAE reserves [2]         N/A     N/A       N/A     N/A
1994 total reserves [2]                      N/A     N/A       N/A     N/A
Allocated LAE payments (recoveries)       $   52  $   (9)   $  324  $   81

[1] Loss and reserve data for 1992 reflects a reserving practice specific to
    the Owens Corning Fiberglass ("OCF") claims (discussed subsequently) where
    case reserves were reduced by reinsurance receivables on paid losses.
    Normally, reinsurance receivables are shown on a "gross" basis, that is,
    separately stated on the balance sheet.  This practice for the OCF claims
    resulted in an offsetting understatement of case reserves and reinsurance
    recoverables.  This practice was reversed in 1993.
[2] Beginning in 1994, IBNR/Allocated LAE reserves have been allocated to
    certain claim categories; prior to 1994, similar allocations were not
    made, thus the data for 1993 and prior years has been marked as not
    available ("N/A") in the table.

The largest asbestos bodily injury claims have originated from policies issued 
to Owens Corning Fiberglas ("OCF") who manufactured and distributed insulation 
containing asbestos.  These policies were issued or assumed by an Insurance 
Company within The Resolution Group.  Numerous claims alleging bodily injury 
through exposure to asbestos were filed against OCF during the past two 
decades.  Included in the preceding table are cumulative paid losses from 
these policies of approximately $714 million and $10 million and allocated LAE 
of approximately $310 million and $14 million on a gross and net basis, 
respectively, for 1994 and prior years resulting in a total paid amount of 
$1,024 million and $24 million on a gross and net basis, respectively.  
Management of The Resolution Group and Talegen believe that all significant 
losses have been paid on this coverage.  Of the approximately $1 billion in 
reinsurance believed to be appropriately recoverable from these claims, $682 
million has been collected and $168 million has either been written off or 
reserved through the allowance for uncollectible reinsurance, resulting in a 
remaining net recoverable balance of $150 million at December 31, 1994.  See 
discussion of the status of two separate lawsuits pertaining to reinsurance 
recoverable on OCF claims, of which one has been substantially settled, in 
Note 18 on Page 79 of the Company's 1994 Annual Report to Shareholders.

Asbestos-In-Buildings Claims

In addition to bodily injury claims, asbestos-in-building claims have been 
brought against certain Insurance Companies of the Talegen insurance operating 
groups seeking reimbursement for the expense of replacing insulation material 
and other building components made of asbestos.  The Insurance Companies have 
generally contested coverage to the extent that product liability insurance 
does not cover replacement costs unless there has been property damage, as 
defined in the policies, to the buildings in which asbestos containing 
products were installed.  Sufficient case law has not yet been established to 
determine the extent to which the courts will interpret the policies 
consistently with this position, and the theories put forth by the courts have 
varied considerably to support the few payments made by insurers to date for 
asbestos-in-buildings property damage claims.  Although it is difficult to 
estimate when the pending asbestos-in-buildings claims will be resolved and 
closed, the claims inventory has been declining, similar to asbestos bodily 
injury claims.  Of the total open claims at the end of 1991, approximately 48% 
had been closed at December 31, 1994.

The following table sets forth gross and net unpaid losses and allocated LAE 
related to asbestos-in-buildings claims of the Insurance Companies:

Asbestos-In-Buildings Reserve Information

                                                1994              1993
Year ended December 31 (in millions)       Gross    Net      Gross    Net
Beginning case reserves                   $   61  $    4    $   59  $    4
Claim payments (recoveries) - Celotex          -       -         -       -
Other claim payments (recoveries)              3       -         1       1
Case incurred losses                           8      (1)        3       1
Ending case reserves                          66       3    $   61  $    4
1994 IBNR/Allocated LAE reserves [1]           -       -       N/A     N/A
1994 total reserves [1]                   $   66  $    3       N/A     N/A
Allocated LAE payments                    $    -  $    -    $    -  $    -

                                                            1991 and Prior
                                                1992            Periods
                                           Gross    Net      Gross    Net
Beginning case reserves                   $   64  $    7    $    -  $    -
Claim payments (recoveries) - Celotex          5       3         -       -
Other claim payments (recoveries)              -       -         -       -
Case incurred losses                           -       -        64       7
Ending case reserves                      $   59  $    4    $   64  $    7
1994 IBNR/Allocated LAE reserves [1]         N/A     N/A       N/A     N/A
1994 total reserves [1]                      N/A     N/A       N/A     N/A
Allocated LAE payments                    $    -  $    -    $    -  $    -

[1] Beginning in 1994, IBNR/Allocated LAE reserves have been allocated to
    certain claim categories, prior to 1994, similar allocations were not
    made, thus the data for 1993 and prior years has been marked as not
    available ("N/A") in the table.

The most significant reported asbestos-in-building claims relate to two 
umbrella contracts issued by Westchester Fire Insurance Company ("Westchester 
Fire"), an Insurance Company within the Westchester Specialty Group, to 
Celotex, et al. covering the 1982 and 1983 policy years, with a combined gross 
and net limit of $50 million and $2 million, respectively.  Since December 
1990, the Celotex Companies have been involved in bankruptcy reorganization 
litigation in the U.S. Bankruptcy Court in Tampa, Florida.  The court has 
temporarily stayed proceedings in all of the underlying asbestos bodily injury 
and asbestos-in-buildings claims.  Westchester Fire and Talegen believe that 
adequate reserves have been established for this exposure.

Hazardous Waste Claims

Hazardous waste claims encompass costs for pollution clean-up, bodily injury 
and property damage.  Significant uncertainties exist with respect to 
estimating the Insurance Companies' exposure to hazardous waste claims.  The 
uncertainty primarily results from lack of historical data, long delays in 
reporting claims, difficulty in identifying potential claimants and complex 
legal and coverage issues that have been further complicated by inconsistent 
conclusions reached by the courts.  Due to the above, it is very difficult to 
estimate when existing hazardous waste claims will close.  However, from a 
historical perspective, of the total open claims at the end of 1991, 
approximately 66% had been closed at December 31, 1994.

The following table sets forth gross and net unpaid losses and allocated LAE 
related to hazardous waste claims of the Insurance Companies:

Hazardous Waste Reserve Information

                                                1994              1993
Year ended December 31 (in millions)       Gross    Net      Gross    Net
Beginning case reserves                   $   43  $   22    $   22  $   14
Claim payments (recoveries)                   28      17        21      12
Case incurred losses                          35      20        42      20
Ending case reserves                          50      25    $   43  $   22
1994 IBNR/Allocated LAE reserves [1],[2]     243     125       N/A     N/A
1994 total reserves [1],[2]               $  293  $  150       N/A     N/A
Allocated LAE payments                    $   20  $   17    $   20  $   17

                                                            1991 and Prior
                                                1992            Periods
                                           Gross    Net      Gross    Net
Beginning case reserves                   $   23  $   14    $    -  $    -
Claim payments (recoveries)                    9       4        52      24
Case incurred losses                           8       4        75      38
Ending case reserves                      $   22  $   14    $   23  $   14
1994 IBNR/Allocated LAE reserves [1],[2]     N/A     N/A       N/A     N/A
1994 total reserves [1],[2]                  N/A     N/A       N/A     N/A
Allocated LAE payments                    $   17  $   14    $   38  $   29

[1] Totals exclude $2 million of reserves for Mt. Airy Insurance Company, a
    subsidiary within the Coregis insurance operating group.  Hazardous waste
    exposures for Coregis are not significant primarily because 1986 was the
    first year significant business volume was written by Insurance Companies
    within the Coregis insurance operating group.
[2] Beginning in 1994, IBNR/Allocated LAE reserves have been allocated to
    certain claim categories, prior to 1994, similar allocations were not
    made, thus the data for 1993 and priors has been marked as not available
    ("N/A") in the table.

The principal federal statute that requires cleanup of environmental damage is 
the Comprehensive Environmental Response, Compensation and Liability Act 
("Superfund"), passed in 1980.  It imposes liabilities on "Potentially 
Responsible Parties," subjecting them to liability for clean-up costs 
regardless of fault, time period and relative contribution of pollutants.  
Superfund is subject to funding authorization that expires in December 1995.  
The current administration has put forth a proposal to reform Superfund that 
would create a government fund (estimated at $8.1 billion) used to clean up 
"National Priority Listed" ("NPL") sites.

The last draft of the proposed law issued by the Senate Finance Committee 
(dated September 27, 1994), if it had been adopted, would have raised the fund 
through a combination of retrospective and prospective taxes for primary 
insurers and a retrospective tax for reinsurers.  The 103rd Congress did not 
pass the reform bill.  Because there is new legislative leadership in both the 
House and the Senate, among other reasons, management of Talegen does not 
believe the proposed law will pass the 104th Congress as last drafted.  
Accordingly, it is not possible to predict what effect the future legislative 
changes or reauthorization of Superfund will have on Talegen's future results.

Although it is not likely the law will be passed as last drafted, the 
Insurance Companies continue to receive requests from insurance company rating 
agencies and other interested parties regarding the percentage of hazardous 
waste claims and reserves involving NPL sites as well as estimates of taxes 
under the proposed law.  Because of these requests, the following table 
provides the Insurance Companies estimate of such information at December 31, 
1994:

NPL Information

Percentages of Total Applicable Hazardous Waste
Amounts that Include NPL Sites; Aggregate Tax
Amounts and Average Attachment Points in millions.

                                                Policy       Excess Policies
                                       Gross   Limits on              Average
                                Open    Case    Primary     Policy  Attachment
                               Claims Reserves Policies[3] Limits[3] Point[4]
Constitution Reinsurance [1]    N/A     N/A       N/A         N/A       N/A
Coregis [2]                     N/M     N/M       N/M         N/M       N/M
Crum & Forster Insurance         25%     47%       53%         38%     $ 38
Westchester Specialty Group      48%     20%       19%         46%     $ 16
The Resolution Group             55%     70%       50%         71%     $ 42

                                                   Estimates of Aggregate
                                                   Proposed Superfund Tax
                                               Retrospective[6] Prospective[7]
Constitution Reinsurance [1]                         $ 19           N/A[5]
Coregis [2]                                          $  1          $ 15
Crum & Forster Insurance                             $ 59          $ 67
Westchester Specialty Group                          $  4          $ 23
The Resolution Group                                 $  5          $  2

[1] Specific NPL information has generally not been submitted by primary
    insurers to Constitution Reinsurance thus the information has been marked
    as not available ("N/A") in the table.
[2] Due to the relatively insignificant number of reported hazardous waste
    claims and resultant case reserves, this information is not meaningful
    ("N/M") to Coregis.
[3] Exposed limits are defined as total policy limits on open claims less
    losses paid-to-date at December 31, 1994.
[4] The attachment point on an excess of loss insurance policy represents the
    loss dollar amount at which point the insurance policy would respond in
    accordance with the terms of coverage granted.  For example, if the
    attachment point on an excess of loss policy is $30 million, insurance
    coverage on that policy would not be exposed to a loss unless the total
    loss related to the insured event for that year of coverage exceeds $30
    million.  This information has been estimated based on a sample of
    policies from open applicable claims.
[5] Reinsurers are not subject to a prospective tax in the proposed law.
[6] The retrospective tax for primary insurers under the law would have been
    based on the insurers proportionate share of commercial multiple peril and
    other liability lines of business written between 1968 and 1985 and, for
    reinsurers, would have been based on their net premiums written between
    1968 and 1985.  This information has been estimated based on a sample of
    policies from open applicable claims.
[7] The prospective tax for primary insurers would have been based on primary
    insurers' proportionate share of premiums written for the next ten years.

Other Latent or Long-Tail Claims

A diversity of claims have been filed that assert injury or loss due to 
exposure to a substance or device from a prolonged period.  The following 
table sets forth gross and net losses and allocated LAE related to other 
latent or long-tail claims of the Insurance Companies:

Other Latent or Long-Tail Claims Reserve Information

                                                1994              1993
Year ended December 31 (in millions)       Gross    Net      Gross    Net
Beginning case reserves                   $ 131   $  103    $  185  $   97
Claim payments (recoveries) - Farm
  and Home                                  (23)      33        49     (11)
Other claim payments (recoveries)             7        4        11       4
Case incurred losses                        (44)[2]  (28)[2]     6      (1)
Ending case reserves                        103       38    $  131  $  103
1994 IBNR/Allocated LAE reserves [1]         64       22       N/A     N/A
1994 total reserves [1]                   $ 167   $   60       N/A     N/A
Allocated LAE payments                    $  46   $   32    $    4  $   10

                                                            1991 and Prior
                                                1992            Periods
                                           Gross    Net      Gross    Net
Beginning case reserves                   $  145  $   81    $    -  $    -
Claim payments (recoveries) - Farm
  and Home                                   145     121        41       5
Other claim payments (recoveries)             19       5        26       7
Case incurred losses                         204     142       212      93
Ending case reserves                      $  185  $   97    $  145  $   81
1994 IBNR/Allocated LAE reserves [1]         N/A     N/A       N/A     N/A
1994 total reserves [1]                      N/A     N/A       N/A     N/A
Allocated LAE payments                    $    6  $    6    $   45  $   17

[1] Beginning in 1994, IBNR/Allocated LAE reserves have been allocated to
    certain claim categories, prior to 1994, similar allocations were not
    made, thus the data for 1993 and prior years has been marked as not
    available ("N/A") on the table.
[2] Benefit in incurred losses originated from a reallocation in Farm & Home
    case reserves in 1994 where the reduction in unpaid loss and loss expense
    reserves was offset by a write-off to paid loss receivables which thus
    resulted in no net gain or loss.

As shown in the preceding reserve table, a significant amount of paid claims 
relate to claims associated with Farm & Home Savings Association ("Farm and 
Home"), the developer of the Southbend subdivision in Friendswood, Texas that 
is located close to the Brio superfund site.  See discussion of litigation 
associated with these claims in Note 18 on Page 79 of the Company's 1994 
Annual Report to Shareholders.

Certain Insurance Companies have written excess of loss policies with parties 
that have been named in various lawsuits involving surgical breast implants.  
Gross and net issued policy limits for allegedly implicated policies, grouped 
by range of the attachment point for the excess of loss policies, are as 
follows at December 31, 1994:

Surgical Breast Implant
Issued Policy Limits Grouped by Attachment Point

                            $0-5 Million[1] $5-20 Million[1] >$20 Million[1]
(in millions)                 Gross   Net      Gross   Net     Gross   Net
Crum & Forster Insurance       $  6  $  6       $  3  $  -      $ 26  $  5
Westchester Specialty Group       5     3         25    17        85    22
The Resolution Group             63     3        106     6       162     4
  Total                        $ 74  $ 12       $134  $ 23      $273  $ 31

[1] The attachment point on an excess of loss insurance policy represents the
    loss dollar amount at which point the insurance policy would respond in
    accordance with the terms of coverage granted.  For example, if the
    attachment point on an excess of loss policy is $30 million, insurance
    coverage on that policy would not be exposed to a loss unless the total
    loss related to the insured event for that year of coverage exceeds $30
    million.

Major surgical breast implant manufacturers and the principal plaintiffs' 
attorneys have entered into a "Global Settlement" which is reported to cost 
the defendants $4.25 billion over a thirty year period.  The trial court has 
approved the Global Settlement, however, it is expected that all aspects of 
the settlement will be appealed to a higher court when the trial court has 
concluded all proceedings.  Additionally, although the Global Settlement has 
been approved by the plaintiffs, the Insurance Companies have generally not 
been presented with claims.  Should claims be asserted, the allegedly affected 
Insurance Companies are investigating various policy coverage issues.  For 
example, while over half the global settlement amount may represent bodily 
injury claims as defined in the contracts, the insurance industry does not 
agree that the remaining portion of the fund represents bodily injury caused 
by a covered occurrence as defined in the contracts and hence is excludable 
from coverage.  Plaintiffs can opt out of the settlement and pursue other 
traditional remedies if they so elect within prescribed time frames.

Range of Reasonably Possible Losses on Known Claims

The following table compares the internal estimates of the range of ultimate 
net losses that are considered reasonably possible for known asbestos bodily 
injury, asbestos-in-building, hazardous waste and other latent or long-tail 
claims to total net reserves for these claim categories at December 31, 1994:

Range of Net Unpaid Losses and Allocated
Loss Adjustment Expense Reserves on Known
Claims Compared to Total Net Reserves [1]

                    Range of Net Unpaid Losses and Allocated Loss
                         Adjustment Expenses on Known Claims
                   Asbestos  Asbestos             Other               Total
                    Bodily     -in-   Hazardous Latent or              Net
                    Injury   Building   Waste   Long-Tail   Total   Reserves
(in millions)     Low  High Low  High Low  High Low  High Low  High    [1]
Constitution
  Reinsurance     $  5 $ 20 $  - $  - $ 10 $ 30 $  - $  - $ 15 $ 50   $ 52
Crum & Forster
  Insurance         20   40    -    3   10   70   40   80   70  193    158
The Resolution
  Group             10   20    2    4    2   80    -    5   14  109     57
Westchester
  Specialty Group    5   15    1    3    2   35    -    6    8   59     34
  Total           $ 40 $ 95 $  3 $ 10 $ 24 $215 $ 40 $ 91 $107 $411   $301

[1] Included are case, IBNR and allocated loss adjustment expense reserves.
    Total excludes $2 million of reserves for Mt. Airy Insurance Company, an
    Insurance Company within the Coregis insurance operating group.  Hazardous
    waste exposures for Coregis are not significant primarily because 1986 was
    the first year significant business volume was written by Insurance
    Companies within the Coregis insurance operating group.

Because the above ranges have been estimated on a net basis, they do not allow 
for uncollectible reinsurance.  See discussion of the allowance for doubtful 
reinsurance in Note 13 on Page 68 of the Company's 1994 Annual Report to 
Shareholders.  Additionally, the above ranges exclude consideration of 
potential Ridge Re contract recoveries, which, as previously described, 
provides aggregate excess of loss protection for adverse development on all 
loss and loss expense reserves and uncollectible reinsurance reserves for 1992 
and prior accident years.  Cessions to Ridge Re, while beneficial to Talegen, 
do not result in a benefit to the Insurance segment or consolidated Xerox 
accounts.  Based on the information available to them at December 31, 1994, 
the insurance operating groups and Talegen do not expect that liabilities 
associated with incurred asbestos bodily injury, asbestos-in-building, 
hazardous waste and other latent or other long-tail liability claims will have 
a material adverse affect on any of the above insurance operating group's 
future liquidity or financial position.  However, given the complexity and 
lack of precision in estimating the exposure, no assurance can be made as to 
the future potential impact of such claims.

Discontinued Operations

Other Financial Services, which were discontinued in 1993, had no after-tax 
income in 1994, $63 million income in 1993, and a $39 million loss in 1992.  
Included in the 1993 income was a $62 million after-tax gain from the 
completion of two sales.  The 1992 loss includes $90 million of adjustments, 
primarily for the partial write-down of goodwill.  The net investment in OFS 
was $232 million at December 31, 1994.  The Company believes that the 
liquidation of the remaining OFS units will not result in a net loss.  On 
February 17, 1993, the Company completed the sale of VKM to an entity formed 
by Clayton, Dubilier & Rice, Inc. for approximately $360 million.  On October 
25, 1993, the Company completed the sale of Furman Selz to a group of Furman 
Selz employees.  The purchase price was $99 million in cash and junior 
subordinated debt.  As part of the transaction, an affiliate of XFSI acquired 
nine percent of the equity of the newly constituted Furman Selz.  The $99 
million price does not include the proceeds from the sale of Shields, a Furman 
Selz subsidiary, and Regent, a subsidiary of Shields.  The business and assets 
of Shields and Regent were sold to Alliance Capital Management L.P. in a sale 
that closed in the first quarter of 1994.  The terms of the Furman Selz sales 
agreement resulted in additional sales proceeds yielding approximately $60 
million before settlement of related liabilities.

General American Life Insurance Company and XFSI signed a definitive agreement 
in January 1995 for a wholly-owned subsidiary of General American (New 
Owner)to acquire Xerox Life and related companies.  Closing of the sale is 
subject to the customary closing conditions and regulatory approvals, and is 
targeted for the first half 1995.  At closing, New Owner will rename the Xerox 
Life Companies.  OakRe Life Insurance Company, an XFSI subsidiary formed in 
1994, will assume responsibility for existing Single Premium Deferred Annuity 
(SPDA) policies issued by Xerox Life's Missouri and California companies (Life 
Companies) via a reinsurance agreement (Agreement).  The Agreement includes a 
provision for the assumption (at their election) by the Life Companies, of all 
of the SPDA policies at the end of their current rate reset periods. A 
Novation Agreement with a New Owner affiliate provides for the assumption of 
the liability under the Coinsurance Agreement for any SPDA policies not so 
assumed by the Life Companies. Other policyholders (of Immediate, Whole Life, 
and Variable annuities, as well as a minor amount of SPDAs issued by Xerox 
Life New York) will continue to be the responsibility of the New Owner.

During 1990, the Company decided to withdraw from its real-estate development 
and financing operations and third-party financing businesses.  Since that 
time, these operations have been in an orderly liquidation and assets were 
reduced to $547 million at the end of 1994 from $3,749 million at the end of 
1989, with assigned debt correspondingly reduced to $231 million from $2,781 
million.  Management believes that the combination of existing reserves 
together with run-off profits should adequately provide for any credit losses 
or losses on disposition.


I
tem 2. Properties

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

In addition, within the Document Processing segment, there are numerous 
facilities which encompass general offices, sales offices, service locations 
and distribution centers.  The principal owned facilities are located in New 
York, England, Italy and Mexico.  The principal leased facilities are located 
in California, Virginia, Brazil, Canada, England, France, Germany and Italy.

As part of the Worldwide Document Processing restructuring program announced 
in December 1993, the Company identified specific facilities to be closed or 
consolidated over the next two years.  Details of the facilities to be closed 
are announced periodically as local implementation plans are finalized.

Within the Insurance industry segment, there are numerous facilities, 
primarily within the United States, which encompass general, sales and 
administrative offices.  The principal facilities, almost all of which are 
leased, are located in California, Illinois, New Jersey, New York and 
Washington.

The Company's Corporate Headquarters facility, located in Connecticut, is 
leased; a training facility, located in Virginia, is owned by the Company.  In 
the opinion of Xerox management, its properties have been well maintained, are 
in sound operating condition and contain all the necessary equipment and 
facilities to perform the Company's functions.


Item 3. Legal Proceedings

The information set forth under Note 18 "Litigation" on pages 79 through 81 of 
the Company's 1994 Annual Report to Shareholders is incorporated by reference 
in this document in answer to this item.

On July 21, 1993, the Company was notified that it had been named as a 
respondent by the United States Environmental Protection Agency ("EPA") in a 
unilateral Comprehensive Environmental Response, Compensation and Liability 
Act ("CERCLA") section 106 (a) Administrative Order regarding the Metcoa 
Radiation Site in Pulaski, PA.  The Order directs the Company and 21 other 
companies to perform remedial work at the Site.  The order alleges that these 
parties are jointly and severally liable to perform the work.   Under CERCLA, 
a respondent that does not comply with the Order could be subject to a civil 
penalty of $25,000 for each day of noncompliance and be liable for punitive 
damages at least equal to treble the EPA's cost of cleaning up the Site.  The 
Company denies that it is liable to perform the work described in the Order. 


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

None.


PART II


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

The information set forth under the following captions on the indicated pages 
of the Company's 1994 Annual Report to Shareholders is hereby incorporated by 
reference in this document in answer to this Item:

              Caption                                           Page No.

      Stock Listed and Traded                                      92
      Dividends and Stock Prices                                   89
      Nine Years in Review - Common Shareholders
        of Record at Year-End                                  88 and 89


Item 6. Selected Financial Data

The following information, as of and for the five years ended December 31, 
1994, as set forth and included under the caption "Nine Years in Review" on 
pages 88 and 89 of the Company's 1994 Annual Report to Shareholders, is hereby 
incorporated by reference in this document in answer to this Item:

        Revenues - Document Processing
        Revenues - Insurance
        Total revenues
        Income (loss) from continuing operations
        Primary earnings (loss) per common share from continuing operations
        Total assets
        Long-term debt
        Preferred stock
        Dividends declared per common share


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

The information set forth under the caption "Financial Review" on pages 29-37, 
39, and 42-57 of the Company's 1994 Annual Report to Shareholders is hereby 
incorporated by reference in this document in answer to this Item.


Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of Xerox Corporation and subsidiaries 
and the notes thereto and the report thereon of KPMG Peat Marwick LLP, 
independent auditors, which appear on pages 28, 38, 40-41, 58-85, and 87 of 
the Company's 1994 Annual Report to Shareholders, are hereby incorporated by 
reference in this document in answer to this Item.  In addition, also included 
is the quarterly financial data included under the caption "Quarterly Results 
of Operations (Unaudited)" on page 86 of the Company's 1994 Annual Report to 
Shareholders.

The other financial statements and schedules required herein are filed as 
"Financial Statement Schedules" pursuant to Item 14 of this Report on Form 
10-K.


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

Not applicable.


PART III

The information set forth in "Proposal 1--Election of Directors" in the 
Company's Notice of the 1995 Annual Meeting of Shareholders and Proxy 
Statement, to be filed pursuant to Regulation 14A not later than 120 days 
after the close of the fiscal year covered by this report on Form 10-K, is 
hereby incorporated by reference in this document in answer to this Part III.

Executive Officers of Xerox

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

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

Paul A. Allaire*     56    Chairman of the Board, Chief      1991        1983
                           Executive Officer and Chairman
                           of the Executive Committee

A. Barry Rand        50    Executive Vice President,         1992        1986
                           Operations

Barry D. Romeril     51    Executive Vice President and      1993        1993
                           Chief Financial Officer

Stuart B. Ross       57    Executive Vice President;         1990        1979
                           Chairman and Chief Executive
                           Officer, Xerox Financial
                           Services, Inc.

Peter van Cuylenburg 47    Executive Vice President,         1993        1993
                           Operations

William F. Buehler   55    Senior Vice President and         1993        1991
                           Chief Staff Officer

Allan E. Dugan       54    Senior Vice President,            1992        1990
                           Corporate Strategic Services

Mark B. Myers        56    Senior Vice President, Corporate  1992        1989
                           Research and Technology

Richard S. Paul      53    Senior Vice President and         1992        1989
                           General Counsel


* Member of Xerox Board of Directors.


Executive Officers of Xerox, Continued

                                                             Year
                                                           Appointed
                                                          to Present   Officer
     Name           Age         Present Position           Position     Since

Richard S. Barton    46    Vice President; President,        1993        1993
                           U.S. Customer Operations

Eunice M. Filter     54    Vice President, Treasurer         1990        1984
                           and Secretary

Philip D. Fishbach   53    Vice President and Controller     1995        1990

John A. Lopiano      56    Vice President; President,        1995        1993
                           Xerox Production Systems

Patrick J. Martin    54    Vice President; President,        1993        1992
                           Office Document Products


Each officer named above, with the exceptions of William F. Buehler, Barry D. 
Romeril and Peter van Cuylenburg, has been an officer or an executive of Xerox 
or its subsidiaries for at least the past five years.

Prior to joining Xerox in 1991, Mr. Buehler was Vice President, Network 
Systems Sales at the American Telephone & Telegraph Company (AT&T).  Mr. 
Buehler had been affiliated with AT&T since 1964.

Prior to joining Xerox in 1993, Mr. Romeril had been Group Finance Director at 
British Telecommunications Plc since 1988.  From 1987 to 1988 he was Finance 
Director at BTR, Incorporated.

Prior to joining Xerox in 1993, Mr. van Cuylenburg had been President and 
Chief Operating Officer of NeXT Computer Inc. since 1992.  From 1989 to 1992 
he was with Cable & Wireless Plc as a group director and as Chief Executive of 
Mercury Communications Ltd., a subsidiary.



PART IV


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

 (a)  (1) and (2)  The financial statements, independent auditors' reports 
      and financial statement schedules being filed are listed or otherwise 
      included in the attachment.

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

 (b)  No Current Reports on Form 8-K were filed during the last quarter of the 
      period covered by this Report.

 (c)  The management contracts or compensatory plans or arrangements listed
      in the Index of Exhibits that are applicable to the executive officers
      named in the Summary Compensation Table which appears in Registrant's
      1995 Proxy Statement are preceded by an asterisk (*).



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange 
Act of 1934, the registrant has duly caused this report to be signed on its 
behalf by the undersigned, thereunto duly authorized.

                                                 XEROX CORPORATION


                                            By:  /s/ Barry D. Romeril
                                                 Executive Vice President and 
                                                 Chief Financial Officer
March 30, 1995

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

March 30, 1995



    Signature                                 Title

Principal Executive Officer:

Paul A. Allaire                              /s/ Paul A. Allaire

                                             Chairman, Chief Executive Officer
                                             and Director


Principal Financial Officer:

Barry D. Romeril                             /s/ Barry D. Romeril

                                             Executive Vice President and
                                             Chief Financial Officer


Principal Accounting Officer:

Philip D. Fishbach                           /s/ Philip D. Fishbach

                                             Vice President and Controller


Directors:


/s/ Robert A. Beck                                   Director


/s/ Joan Ganz Cooney                                 Director


/s/ B. R. Inman                                      Director


/s/ Vernon E. Jordan, Jr.                            Director


/s/ Yotaro Kobayashi                                 Director


/s/ Ralph S. Larsen                                  Director


/s/ John D. Macomber                                 Director


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


/s/ John E. Pepper                                   Director


/s/ Martha R. Seger                                  Director


/s/ Thomas C. Theobald                               Director



Report of Independent Auditors



To the Board of Directors and Shareholders of Xerox Corporation


Under date of January 31, 1995, we reported on the consolidated balance sheets 
of Xerox Corporation and consolidated subsidiaries as of December 31, 1994 and 
1993 and the related consolidated statements of income and cash flows for each 
of the years in the three-year period ended December 31, 1994, as contained in 
the Xerox Corporation 1994 Annual Report to Shareholders on pages 28, 38, 40-
41, and 58-85.  These consolidated financial statements and our report thereon 
are incorporated by reference in the 1994 Annual Report on Form 10-K.  In 
connection with our audits of the aforementioned consolidated financial 
statements, we also have audited the related financial statement schedules 
listed in the accompanying index.  These financial statement schedules are the 
responsibility of the Company's management.  Our responsibility is to express 
an opinion on these financial statement schedules based on our audits.

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

As discussed in Note 2, the Company changed its methods of accounting for 
income taxes and postretirement benefits other than pensions in 1992.



                                                KPMG PEAT MARWICK LLP



Stamford, Connecticut
January 31, 1995, except as to Notes 18 and 22,

which are as of March 2, 1995



Index to Financial Statements and Schedules

Financial Statements:

   Consolidated statements of income of Xerox Corporation and subsidiaries for
     each of the years in the three-year period ended December 31, 1994

   Consolidated balance sheets of Xerox Corporation and subsidiaries as of 
     December 31, 1994 and 1993

   Consolidated statements of cash flows of Xerox Corporation and subsidiaries 
     for each of the years in the three-year period ended December 31, 1994


   Notes to consolidated financial statements

      The above consolidated financial statements and related notes which 
      appear on pages 28, 38, 40-41, and 58-85 of the Company's 1994 Annual
      Report to Shareholders are hereby incorporated by reference in this
      document.

Commercial and Industrial (Article 5) Schedules:

   I  - Condensed financial information of registrant

   II - Valuation and qualifying accounts


Insurance (Article 7) Schedules:

   None


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


 
                                                                  SCHEDULE I
Xerox Corporation - Parent Company
Condensed Statements of Income

Year ended December 31 
(in millions, except per-share data)                     1994    1993    1992
Revenues 
     Sales                                            $ 3,582 $ 3,336 $ 3,270
     Service and rentals                                3,399   3,162   3,033
     Sales to unconsolidated companies                  1,090     902   1,093
     Other income                                          51      63      58

     Total Revenues                                     8,122   7,463   7,454

Costs and Expenses
     Cost of sales                                      2,066   1,824   1,769
     Cost of service and rentals                        1,633   1,614   1,556
     Cost of sales to unconsolidated companies            987     825     878
     Research and development expenses                    832     814     838
     Selling, administrative and general expenses       2,342   2,311   2,298
     Interest expense                                     213     210     199
     Special charges, net                                   -     887       -
     Other, net                                          (303)   (302)   (326)
 
     Total Costs and Expenses                           7,770   8,183   7,212

Income (Loss) before Income Taxes and Equity Income       352    (720)    242

Income Taxes (Benefits)                                   173    (262)    160

Equity in Net Income (Loss) of Unconsolidated
     Companies' Continuing Operations                     615     269    (299)

Income (Loss) from Continuing Operations                  794    (189)   (217)

Equity in Net Income (Loss) of Unconsolidated
     Companies' Discontinued Operations                     -      63     (39)

Cumulative Effect of Changes in Accounting Principles       -       -    (764)

Net Income (Loss)                                     $   794 $  (126)$(1,020)

Primary Earnings (Loss) per Share
     Continuing Operations                            $  6.73 $ (2.46)$ (2.91)
     Discontinued Operations                                -     .62    (.41)
     Cumulative Effect of Changes 
        in Accounting Principles                            -       -   (7.97)
Primary Earnings (Loss) per Share                     $  6.73 $ (1.84)$(11.29)

Fully Diluted Earnings (Loss) per Share
     Continuing Operations                            $  6.44 $ (2.46)$ (2.91)
     Discontinued Operations                                -     .62    (.41)
     Cumulative Effect of Changes 
        in Accounting Principles                            -       -   (7.97)
Fully Diluted Earnings (Loss) per Share               $  6.44 $ (1.84)$(11.29)

See notes to condensed financial statements.


                                                                  SCHEDULE I
Xerox Corporation - Parent Company
Condensed Balance Sheets

December 31 (in millions)                                   1994        1993

Assets

Cash                                                     $    29     $    23

Accounts Receivable, net                                     673         670

Finance Receivables, net                                   1,170       1,079

Inventories                                                1,068         995

Land, Buildings and Equipment, net                         1,232       1,301

Investments in and Advances to Unconsolidated
  Companies' Continuing Operations                         5,783       5,218

Deferred Income Taxes                                        694         828

Investments in Discontinued Operations,net                   779       1,063

Other Assets                                                 368         411

Total Assets                                             $11,796     $11,588

Liabilities and Equity

Accounts Payable                                         $   251     $   252

Accrued Compensation and Benefit Costs                       585         451

Unearned Income                                               99         132

Other Liabilities                                          1,787       2,033

Short-Term Debt and Current Portion of Long-Term Debt        480         327

Long-Term Debt                                             3,201       3,023

Liability for Postretirement Medical Benefits                980         973

Deferred ESOP Benefits                                      (596)       (641)

Preferred Stock                                              832       1,066

Common Shareholders' Equity*                               4,177       3,972

Total Liabilities and Equity                             $11,796     $11,588

See notes to condensed financial statements.

*   Shares of common stock issued and outstanding at December 31, 1994 and
    1993 were (in thousands) 105,993 and 104,122, respectively.


                                                                   SCHEDULE I

Xerox Corporation - Parent Company
Condensed Statements of Cash Flows

Year ended December 31 (in millions)                       1994   1993   1992
Net Cash Flows from Operating Activities

Income (Loss) from Continuing Operations                  $ 794  $(189) $(217)
Adjustments required to reconcile income (loss) from
  continuing operations to cash flows from
  operating activities:
    Depreciation and amortization                           356    317    293
    Document Processing provision for special charges         -    887      -
    Provisions for doubtful accounts                         57     56     85
    Provision for postretirement medical benefits            53     65     58
    Charges against 1993 restructuring reserve             (226)     -      -
    Equity in (income) loss of unconsolidated companies'
      continuing operations, net of dividends              (540)  (231)   394
    Net increase in inventories                            (274)  (175)  (255)
    Net increase in other operating
      assets and liabilities                                (31)  (100)  (355)
    Other, net                                              170   (324)   414

    Total                                                   359    306    417

Cash Flows from Investing Activities

  Additions to land, buildings and equipment               (203)  (271)  (282)
  Proceeds from sales of land, buildings and equipment      115     12     10
  Investments in and advances to unconsolidated
    companies                                              (110)   (79)  (135)
  Return of capital from unconsolidated companies            13     20      -
  Other, net                                                  7      4      7

    Total                                                  (178)  (314)  (400)

Cash Flows from Financing Activities

  Decrease in short-term debt, net                            -      -    (98)
  Proceeds from long-term debt                              679    150    484
  Principal payments on long-term debt                     (304)  (324)  (168)

    Subtotal                                                375   (174)   218

  Dividends on common and preferred stock                  (395)  (389)  (373)
  Proceeds from sale of common stock                         90    665    113
  Redemption of preferred stock                            (245)    (6)    (6)
  Other, net                                                  -     (1)    (1)

    Total                                                  (175)    95    (49)

Change in Cash (Bank Overdraft) During the Year               6     87    (32)
Cash (Bank Overdraft) at Beginning of Year                   23    (64)   (32)
Cash (Bank Overdraft) at End of Year                      $  29  $  23  $ (64)

See notes to condensed financial statements.


                                                                    SCHEDULE I

Xerox Corporation - Parent Company

Notes To Condensed Financial Statements

Note 1. Financial Statement Presentation

Certain prior year balances have been reclassified to conform to the 1994 
presentation.

Note 2. Long-Term Debt

A summary of long-term debt at December 31, 1994 and 1993 follows:

                                          Weighted average
                                          interest rates at
(in millions)                             December 31, 1994      1994     1993

  Guaranteed ESOP notes
    due 1999-2004                                    7.69%     $  596   $  641

  Notes due 1994                                        -           -      200
  Notes due 1995                                     8.75         150      150
  Notes due 1996                                     8.38         100      100
  Notes due 1997                                     9.63         200      200
  Notes due 1999                                     6.93         738      250
  Notes due 2000                                     9.75         200      200
  Notes due 2001                                     7.39          62        -
  Notes due 2002                                     8.13         200      200
  Notes due 2004                                     7.17         225      200
  Notes due 2006                                     8.09          45        -
  Debentures due 1995                                9.25         200      200
  Debentures due 2000                                9.63         100      100
  Commercial paper                                   6.03         761      701
  Other debt due 1994-2014                           8.51          97      201
  Capital lease obligations                          5.48           7        7

  Subtotal                                                      3,681    3,350

  Less current maturities                                         480      327

  Total long-term debt                                         $3,201   $3,023

Debt Maturities - Scheduled payments due on long-term debt for the next five 
years are (in millions):  1995-$480; 1996-$161; 1997-$266; 1998-$71; 1999-$813 
and thereafter $1,890.

Payment subsequent to 1999 include domestic commercial paper which has been 
classified as long-term debt because the Company has the intention and the 
ability under the revolving credit agreements to affect refinancing on a long-
term basis.

Note 3. Dividends from Unconsolidated Companies

Dividends received from unconsolidated companies were (in millions):  1994-
$75; 1993-$38; and 1992-$95.


 
                                                                  SCHEDULE II

Valuation and Qualifying Accounts
Year ended December 31, 1994, 1993 and 1992

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

1994
Allowance for Losses on:
   Accounts Receivable            $ 62          $ 70         $ 53         $ 79
   Finance Receivables             300           182          163          319
   Reinsurance Receivables           5            12           10            7
   Premiums Receivable              16             -            1           15
Deferred Tax Valuation 
   Allowance*                      134           152            -          286

                                  $517          $416         $227         $706

1993
Allowance for Losses on:
   Accounts Receivable            $ 68          $ 51         $ 57         $ 62
   Finance Receivables             275           199          174          300
   Reinsurance Receivables          30             5           30            5
   Premiums Receivable               9             2           (5)          16
Deferred Tax Valuation 
   Allowance                       100            34            -          134

                                  $482          $291         $256         $517

1992
Allowance for Losses on:
   Accounts Receivable            $ 68          $ 67         $ 67         $ 68
   Finance Receivables             212           200          137          275
   Reinsurance Receivables         103           205          278           30
   Premiums Receivable               7             5            3            9
Deferred Tax Valuation 
   Allowance                       100             -            -          100

                                  $490          $477         $485         $482



*  The 1994 increase in deferred tax valuation allowance was charged to net
   unrealized gain (loss) on investment securities in the Company's
   consolidated balance sheet.


Index of Exhibits

Document and Location
  
(3) (a) (1) Restated Certificate of Incorporation of Registrant filed by the 
            Department of State of New York on June 10, 1988.
  
            Incorporated by reference to Exhibit 3(a) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1988.
  
        (2) Certificate of Amendment dated July 7, 1989 to the Restated 
            Certificate of Incorporation.

            Incorporated by reference to Exhibit 3(a) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1989.

        (3) Certificate of Amendment dated October 10, 1994 to the Restated
            Certificate of Incorporation.
   
    (b)     By-Laws of Registrant, as amended through May 29, 1991.
  
            Incorporated by reference to Exhibit 3(b)(2) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1991.
  
(4) (a)     Indenture dated as of July 1, 1986 between Registrant and Bankers 
            Trust Company relating to unlimited amounts of debt securities 
            which may be issued from time to time by Registrant when and as 
            authorized by or pursuant to a resolution of Registrant's Board 
            of Directors.
   
            Incorporated by reference to Exhibit 4(a) to Registration No. 
            33-7415.
   
    (b)     Indenture dated as of February 1, 1989 between Registrant and 
            Chemical Bank relating to unlimited amounts of debt securities 
            which may be issued from time to time by Registrant when and as 
            authorized by or pursuant to a resolution of Registrant's Board 
            of Directors.
   
            Incorporated by reference to Exhibit 4(a) to Registration No.
            33-27188.

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

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

    (d)     Indenture dated as of December 1, 1991 between Registrant and 
            Citibank, N.A. relating to unlimited amounts of debt securities 
            which may be issued from time to time by Registrant when and 
            as authorized by or pursuant to a resolution of Registrant's 
            Board of Directors.
  
            Incorporated by reference to Exhibit 4(a) to Registration No. 
            33-44597.
  
    (e)     Indenture dated as of February 1, 1987 between Xerox Credit 
            Corporation (XCC) and Continental Illinois National Bank and Trust
            Company of Chicago relating to unlimited amounts of debt 
            securities which may be issued from time to time by XCC when and
            as authorized by the XCC's Board of Directors or the Executive
            Committee of the Board of Directors.
  
            Incorporated by reference to Exhibit (4)(a) to XCC's Registration 
            Statement No. 33-12160.
 
    (f)     Indenture dated as of March 1, 1988, as supplemented by the First 
            Supplemental Indenture dated as of July 1, 1988, between XCC and 
            The First National Bank of Chicago relating to unlimited amounts 
            of debt securities which may be issued from time to time by XCC 
            when and as authorized by XCC's Board of Directors or the 
            Executive Committee of the Board of Directors.

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

    (g)     Indenture dated as of March 1, 1989, as supplemented by the First 
            Supplemental Indenture dated as of October 1, 1989, between XCC 
            and Citibank, N.A. relating to unlimited amounts of debt 
            securities which may be issued from time to time by XCC when and 
            as authorized by XCC's Board of Directors or Executive Committee 
            of the Board of Directors.
  
            Incorporated by reference to Exhibit 4(a) to XCC's Registration 
            Statement No. 33-27525 and to Exhibit 4(a)(2) to XCC's 
            Registration Statement No. 33-31367.
  
    (h)     Indenture dated as of August 1, 1991, as supplemented by the 
            First Supplemental Indenture dated as of December 31, 1991, 
            between XCC and Bank of Montreal Trust Company relating to 
            unlimited amounts of debt securities which may be issued from 
            time to time by XCC when and as authorized by XCC's Board of 
            Directors or Executive Committee of the Board of Directors.
  
            Incorporated by reference to Exhibit 4(a) to XCC's Registration 
            Statement No. 33-39838. 

    (i)     Indenture dated as of October 1, 1991, as supplemented by the 
            First Supplemental Indenture dated as of May 1, 1992, between XCC 
            and Citibank, N.A. relating to unlimited amounts of debt 
            securities which may be issued from time to time by XCC when and 
            as authorized by XCC's Board of Directors or Executive Committee 
            of the Board of Directors.
  
            Incorporated by reference to Exhibit 4(a) to XCC's Registration 
            Statement No. 33-43470.
    (j)     Indenture dated as of May 1, 1994, between XCC and The First
            National Bank of Boston relating to unlimited amounts of debt
            securities which may be issued from time to time by XCC when and
            as authorized by XCC's Board of Directors or Executive Committee
            of the Board of Directors.

            Incorporated by reference to Exhibit 4(a) to XCC's Registration
            Statement No. 33-53533 and to Exhibits 4(a)(1) and 4(a)(2) to
            XCC's Registration Statement No. 33-43470.

    (k)     Instruments with respect to long-term debt where the total amount 
            of securities authorized thereunder does not exceed 10% of the 
            total assets of the Registrant and its subsidiaries on a 
            consolidated basis have not been filed.  The Registrant agrees to 
            furnish to the Commission a copy of each such instrument upon 
            request. 
  
(10)        The management contracts or compensatory plans or arrangements 
            listed below that are applicable to the executive officers named 
            in the Summary Compensation Table which appears in Registrant's 
            1995 Proxy Statement are preceded by an asterisk (*).
 
   *(a)     Registrant's 1976 Executive Long-Term Incentive Plan, as amended 
            through February 4, 1991.
 
            Incorporated by reference to Exhibit (10)(a) to the Registrant's 
            Annual Report on Form 10-K for the Year Ended December 31, 1991.

   *(b)     Registrant's 1991 Long-Term Incentive Plan, as amended through 
            July 15, 1991.
 
            Incorporated by reference to Exhibit 10(b) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended June 30, 
            1991.
  
    (c)     Registrant's Retirement Income Plan for Directors, as amended 
            through October 2, 1989.
 
            Incorporated by reference to Exhibit 10(n) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended September 
            30, 1989.
  
   *(d)     Description of Registrant's Annual Performance Incentive Plan.

            Incorporated by reference to Exhibit 10(d) to Registrant's Annual
            Report on Form 10-K for the year ended December 31, 1993.
 
   *(e)     Registrant's 1993 Restatement of Unfunded Retirement Income 
            Guarantee Plan.

            Incorporated by reference to Exhibit 10(e) to Registrant's Annual
            Report on Form 10-K for the year ended December 31, 1993.

    (f)     Consent Order To Cease and Desist.  In the Matter of Xerox 
            Corporation, Before the Federal Trade Commission, Docket No. 
            8909 dated 3/29/75.
           
            Incorporated by reference to Exhibit I to Registrant's Report on 
            Form 8-K for July 1975.

   *(g)      1993 Restatement of Registrant's Unfunded Supplemental Retirement 
             Plan.

             Incorporated by reference to Exhibit 10(g) to Registrant's Annual
             Report on Form 10-K for the year ended December 31, 1993.

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

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

    (i)      Registrant's Restricted Stock Plan for Directors, as amended 
             through February 7, 1994.

             Incorporated by reference to Exhibit 10(i) to Registrant's Annual
             Report on Form 10-K for the Year Ended December 31, 1993.

   *(j)      Form of severance agreement entered into and to be entered into 
             with various executive officers.

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

   *(k)      Registrant's Contributory Life Insurance Plan.

             Incorporated by reference to Exhibit 10(s) to Registrant's 
             Quarterly Report on Form 10-Q for the Quarter Ended June 30, 
             1989. 
 
    (l)      1993 Amendment and Restatement of Registrant's 1989 Deferred 
             Compensation Plan for Directors.

             Incorporated by reference to Exhibit 10(l) to Registrant's Annual
             Report on Form 10-K for the year ended December 31.
 
   *(m)      1993 Amendment and Restatement of Registrant's 1989 Deferred 
             Compensation Plan for Executives.

             Incorporated by reference to Exhibit 10(m) to Registrant's Annual
             Report on Form 10-K for the year ended December 31, 1993.
 
(11)         Statement re computation of per share earnings.
 
(12)         Computation of Ratio of Earnings to Fixed charges.
 
(13)         Pages 28 through 92 of Registrant's 1994 Annual Report
             to Shareholders.

(21)         Subsidiaries of the Registrant.

(23)         Consent of KPMG Peat Marwick LLP.

(28) P       Schedule P of Annual Statements to State Regulatory Authorities.

             Incorporated by reference to Exhibit (28) on the Form SE of 
             Registrant dated March 27, 1995.






                                                               EXHIBIT 3(a)(3)



Certificate of Amendment
of the
Certificate of Incorporation
of
Xerox Corporation
Under Section 805 of the Business Corporation Law


          We, the undersigned, Eunice M. Filter, Vice President and Martin S. 
Wagner, Assistant Secretary of Xerox Corporation (the "Corporation") hereby 
certify that:

          1.  The name of the Corporation is "XEROX CORPORATION".  The name 
under which the Corporation was formed is "THE HALOID COMPANY".

          2.  The Certificate of Incorporation was filed by the Department of 
State on April 18, 1906 under the name The Haloid Company.

          3.  The Certificate of Incorporation of the Corporation is hereby 
being amended pursuant to Section 805 of the BCL to (a) reduce the number of 
authorized shares of Cumulative Preferred Stock, par value $1.00 per share, of 
the Corporation ("Cumulative Preferred Stock") and (b) reduce the stated 
capital of the Corporation resulting from (i) the cancellation, pursuant to 
Section 515(d) of the BCL, of 2,970,153 shares of the Corporation's $4.125 
Twenty-Year Sinking Fund Preferred Stock (the "Twenty-Year Preferred Stock"), 
a series of Cumulative Preferred Stock, heretofore acquired by the Corporation 
by optional redemption other than for a sinking fund and (ii) the elimination, 
pursuant
 to Section 515(e) of the BCL and subdivision 4 of Article FOURTH of 
the Certificate of Incorporation of he Corporation, of 1,456,933 shares of 
Cumulative Preferred Stock (consisting of 456,933 shares of the Twenty-Year 
Preferred Stock and 1,000,000 shares of the Corporation's $3.6875 Ten-Year 
Sinking Fund Preferred Stock, a series of Cumulative Preferred Stock) 
heretofore acquired by the Corporation by sinking fund redemptions.  
Subdivision 4 of Article FOURTH of the Certificate of Incorporation of the 
Corporation prohibits the reissue of any shares of Cumulative Preferred Stock 
of any series redeemed or retired pursuant to a sinking fund and requires that 
such shares be eliminated in the manner provided by law from the authorized 
capital stock of the Corporation.

          4.  The lead-in paragraph of Article FOURTH of the Certificate of 
Incorporation of the Corporation reads as follows:

                  "FOURTH:  The aggregate number of shares which the
              Corporation shall have the authority to issue is 
              350,000,000 shares of Common Stock, of the par value
              of $1.00 each (hereinafter referred to as "Common 
              Stock"), 600,000 shares of Class B Stock of the par
              value of $1.00 each (hereinafter referred to as "Class
              B Stock"), and 25,000,000 shares of Cumulative Preferred
              Stock, of the par value of $1.00 each (hereinafter 
              referred to as "Cumulative Preferred Stock")."

          5.  The lead-in paragraph of Article FOURTH of the Certificate of 
Incorporation of the Corporation is hereby amended to read as follows:

                  "FOURTH:  The aggregate number of shares which the 
              Corporation shall have the authority to issue is
              350,000,000 shares of Common Stock, of the par value
              of $1.00 each (hereinafter referred to as "Common
              Stock"), 600,000 shares of Class B Stock of the
              par value of $1.00 each (hereinafter referred 
              to as "Class B Stock"), and 23,543,067 shares of
              Cumulative Preferred Stock, of the par value of
              $1.00 each (hereinafter referred to as "Cumulative 
              Preferred Stock")."

          6.  The stated capital of the Corporation is hereby reduced by 
$4,427,086, the amount represented by the shares of Cumulative Preferred Stock 
heretofore acquired by the Corporation by optional and sinking fund 
redemptions and thereafter cancelled or eliminated.

          7.  The foregoing amendment of the Certificate of Incorporation of 
the Corporation was authorized by the Board of Directors of the Corporation at 
a meeting duly called and held on October 10, 1994.

          IN WITNESS WHEREOF, we have subscribed this document on the date set 
forth below and do hereby affirm, under the penalties of perjury, that the 
statements contained therein have been examined by us and are true and 
correct.



Date:  October 10, 1994

                                             /s/ Eunice M. Filter
                                             Name:   Eunice M. Filter
                                             Title:  Vice President

                                             /s/ Martin S. Wagner
                                             Name:   Martin S. Wagner
                                             Title:  Assistant Secretary






Computation of Net Income Per Common Share

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

     Average common shares outstanding during the period
     Common shares issuable with respect to common
       stock equivalents for stock options, incentive and
       exchangeable shares
     Adjusted average shares outstanding for the period

     Primary earnings (loss) per share:
       Continuing operations
       Discontinued operations
       Change in accounting principles
     Primary earnings (loss) per share


II.Fully Diluted Net Income (Loss) Per Common Share
     Income (loss) from continuing operations
     Accrued dividends on ESOP preferred stock, net
     Accrued dividends on redeemable preferred stock 
     Call premium on redeemable preferred stock
     ESOP expense adjustment, net of tax
     Interest on convertible debt, net of tax
     Adjusted income (loss) from continuing operations
     Discontinued
 operations
     Change in accounting principles
     Anti-dilution adjustment, net
     Adjusted net income (loss)

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

     Fully diluted earnings (loss) per share:
       Continuing operations
       Discontinued operations
       Change in accounting principles
     Fully diluted earnings (loss) per share *

*  Fully diluted net income per share for the year ended December 31, 1990 is
   computed by dividing adjusted net income of $157 by the adjusted average 
   shares outstanding for the period of 94,220 used in the computation of 
   primary net income per common share.  This computation is necessitated by 
   the anti-dilutive nature of convertible debt and ESOP preferred stock 
   which would otherwise increase fully diluted net income per share for this 
   period.

                                                                   EXHIBIT 11

         1994            1993            1992            1991            1990

     $    794         $  (189)        $  (217)       $    438        $    610
          (41)            (38)            (39)            (60)            (63)
          (12)            (23)            (23)            (23)            (23)
          (11)              -               -               -               - 
          730            (250)           (279)            355             524
            -              63             (39)             16            (367)
            -               -            (764)              -               -
     $    730         $  (187)        $(1,082)       $    371        $    157

      105,425         100,047          94,424          92,447          92,196


        3,001           1,354           1,484           2,479           2,024
      108,426         101,401          95,908          94,926          94,220


     $   6.73         $ (2.46)        $ (2.91)       $   3.74        $   5.56
            -             .62            (.41)            .17           (3.90)
            -               -           (7.97)              -               -
     $   6.73         $ (1.84)        $(11.29)       $   3.91        $   1.66



     $    794         $  (189)        $  (217)       $    438        $    610
            -             (38)            (39)              -               -
          (12)            (23)            (23)            (23)            (23)
          (11)              -               -               -               -
           (7)              -               -             (25)            (33)
            3               -               -               1               4
          767            (250)           (279)            391             558
            -              63             (39)             16            (367)
            -               -            (764)              -               -
            -               -               -               -             (34)
     $    767         $  (187)        $(1,082)       $    407        $    157

      105,425         100,047          94,424          92,447          92,196
             
        3,001           1,354           1,484           2,791           2,024
          881               -               -             217             881
        9,770               -               -          10,007          10,028
      119,077         101,401          95,908         105,462         105,129


     $   6.44         $ (2.46)        $ (2.91)       $   3.71        $   5.31
            -             .62            (.41)            .15           (3.65)
            -               -           (7.97)              -               -
     $   6.44         $ (1.84)        $(11.29)       $   3.86        $   1.66




                                                                   EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges

Year ended December 31  (in millions)  1994     1993*   1992**   1991*** 1990
Fixed Charges:
   Interest expense                  $  732  $   755  $  845   $  818  $  855
   Rental expense                       190      201     213      211     196
    Total fixed charges before
     capitalized interest               922      956   1,058    1,029   1,051
   Capitalized interest                   2        5      17        3       -
    Total fixed charges              $  924  $   961  $1,075   $1,032  $1,051
Earnings available for fixed 
  charges:
   Earnings****                      $1,602  $  (227)  $ 171   $  963  $1,103
   Less undistributed income in
    minority owned companies            (54)     (51)    (52)     (70)    (60)
   Add fixed charges before
    capitalized interest                922      956   1,058    1,029   1,051
   Total earnings available for 
    fixed charges                    $2,470  $   678 $ 1,177   $1,922  $2,094
Ratio of earnings to
 fixed charges (1)(2)                  2.67     0.71    1.09     1.86    1.99

(1)   The ratio of earnings to fixed charges has been computed based on the 
      Company's continuing operations by dividing total earnings available
      for fixed charges, excluding capitalized interest, by total fixed 
      charges.  Fixed charges consist of interest, including capitalized 
      interest, and one-third of rent expense as representative of the
      interest portion of rentals.  Interest expense has been assigned to
      discontinued operations principally on the basis of the relative amount
      of gross assets of the discontinued operations.
  Management believes
      that this allocation method is reasonable in light of the debt
      specifically assigned to discontinued operations.  The discontinued
      operations consist of the Company's real estate development and related
      financing operations and its third-party financing and leasing
      businesses, and Other Financial Services businesses.
(2)   The Company's ratio of earnings to fixed charges includes the effect 
      of the Company's finance subsidiaries, which primarily finance Xerox 
      equipment.  Financing businesses, due to their nature, traditionally 
      operate at lower earnings to fixed charges ratio levels than do non-
      financial companies.
*     In 1993, the ratio of earnings to fixed charges includes the effect of
      the $1,373 million before-tax ($813 million after-tax) charge incurred
      in connection with the restructuring provision and litigation
      settlements.  Excluding this charge, the ratio was 2.13.  1993 earnings
      were inadequate to cover fixed charges.  The coverage deficiency was
      $283 million.
**    In 1992, the ratio of earnings to fixed charges includes the effect of
      the $936 million before-tax ($778 million after-tax) charge incurred in 
      connection with the decision to disengage from the Company's Insurance
      and Other Financial Services businesses.  Excluding this charge, the
      ratio was 2.05.
***   In 1991, the ratio of earnings to fixed charges includes the effect of 
      the $175 million before-tax charge incurred in connection with the 
      Document Processing work-force reduction.  Excluding this charge, the
      ratio was 2.08.
****  Sum of income before income taxes and income in minority owned
      companies.




   

<PAGE>
 
Consolidated Statements of Income 


<TABLE> 
<CAPTION> 
Year ended December 31 (in millions, except per-share data)                       1994              1993            1992
                                                                          ================================================
-------------------
Document Processing
-------------------
<S>                                                                          <C>                <C>               <C> 
Revenues
    Sales                                                                    $    7,853         $   7,211         $  7,292
    Service and rentals                                                           6,229             5,954            5,948
    Finance income                                                                1,006             1,064            1,058
                                                                          ------------------------------------------------
    Total Revenues                                                               15,088            14,229          14,298
                                                                          ------------------------------------------------
Costs and Expenses
    Cost of sales                                                                 4,653             4,098            3,898
    Cost of service and rentals                                                   3,016             2,986            3,080
    Equipment financing interest                                                    502               537              547
    Research and development expenses                                               895               883              922
    Selling, administrative and general expenses                                  4,394             4,477            4,664
    Special charges, net                                                              -             1,373                -
    Other, net                                                                      114               155               64
                                                                          ------------------------------------------------
    Total Costs and Expenses                                                     13,574            14,509           13,175
                                                                          ------------------------------------------------
Income (Loss) before Income Taxes, Equity Income and 
    Minorities' Interests                                                         1,514              (280)           1,123
    Income Taxes (Benefits)                                                         595               (78)             493
    Equity in Net Income of Unconsolidated Affiliates                                88                87               81
    Minorities' Interests in Earnings of Subsidiaries                               213                78              149
                                                                          ------------------------------------------------
Income (Loss) from Document Processing                                              794              (193)             562
                                                                          ------------------------------------------------
<CAPTION> 
---------
Insurance
---------
<S>                                                                          <C>                <C>               <C> 
Revenues
    Insurance premiums earned                                                     2,312             2,408           2,326
    Investment and other income                                                     437               401             552
                                                                          ------------------------------------------------
    Total Revenues                                                                2,749             2,809           2,878
                                                                          ------------------------------------------------
Costs and Expenses
    Insurance losses and loss expenses                                            1,769             1,836           2,725
    Insurance acquisition costs and other insurance operating expenses              777               785             957
    Interest
 expense                                                                212               215             218
    Administrative and general expenses                                              47                95             106
    Goodwill write-down                                                               -                 -             400
                                                                          ------------------------------------------------
    Total Costs and Expenses                                                      2,805             2,931           4,406
                                                                          ------------------------------------------------
Realized Capital Gains                                                               12                88             516
                                                                          ------------------------------------------------
Income (Loss) before Income Taxes                                                   (44)              (34)         (1,012)
    Income Taxes (Benefits)                                                         (44)              (38)           (233)
                                                                          ------------------------------------------------
Income (Loss) from Insurance                                                          -                 4            (779)
                                                                          ------------------------------------------------
<CAPTION> 
-------------
Total Company
-------------
<S>                                                                          <C>                <C>               <C> 
Income (Loss) from Continuing Operations                                            794              (189)           (217)
    Discontinued Operations                                                           -                63             (39)
    Cumulative Effect of Changes in Accounting Principles                             -                 -            (764)
                                                                          ------------------------------------------------
Net Income (Loss)                                                            $      794         $    (126)        $(1,020)
                                                                          ================================================
<CAPTION> 
---------------------------------
Primary Earnings (Loss) per Share
---------------------------------
<S>                                                                          <C>                <C>               <C> 
    Continuing Operations                                                    $     6.73         $    (2.46)       $ (2.91)
    Discontinued Operations                                                           -                .62           (.41)
    Cumulative Effect of Changes in Accounting Principles                             -                  -          (7.97)
                                                                          ------------------------------------------------
Primary Earnings per Share                                                   $     6.73         $    (1.84)       $(11.29)
                                                                          ================================================
<CAPTION> 
---------------------------------------
Fully Diluted Earnings (Loss) per Share
---------------------------------------
<S>                                                                          <C>                <C>               <C> 
    Continuing Operations                                                    $     6.44         $    (2.46)       $ (2.91)
    Discontinued Operations                                                           -                .62           (.41)
    Cumulative Effect of Changes in Accounting Principles                             -                  -          (7.97)
                                                                          ------------------------------------------------
Fully Diluted Earnings per Share                                             $     6.44         $    (1.84)       $(11.29)
                                                                          ================================================
</TABLE>
 

The accompanying notes are an integral part of the consolidated financial
statements.

28

<PAGE>
 
Financial Review:  

Document Processing and Total Company 


SUMMARY OF TOTAL COMPANY RESULTS

In view of the Company's 1993 decision to concentrate its resources on its 
core Document Processing business and disengage from the Insurance and Other 
Financial Services (IOFS) businesses, management believes the most meaningful 
and appropriate portrayal of the Company's operating results and financial 
position is to report the Document Processing and Insurance businesses on a 
tiered basis within the Company's consolidated financial statements. During 
1993, the Other Financial Services businesses qualified as discontinued 
operations and are accounted for accordingly.

Document Processing revenues increased 6 percent to $15.1 billion in 1994, 
following a slight decline in revenues to $14.2 billion in 1993 from $14.3 
billion in 1992. Insurance revenues declined 2 percent to $2.7 billion in 
1994, following a decline of 2 percent to $2.8 billion in 1993 from $2.9 
billion in 1992. 

Document Processing income in 1994 increased 37 percent to $794 million, 
compared with $580 million in 1993 before special items. On the same basis, 
income increased 3 percent in 1993 from $562 million in 1992. The 1993 
special items were charges of $813 million after taxes to provide for the 
costs of restructuring the Document Processing business and lawsuit 
settlements, and $40 million in one-time tax benefits. After special items, 
Document Processing reported a $193 million loss in 1993. 

Insurance income was zero in 1994, compared with income of $4 million in 
1993, and a loss of $779 million in 1992. In 1992, in connection with the 
restructuring of the Company's property and casualty insurance unit, Talegen 
Holdings, Inc., the Company recognized after-tax charges of $981 million, 
which were partially offset by associated realized capital gains of $293 
million after taxes.

The Company's discontinued operations had zero income in 1994 compared with 
income of $63 million in 1993, and a loss of $39 million in 1992. The 1993 
results included a $62 million after-tax gain on the sale of Van Kampen 
Merritt (VKM). The 1992 results included $90 million of adjustments, 
primarily for the partial write-down of goodwill.

In 1992, the Company recognized a charge of $764 million associated with the 
cumulative effect of the adoption of two accounting standards related to 
postretirement medical benefits and income taxes.

The Company's net income in 1994 of $794 million compared with a net loss of 
$126 million in 1993 after special items, and a net loss of $1,020 million in 
1992 after special charges and the cumulative effect of the adoption of the 
two accounting standards. On a comparable basis, the Company had net income 
of $6.73 per primary share in 1994 compared with a net loss of $1.84 per 
share in 1993 and a net loss of $11.29 per share in 1992. Fully diluted 
earnings per share were $6.44 in 1994 compared with a net loss of $1.84 per 
share in 1993 and a net loss of $11.29 per share in 1992. 

Pictured here was a bar chart depicting Document Processing Earnings per 
Share of $6.73 for 1994, $5.07 for 1993 before special items and $5.15 for 
1992.

Although the presentation of separate Document Processing and Insurance 
Earnings Per Share is not in accordance with generally accepted accounting 
principles, the Company believes that, for analytical purposes, the separate 
reporting of Earnings Per Share represents the contributions of the Company's 
two businesses to the consolidated results of operations.
                                                                              29

<PAGE>
 
Primary earnings per share for Document Processing increased 33 percent to 
$6.73 in 1994 from $5.07 in 1993 before special items, which was a 2 percent 
decrease from $5.15 in 1992. Fully diluted earnings per share for Document 
Processing increased 33 percent to $6.44 in 1994 from $4.86 in 1993 before 
special items, which was a 1 percent decrease from $4.93 in 1992. 1993 
Document Processing earnings per share reflect the impact of the additional 
8.1 million shares issued in connection with the Company's equity offering in 
June 1993.

Primary and fully diluted earnings per share for Insurance were zero in 1994 
compared with income of $.04 in 1993 and a loss of $8.06 in 1992.


DOCUMENT PROCESSING 


UNDERLYING GROWTH

To understand the trends in the business, the Company believes that it is 
helpful to adjust revenue and expense growth (except for ratios) to exclude 
the impact of the translation of foreign currencies into U.S. dollars and 
special one-time items that distort the trends. This adjusted growth is 
referred to as "underlying growth." The items that have been excluded from 
the discussion of underlying growth are the 1993 charges from the Document 
Processing restructuring program and the lawsuit settlements, and one-time 
tax benefits.

When compared with the major European currencies, the U.S. dollar was 
approximately 2 percent stronger in 1994 and 11 percent stronger in 1993. As 
a result, foreign currency translation had an unfavorable impact of 1 
percentage point on revenues in 1994 and 4 percentage points on revenues in 
1993.

The Company does not hedge foreign-currency denominated revenues. 

REVENUES

The estimated components of underlying growth were as follows:



<TABLE> 
<CAPTION> 

                                         Underlying Growth
                                     --------------------------
                                      1994      1993      1992
---------------------------------------------------------------
<S>                                   <C>       <C>       <C> 
Total Revenues                          7%        3%        5%
=============================================================== 
Equipment Sales                        10         1         6
Non-equipment revenues                  5         5         6
    Supplies                           10        11        12
    Paper                               6        (4)       (3)
    Service                             4         6         6
    Rentals                            (1)       (6)       (6)
    Facilities Management/Other        20         5        10
    Finance Income                     (4)        4        11
=============================================================== 
</TABLE>
 

The changes in the growth rates of total revenues are principally driven by 
changes in the growth rates of equipment sales.

The improved growth in equipment sales in 1994 reflected good growth in 
black-and-white copiers, excellent growth in the DocuTech family of digital 
publishers and a near doubling of color copier and printer equipment sales. 
OEM printer sales also had strong growth. The 1993 reduction in the growth 
rate was principally the result of several weak economic environments, 
particularly in Western Europe.

Pictured here was a graphic depicting Equipment Sales Growth of 10% in 1994, 
1% in 1993 and 6% in 1992.

30

<PAGE>

Non-equipment revenues from supplies, paper, service, rentals, facilities 
management and other revenues, and income from customer financing, which 
represented 65 percent of total revenues in 1994, are less volatile than 
equipment sales revenues, and therefore provide significant stability to 
overall revenues. Growth in these revenues is primarily a function of the 
growth in the Company's installed population of equipment, usage and pricing.

Pictured here was George Roth, Treasury, Xerox Corporation.
 
.    Supplies sales: The strong growth over the last several years is 
principally due to cartridge sales for personal and convenience copiers and 
to new OEM customers.

.    Paper sales: The improvement in the growth rate in 1994 is primarily due 
to higher prices after several years of declining wholesale prices. The 
Company's strategy is to charge a spread over mill wholesale prices.

.    Service revenues: The decline in growth in 1994 reflected the weak 
equipment sales growth in 1993.

.    Rental revenues: After a number of years of decline, reflecting a 
customer preference for outright purchase of equipment, the rate of decline 
was arrested by an increasing, but still relatively small, trend toward 
cost-per-copy rental plans. During the 1994 fourth quarter, rental revenues 
grew modestly for the first time in several years.

.    Facilities management, copy centers and other revenues: The growth in 
1994 and 1993 reflected the trend of customers focusing on their core 
businesses and outsourcing their document processing requirements to Xerox.

.    Finance income: The decline in 1994 reflects lower interest rates on 
financing contracts and a stabilization in the percent of customers who 
finance purchases through the Company at approximately 80 percent of 
equipment sales in the U.S. and 70 percent in Western Europe. Over time, the 
growth rate of finance income is expected to reflect the growth rate of 
equipment sales and trends in interest rates. The Company's strategy is to 
charge a spread over its cost of borrowing. 

Geographically, the underlying revenue growth rates were estimated as 
follows:


<TABLE> 
<CAPTION> 

                                          Underlying Growth
                                     --------------------------
                                      1994       1993     1992
---------------------------------------------------------------
<S>                                   <C>        <C>      <C> 
Total Revenues                          7%         3%       5%
===============================================================
United States                           7          4        6
Rank Xerox                              7          2        6
Other Areas                             7          4        5
===============================================================

</TABLE>
 

United States revenues were 52 percent of total revenues. Revenues of Rank 
Xerox Limited and related companies (Rank Xerox), which manufactures and 
markets Xerox products in eastern hemisphere countries, were 31 percent of 
total revenues. Revenues of Other Areas, which includes operations 
principally in Latin America and Canada, were 17 percent of total revenues. 
The improved revenue growth in all areas in 1994 reflected good growth in 
black-and-white copiers, excellent growth in the DocuTech family of digital 
publishers and a near doubling of color copier and printer revenues, 
attributable, in part, to improved sales productivity and economic 
environments. The decline in U.S. revenue growth in 1993 was primarily due to 
the disruptions early in the year from the realignment of the U.S. sales 
force. The decline in Rank Xerox revenue growth in 1993 was primarily the 
result of the weak economic environment in Western Europe.

For the major product categories, the underlying revenue growth rates were 
estimated as follows:


<TABLE> 
<CAPTION> 
                                         Underlying Growth
                                     -------------------------
                                      1994      1993     1992
--------------------------------------------------------------
<S>                                   <C>       <C>      <C> 
Total Revenues                          7%        3%      5%
==============================================================
Digital Products                       20        18      32
Black & White Copiers                   4         -       1
Paper and Other Products                3        (5)     (5)
==============================================================
</TABLE>
 

Revenues from digital products, comprised of digital publishing, electronic
printing, and color copying and printing, represented 22 percent of total
document processing revenues in 1994,

                                                                              31

<PAGE>
 
19 percent in 1993 and 17 percent in 1992. Total revenues from the DocuTech
family of digital publishing products reflected excellent growth to $1 billion
in 1994, revenues from color products almost doubled to $400 million, and
revenues from black-and-white electronic printers had good growth in both 1994
and 1993.

The improved growth in revenues from black-and-white copiers in 1994 results 
from customer acceptance of the Company's broad product line, excellent 
growth in facilities management, strong growth in the emerging markets in 
Latin America, Africa, Eastern Europe and the former Soviet Union, and 
stronger economic environments in Europe and Brazil. Revenues from 
black-and-white copying represented 63 percent of total document processing 
revenues in 1994, 65 percent in 1993 and 66 percent in 1992.

The 1994 growth in revenues from paper and other products, which represented 
15 percent of total revenues in 1994, and the declines in 1993 and 1992 are 
principally due to paper pricing. 

PRODUCTIVITY INITIATIVES

In December 1993, the Company announced a restructuring program with the 
objectives of continuing to significantly reduce the cost base and to improve 
productivity. The Company expects to reduce its worldwide work force by more 
than 10,000 employees and to close or consolidate a number of facilities by 
early 1996. The Company estimated that this program would result in pre-tax 
cost reductions of approximately $350 million in 1994, approximately $700 
million in 1995 and higher amounts thereafter. The Company stated, however, 
that it expected a portion of these savings to be reinvested to reengineer 
business processes, to support expansion in emerging markets, and to mitigate 
anticipated continued pressure on gross margins.

Employment declined by 9,400 from year-end 1993 to 87,600 employees at the 
end of 1994; 7,600 of the reductions were due to restructuring program 
initiatives, 500 were due to net attrition and 1,300 employees were 
transferred to Electronic Data Systems Corp. (EDS).

In June 1994, the Company awarded a 10-year, $3.2 billion contract to EDS to 
operate its worldwide computer and telecommunications network, including data 
center operations, telecommunications systems, desktop systems support, and 
business applications support. Information management strategy and 
architecture, and the development of systems for reengineered business 
processes were not outsourced.

Also in June 1994, the Company signed a labor agreement that enables 
productivity and competitive advantages, provides a seven-year job guarantee 
and provides cost-of-living wage protection at the Company's primary 
manufacturing operation in Webster, New York. Other provisions of the 
agreement include: new starting and entry-level wage rates, modifications of 
benefit programs, greater latitude in hiring temporary workers, flexibility 
in promotions and transfers, and studies to reduce cost in low value-added 
positions. The Company believes that the contract will enable significant 
progress towards achieving benchmark unit manufacturing costs.

To date, the activities associated with the productivity initiatives are on 
track towards achieving the Company's objectives. 

Pictured here was Dave Edwards, Xerox Graphic Systems.

32

<PAGE>
 
COSTS AND EXPENSES

The gross margins by revenue stream were as follows:


<TABLE> 
<CAPTION> 


                                            Gross Margins
                                     --------------------------
                                      1994      1993      1992
---------------------------------------------------------------
<S>                                   <C>       <C>       <C> 
Total                                 45.8%     46.4%     47.4%
===============================================================
Sales                                 40.7      43.2      46.5
Service and Rentals                   51.6      49.9      48.2
Finance Income                        50.1      49.5      48.3
===============================================================
</TABLE>
 

The declines in sales gross margins were principally due to adverse currency, 
competitive equipment pricing, unfavorable product and channel mix, and 
inventory adjustments in 1994, partially offset by improved productivity. The 
improvements in service and rentals gross margins were principally due to 
improved productivity and price increases, partially offset by economic cost 
increases and adverse currency. The improvements in finance income gross 
margins were principally due to country mix.

     Research and development (R&D) expense increased 1 percent in 1994 after a 
decline of 3 percent in 1993. The Company expects to increase its investment 
in technological development in 1995 and over the longer term to maintain its 
premier position in the rapidly changing document processing market. The 
Company's R&D is strategically coordinated with Fuji Xerox. The R&D 
investment by Fuji Xerox was approximately $500 million in 1994, bringing the 
total to almost $1.4 billion.

     Selling, administrative and general expenses (SAG) declined 1 percent in 
1994 on an underlying basis and were essentially unchanged in 1993 from 1992.
SAG as a percent of revenues was 29.1 percent in 1994 compared with 31.5 percent
in 1993 and 32.6 percent in 1992. The improvement in the ratios is primarily due
to improved productivity.

Pictured here was a graphic depicting Selling, Administrative and General 
Expenses (percent of revenues) of 29.1% in 1994, 31.5% in 1993 and 32.6% in 
1992.

     Other expenses, net, were $114 million in 1994, $155 million in 1993, and 
$64 million in 1992. The largest component of other expenses is aggregate
foreign currency exchange gains and losses. The Company's South American
operations in general, and Brazil in particular, are subject to hyper-inflation,
government-imposed price controls and currency devaluation. The aggregate
foreign currency losses which amounted to $136 million in 1994, $174 million in
1993 and $67 million in 1992, were substantially all in Brazil where the rate of
inflation and devaluation, after increasing in 1993 and the first half of 1994,
declined in the second half of 1994 following implementation by the Brazilian
government on July 1, 1994 of a new economic plan. It should be noted, however,
that the reduced aggregate exchange loss in 1994 was more than offset by lower
prices and other adverse impacts related to the new economic plan. Nevertheless,
South American operations continued to have good profit growth in 1994.

                                                                              33

<PAGE>
 
INCOME TAXES, EQUITY IN NET INCOME OF UNCONSOLIDATED AFFILIATES, AND 
MINORITIES' INTERESTS IN EARNINGS OF SUBSIDIARIES BEFORE SPECIAL ITEMS

Income before special items and income taxes was $1,514 million in 1994 
compared with $1,093 million in 1993 and $1,123 million in 1992.

  The effective tax rate was 39 percent in 1994 compared with 37 percent in 
1993 and 44 percent in 1992. The changes in tax rates are primarily due to 
the mix of operations and ESOP dividends, and, in 1993, due to favorable 
revaluations of deferred tax provisions resulting from changes in statutory 
income tax rates.

  Equity in Net Income of Unconsolidated Affiliates was essentially unchanged at
$88 million in 1994 after increasing 7 percent in 1993 from 1992. The equity in
the income of Fuji Xerox, the principal unconsolidated affiliate, was also
essentially unchanged in 1994, with improved results from operations offset by a
provision for an early retirement program. The 1993 increase was primarily due
to the strengthening of the Japanese yen against the U.S. dollar.

  Minorities' Interests in Earnings of Subsidiaries was $213 million in 1994
compared with $152 million, before the effect of special items, in 1993 and $149
million in 1992. The 1994 increase was due to excellent growth in Rank Xerox
income, reflecting strong revenue growth as well as benefits from productivity.
The 1993 increase was primarily due to productivity improvements partially
offset by currency. The restructuring provision reduced 1993 Minorities'
Interests in the Earnings of Subsidiaries by $74 million.

Pictured here was Jane Moyer, Xerox Business Services.

INCOME

In 1994, Document Processing income of $794 million grew 37 percent before 1993
special items. 1993 income of $580 million, before special charges and one-time
tax benefits of $40 million, grew 3 percent from $562 million in 1992.

GEOGRAPHIC INCOME

The following table shows 1992 through 1994 Document Processing income, 
excluding the special items, by geographic area (in millions):

<TABLE> 
<CAPTION> 
                                   Income after Minorities' Interests
                                        and before Special Items
                                  ------------------------------------
                                      1994        1993        1992
----------------------------------------------------------------------
<S>                                   <C>         <C>         <C> 
United States                         $329        $248        $301
Rank Xerox                             215         100          74
Other Areas                            250         232         187
----------------------------------------------------------------------
Total                                 $794        $580        $562
======================================================================
</TABLE>
 
In addition to adjusting the 1993 income by geographic area for 1993 special
items, 1994 income has been adjusted to exclude certain intercompany transfers
for comparability purposes.

  The improvement in 1994 income in the U.S. and Rank Xerox was primarily due to
strong equipment sales growth and improved productivity. The decline in the
United States income in 1993 was driven primarily by lower gross margins
principally due to competitive pricing, adverse currency and a shift in mix
toward the low end/lower margin products partially offset by improved
productivity. The increase in the Company's 1993 share of Rank Xerox income was
principally attributable to aggressive productivity actions partially offset by
currency. Other Areas income continued to have good growth in spite of a decline
in income in Mexico because of the weak 1994 economic environment.

34

<PAGE>
 
RETURN ON ASSETS

Improving Return on Assets (ROA) is a key priority throughout all levels of 
the Document Processing organization. ROA is used as a surrogate for return 
on equity since asset and asset-related return targets can be more clearly 
assigned to operating managers. The Company's 1994 ROA was 16.1 percent 
compared with 12.6 percent in 1993 excluding special items, and 13.6 percent 
in 1992. 

The Company's internal measurement for ROA is defined as Document Processing 
before-tax profits plus equity in the net income of unconsolidated affiliates 
divided by average ROA assets. These assets are Document Processing assets 
less investments in affiliates and Xerox equipment financing debt.

Pictured here was a bar chart depicting Document Processing Return on Assets 
of 16.1% in 1994, 12.6% in 1993 before special items and 13.6% in 1992.


QUARTERLY ANALYTICAL EARNINGS PER SHARE

The presentation of separate Document Processing and Insurance earnings per 
share (EPS) amounts is not in accordance with generally accepted accounting 
principles.

The Company believes, however, that for analytical purposes, these EPS 
amounts represent the contributions of the Company's two businesses to the 
consolidated results of operations and that the Document Processing results 
are an appropriate basis for comparison with future financial results from 
Document Processing.

The following schedule summarizes the 1994 Document Processing revenues, 
income and EPS computations on a quarterly basis.
                                                                               

<TABLE> 
<CAPTION> 


                                                                  First         Second          Third         Fourth        Full
(In millions, except per-share data, unaudited)                 Quarter        Quarter        Quarter        Quarter        Year
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>            <C>             <C>        <C> 
Revenues                                                         $3,271         $3,584        $3,636          $4,597     $15,088
Income                                                           $  131         $  167        $  185          $  311     $   794
Primary Earnings Per Share                                                                                            
    Preferred dividends net of tax benefit                       $  (15)        $  (26)       $  (12)         $  (11)    $   (64)
    Income available for common shareholders                        116            141           173             300         730
    Adjusted average shares outstanding                           107.9          108.6         108.8           108.9       108.4
    Primary Earnings Per Share                                   $ 1.07         $ 1.30        $ 1.60          $ 2.76     $  6.73
Fully Diluted Earnings Per Share                                                                                      
    Preferred dividends net of tax benefit                       $   (7)        $  (16)          $(3)         $   (1)    $   (27)
    Income available for common shareholders                        124            151           182             310         767
    Adjusted average shares outstanding                           118.6          119.3         119.5           119.5       119.1
    Fully Diluted Earnings Per Share                             $ 1.04         $ 1.27        $ 1.53          $ 2.60     $  6.44
================================================================================================================================

</TABLE>
 

                                                                              35

<PAGE>
 
SPECIAL ITEMS

In the fourth quarter of 1993, the Company provided $813 million after income 
taxes and minorities' interests in earnings of subsidiaries for the costs of 
a restructuring program and lawsuit settlements.

The Company reached agreement to settle a 1992 antitrust class action lawsuit 
involving selling spare parts for high-volume copiers and printers to 
independent service organizations, and a lawsuit involving the termination of 
a contract to purchase laptop computers. Under the antitrust settlement, the 
Company has provided $225 million of discount certificates to members of the 
plaintiff class for use as partial payment on future purchases of Xerox 
products, and has agreed to sell service parts to independent service 
organizations in the U.S., similar to the existing policy in Europe.

Pictured here was Noel Jackson, Production Systems Division, Rank Xerox.

This change in policy is not expected to have any material ongoing impact on 
future service revenues because of the Xerox total satisfaction guarantee and 
the sophisticated service support that the Company provides to ensure high 
levels of customer satisfaction. The discount certificates are available for 
use over a three-year period which commenced in September 1994 and may be 
applied against the payment of future purchases by the Company's customers. 
The settlement will have no impact on future revenues or income. Through 1994, 
$42 million of discount certificates were applied against purchases.

In 1993, the Company benefited from a total of $40 million of favorable 
revaluations of deferred tax provisions due to changes in the U.S. and 
Brazilian statutory income tax rates.

ADDITIONAL FINANCIAL INTEREST IN RANK XEROX

On February 28, 1995, Xerox paid The Rank Organisation Plc (RO) (Pounds)620 
million, or approximately $970 million, for a 40 percent interest in RO's 
financial interest in Rank Xerox. The transaction increased the Xerox 
financial interest in Rank Xerox to about 80 percent from 67 percent. The 
transaction was funded with commercial paper. The Company may retire a 
portion of the commercial paper with proceeds from the announced sales of 
Constitution Re Corporation (Constitution Re) and Xerox Financial Services 
Life Insurance Company (Xerox Life) and/or fund out a portion with longer-
term debt. The transaction resulted in goodwill of approximately $570 million
and a decline in minorities' interests in equity of subsidiaries of
approximately $400 million.

The Company estimates that the transaction will increase its earnings per 
share, will have a neutral to slightly positive cash flow impact in 1995, and 
will have a positive impact on earnings per share and cash flow going 
forward. Minorities' interests in earnings of subsidiaries will decline by 
approximately 40 percent. The resultant increase in interest expense will 
depend on the method of funding. The goodwill will be amortized over 40 
years, resulting in an annual impact of $14 million, before and after taxes.


36

<PAGE>
 
RANK XEROX AND LATIN AMERICAN FISCAL-YEAR CHANGE IN 1995

Effective January 1, 1995, the Company changed Rank Xerox and Latin American 
operations to calendar-year financial reporting. The 1994 fiscal year ended 
on October 31 for Rank Xerox and on November 30 for Latin American 
operations. The results of these non-U.S. operations that occur between the 
1994 and 1995 fiscal years (the stub period) will be accounted for as a 
direct charge or credit to equity.

MEXICAN ECONOMIC ENVIRONMENT

Because of the change in fiscal years, the impact of the December devaluation 
of the Mexican currency and related economic dislocations, net of the benefit 
of a currency hedge, will be reported in the stub period.

It is too early to determine the impact of the Mexican economic problems on 
Xerox operations, revenues and income in 1995. The Company's 1994 Mexican 
revenues were approximately 2 percent of total revenues.

BRAZILIAN TAX RATE

In January, the Brazilian Congress approved an increase in the statutory tax 
rate. The impact of this rate increase, if the enactment is for more than one 
year, on Xerox of Brazil will be a one-time charge to deferred tax expense of 
approximately $30 million in the 1995 first quarter. 

Pictured here were Val Tanigawa, Louise Pardyjak, Dennis Coyne and Chris 
Debski, Personal Document Products; and the 5305 Personal Copier, introduced 
in 1994.


CAPITAL RESOURCES AND LIQUIDITY

CAPITAL

Total equity increased to $6,030 million at December 31, 1994, compared with 
$5,882 million in 1993 and $5,832 million in 1992. The $148 million increase 
in 1994 was primarily due to strong earnings of $794 million, an increase of 
$177 million in Minorities' Interests, favorable currency of $145 million, 
and $92 million from the exercise of employee stock options, partially offset 
by unrealized insurance investment portfolio losses of $439 million, $395 
million of shareholder dividends and preferred stock redemptions of $245 
million. In 1993, the impact of the Company's net loss of $126 million (after 
special items of $813 million) and $389 million of shareholder dividends was 
more than offset by $580 million of proceeds generated by the issuance of 8.1 
million common shares and $58 million of new equity associated with the 
exercise of employee stock options. 

Total debt, excluding debt of the Company's ESOP, which is guaranteed by 
Xerox, increased to $10,343 million at December 31, 1994, from $9,443 million 
in 1993 and $9,957 million in 1992. ESOP debt in 1994, 1993 and 1992 was $596 
million, $641 million and $681 million, respectively.

On a consolidated basis, the debt-to-capital ratio at December 31, 1994 was 
67 percent, including the debt associated with the Company's ESOP, and 63 
percent excluding ESOP debt. Both these ratios were up 1 percentage point 
from 1993 due to the growth in debt associated with the Company's financing 
of equipment sales, and were unchanged from 1992.

                                                                              37

<PAGE>
 
Consolidated Balance Sheets 


<TABLE> 
<CAPTION> 

December 31 (in millions)                                                             1994                          1993
                                                                                   =====================================
<S>                                                                                <C>                          <C> 
Assets
------
Document Processing

Cash                                                                                $    35                      $    68
Accounts Receivable, net                                                              1,811                        1,613
Finance Receivables, net                                                              3,910                        3,358
Inventories                                                                           2,294                        2,162
Deferred Taxes and Other Current Assets                                               1,199                        1,167
                                                                                   -------------------------------------
    Total Current Assets                                                              9,249                        8,368
Finance Receivables Due after One Year, net                                           6,038                        5,594
Land, Buildings and Equipment, net                                                    2,108                        2,219
Investments in Affiliates, at Equity                                                  1,278                        1,094
Other Assets                                                                            701                          883
                                                                                   -------------------------------------
    Total Document Processing Assets                                                 19,374                       18,158
                                                                                   -------------------------------------
Insurance                                                                                          

Cash                                                                                     21                           18
Investments Available-for-Sale                                                        8,384                        8,344
Reinsurance Recoverable                                                               3,116                        3,835
Premiums and Other Receivables                                                        1,276                        1,443
Goodwill                                                                                284                          291
Deferred Taxes and Other Assets                                                       1,438                        1,487
                                                                                   -------------------------------------
    Total Insurance Assets                                                           14,519                       15,418
                                                                                   -------------------------------------
Investment in Discontinued Operations                                                 4,692                        5,174
                                                                                   -------------------------------------
Total Assets                                                                        $38,585                      $38,750
                                                                                   =====================================
Liabilities and Equity                                                                             

Document Processing                                                                                

Short-Term Debt and Current Portion of Long-Term Debt                               $ 3,159                      $ 2,698
Accounts Payable                                                                        562                          541
Accrued Compensation and Benefit Costs                                                  709                          511
Unearned Income                                                                         298                          335
Other Current Liabilities                                                             2,110                        1,926
                                                                                   -------------------------------------
    Total Current Liabilities                                                         6,838                        6,011

Long-Term Debt                                                                        5,494                        5,157
Liability for Postretirement Medical Benefits                                         1,006                          997
Deferred Taxes and Other Liabilities                                                  2,210                        2,608
                                                                                   -------------------------------------
    Total Document Processing Liabilities                                            15,548                       14,773
                                                                                   -------------------------------------
Insurance                                                                                          

Unpaid Losses and Loss Expenses                                                       8,862                        9,684
Unearned Income                                                                       1,066                        1,077
Notes Payable                                                                           425                            -

Other Liabilities                                                                       954                          990
                                                                                   -------------------------------------
    Total Insurance Operating Liabilities                                            11,307                       11,751
                                                                                   -------------------------------------
Discontinued Operations Liabilities - Policyholders' Deposits and Other               4,194                        4,585
Other Long-Term Debt and Obligations                                                  2,102                        2,400
Deferred ESOP Benefits                                                                 (596)                        (641)
Minorities' Interests in Equity of Subsidiaries                                       1,021                          844
Preferred Stock                                                                         832                        1,066
Common Shareholders' Equity                                                           4,177                        3,972
                                                                                   -------------------------------------
Total Liabilities and Equity                                                        $38,585                      $38,750
                                                                                   =====================================

</TABLE>
 
Shares of common stock issued and outstanding at December 31, 1994 and 1993 
(in thousands) were 105,993 and 104,122, respectively.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial 
statements.

38

<PAGE>
 
The Company manages the capital structure of its non-financing operations 
separately from that of its more highly leveraged activities. The following 
table summarizes the debt, equity, and total capital for the Company's 
non-financing and financing activities for the three-year period ended 
December 31, 1994.

<TABLE> 
<CAPTION> 

(Dollars in millions)                 1994                1993             1992
---------------------------------------------------------------------------------
<S>                                  <C>                 <C>              <C>   
Non-Financing:
Debt*                                $2,055              $1,805           $2,522
Equity                                4,730               4,679            4,682
---------------------------------------------------------------------------------
    Total Capital                    $6,785              $6,484           $7,204
=================================================================================
    Debt-to-Capital Ratio              30.3%               27.8%            35.0%
=================================================================================
Financing:
Xerox Equipment 
    Financing Debt                   $8,057              $7,214           $6,812
Third-Party Financing Debt              231                 424              623
---------------------------------------------------------------------------------
    Total Debt                        8,288               7,638            7,435
Equity                                1,300               1,203            1,150
---------------------------------------------------------------------------------
    Total Capital                    $9,588              $8,841           $8,585
=================================================================================
    Debt-to-Equity Ratio               6.4x                6.4x             6.5x
=================================================================================
</TABLE>
 

*Primarily related to investments in disengaged IOFS businesses. Excludes ESOP
debt of $596 million, $641 million, and $681 million for 1994, 1993 and 1992,
respectively.

The Company's 1994 debt-to-total-capital ratio for its non-financing 
operations (excluding ESOP debt) was 30.3 percent, up from 27.8 percent in 
1993 as strong Document Processing funds generation was offset by the impact 
of Talegen business unit borrowings, unrealized insurance investment 
portfolio losses and the redemption of preferred stock. The 1993 ratio 
declined from 35.0 percent in 1992 due to strong Document Processing funds 
generation and the proceeds from the common stock offering, partially offset 
by the reduction in equity associated with the restructuring and lawsuit 
settlement provisions.

With respect to its financing activities, the Company match funds by 
arranging fixed-rate liabilities with similar maturities as the underlying 
customer financing assets. The Company's target debt-to-equity ratio for the 
financing activities is 6.5 to 1. In 1994, this ratio was 6.4 to 1 compared 
with 6.4 to 1 in 1993 and 6.5 to 1 in 1992.

The following table summarizes funds generation and usage for the three-year 
period ended December 31, 1994 and the related impacts on cash and debt 
balances. These data exclude restricted cash flows of the insurance 
businesses.


<TABLE> 
<CAPTION> 

                                                   Funds Generation (Use)
                                           ------------------------------------
(In millions)                               1994            1993          1992
-------------------------------------------------------------------------------
<S>                                        <C>             <C>          <C> 
Non-Financing:

Document Processing                        $ 989           $ 496        $   354
Yen/$ Financing repayment                   (116)              -              -
IOFS-related/other                          (605)             15           (180)
-------------------------------------------------------------------------------
Non-Financing                                268             511            174
-------------------------------------------------------------------------------
Financing:

Xerox Equipment Financing                   (844)           (409)        (1,128)
Third-Party Financing                        193             199            392
-------------------------------------------------------------------------------
Financing                                   (651)           (210)          (736)
-------------------------------------------------------------------------------
Operations generation (use)                 (383)            301           (562)
Shareholder dividends                       (395)           (389)          (374)
Equity issuance (redemption) and
    changes in cash                         (122)            602            121
-------------------------------------------------------------------------------
Debt (increase) decrease                   $(900)          $ 514        $  (815)
===============================================================================

</TABLE>
 

Pictured here were Ping Mei and Jason Wu, Palo Alto Research Center.

                                                                              39

<PAGE>
 
Consolidated Statements of Cash Flows


<TABLE> 
<CAPTION> 
Year ended December 31 (in millions)                                         1994              1993            1992
                                                                           =========================================== 
<S>                                                                        <C>              <C>               <C> 
Cash at Beginning of Year
-------------------------
Document Processing                                                        $    68          $     2           $     10
Insurance                                                                       18               41                 35
                                                                           ------------------------------------------- 
    Total                                                                       86               43                 45
                                                                           ------------------------------------------- 
Document Processing
-------------------
Cash Flows from Operating Activities                                           477              526               (353)
                                                                           ------------------------------------------- 
Cash Flows from Investing Activities
  Cost of additions to land, buildings and equipment                          (389)            (470)              (582)
  Proceeds from sales of land, buildings and equipment                         220               41                 43
  Net change in payables to Insurance                                         (124)              19                395
  Net transactions with Insurance                                              215              164               (411)
  Net transactions with Discontinued Operations                                 66             (206)               263
                                                                           ------------------------------------------- 
    Total                                                                      (12)            (452)              (292)
                                                                           ------------------------------------------- 
Cash Flows from Financing Activities
  Net change in debt                                                           375             (151)             1,014
  Yen financing repayment                                                     (116)               -                  -
  Dividends on common and preferred stock                                     (395)            (389)              (373)
  Proceeds from sale of common stock                                            90              665                113
  Redemption of preferred stock                                               (245)              (6)                (6)
  Dividends to minority shareholders                                           (97)            (105)              (121)
  Proceeds received from (returned to) minority shareholders                   (32)              12                 31
                                                                           ------------------------------------------- 
    Total                                                                     (420)              26                658
                                                                           ------------------------------------------- 
Effect of Exchange Rate Changes on Cash                                        (78)             (34)               (21)
                                                                           ------------------------------------------- 
    Net Cash Flows from Document Processing                                    (33)              66                 (8)
                                                                           ------------------------------------------- 
Insurance
---------
Cash Flows from Operating Activities                                           (53)            (167)              (595)
                                                                           ------------------------------------------- 
Cash Flows from Investing Activities
  Purchase of portfolio investments                                         (2,053)          (5,143)           (14,481)
  Proceeds from sales and maturities of portfolio investments                  879            6,077             14,592
  Decrease (increase) in short-term investments                                707           (1,212)               181
                                                                           ------------------------------------------- 
    Subtotal                                                                  (467)            (278)               292
  Other, net                                                                   126             (181)              (201)
  Net transactions with Discontinued Operations                                 12              401                (31)
                                                                           ------------------------------------------- 
    Total                                                                     (329)             (58)                60
                                                                           ------------------------------------------- 
Cash Flows from Financing Activities
  Net change in debt                                                           600              366                130
  Net transactions with Document Processing                                   (215)            (164)               411
                                                                           ------------------------------------------- 
    Total                                                                      385              202                541
                                                                           ------------------------------------------- 
    Net Cash Flows from Insurance                                                3              (23)                 6
                                                                           ------------------------------------------- 
Discontinued Operations
-----------------------
  Income (Loss) from Discontinued Operations                                     -               63                (39)
  Collections and changes in assets, net                                       469              418                236
  Net change in debt                                                          (193)            (584)              (378)
  Net change in operating liabilities                                         (198)             211                413
  Settlement of tax benefits with Document Processing                            -               87                  -
  Net transactions with Document Processing                                    (66)             206               (263)
  Net transactions with Insurance                                              (12)            (401)                31
                                                                           ------------------------------------------- 
    Net Cash Flows from Discontinued Operations                                  -                -                  -
                                                                           ------------------------------------------- 
Cash at End of Year
-------------------
Document Processing                                                             35               68                  2
Insurance                                                                       21               18                 41
                                                                           ------------------------------------------- 
    Total                                                                  $    56          $    86           $     43
                                                                           ===========================================
</TABLE>
 
The Supplemental Cash Flows Information and accompanying notes are an integral
part of the consolidated financial statements.

40

<PAGE>
 
Consolidated Statements of Cash Flows
Supplemental Cash Flows Information

A reconciliation of income (loss) to cash flows from operating activities for
the last three years follows:


<TABLE> 
<CAPTION> 
Year ended December 31 (in millions)                                             1994           1993              1992
                                                                              ========================================
<S>                                                                             <C>            <C>               <C>   
Document Processing
-------------------
Income (Loss) from Document Processing                                          $ 794         $ (193)          $   562
Adjustments required to reconcile income (loss) to cash flows 
  from operating activities:
    Depreciation and amortization                                                 649            629               672
    Provision for special charges                                                   -          1,373                 -
    Provisions for doubtful accounts                                              252            250               267
    Provision for postretirement medical benefits                                  54             70                61
    Charges against 1993 restructuring reserve                                   (423)             -                 -
    Minorities' interests in earnings of subsidiaries                             213             78               149
    Undistributed equity in income of affiliated companies                        (54)           (51)              (52)
    Increase in inventory                                                        (472)          (228)             (524)
    Increase in finance receivables                                              (937)          (993)           (1,389)
    (Increase) decrease in accounts receivable                                   (266)           134               (34)
    Increase (decrease) in accounts payable and accrued 
     compensation and benefit costs                                               205            (65)              (14)
    Net change in current and deferred income taxes                               258           (359)               41
    Settlement of Discontinued Operations tax benefits                              -            (87)                -
    Other, net                                                                    204            (32)              (92)
                                                                              ----------------------------------------
Cash Flows from Operating Activities                                            $ 477         $  526           $  (353)
                                                                              ========================================
Insurance
---------
Income (Loss) from Insurance                                                    $  -          $    4           $  (779)
Adjustments required to reconcile income (loss) to cash flows 
  from operating activities:
    Depreciation and amortization                                                 32              26                55
    Provisions for doubtful accounts                                              12               7                19
    Talegen reserve strengthening actions                                          -               -               880
    Goodwill write-down                                                            -               -               400
    Realized capital gains                                                       (12)            (88)             (516)
    Decrease in receivables                                                      730             457               163
    Increase in accounts payable and accrued
     compensation and benefit costs                                               69             126               114
    Increase (decrease) in unearned income                                       (11)              4               (37)
    Decrease in unpaid losses and loss expenses                                 (809)           (955)             (498)
    Other, net                                                                   (64)            252              (396)
                                                                              ----------------------------------------
Cash Flows from Operating Activities                                           $ (53)         $ (167)          $  (595)
                                                                              ========================================
</TABLE>
 
See accompanying Consolidated Statements of Cash Flows.

                                                                              41

<PAGE>
 
NON-FINANCING OPERATIONS

The following table summarizes 1994 and 1993 Document Processing non-financing
operations funds generation and usage, after investments in the business.


<TABLE> 
<CAPTION> 
                                      Funds Generation (Use)
                                      ----------------------
(In millions)                               1994        1993
------------------------------------------------------------
<S>                                        <C>         <C> 
Document Processing
Non-Financing:

Income                                     $ 565       $ 379
Depreciation and Amortization                649         629
Restructuring Payments                      (423)          -
Capital Expenditures                        (389)       (470)
Assets Sold                                  220          41
Working Capital/Other                        367         (83)
------------------------------------------------------------
                                           $ 989       $ 496
============================================================
</TABLE>
 

The improvement in year-over-year 1994 funds generation was largely due to 
higher income, increased sales of fixed assets primarily related to the 
information management outsourcing and lower working capital and other 
requirements, partially offset by restructuring payments.

  IOFS-related/other funds usage of $605 million in 1994 compares with funds 
generation of $15 million in 1993 and was mainly due to Talegen business unit 
borrowings totaling $425 million to retire intercompany debt and fund 
investment activity. The decrease in IOFS-related/other usage in 1993, versus 
the prior year, was mainly due to cash proceeds from the 1993 sales of VKM 
and Furman Selz Holding Corporation, partially offset by the requirements to 
restructure Talegen and to initiate scheduled funding for Ridge Reinsurance 
Limited.

Pictured here were Abdul Terry, Office Document Products; Tomoko Lane, 
Planning and Spare Parts; Negin Naghib, Middle East and Africa; Richard 
Sullivan, Nordic Entity; all from Rank Xerox.

FINANCING ACTIVITIES

Incremental debt required to fund the growth of Xerox equipment financing in 
1994 was $843 million, an increase of $441 million from 1993, due to 
accelerated growth in equipment sales revenues and the effects of translating 
foreign currencies into U.S. dollars. Xerox equipment financing debt growth 
of $402 million in 1993 was $709 million lower than in 1992 due to less rapid 
sales growth and the effects of currency translation.

  Debt related to discontinued third-party financing activities declined by 
$193 million in 1994, reflecting asset sales and portfolio run-off. This 
decrease was in line with 1993 experience and less than the reduction in 1992 
due to the declining asset base and the long-duration contractual maturities 
and unique tax attributes of most of the remaining assets.

  The total increase in debt required to fund the growth of financing 
activities in 1994, therefore, was $650 million compared with increases of 
$203 million in 1993 and $719 million in 1992.

42

<PAGE>
 
FUNDING PLANS FOR 1995

Non-financing debt levels will be significantly affected by the Company's 
recently completed acquisition of 40 percent of The Rank Organisation Plc's 
financial interest in Rank Xerox for (Pounds)620 million, or approximately 
$970 million. The transaction was funded with commercial paper. The Company 
may retire a portion of the commercial paper with proceeds from the announced 
sales of Constitution Re and Xerox Life and/or fund out a portion with 
longer-term debt. Any further disposition of the Talegen business units could
also significantly impact 1995 funding levels since proceeds from the sales will
be used to pay down debt.

  In 1995, debt levels associated with the financing of customer purchases of 
Xerox equipment are planned to increase in line with sales activity. Ongoing 
run-off and opportunistic sales of third-party financing assets are not 
expected to significantly impact the Company's overall financing debt level.

  Management believes that the Company has adequate short-term credit 
facilities available to fund its day-to-day operations and has readily 
available access to the capital markets to meet any longer-term financing 
requirements. To provide added funding flexibility during 1994, the Company 
increased the revolving credit agreements of its domestic operations from $3 
billion to $5 billion. In addition, Rank Xerox had $2 billion of revolving 
credit facilities. At December 31, 1994, the Company and XCC had domestic 
shelf capacity of $940 million and $980 million, respectively. In 1995, the 
Company intends to establish a $1 billion Euro-debt facility that will be 
available to both Xerox and XCC. Depending upon the status of Talegen 
disengagement, term debt financing may be required in 1995 to refinance 
maturing and callable securities and to enable the matched funding of the 
Xerox equipment financing activities.

Pictured here was Peter Boden, Jr., U.S. Customer Operations.

                                                                              43

<PAGE>
 
LIQUIDITY

The Company's primary sources of liquidity are funds generated from 
operations and borrowings.

  Document Processing operations used net cash of $33 million in 1994, compared 
with $66 million generated in 1993 and $8 million usage in 1992. The 
significant changes in the components of Document Processing cash flows 
follow:

.  Non-financing operations generated $989 million in 1994, $496 million in 
1993 and $354 million in 1992, as shown on Page 39. Xerox equipment financing 
activities used $844 million in 1994, $409 million in 1993 and $1,128 million 
in 1992.

.  During 1994, a 1984 yen-denominated financing was repaid for $116 million.

.  During 1993, $580 million of net proceeds was received from the sale of 
8.1 million shares of common stock via a public offering.

.  During 1994, the Company redeemed shares of its preferred stock for $245 
million, including an $11 million call premium.

  Insurance operations generated $3 million of cash in 1994 compared with net 
cash usage of $23 million in 1993 and net cash generation of $6 million in 
1992. The significant changes in cash flows follow:

.  A net decrease in receivables of $730 million in 1994 compared with 
decreases of $457 million in 1993 and $163 million in 1992 reflects a decline 
in reinsurance recoverables due to collections on balances established in 
prior periods and less dependence on reinsurance in recent years. The 
reduction also reflects a premium decline caused primarily by a continued 
focus on profitability versus maintaining market share, particularly in the 
non-standard automobile, casualty and workers' compensation lines.

.  A net decrease in unpaid losses and loss expense of $809 million in 1994 
compared with decreases of $955 million in 1993 and $498 million in 1992 
reflects continued operational trends where claims payments are in excess of 
new reserves established.

.  A net increase in aggregate investments of $467 million in 1994 compared 
with an increase of $278 million in 1993 and a decrease of $292 million in 
1992 reflects investment activities supported by cash flow from operations 
and debt proceeds.

.  A net increase in Talegen debt of $425 million in 1994, the proceeds of 
which were used to retire intercompany debt and fund investment activity.

  Discontinued operations net cash flows were zero during 1994, 1993 and 1992, 
as cash generated by collection and sales activities and tax benefits was 
used to reduce assigned debt.

Pictured here were Andrius Buldygerovas and Marysia Mycielska, Eastern Export 
Operations.

44

<PAGE>
 
HEDGING INSTRUMENTS

  Certain financial instruments have been entered into by the Company to manage 
its interest rate and foreign currency exposures. These instruments are held 
solely for hedging purposes and include interest rate swap agreements and 
forward foreign-exchange agreements. The Company has long-standing policies 
prescribing that derivative instruments are only to be used to achieve a set 
of very limited objectives: to lock in the value of cross-border cash flows 
and to reduce the impact of currency and interest rate volatility on costs, 
assets and liabilities. The Company does not enter into derivative instrument 
transactions for trading purposes.

  Currency derivatives are only arranged in conjunction with underlying 
transactions that give rise to foreign-currency-denominated payables and 
receivables: for example, an option to buy foreign currency to settle the 
importation of goods from suppliers, or, a forward foreign-exchange contract 
to fix the rate at which a dividend will be paid by a foreign subsidiary.

  The Company does not hedge foreign-currency-denominated revenues of its 
foreign subsidiaries since these do not represent cross-border cash flows.

  With regard to interest rate hedging, virtually all customer financing assets 
earn fixed rates of interest and, therefore, the Company "locks in" an 
interest rate spread by arranging fixed-rate liabilities with similar 
maturities as the underlying assets. Additionally, customer financing assets 
in one currency are consistently funded with liabilities in the same 
currency. The Company refers to the effect of these conservative practices as 
"match funding" its customer financing assets.

Pictured here was Liz Blythers, Office Document Systems; and the Xerox 4510 
Desktop laser printer with bi-directional communications software.

  More specifically, pay fixed-rate and receive variable-rate swaps are 
typically used in place of more expensive fixed-rate debt for the purpose of 
match funding fixed-rate, customer contracts. Pay variable-rate and receive 
variable-rate swaps are used to transform variable-rate medium-term debt into 
commercial paper or local currency LIBOR obligations. Additionally, pay 
variable-rate and receive fixed-rate swaps are used infrequently to transform 
longer-term fixed-rate debt into commercial paper-based rate obligations. The 
transactions performed within each of these three categories enable the 
Company to manage its interest rate exposures. The potential risk attendant 
to this strategy is the performance of the swap counterparty. The Company 
addresses this risk by arranging swaps exclusively with a diverse group of 
strong-credit counterparties, regularly monitoring their credit ratings, and 
determining the replacement cost, if any, of existing transactions.

  On an overall worldwide basis, weighted average interest rates for 1994, 1993 
and 1992 approximated 7.2 percent, 8.3 percent and 9.2 percent, respectively, 
which include the impact of the Company's hedging activities.

  The Company's currency and interest rate hedging are typically not affected 
by changes in market conditions as forward contracts, options and swaps are 
normally held to maturity in order to lock in currency rates and interest 
rate spreads on the underlying transactions.

                                                                              45

<PAGE>
 
Financial Review:  

Insurance and Other Financial Services (IOFS)

In January 1993, the Company announced its decision to concentrate on the core
Document Processing business and disengage from the financial services
businesses. Consistent with this objective, the Van Kampen Merritt Companies,
Inc. (VKM), an investment advisory organization, and Furman Selz Holding
Corporation (Furman Selz), an institutional brokerage, investment banking and
management firm, were sold in 1993. In 1994, Shields Asset Management, Inc.
(Shields), a Furman Selz subsidiary, and Regent Investor Services Incorporated
(Regent), a subsidiary of Shields, were sold. Contracts were also signed to sell
Constitution Re Corporation (CRC) to EXOR America Inc. in 1994 and Xerox
Financial Services Life Insurance Company (Xerox Life) to a subsidiary of
General American Life Insurance Company in 1995. Both sales will close after
regulatory approvals. The Company will continue to implement its strategy for
divesting the remaining insurance businesses in an orderly and disciplined way.

  The ongoing operations of Xerox Credit Corporation and the international
financing companies that finance customer purchases of Xerox equipment remain
unaffected by the Company's decision to disengage from financial services.

STATUS OF INSURANCE

The Insurance segment includes Talegen Holdings, Inc. (Talegen), a holding
company of seven property and casualty insurance operating groups and three
insurance related service companies, Ridge Reinsurance Limited (Ridge Re) and
that portion of the Xerox Financial Services, Inc. (XFSI) headquarters costs and
interest expense associated with the continuing business activities. In 1993,
Talegen established and capitalized seven insurance operating groups, each of
which includes one or more legal insurance entities (the "Insurance Companies").
Each of the Insurance Companies maintains its own investment portfolio, loss
reserves and capital. This recapitalization and legal restructuring was approved
by the insurance departments of all states in which Talegen's Insurance
Companies are domiciled. The objective of the Talegen restructuring was to
strengthen the insurance operating groups and facilitate the realization of
shareholder value.

  The seven insurance operating groups and their areas of specialization are:

.  Constitution Reinsurance - treaty and facultative reinsurance

.  Coregis - professional liability, public entity and other property and 
casualty programs 

.  Crum & Forster Insurance - commercial property and casualty insurance 
through a select network of independent agents

.  Industrial Indemnity - workers compensation coverage and services 

.  The Resolution Group - reinsurance collection services and management of 
run-off businesses

.  Viking - non-standard personal automobile insurance

.  Westchester Specialty Group - umbrella, excess casualty and specialty 
property business

  In connection with the 1993 restructuring and the regulatory approvals, XFSI 
agreed to provide various forms of capital support to ensure that statutory 
capital requirements of the newly established legal entities were met. The 
capital contributions consisted of $235 million in cash, which was used to 
purchase portfolio investments, and $100 million of XFSI promissory notes 
(guaranteed by the Company). In connection with actions taken to strengthen 
the Talegen balance sheet at the end of 1992, XFSI also provided support in 
the form of $200 million in notes guaranteed by the Company.

  XFSI also agreed that support would be provided in the form of aggregate
excess of loss reinsurance protection issued by Ridge Re, XFSI's wholly-owned
Bermuda reinsurance company established in 1992. XFSI is obligated to pay annual
premium installments of $49 million in the aggregate, plus finance charges,
payable for up to ten years, for coverage

46

<PAGE>
 
totaling $1,245 million, which is net of 15 percent coinsurance. A total of
eight years annual premium installments remain to be paid as of December 31,
1994. The Company has guaranteed the payment by XFSI of all such premiums.

  In addition to XFSI's original contribution of $25 million to the 
capitalization of Ridge Re, XFSI may be required, under certain 
circumstances, to purchase over time additional redeemable preferred shares 
up to a maximum of $301 million.

  XFSI has guaranteed to the Talegen insurance companies that Ridge Re will 
meet all of its financial obligations under all of the foregoing excess of 
loss reinsurance issued to them.

  In December 1994, a stock purchase agreement was signed with EXOR America 
Inc. for its purchase of Constitution Re Corporation, a Talegen subsidiary, 
for approximately $410 million subject to closing adjustments, which is 
approximately the same as book value. The closing of the sale is subject to 
customary closing conditions and regulatory approvals and is expected to 
close during the first half of 1995.

  At December 31, 1994, the Company's investment in Insurance amounted to 
$3,645 million, which excludes the effect of unrealized losses on investment 
securities. The ultimate exit from the insurance businesses and the recovery 
of the investment could take several years. During the disengagement process, 
the Company will continue to be exposed to all the business risks of its 
insurance businesses. The Company anticipates that future income or losses 
from its insurance businesses may vary widely as the disengagement strategy 
is implemented, due to, among other reasons, the recognition of proceeds of 
sales or other forms of disengagement and the results from operations of the 
remaining insurance businesses. No assurances can be given as to the timing 
of the disengagement process, the amount and timing of proceeds of sales or 
other forms of disengagement from insurance units or the impact the remaining 
insurance businesses will have on the Company's total results from operations 
during the disengagement process.

OPERATING RESULTS

The results of IOFS are separated into the continuing Insurance segment and 
discontinued operations, which include Other Financial Services (discontinued 
in 1993) and third-party financing and real-estate development (discontinued 
in 1990). The Insurance segment includes Talegen, Ridge Re and that portion 
of XFSI interest expense and other costs associated with the continuing 
business activities.

  Income from the Insurance segment was break-even in 1994 compared with $4 
million in 1993 and a $779 million loss in 1992 as summarized in the 
following table.


<TABLE> 
<CAPTION> 
                                   Insurance Income Summary
                                   --------------------------
(In millions)                       1994      1993      1992
-------------------------------------------------------------
<S>                                <C>       <C>       <C> 
Talegen
   Underwriting                    $(168)    $(213)    $(479)
   Investment Income                 421       380       525
   Taxes/Other                       (75)      (54)      (36)
-------------------------------------------------------------
   Operations Before Capital
     Gains/Other                     178       113        10
   Capital Gains After Tax             8        57        48
   One-Time Items                      -       (21)     (704)
Cessions to Ridge Re                 (35)        -         -
Interest/Other                      (151)     (145)     (133)
-------------------------------------------------------------
  Total Insurance                  $   -     $   4     $(779)
=============================================================
</TABLE>
 

In connection with the operational and legal restructuring of Talegen, the 
Company recognized net pre-tax charges of $58 million and $836 million in 
1993 and 1992, respectively. The 1992 charges included strengthening of loss 
reserves and reinsurance recoverable provisions of $880 million, and $400 
million related to the partial write-down of goodwill, offset by $444 million 
in capital gains realized as Talegen repositioned its investment portfolio in 
anticipation of restructuring. The 1993 charge was largely made up of 
relocation, severance and leasehold expenses as a result of the 
decentralization and downsizing of support functions to the  

                                                                              47

<PAGE>
 
new stand alone units. The after-tax restructuring charges amounted to $38
million and $688 million in 1993 and 1992, respectively. These amounts are
included in the "one-time" items category on the preceding chart, which totals
$21 million in 1993 and $704 million in 1992. The balance relates to one-time
SFAS No. 109 impacts.

  On an analytical basis, excluding the restructuring and tax-related impacts 
for adoption of SFAS No.109 in 1993 and 1992, and after-tax realized capital 
gains in the 1992-94 period, management estimates Talegen's operating income 
grew 58 percent to $178 million in 1994, compared with $113 million in 1993 
and $10 million in 1992. 

  Revenues from the insurance businesses were $2.7 billion in 1994, a decline 
of 2 percent from 1993, which in turn had declined by 2 percent from 1992. 
The lower revenues in 1994 reflect a 4 percent decrease in earned premiums, 
partially offset by a 9 percent increase in investment and other income. The 
1993 revenue decline reflects a lower level of investment income, as 
described later, partially offset by a 4 percent growth in earned premiums. 
Further details on premium levels are included in the individual Talegen 
insurance operating group results.

  Excluding the unusual charges in 1993 and 1992 noted previously, the overall 
underwriting loss in 1994 for Talegen's seven insurance operating groups 
improved by $45 million to $168 million, compared with $213 million in 1993 
and $479 million in 1992. The overall decreases in 1994 and 1993 reflect 
improvements in both losses and expenses as the insurance operating groups 
continued to tighten their strategic focus on more profitable business 
segments, maintain price disciplines and increase productivity. Underwriting 
results for 1994 exclude $53 million of adverse development on loss and 
reinsurance recoverable reserves ceded to Ridge Re for 1992 and prior 
accident years (as discussed in the Ridge Re Related/Other section). 

  Net catastrophe losses were $27 million in 1994, $25 million in 1993 and $52 
million in 1992. The 1994 catastrophe losses primarily reflect the California 
earthquake and Northeast winter storms in the first quarter. In 1993, 
catastrophe losses were largely attributable to the World Trade Center 
bombing and East Coast storms in the first quarter. The 1992 catastrophe 
losses primarily relate to Hurricanes Andrew and Iniki.

  Excluding the unusual charges, underwriting results for each of Talegen's six 
ongoing insurance operating groups are expressed on the next page in terms of 
annual gross written premiums and combined ratios. Underwriting results for 
The Resolution Group are not meaningful on this basis since that unit has 
only run-off premiums and, therefore, are excluded.

48

<PAGE>
 

<TABLE> 
<CAPTION> 
(Dollars in millions)                           Gross Written Premiums                               Combined Ratio
                                           -------------------------------                    -----------------------------
Year                                         1994         1993        1992                     1994        1993        1992
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>           <C>                     <C>         <C>         <C> 
Constitution Reinsurance                   $  545       $  532        $505                    100.7       102.4       110.0
Coregis                                       371          373         379                    103.7       105.2       106.2
Crum & Forster Insurance                    1,022        1,021         972                    106.9       109.8       120.0
Industrial Indemnity                          370          492         486                    105.2       112.4       118.8
Viking                                        152          170         212                     97.3       100.2       102.6
Westchester Specialty Group                   334          356         357                    115.7       102.5        91.6
===========================================================================================================================
</TABLE>
 

  The combined ratio is a standard insurance industry measure of underwriting
results. It measures the relationship of losses and expenses to net earned
premiums. It does not include income from an insurer's investments. The combined
ratio is the sum of the three ratios: (i) the loss and loss adjustment expense
ratio, (ii) the underwriting expense ratio and (iii) the dividend ratio. The
loss and loss adjustment expense ratio reflects claims expenses, the
underwriting expense ratio reflects policy acquisition and administrative costs,
and the dividend ratio reflects dividends to policyholders. The objective of the
combined ratio is to match costs with revenues. A combined ratio under 100
percent indicates underwriting profits while a combined ratio exceeding 100
percent indicates underwriting losses.

  The following are the key reasons for the year-over-year performance changes 
for each of these insurance operating groups.

  Constitution Reinsurance's combined ratio improved 1.7 points for the year 
reflecting a continuing shift toward more profitable pro-rata business and 
decreased emphasis on per risk business. This improvement was moderated by 
higher catastrophe losses in 1994 than in the prior year. The combined ratio 
in 1993 was 7.6 points lower than 1992 which included significant losses 
related to Hurricanes Andrew and Iniki. Constitution's gross premium volume 
in 1994 increased 3 percent due to continuing strong overall production and 
retention levels, as well as improved pricing, the benefits of which were 
moderated by a timing change in premium recognition for certain treaties in 
1994. In 1993, Constitution's gross premiums increased 5 percent reflecting 
continued expansion in the company's non-standard automobile segment.

  At Coregis the combined ratio decreased 1.5 points and 1.0 point in 1994 and 
1993, respectively. These declines resulted from improvements in both overall 
loss experience and expenses in both periods. Gross premium volume in 1994 
was even with 1993 as strong renewal retentions and new business growth in 
selected programs were offset by the effects of reunderwriting initiatives 
taken in 1993 and early 1994. Gross premiums in 1993 declined 2 percent from 
1992 caused by competitive pressure primarily in one major program.

  Crum & Forster Insurance had combined ratio improvement of 2.9 points for 
1994 reflecting better management of underwriting and claims handling 
expenses. The combined ratio decline of 10.2 points in 1993 resulted from 
better loss experience including lower catastrophe losses. Gross written 
premiums in 1994 were approximately equal to 1993, which showed a 5 percent 
increase over 1992. These volumes reflect continuing strong renewal 
retentions and expansion in the company's custom agent segment. In 1994 the 
effects of this strategic penetration were offset by reduced volumes 
resulting from the company's withdrawal from non-voluntary business and from 
a large account. 

  At Industrial Indemnity the combined ratio dropped 7.2 points in 1994 and 6.4 
points in 1993 reflecting significantly improved loss experience in the 
company's workers compensation business. Gross premium volume declined 25 
percent in 1994 and increased a modest 1 percent in 1993. In California, the 
company's largest market, loss costs 


                                                                              49

<PAGE>

have declined 30 percent in the past two years. This trend resulted in state
mandated rate reductions of a similar magnitude and a corresponding downward
pressure on premiums, although pricing margins remained adequate in 1993 and
1994. Volume in 1994 was also impacted by increased competition in the
California market in anticipation of the new open rating environment effective
January 1, 1995.

  Viking's combined ratio improved 2.9 points in 1994 and 2.4 points in 1993 
reflecting the benefits of corrective pricing and agency management actions 
taken in 1992. Gross written premiums declined 11 percent and 20 percent in 
1994 and 1993, respectively, as a result of the company's continuing focus on 
improving profitability versus maintaining market share. This focus has 
resulted in significant improvement in loss experience, the benefits of which 
were somewhat moderated by increases in the expense ratio due to the lower 
premium volume.

  At Westchester Specialty Group gross premium volume declined 6 percent in 
1994 and 1 percent in 1993 as the effects of continuing intense competitive 
pressure on casualty prices and related exposure reductions were partially 
offset by growth in profitable property business. Reflecting the 
deteriorating market conditions for casualty business, the company has 
increased its loss funding for these exposures to much more conservative 
levels causing the combined ratio to increase 13.2 points in 1994 and 10.9 
points in 1993.

  Investment income for Talegen was $421 million in 1994 compared with $380 
million in 1993 and $525 million in 1992. The increase in 1994 primarily 
reflects a higher level of invested assets. The decrease in 1993 resulted 
from the initial repositioning of the portfolio in 1992 in anticipation of 
the Talegen restructuring and from a decline in interest rates. The 1992 
repositioning and reinvestment in U. S. Treasuries shortened the duration of 
fixed income securities to an average of approximately 3 years from 13 years.

  Realized pre-tax capital gains in 1994 for Talegen totaled $13 million 
compared with $88 million in 1993 and $516 million in 1992. The level of 
capital gains in 1994 reflects normal investment activities coupled with 
fewer opportunities to realize gains due to the impact of high interest rates 
on bond portfolio values. The 1993 capital gains primarily resulted from the 
Talegen insurance operating groups progress in realigning their investments 
with the liabilities of each dedicated company following completion of the 
restructuring. The 1992 level included $444 million associated with the 
initial repositioning of the portfolio, as previously discussed. On an 
after-tax basis, Talegen capital gains totaled $8 million in 1994, $57 
million in 1993 and $48 million in 1992, excluding the impact of the initial 
repositioning of the portfolio.

PROPERTY AND CASUALTY OPERATING TRENDS 

The industry's profitability can be significantly affected by cyclical 
competitive conditions as well as by volatile and unpredictable developments, 
including changes in the propensity of courts to grant large awards, 
fluctuations in interest rates and other changes in the investment 
environment (which affect market prices of insurance companies' investments, 
the income from those investments and inflationary pressures that may tend to 
affect the size of losses), and judicial decisions affecting insurers' 
liabilities. Talegen operating results have historically been influenced by 
these industry trends, as well as by Talegen's exposure to uncollectible 
reinsurance, which had been greater than most other insurers.

50

<PAGE>
 
TALEGEN RESERVES

OVERVIEW

Losses from claims and related loss adjustment expenses comprise the majority 
of costs from providing insurance products and, therefore, unpaid losses and 
loss expenses are the largest liabilities on a property and casualty 
insurer's balance sheet. Insurance companies utilize a variety of loss 
trending and analysis techniques to estimate anticipated ultimate losses and 
the timeframes when claims are likely to be reported and paid. In order to 
moderate the potential impact of unusually severe or frequent losses, 
insurers often cede (i.e., transfer) a portion of their gross policy premiums 
to reinsurers in exchange for the reinsurer's agreement to share a portion of 
the covered losses with the insurer. Although the ceding of insurance does 
not discharge the original insurer from its primary liability to its 
policyholder, the reinsurance company that accepts the risk assumes an 
obligation to the original insurer. A contingent liability exists, however, 
with respect to reinsurance ceded to the extent that any reinsuring company 
might not be able to meet its obligations.

  Over the policy period, as premiums are earned, a portion of the premiums are 
set aside as gross reserves for incurred but not reported (IBNR) losses in 
anticipation of claims which will be incurred. IBNR reserves also include 
amounts to supplement case reserves, when established, to provide for 
potential further loss development. In addition, gross reserves are also 
established for internal and external loss adjustment expenses associated 
with handling the claims inventory. When a claim is reported, case reserves 
are established on the basis of all pertinent information available at the 
time. Reinsurance recoverables on gross reserves are recorded for amounts 
that are anticipated to be recovered from reinsurers and are determined in a 
manner consistent with the liabilities associated with the reinsured 
policies. Net reserves are gross reserves less anticipated reinsurance 
recoverables on those reserves.

  The following sections of the Talegen Reserves discussion provide further 
details related to the reserving practices and the specific reserve levels of 
the Insurance Companies within Talegen's insurance operating groups. Due to 
the unique complexities and uncertainties related to asbestos-related, 
hazardous waste and other latent or long-tail claims, additional information 
regarding these claim categories is provided, although it is the policy of 
Talegen not to disclose established case reserves on specific claims.

OVERALL RESERVES

The following table sets forth gross unpaid losses and loss expenses, 
reinsurance recoverables on unpaid losses and loss expenses and the resultant 
net unpaid losses and loss expenses for the Insurance Companies included in 
each insurance operating group as of December 31, 1994 and 1993:

Unpaid Losses and Loss Expenses


<TABLE> 
<CAPTION> 
                                         Gross     Reinsurance         Net
(In millions)                         Reserves     Recoverable    Reserves
-----------------------------------------------------------------------------
<S>                                   <C>          <C>            <C> 
December 31, 1994
Constitution Reinsurance                $  881          $  200      $  681
Coregis                                    995             271         724
Crum & Forster Insurance                 2,941             768       2,173
Industrial Indemnity                     1,445             188       1,257
The Resolution Group                     1,680             983         697
Viking                                      97               -          97
Westchester Specialty Group              1,225             485         740
Ceded balances to affiliates              (451)           (451)          -
-----------------------------------------------------------------------------
    Total                               $8,813/1/       $2,444      $6,369/1/
=============================================================================

December 31, 1993
Constitution Reinsurance                $  883          $  202      $  681
Coregis                                    992             330         662
Crum & Forster Insurance                 3,171             872       2,299
Industrial Indemnity                     1,586             213       1,373
The Resolution Group                     2,576           1,720         856
Viking                                     124               6         118
Westchester Specialty Group              1,272             512         760
Ceded balances to affiliates              (920)           (920)          -
-----------------------------------------------------------------------------
    Total                               $9,684          $2,935      $6,749
=============================================================================
</TABLE>
 
/1/Balance excludes $53 million cessions to Ridge Re.

The overall decrease in gross reserves is primarily the result of actions 
taken over the past several years to reduce exposures in underperforming and 
non-strategic business segments. Reinsurance recoverables have decreased due 
to the underlying reduction in gross reserves, increased collection of 

                                                                              51

<PAGE>
 
recoverable balances and an increase in business retained by the Insurance 
Companies. Gross and net reserves as of December 31, 1992 were $10,657 
million and $6,869 million, respectively. Due to its mission of managing 
run-off business, The Resolution Group had the most significant decrease in 
overall gross and net reserves. In 1994, Insurance Companies within the 
Westchester Specialty Group, The Resolution Group and the Crum & Forster 
Insurance operating group strengthened net reserves by approximately $40 
million, $33 million and $8 million, respectively, for development on 1993 
and prior accident year reserves. Of these amounts, $20 million, $28 million 
and $5 million, respectively, were ceded to Ridge Re. No material adjustments 
were made to net reserves in 1993. 

MONITORING OF INSURANCE 

The insurance operating groups continually monitor the gross and net reserves 
of their Insurance Companies for business written in both current and prior 
years, and Talegen senior management reviews these reserves on a periodic 
basis. In addition, these reserves are reviewed and certified on an annual 
basis by an outside actuary appointed by the Insurance Companies. Overall 
reserve levels are impacted primarily by the types and amounts of insurance 
coverage currently being written and the trends developing from newly 
reported claims and claims which have been paid and closed. Adjustments are 
made to reserves in the period they can be reasonably estimated to reflect 
evolving changes in loss development patterns and various other factors, such 
as social and economic trends and known changes in judicial interpretation of 
legal liability.

USE OF REINSURANCE AND MANAGEMENT OF REINSURANCE COLLECTION

Most of the Insurance Companies made significant use of reinsurance during 
the 1970s and the early 1980s. Since that time, the Insurance Companies have 
generally increased the portion of business they retain while reducing the 
number of reinsurers used for their reinsurance contracts. Accordingly, in 
the aggregate, net reserves as a percent of gross reserves increased from 65 
percent as of December 31, 1992 to 72  percent as of December 31, 1994, and 
the percent of written premiums ceded to reinsurers to gross written premiums 
decreased from 21 percent in 1992 to 16 percent in 1994. Additionally, as of 
December 31, 1994 the Insurance Companies had current and future reinsurance 
recoverables due from approximately 700 reinsurers for all policy years. 
However, in 1994 more than 70 percent of premiums ceded were placed with 
approximately 30 reinsurers. 

  Talegen has a reinsurance security committee composed of senior management 
who approve those reinsurers with whom Talegen will do business. Based upon 
the review of financial condition and assessment of other available 
information, the Insurance Companies maintain an allowance for uncollectible 
amounts due from troubled reinsurers as reported in Note 13 to the 
consolidated financial statements on Page 69. The balance of reinsurance 
recoverable is considered to be valid and collectible. 

  The potential uncollectibility of ceded reinsurance is an industry-wide 
issue. With respect to the management of recoveries due from reinsurers, the 
Insurance Companies operate within common guidelines on the early 
identification of potential collection problems and assign these cases to a 
specialized unit with The Resolution Group staffed by "work-out" experts. 
This unit aggressively pursues collection of reinsurance recoverables through 
mediation, arbitration and, where necessary, litigation to enforce a 
contractual right against reinsurers. Nevertheless, periodically, it becomes 
necessary for management to adjust reserves for potential losses to reflect 
their ongoing evaluation of developments which affect recoverability, 
including increased damage awards and the severe financial difficulties that 
some reinsurers are experiencing.

52

<PAGE>
 
EFFECTS OF RESTRUCTURING ON RESERVES

In 1992, as part of the announced Talegen restructuring plan and related 
balance sheet strengthening actions, reserves were strengthened by $880 
million on a pre-tax basis. Talegen, after completing a detailed review of 
its outstanding reinsurance recoverables, in the fourth quarter of 1992 
wrote-off $516 million in reinsurance recoverables due from approximately 600 
reinsurers against the allowance for doubtful reinsurance accounts (including 
$174 million for paid reinsurance recoverables). Additionally, in conjunction 
with obtaining the necessary regulatory approvals to consummate the 
restructuring, XFSI agreed to provide excess of loss reinsurance protection 
issued by Ridge Re, XFSI's wholly-owned, single purpose Bermuda reinsurance 
company, which was established in 1992. Adjustments to the reserves in 1993 
pursuant to the restructuring were not material.

ASBESTOS-RELATED, HAZARDOUS WASTE AND OTHER LATENT OR LONG-TAIL CLAIMS

Claims resulting from asbestos-related, hazardous waste, other latent and 
other long-tail losses have provided unique challenges to the insurance 
industry. The possibility that these claims would emerge was often not 
recognized or contemplated at the time the policies were written, and 
traditional actuarial reserving methodologies have not always been useful in 
accurately estimating ultimate losses. Asbestos bodily injury claims were the 
first type of such exposures to cause significant losses to the insurance 
industry. Because case law for asbestos-related injuries is now reasonably 
developed and the number of open claims has been declining, the remaining 
exposure and related uncertainty to the Insurance Companies are also 
decreasing. In addition to bodily injury claims, asbestos-in-building claims 
have been brought against certain Insurance Companies of the Talegen 
insurance operating groups seeking reimbursement for the expense of replacing 
insulation material and other building components made of asbestos. The 
Insurance Companies have generally contested coverage to the extent that the 
product liability insurance does not cover replacement costs unless there has 
been property damage, as defined in the policies, to the buildings in which 
asbestos containing products were installed. Sufficient case law has not yet 
been established to determine the extent to which the courts will interpret 
the policies consistently with this position, and the theories put forth by 
the courts have varied considerably to support the few payments made by 
insurers to date for asbestos-in-building property damage claims.

  Hazardous waste claims have been the second major type of such claims to 
emerge and significantly impact the insurance industry. Hazardous waste 
claims encompass costs for pollution clean-up, bodily injury and property 
damage. Significant uncertainties exist with respect to estimating the 
Insurance Companies' exposure to hazardous waste claims. The uncertainty 
primarily results from lack of historical data, long delays in reporting 
claims, difficulty in identifying potential claimants and complex legal and 
coverage issues that have been further complicated by inconsistent 
conclusions reached by the courts.

  Other latent or long-tail exposures such as repetitive stress, lead paint and 
surgical breast implants are the latest type of such liability to emerge. 
These claim types also are not suitable for traditional actuarial reserving 
techniques due to significant uncertainties as to how legal issues will 
develop. 

  As judicial patterns emerge through the appellate process and remove 
uncertainties related to asbestos bodily injury, asbestos-in-building, 
hazardous waste and other latent or long-tail claims, additional liabilities 
and reinsurance recoverables could arise.

                                                                              53

<PAGE>
 
  Total reserves for asbestos bodily injury, asbestos-in-building, hazardous 
waste and other latent or long-tail claims as of December 31, 1994 are as 
follows:


<TABLE> 
<CAPTION> 
                                                     Reserves/1/ by Claim Category as of December 31, 1994
                                        ----------------------------------------------------------------------------------
                                          Asbestos       Asbestos-in-       Hazardous      Other Latent
                                        Bodily Injury      Building           Waste        or Long-Tail          Total
                                        -------------    -------------     ------------    ------------      -------------
(In millions)                           Gross    Net     Gross     Net     Gross    Net    Gross    Net      Gross     Net
--------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>      <C>     <C>      <C>      <C>     <C>     <C>     <C>       <C>     <C> 
Constitution Reinsurance                 $ 66    $20       $ -      $-      $ 79   $ 32     $  -    $ -       $145    $ 52
Crum & Forster Insurance                   58     40         -       -        79     61      110     57        247     158
Coregis                                     -      -         -       -         2      2        -      -          2       2
Industrial Indemnity                        -      -         -       -         -      -        -      -          -       -
The Resolution Group                      170     17        21       2       101     36       48      2        340      57
Viking                                      -      -         -       -         -      -        -      -          -       -
Westchester Specialty Group                38     11        45       1        34     21        9      1        126      34
--------------------------------------------------------------------------------------------------------------------------
Total                                    $332    $88       $66      $3      $295   $152     $167    $60       $860    $303
==========================================================================================================================
</TABLE>
 
/1/Included are case, IBNR and allocated loss adjustment expense reserves.

  The vast majority of claims in the above areas have resulted from policies
covering corporate property and casualty insurance, thus insurance operating
groups whose Insurance Companies have not underwritten (or reinsured) this type
of business generally do not have these types of claims. Although Insurance
Companies within Coregis are currently underwriting certain commercial property
and casualty business, these companies did not underwrite any significant volume
of business prior to 1986 and thus have not had many asbestos bodily injury or
hazardous waste claims as most such claims for the insurance industry have
originated from accident years prior to 1986.

  In 1985, Talegen established a stand-alone unit to centrally handle 
asbestos-related, hazardous waste and certain other latent or long-tail 
claims. The unit was established as a separate service company of Talegen in 
January, 1993 and named Envision Claims Management Corporation (Envision). 
Envision is currently engaged in working on claims for the Insurance 
Companies within the Crum & Forster Insurance, Coregis, The Resolution Group 
and Westchester Specialty Group insurance operating groups. The objectives of 
Envision are to bring expertise to this highly specialized area, promote 
consistency in claim administration and reserving practices, and judiciously 
work through and close such claims on behalf of the Insurance Companies. 
Since January 1, 1993, nearly twice as many claims have been closed by 
Envision as have been opened, causing an overall 33 percent reduction in 
total applicable claims outstanding during that period.

54

<PAGE>
 
SIGNIFICANT MATTERS

The largest asbestos bodily injury claims have originated from policies 
issued to Owens-Corning Fiberglas (OCF), who manufactured and distributed 
insulation containing asbestos. Numerous claims alleging bodily injury 
through exposure to asbestos were filed against OCF during the past two 
decades. Over the past several years, loss and loss expense payments on 
policies within The Resolution Group have aggregated $1,024 million and $24 
million on a gross and net basis, respectively. Management of The Resolution 
Group and Talegen believe that all significant losses have been paid on this 
coverage. Of the approximately $1 billion in reinsurance believed to be 
appropriately recoverable from these claims, $682 million has been collected 
and $168 million has either been written-off or reserved through the 
allowance for uncollectible reinsurance, resulting in a remaining net 
recoverable balance of $150 million as of December 31, 1994. See discussion 
of status of two separate lawsuits pertaining to reinsurance recoverable on 
OCF claims, of which one has been substantially settled, in Note 18 of the 
consolidated financial statements beginning on Page 79.

  With respect to hazardous waste claims, the principal federal statute that 
requires cleanup of environmental damage is the Comprehensive Environmental 
Response, Compensation and Liability Act ("Superfund"), passed in 1980. It 
imposes liabilities on "Potentially Responsible Parties," subjecting them to 
liability for clean-up costs regardless of fault, time period and relative 
contribution of pollutants. Superfund is subject to funding authorization 
that expires in December 1995. The current administration has put forth a 
proposal to reform Superfund that would create a government fund used to 
clean up "National Priority Listed" sites that would be paid for through a 
combination of retrospective and prospective taxes for primary insurers and a 
retrospective tax for reinsurers. Because the 103rd Congress did not pass the 
reform bill, and because there is new legislative leadership in both the 
House and the Senate, it is not possible to predict what effect the future 
legislative changes or reauthorization of Superfund will have on Talegen's 
future results.

RANGE OF REASONABLY POSSIBLE LOSSES ON KNOWN CLAIMS

The following table compares the internal estimates of the range of ultimate 
net losses that are considered reasonably possible for known asbestos bodily 
injury, asbestos-in-building, hazardous waste and other latent or long-tail 
claims to total net reserves for these claim categories as of December 31, 
1994:

<TABLE> 
<CAPTION> 
                                                 Range of Net Unpaid Loss and Allocated Loss Adjustment Expense Reserves 
                                                        Compared to Total Net Reserves/1/ as of December 31, 1994
                                     ------------------------------------------------------------------------------------------
                                         Range of Net Unpaid Loss and Allocated Loss Adjustment Expenses on Known Claims
                                     -----------------------------------------------------------------------------------
                                        Asbestos       Asbestos-in-     Hazardous     Other Latent            
                                     Bodily Injury      Building          Waste       or Long-Tail       Total              
                                     -------------     ------------     ---------    -------------    -----------    Total Net
(In millions)                        Low     High      Low     High     Low  High    Low      High    Low    High   Reserves/1/
-------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>     <C>       <C>     <C>      <C>  <C>     <C>      <C>     <C>    <C>    <C> 
Constitution Reinsurance             $ 5      $20       $-      $ -     $10  $ 30    $ -       $ -    $ 15   $ 50       $ 52
Crum & Forster Insurance              20       40        -        3      10    70     40        80      70    193        158
The Resolution Group                  10       20        2        4       2    80      -         5      14    109         57
Westchester Specialty Group            5       15        1        3       2    35      -         6       8     59         34
-------------------------------------------------------------------------------------------------------------------------------
Total                                $40      $95       $3      $10     $24  $215    $40       $91    $107   $411       $301
===============================================================================================================================
</TABLE>
 
/1/Included are case, IBNR and allocated loss adjustment expense reserves. Total
excludes $2 million of reserves for hazardous waste claims for Coregis Insurance
Company, a subsidiary of the Coregis insurance operating group. Hazardous waste
exposures to Coregis are not significant primarily because 1986 was the first
year significant business volume was written in the Coregis Insurance Companies.

                                                                              55

<PAGE>
 
Because the above ranges have been estimated on a net basis, they do not 
allow for uncollectible reinsurance. See discussion of the allowance for 
doubtful reinsurance in Note 13 of the consolidated financial statements on 
Page 69. Additionally, the above ranges exclude consideration of potential 
Ridge Re contract recoveries, which provides aggregate excess of loss 
protection over all loss and loss expense reserves and uncollectible 
reinsurance reserves for 1992 and prior accident years. Cessions to Ridge Re, 
while beneficial to Talegen, do not result in a benefit to the Insurance 
segment or consolidated Xerox accounts. Based on information available to 
them as of December 31, 1994, the insurance operating groups and Talegen do 
not expect that liabilities associated with incurred asbestos bodily injury, 
asbestos-in-building, hazardous waste and other latent or long-tail claims 
will have a material adverse affect on their future liquidity or financial 
position. However, given the complexity and lack of precision in estimating 
the exposure, no assurance can be made as to the future potential impact of 
such claims.

REGULATORY RESTRICTION

The assets of the Insurance Companies are highly regulated and are generally 
restricted by regulatory authorities for use within the Insurance Company. 
Accordingly, they are generally not available for general corporate purposes. 
Restricted net assets of the Insurance Companies were $3.1 billion at 
December 31, 1994, $3.2 billion at December 31, 1993 and $2.6 billion at 
December 31, 1992.

RIDGE RE RELATED/OTHER

Operating results related to Ridge Re were insignificant in 1993 because the 
Talegen insurers did not experience adverse reserve development during that 
period. Accordingly, no losses were recorded in 1993 under Ridge Re's excess 
of loss reinsurance contracts.

  The Ridge Re related 1994 pre-tax underwriting loss was $53 million, based 
upon loss cessions from three of the Talegen insurance operating groups (The 
Resolution Group - $28 million, Westchester Specialty Group - $20 million, 
and Crum & Forster Insurance - $5 million). The after-tax impact totaled $35 
million in 1994.

  Interest/Other charges on an after-tax basis were $151 million in 1994, $145 
million in 1993 and $133 million in 1992. These charges primarily include net 
interest expense.

DISCONTINUED OPERATIONS

Other Financial Services (OFS), which were discontinued in the fourth quarter 
of 1993, had no after-tax income in 1994, $63 million in 1993, and a $39 
million loss in 1992. Included in the 1993 income was a $62 million after-tax 
gain from the completion of two sales. The 1992 loss includes $90 million of 
adjustments, primarily for the partial write-down of goodwill. The net 
investment in OFS was $232 million at December 31, 1994. The Company believes 
that the liquidation of the remaining OFS units will not result in a net 
loss.

  In February 1993, the Company completed the sale of VKM for approximately 
$360 million, which resulted in before- and after-tax gains of $101 million 
and $62 million, respectively. In October 1993, the Company completed the 
sale of Furman Selz for $99 million. The gain on the sale was immaterial. The 
proceeds of the above sales were used to retire debt.

56

<PAGE>
 
  The sale of the business and assets of Shields, a Furman Selz subsidiary, and 
Regent, a subsidiary of Shields, to Alliance Capital Management L. P. was 
completed in March 1994. Under the terms of the Furman Selz sales agreement, 
the sales proceeds yielded cash of approximately $60 million before 
settlement of related liabilities.

  General American Life Insurance Company and XFSI signed a definitive 
agreement in January, 1995 for a wholly-owned subsidiary of General American 
(New Owner) to acquire Xerox Life and related companies. Closing of the sale 
is subject to the customary closing conditions and regulatory approvals, and 
is targeted for the first half 1995. At closing, New Owner will rename the 
Xerox Life companies. OakRe Life Insurance Company, an XFSI subsidiary formed 
in 1994, will assume responsibility for existing Single Premium Deferred 
Annuity (SPDA) policies issued by Xerox Life's Missouri and California 
companies (Life Companies) via a reinsurance agreement (Agreement). The 
Agreement includes a provision for the assumption (at their election) by the 
Life Companies, of all of the SPDA policies at the end of their current rate 
reset periods. A Novation Agreement with a New Owner affiliate provides for 
the assumption of the liability under the Coinsurance Agreement for any SPDA 
policies not so assumed by the Life Companies. Other policyholders (of 
Immediate, Whole Life, and Variable annuities, as well as a minor amount of 
SPDAs issued by Xerox Life New York) will continue to be the responsibility 
of the New Owner. See Note 11 to the consolidated financial statements on 
Page 64 for additional information.

  The third-party financing and real-estate development and financing 
operations that were discontinued in 1990 were unaffected by the IOFS 
disengagement decisions. During 1994, several favorable developments occurred 
including sales of real-estate and third-party assets and sale and run-off 
activity, which reduced assets associated with these businesses by $272 
million to a total of $547 million. Assigned debt was correspondingly reduced 
by $193 million to $231 million. Management believes that the combination of 
existing reserves together with run-off profits should adequately provide for 
any credit losses or losses on disposition.

CONSOLIDATED DEFERRED TAX ASSET POSITION

As is common for companies with large property and casualty insurance 
operations, the Company's domestic operations are in a net deferred tax asset 
position. In recent years, domestic profitability has been adversely affected 
by several non-recurring charges including the 1993 Document Processing 
restructuring charge and litigation settlements; the 1992 IOFS restructuring 
charges; the 1991 Document Processing work-force reduction provision; a 
smaller 1991 provision associated with the closing of certain Talegen 
locations; and, in 1990, by the charge associated with discontinuing the 
Company's real-estate operations. These charges were incurred in conjunction 
with the Company's ongoing efforts to exit from non-core businesses and to 
position the Company for future profitable growth. In addition, the 1992 
adoption of the new accounting standards for postretirement medical benefits 
has also significantly contributed to the Company's domestic deferred tax 
asset position. The Company has scheduled the timing of the reversal of its 
deferred tax assets and, as further discussed in Note 17 to the consolidated 
financial statements on Page 79, expects to realize the majority of these in 
the ordinary course of future operations.

                                                                              57

<PAGE>
 
Notes to Consolidated Financial Statements

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation.  The consolidated financial statements include the 
accounts of Xerox Corporation and all majority-owned subsidiaries (the 
Company). All significant intercompany accounts and transactions have been 
eliminated.

  Rank Xerox Limited, Rank Xerox Holding BV, Rank Xerox Investment Limited, R-X
Holdings Limited and their respective subsidiaries, and the other subsidiaries
jointly owned by the Company and The Rank Organisation Plc are referred to as
the Rank Xerox Companies. The accounts of the Rank Xerox Companies are included
for their fiscal years ended October 31. The accounts of the Latin American
subsidiaries are included for their fiscal years ended November 30.

  Investments in which the Company has a 20 to 50 percent ownership interest 
are accounted for on the equity method.

Earnings Per Share.  Primary earnings per share are based on net income less 
preferred stock dividend requirements divided by the average common shares 
outstanding during the period and common equivalent shares related to 
dilutive stock options, Xerox Canada Inc. exchangeable Class B stock and 
incentive shares. Fully diluted earnings per share assume full conversion of 
convertible debt and convertible preferred stock into common stock at the 
beginning of the year or date of issuance, unless they are antidilutive.

Goodwill.  Goodwill represents the cost of acquired businesses in excess of 
the net assets purchased and is amortized on a straight-line basis, generally 
over 40 years. Goodwill is reported net of accumulated amortization and the 
recoverability of the carrying value is evaluated on a periodic basis. During 
1992, the Company recorded a $470 million write-down of goodwill in 
connection with the restructuring of Insurance and Other Financial Services.

Significant Accounting Policies of Document Processing:

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

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

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

Buildings and Equipment.  Buildings and equipment are depreciated over their 
estimated useful lives. Depreciation is computed using principally the 
straight-line method. Significant improvements are capitalized; maintenance 
and repairs are expensed.

Classification of Commercial Paper and Bank Notes Payable.  It is the 
Company's policy to classify as long-term debt that portion of commercial 
paper and bank notes payable that is intended to match fund finance 
receivables due after one year to the extent that it has the ability under 
its revolving credit agreements to refinance such commercial paper and notes 
payable on a long-term basis. See Note 15 on Page 72.

Reclassifications.  Certain prior year balances have been reclassified to 
conform to the 1994 presentation.

Foreign Currency Translation.  The functional currency for most foreign 
operations is the local currency. Net assets are translated at current rates 
of exchange and income and expense items are translated at the average 
exchange rate for the year. The resulting translation adjustments are 
recorded as a separate component of shareholders' equity. The U.S. dollar is 
used as the functional currency for the Company's subsidiaries, such as in 
South America, which conduct their business in U.S. dollars or operate in 
hyper-inflationary economies. A combination of current and historical 
exchange rates are used in remeasuring the local currency transactions of 
these subsidiaries and the resulting exchange adjustments are included in 
income. Aggregate foreign currency losses were (in millions) $136, $174 and 
$67 in 1994, 1993 and 1992, respectively, and are included in Other, net in 
the consolidated statements of income.

58

<PAGE>
 
Significant Accounting Policies of Insurance:

Revenue Recognition.  Insurance premiums are generally earned pro rata over 
the period the coverage is provided. 

Deferred Policy Acquisition Costs.  Property and casualty insurance policy 
acquisition costs are deferred and recognized over the periods the related 
premiums are earned. Anticipated investment income is considered in the 
determination of the recovery of deferred policy acquisition costs.

Reinsurance.  Reinsurance recoverable includes the balance due from 
reinsurance companies for paid losses and loss expenses and the estimates of 
the amount of unpaid losses and loss expenses that will be recovered from 
reinsurers determined in a manner consistent with the liabilities associated 
with the reinsured policies. The provision for uncollectible reinsurance is 
determined based upon the review of the financial condition of the reinsurers 
and assessment of other available information, as is further discussed in 
Note 13 on Page 69.

Insurance Losses and Loss Expenses.  Property and casualty insurance losses 
and loss expenses are charged to expense as incurred. The reserve for unpaid 
losses and loss expenses is determined on the basis of claim adjusters' 
evaluations and other estimates, including those for incurred but not 
reported (IBNR) losses and for salvage and subrogation recoveries. Overall 
reserve levels are impacted primarily by the types and amounts of insurance 
coverage currently being written, trends developing from newly reported 
claims and claims which have been paid and closed. Talegen's insurance 
operating groups continually monitor gross and net losses and loss expense 
reserves of their insurance companies for business written in both the 
current and prior years, and Talegen senior management reviews these reserves 
on a periodic basis. Adjustments are made to reserves in the period in which 
they can be reasonably estimated to reflect evolving changes in loss 
development patterns and various other factors, such as social and economic 
trends and judicial interpretation of legal liability. These reserves are not 
recorded on a discounted basis.

Investments. The fixed maturity investments of Insurance operations are
considered to be investments available-for-sale because substantial portions of
these portfolios may be sold prior to maturity. Fixed maturity investments and
equity securities are valued at market. Unrealized gains and losses from the
revaluation of these securities are credited or charged to shareholders' equity.

  Realized gains and losses on the sale of investments are determined on a
specific identification basis. A provision in the consolidated statement of
income is made only when the decline in the fair value of debt and equity
securities is other than temporary. Investment income is recorded when earned.

2.  ACCOUNTING CHANGES

Commencing in 1994, Statement of Financial Accounting Standards (SFAS) No. 
112 - "Employers' Accounting for Postemployment Benefits" - requires accrual 
accounting for employee benefits that are paid between the termination of 
active employment and retirement. SFAS No. 112 did not have an impact on 
operating results as the applicable benefits are either routinely accrued or 
are types of benefits not currently offered by the Company.

  Effective January 1, 1994, the Company adopted SFAS No. 115 - "Accounting for 
Certain Investments in Debt and Equity Securities," which is more fully 
discussed in Note 12 on Page 66.

  Effective December 31, 1994, the Company adopted SFAS No. 119 - "Disclosure 
about Derivative Financial Instruments and Fair Value of Financial 
Instruments." See Note 21 on Pages 83 through 85 for disclosures relating to 
derivative financial instruments.

  In 1992, the Company recorded an after-tax charge of $764 million for the 
cumulative effect of accounting changes consisting of $606 million for SFAS 
No. 106 - "Employers' Accounting for Postretirement Benefits Other Than 
Pensions," and $158 million for SFAS No. 109 - "Accounting for Income Taxes."

                                                                              59

<PAGE>
 
DOCUMENT PROCESSING DISCLOSURES

3.  1993 SPECIAL CHARGES, NET

In 1993, the Company recorded special charges which aggregated $1,373 million 
and included the following pre-tax amounts: $1,195 million related to a 
restructuring of Document Processing operations and $278 million related to 
litigation settlements. As a result of these charges, the Company's Document 
Processing operations generated a net loss for 1993; accordingly, these 
provisions had been partially offset by $100 million in reduced 
performance-based employee profit sharing which had previously been accrued 
and would have been paid based on profit before the special charges. As a 
consequence, these special charges resulted in an after-tax charge of $813 
million or $7.96 per share. The restructuring program and litigation 
settlements are discussed below:

Document Processing Restructuring Program.  The Document Processing 
restructuring program announced in December 1993 is a worldwide action aimed 
at significantly reducing the Company's cost base and at improving 
productivity.

  The $1,195 million provision consisted of the following: $843 million related 
to severance pay and other employee separation benefits; $258 million related 
to lease cancellation and other facilities rationalization and site 
consolidation costs; and $94 million for the write-off or write-down of 
various assets in certain non-strategic businesses the Company will exit and 
other costs directly related to the restructuring program. Approximately 70 
percent of this provision relates to the Company's domestic operations.

  The $1,195 million pre-tax provision resulted in the Company recognizing $416 
million in deferred tax benefits and reducing minorities' interests in 
earnings of subsidiary companies by approximately $74 million. As a 
consequence, the restructuring program resulted in an after-tax charge in 
1993 of $705 million or $6.91 per share.

  The Company anticipated, as a result of this restructuring program, to reduce 
its worldwide Document Processing work force by more than 10,000 employees by 
early 1996. In addition, the Company identified specific facilities to be 
closed, which are publicly announced as local implementation plans are 
finalized.

  As of December 31, 1994, the activities associated with the restructuring 
program are on track towards achieving the Company's objectives. The progress 
of the restructuring program is included in the accompanying Financial Review 
on Page 32.

  During 1994, $430 million of net pre-tax charges were charged against the 
restructuring reserve. Management believes the aggregate reserve balance of 
$765 million at December 31, 1994 is adequate for the completion of the 
restructuring program.

  The consolidated balance sheets at December 31, 1994 and 1993 include $429 
million and $395 million, respectively, of current liabilities and $260 
million and $717 million, respectively, of non-current liabilities relating 
to the pre-tax cash obligations associated with the restructuring action. 

  During 1994, actual savings approximated $350 million. The cost savings 
resulting from this action are estimated to be approximately $700 million in 
1995 and at higher amounts thereafter (These cost savings amounts are 
unaudited). These savings are primarily the result of reduced compensation 
expenses and occupancy costs. Partially offsetting these savings will be 
expenses incurred in future years to reengineer various business processes, 
such as the expansion of the use of technology in the customer order entry 
and sales processing functions; investments in hardware and software and 
related training to improve the efficiency of the Company's field service and 
sales organizations; and training to expand the local capabilities of 
technical service personnel. Additionally, some of these savings will be 
reinvested in support of the Company's expansion into emerging markets and to 
mitigate anticipated effects of continuing pressure on gross margins.

Litigation Settlements.  In December 1993, the Company recorded a pre-tax 
charge of $278 million towards the settlement of two outstanding lawsuits in 
Texas. Of this charge, $256 million related to the settlement of an antitrust 
suit against the Company and $22 million related to the settlement of claims 
in connection with an alleged breach of contract. Net of income taxes, these 
settlements reduced the Company's 1993 net income by $167 million or $1.63 
per share.

60

<PAGE>
 
4.  FINANCE RECEIVABLES, NET

Finance receivables represent installment sales and sales-type leases 
resulting from the marketing of the Company's business equipment products. 
These receivables generally mature over two to five years and are generally 
collateralized by a security interest in the underlying assets. The 
components of finance receivables, net at December 31, 1994, 1993 and 1992 
follow:


<TABLE> 
<CAPTION> 
(In millions)                            1994      1993      1992
-----------------------------------------------------------------
<S>                                   <C>       <C>       <C>  
Gross receivables                     $12,135   $11,119   $10,826
Unearned income                        (2,074)   (2,032)   (2,194)
Unguaranteed residual values              206       165       142
Allowance for doubtful accounts          (319)     (300)     (275)
-----------------------------------------------------------------
Finance receivables, net                9,948     8,952     8,499
Less current portion                    3,910     3,358     3,162
-----------------------------------------------------------------
Amounts due after one year, net       $ 6,038   $ 5,594   $ 5,337
=================================================================
</TABLE>
 

Contractual maturities of the Company's gross finance receivables subsequent 
to December 31, 1994 follow (in millions):


<TABLE> 
<CAPTION> 
  1995    1996    1997    1998   1999   Thereafter
--------------------------------------------------
<S>     <C>     <C>     <C>      <C>    <C> 
$4,939  $3,242  $2,229  $1,207   $453          $65
==================================================
</TABLE>
 

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

5.  INVENTORIES

The components of inventories at December 31, 1994, 1993 and 1992 follow:


<TABLE> 
<CAPTION> 
(In millions)                         1994     1993     1992
------------------------------------------------------------
<S>                                 <C>      <C>      <C> 
Finished goods                      $1,458   $1,421   $1,508
Work in process                         88       80       83
Raw materials                          268      297      292
Equipment on operating leases, net     480      364      374
------------------------------------------------------------
Inventories                         $2,294   $2,162   $2,257
============================================================
</TABLE>
 

Equipment on operating leases consists of the Company's business equipment
products which are rented to customers and are depreciated to estimated residual
value. Depreciable lives vary from two to four years. The Company's business
equipment operating lease terms vary, generally from one to 36 months.
Accumulated depreciation on equipment on operating leases for the three years
ended December 31, 1994 amounted to (in millions) $794, $692 and $697,
respectively. Minimum future rental revenues on the remaining non-cancelable
operating leases with original terms of one year or longer are (in millions):


<TABLE> 
<CAPTION> 
1995            1996              1997      Thereafter
------------------------------------------------------
<S>             <C>               <C>       <C> 
$335            $214              $122             $99
======================================================
</TABLE>
 

Total contingent rentals, principally usage charges in excess of minimum 
rentals for operating leases, for the three years ended December 31, 1994, 
amounted to (in millions) $246, $274 and $290, respectively.

6.  LAND, BUILDINGS AND EQUIPMENT, NET

The components of land, buildings and equipment at December 31, 1994, 1993 
and 1992 follow:


<TABLE> 
<CAPTION> 
                                     Estimated
                                  Useful Lives
(In millions)                          (Years)       1994      1993      1992
-----------------------------------------------------------------------------
<S>                               <C>              <C>       <C>       <C> 
Land                                               $   87    $   83    $   69
Buildings and building
  equipment                           20 to 40        876       824       788
Leasehold improvements              Lease term        339       322       336
Plant machinery                        4 to 12      1,843     1,732     1,558
Office furniture and
  equipment                            3 to 10      1,245     1,576     1,509
Other                                  3 to 20        139       171       172
Construction in progress                              227       277       368
-----------------------------------------------------------------------------
Subtotal                                            4,756     4,985     4,800
Accumulated depreciation                            2,648     2,766     2,650
-----------------------------------------------------------------------------
Land, buildings and equipment, net                 $2,108    $2,219    $2,150
=============================================================================
</TABLE>
 

The Company leases certain land, buildings and equipment. Substantially all such
leases are accounted for as operating leases. Total rent expense under operating
leases for the three years ended December 31, 1994 amounted to (in millions)
$502, $538 and $554, respectively. Future minimum operating lease commitments
that have remaining non-cancelable lease terms in excess of one year at December
31, 1994 are as follows (in millions):


<TABLE> 
<CAPTION> 
1995      1996      1997      1998      1999     Thereafter
-----------------------------------------------------------
<S>       <C>       <C>       <C>       <C>      <C> 
$329      $219      $172      $145      $122           $567
===========================================================
</TABLE>
 

In certain circumstances, the Company subleases space not currently required in
operations. Future minimum sublease income under leases with non-cancelable
terms in excess of one year amounted to $45 million at December 31, 1994.

                                                                              61

<PAGE>
 
7.  INVESTMENTS IN AFFILIATES, AT EQUITY

Investments in corporate joint ventures and other companies in which the 
Company has a 20 to 50 percent ownership interest at December 31, 1994, 1993 
and 1992 follow:


<TABLE> 
<CAPTION> 
(In millions)                               1994      1993      1992
--------------------------------------------------------------------
<S>                                       <C>       <C>         <C> 
Fuji Xerox                                $1,183    $1,004      $868
Other investments                             95        90        89
--------------------------------------------------------------------
Investments in affiliates, at equity      $1,278    $1,094      $957
====================================================================
</TABLE>
 

Rank Xerox Limited, a consolidated subsidiary of the Company, owns 50 percent of
the outstanding stock of Fuji Xerox, a corporate joint venture with Fuji Photo
Co., Ltd. Fuji Xerox is headquartered in Tokyo and operates throughout the Far
East (except China) in the Document Processing business. Condensed financial
data of Fuji Xerox for its last three fiscal years follow:


<TABLE> 
<CAPTION> 
(In millions)                               1994      1993      1992
--------------------------------------------------------------------
<S>                                       <C>       <C>         <C> 
Summary of Operations
Revenues                                  $7,235    $6,259    $5,348
Costs and expenses                         6,829     5,915     5,043
--------------------------------------------------------------------
Income before income taxes                   406       344       305
Income taxes                                 235       195       183
--------------------------------------------------------------------
Net income                                $  171    $  149    $  122
====================================================================
Rank Xerox' equity in net income          $   86    $   75    $   61
====================================================================
Xerox' equity in net income               $   57    $   50    $   41
====================================================================

Balance Sheet Data
Assets
Current assets                            $3,428    $3,175    $2,760
Non-current assets                         3,038     2,573     2,355
--------------------------------------------------------------------
Total assets                              $6,466    $5,748    $5,115
====================================================================

Liabilities and shareholders' 
  equity
Current liabilities                       $2,567    $2,276    $2,100
Long-term debt                               658       794       742
Other non-current liabilities                871       668       477
Shareholders' equity                       2,370     2,010     1,796
--------------------------------------------------------------------
Total liabilities and 
shareholders' equity                      $6,466    $5,748    $5,115
====================================================================
</TABLE>
 

8.  GEOGRAPHIC AREA DATA

Revenues and assets of the Rank Xerox Companies are substantially 
attributable to European operations; their consolidated operations in Africa, 
Asia and the Middle East together comprise less than one percent of the 
Company's consolidated amounts. The Other Areas classification includes 
operations principally in Latin America and Canada.

  Intercompany revenues are generally based on manufacturing cost plus a markup 
to recover other operating costs and to provide a profit margin to the 
selling company.

  The Insurance business conducts substantially all of its operations in the 
United States. The revenues, net income and assets of the Company's Insurance 
businesses are included in the accompanying consolidated statements of income 
and consolidated balance sheets on Pages 28 and 38, respectively.

  Geographic area data for the Company's Document Processing business follows:


<TABLE> 
<CAPTION> 
                                             Year ended December 31,
(In millions)                                1994     1993      1992
--------------------------------------------------------------------
<S>                                       <C>      <C>       <C> 
Revenues from unrelated entities:
  United States                           $ 7,822  $ 7,238   $ 6,942
  Rank Xerox Companies                      4,633    4,479     4,911
  Other Areas                               2,633    2,512     2,445
--------------------------------------------------------------------
Total                                     $15,088  $14,229   $14,298
====================================================================
Intercompany revenues:
  United States                           $ 1,291  $ 1,104   $ 1,292
  Rank Xerox Companies                        262      216       264
  Other Areas                                 362      353       353
--------------------------------------------------------------------
Total                                     $ 1,915  $ 1,673   $ 1,909
====================================================================
Total revenues:
  United States                           $ 9,113  $ 8,342   $ 8,234
  Rank Xerox Companies                      4,895    4,695     5,175
  Other Areas                               2,995    2,865     2,798
  Less intercompany revenues               (1,915)  (1,673)   (1,909)
--------------------------------------------------------------------
Total                                     $15,088  $14,229   $14,298
====================================================================
Net income (before intercompany 
  eliminations):
  United States                           $   379  $  (371)  $   302
  Rank Xerox Companies                        218      (43)       72
  Other Areas                                 250      190       185
--------------------------------------------------------------------
Total*                                    $   847  $  (224)  $   559
====================================================================
Net income (after intercompany 
  eliminations):
  United States                           $   386  $  (334)  $   301
  Rank Xerox Companies                        215      (47)       74
  Other Areas                                 193      188       187
--------------------------------------------------------------------
Total*                                    $   794  $  (193)  $   562
====================================================================
Assets:
  United States                           $ 9,133  $ 8,966   $ 8,095
  Rank Xerox Companies                      7,171    6,349     6,367
  Other Areas                               3,070    2,843     2,678
--------------------------------------------------------------------
Total                                     $19,374  $18,158   $17,140
====================================================================
</TABLE>
 
*The 1993 special charges reduced net income by $813 million. On a geographic
basis, this charge was incurred as follows (in millions): $605-United States;
$147-Rank Xerox Companies; and $61-Other Areas. 

62

<PAGE>
 
9. CONTRACT WITH ELECTRONIC DATA SYSTEMS

In June 1994, the Company awarded a contract to Electronic Data Systems Corp. 
(EDS) to operate the Company's worldwide data processing and 
telecommunications network. EDS has assumed responsibility for virtually all 
of the Company's mainframe data processing, its computer network services and 
telecommunications, and will provide maintenance and other support services 
to the Company's active computer applications that support current internal 
Xerox processes. The contract does not transfer to EDS responsibility for the 
development of new data processing applications. As part of the contract, EDS 
purchased, at approximately book value, substantially all of the Company's 
information management assets for $150 million. Approximately 1,300 Xerox 
employees have become employees of EDS during the second half of 1994.

  The contract is for ten years and is valued at $3.2 billion. Minimum payments 
due EDS under the contract for each of the next five years are as follows (in 
millions):


<TABLE> 
<CAPTION> 
1995         1996        1997         1998         1999
-------------------------------------------------------
<S>          <C>         <C>          <C>          <C> 
$362         $349        $325         $289         $250
=======================================================
</TABLE>
 

These minimum payments will be amended over time to reflect the transfer to 
EDS of responsibility for the management of any new data processing 
applications, certain inflationary effects and other changing business 
conditions.

INSURANCE AND OTHER FINANCIAL SERVICES (IOFS) DISCLOSURES

10.  RESTRUCTURING OF IOFS

In January 1993, the Company announced its intent to sell or otherwise 
disengage from its IOFS businesses. Following the Company's decision to 
disengage from IOFS, an after-tax charge of $778 million was recorded during 
1992 of which $688 million related to Insurance and $90 million related to 
Other Financial Services. The January 1993 announcement to exit the financial 
services businesses is consistent with the strategy that began in 1990. As 
more fully discussed in Note 11 on Page 65, in 1990 the Company discontinued 
its real-estate development and third-party financing businesses.

Restructuring of Insurance Operations.  As the initial step in the legal 
restructuring of Talegen, its investment portfolio was repositioned during 
1992 by shortening the duration of fixed income securities and reinvesting in 
U.S. treasuries. As a result, realized capital gains of $444 million were 
recognized during 1992 which were offset by a pre-tax restructuring provision 
of the same amount. Also during 1992, an after-tax charge of $688 million was 
recorded, which included $400 million for the partial write-down of goodwill 
and $288 million for reserve strengthening. On a pre-tax basis the reserve 
strengthening was $436 million. The combined effects of these charges 
resulted in $880 million in pre-tax reserve strengthening at Talegen.

  In connection with the 1992 charges, Xerox Financial Services, Inc. (XFSI), a 
wholly-owned subsidiary of the Company, provided support to Talegen in the 
form of $200 million in notes guaranteed by the Company.

  During 1993, the insurance departments of all states in which the Talegen 
insurance companies are domiciled approved the legal restructuring and 
recapitalization of Talegen's insurance companies. With this approval, in 
September 1993, Talegen established seven insurance operating groups as 
independent legal entities that, in turn, own one or more independent 
insurance companies. Each insurance company within the insurance operating 
group maintains its own investment portfolio, loss reserves and capital.

                                                                              63

<PAGE>
 
  In connection with the regulatory approvals, the Company, through XFSI, 
provided additional capital support to Talegen. The capital consists of $235 
million in cash and $100 million of XFSI promissory notes which are 
guaranteed by the Company.

  At December 31, 1994 and 1993, intercompany transactions aggregating 
approximately $522 million and $645 million, respectively, have been included 
as Insurance assets on the Company's consolidated balance sheet. The 
corresponding obligations are included in Other Long-Term Debt and 
Obligations in the consolidated balance sheets and represent funding 
commitments by XFSI guaranteed by the Company.

  XFSI has also agreed that support would be provided to Talegen in the form of 
excess of loss reinsurance protection. Commencing in 1993, XFSI is obligated 
to pay annual premium installments of $49 million each year, plus financing 
charges thereon, for up to ten years, for coverage totaling $1,245 million, 
net of 15 percent coinsurance. This reinsurance protection is provided to 
Talegen through XFSI's single purpose, wholly-owned reinsurance company Ridge 
Reinsurance Limited (Ridge Re), which was established in 1992. The XFSI 
premium payments have been guaranteed by the Company.

  XFSI may also be required, under certain circumstances, to purchase up to 
$301 million in redeemable preferred stock of Ridge Re. XFSI has guaranteed 
Ridge Re's obligations to Talegen.

  The Talegen insurance companies and Ridge Re remain consolidated entities of 
the Company's continuing operations.

Sale of Constitution Re Corporation.  In December 1994, a definitive 
agreement was reached for the sale of Constitution Re Corporation (CRC), one 
of the seven insurance operating groups of Talegen, for approximately $410 
million subject to closing adjustments, which is approximately the same as 
book value. The sale is expected to close during the first half of 1995 and 
is subject to regulatory approvals. Revenues for CRC during the years 1994, 
1993 and 1992 were (in millions) $519, $496 and $375, respectively. 

11.  DISCONTINUED OPERATIONS

Other Financial Services.  In 1993, the Company discontinued, for financial 
reporting purposes, its Other Financial Services (OFS) segment, which was 
composed of The Van Kampen Merritt Companies, Inc. (VKM), Furman Selz Holding 
Corporation (Furman Selz) and Xerox Financial Services Life Insurance Company 
(Xerox Life).

  In February 1993, the Company sold VKM for approximately $360 million, which 
resulted in pre- and after-tax gains of approximately $101 million and $62 
million, respectively. The proceeds were used to retire debt.

  In October 1993, the Company sold Furman Selz for $99 million and such 
proceeds were also used to retire debt. The gain on the sale was immaterial. 
The sales price did not include the proceeds from the sale of Shields Asset 
Management, Inc., a former Furman Selz subsidiary, and Regent Investor 
Services Incorporated, a subsidiary of Shields. This sale was completed in 
March 1994 and resulted in additional cash of approximately $60 million 
before settlement of related liabilities.

  The disposition of Xerox Life will be accomplished through the sale of stock 
and run-off. In January 1995, the Company executed a stock purchase agreement 
with General American Life Insurance Company (General American) whereby a 
subsidiary of General American will acquire the capital stock of the Xerox 
Life operations and the Company's immediate, whole life and variable annuity 
businesses. The purchase price is equal to $46 million plus an amount equal 
to the capital and surplus transferred to the buyer. The sale is expected to 
be consummated in the first half of 1995 and is subject to regulatory 
approval.

  OakRe Life Insurance Company, an XFSI subsidiary formed in 1994, will assume 
responsibility for existing Xerox Life single premium deferred annuity (SPDA) 
policies via a reinsurance agreement (Agreement). At December 31, 1994, such 
policies approximated $3 billion of customer deposit contracts outstanding. 
The Agreement includes a provision for the assumption (at its election) by 
Xerox Life, which will be renamed under General American ownership (New 
Owner), of all the SPDA policies at the end of their current reset periods, 
which run for approximately five years. A Novation Agreement with a New Owner 
affiliate provides for the assumption of the liability under the Agreement 
for any SPDA policies not so assumed by 

64

<PAGE>
 
Xerox Life. New Owner will pay additional consideration upon renewal of the
SPDA policies.

  OFS revenues for the three years ended December 31, 1994 were (in millions): 
1994-$302; 1993-$544; and 1992-$702. Revenues include amounts of the 
businesses through their effective sales dates. The net investment in OFS at 
December 31, 1994 and 1993 is approximately $232 million and $244 million, 
respectively. The Company believes that the liquidation of the remaining OFS 
assets will not result in a net loss.

Real-Estate and Third-Party Financing.  During the last four years, the 
Company made substantial progress in disengaging from the real-estate and 
third-party financing businesses that were discontinued in 1990. During the 
three years ended December 31, 1994, the Company received net cash proceeds 
of $1,191 million ($259 million in 1994, $291 million in 1993 and $641 
million in 1992) from the sale of individual assets or of business units, 
from several asset securitizations and from run-off collection activities. 
The amounts received were consistent with the Company's estimates in the 
disposal plan and were used primarily to retire debt.

  In 1992, incremental tax benefits of $122 million were realized by the 
Company. Rather than recording these tax benefits in income, the Company 
increased pre-tax reserves related to discontinued businesses in view of weak 
market conditions and continuing uncertainties in the domestic real-estate 
and credit markets.

  Substantially all of the remaining assets represent direct financing leases, 
approximately $330 million (60 percent) represent passive lease receivables, 
many with long-duration contractual maturities and unique tax attributes. 
Accordingly, the Company expects that the wind-down of the portfolio will be 
slower during 1995 and in future years, compared with prior years. The 
Company believes that the liquidation of the remaining assets will not result 
in a net loss.

Total Discontinued Operations.  The consolidated financial statements have 
been restated, as appropriate, to isolate the effect of the discontinued 
operations. Assigned debt represents debt included in the Company's 
consolidated balance sheets that has been assigned to the discontinued 
businesses based on the relative amount of gross assets of the discontinued 
operations. Proceeds from disposition of these businesses, along with their 
results of operations during the phase-out period, are expected to be used to 
repay such consolidated indebtedness. Assigned interest expense for the three 
years ended December 31, 1994 was (in millions) $34, $76 and $133, 
respectively.

Summarized information of discontinued operations for the three years ended 
December 31, 1994 follows:


<TABLE> 
<CAPTION> 
(In millions)                               1994     1993      1992
-------------------------------------------------------------------
<S>                                       <C>      <C>       <C> 
Summary of Operations
Real-Estate and Third-Party 
  Financing
Loss before income taxes                  $    -   $    -    $ (122)
Income tax benefits                            -        -       122
-------------------------------------------------------------------
Net income                                     -        -         -
-------------------------------------------------------------------
Other Financial Services
Income (loss) before income taxes              -      106       (21)
Income (taxes) benefits                        -      (43)      (18)
-------------------------------------------------------------------
Net income (loss)                              -       63       (39)
===================================================================
Net income (loss) from 
  discontinued operations                 $    -   $   63    $  (39)
===================================================================

Balance Sheet Data

Assets
------
Real-Estate and Third-Party 
  Financing
Gross finance receivables                 $  538   $  841    $1,203
Unearned income and other                      9      (22)      (32)
-------------------------------------------------------------------
Investment, net                              547      819     1,171
-------------------------------------------------------------------
Other Financial Services
Investments                                3,604    3,832     3,766
Other assets, net                            541      523       715
-------------------------------------------------------------------
OFS assets                                 4,145    4,355     4,481
-------------------------------------------------------------------
Investment in discontinued 
  operations                              $4,692   $5,174    $5,652
===================================================================

Liabilities
-----------
Other Financial Services
Policyholders' deposits                   $3,576   $3,716    $3,682
Other OFS liabilities                        337      395       218
Assigned debt                                281      474     1,058
-------------------------------------------------------------------
Discontinued operations liabilities       $4,194   $4,585    $4,958
===================================================================
</TABLE>
 

The investments caption primarily includes the fixed maturity securities owned
by Xerox Life. These investments had net unrealized losses of approximately $290
million at December 31, 1994. These investments are primarily composed of
mortgage-backed securities which do not, per se, have contractual maturities.

  Contractual maturities of the gross finance receivables at December 31, 1994 
follow (in millions):


<TABLE> 
<CAPTION> 
1995      1996      1997      1998       1999     Thereafter
------------------------------------------------------------
<S>       <C>       <C>       <C>        <C>      <C> 
$64        $70       $42       $30        $30           $302
============================================================
</TABLE>
 

                                                                              65

<PAGE>
 
12.  INVESTMENTS AND INVESTMENT INCOME 

Effective January 1, 1994, the Company adopted SFAS No. 115 - "Accounting for 
Certain Investments in Debt and Equity Securities." The effect of this 
statement on the Company is to require fair value accounting for investments 
in debt securities, which the Company does not plan to hold to maturity. Any 
adjustments are charged or credited to common shareholders' equity. At 
adoption, there was no effect on common shareholders' equity. In 1993, the 
fixed maturity investments were accounted for on a lower of cost or market 
basis, whereby any aggregate excess of cost over fair value was directly 
charged to common shareholders' equity and any market value appreciation was 
only recognized to the extent it did not exceed aggregate cost.

  Equity securities were, and continue to be, valued at fair value, with 
unrealized gains and losses from the revaluation credited or charged to 
common shareholders' equity. Short-term investments are carried at cost, 
which approximates market.

The components of Insurance's investment portfolios at December 31, 1994 
follow:


<TABLE> 
<CAPTION> 
                                                                                                    Gross        Gross  
                                                                                  Amortized    Unrealized   Unrealized        Fair
(In millions)                                                                          Cost         Gains       Losses       Value
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>            <C>         <C>         <C> 
Fixed maturities
Bonds
    United States Government and government agencies and authorities                 $5,655           $ 3         $332      $5,326
    States, municipalities and political subdivisions                                 1,277             3           61       1,219
    Public utilities                                                                     20             -            3          17
    All other corporate bonds                                                           307             -           24         283
    Mortgage-backed securities                                                          389             -           20         369
----------------------------------------------------------------------------------------------------------------------------------
      Total fixed maturities                                                          7,648             6          440       7,214
----------------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
    Public utilities                                                                     24             -            2          22
    Banks, trusts and insurance companies                                                19             1            1          19
    Industrial, miscellaneous and all other                                             124            10            7         127
----------------------------------------------------------------------------------------------------------------------------------
      Total equity securities                                                           167            11           10         168
----------------------------------------------------------------------------------------------------------------------------------
Short-term investments                                                                1,002             -            -       1,002
----------------------------------------------------------------------------------------------------------------------------------
Investments available-for-sale                                                       $8,817           $17         $450      $8,384
==================================================================================================================================
</TABLE>
 
The components of Insurance's investment portfolios at December 31, 1993 
follow:


<TABLE> 
<S>                                                                                  <C>            <C>         <C>         <C> 
Fixed maturities
Bonds
    United States Government and government agencies and authorities                 $5,421           $18         $ 34      $5,405
    States, municipalities and political subdivisions                                   656            19           10         665
    All other corporate bonds                                                           291             4            2         293
    Mortgage-backed securities                                                          118             -            -         118
----------------------------------------------------------------------------------------------------------------------------------
      Total fixed maturities                                                          6,486            41           46       6,481
----------------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
    Public utilities                                                                    20              8            6          22
    Banks, trusts and insurance companies                                               16              2            1          17
    Industrial, miscellaneous and all other                                            103             15            4         114
----------------------------------------------------------------------------------------------------------------------------------
      Total equity securities                                                          139             25           11         153
----------------------------------------------------------------------------------------------------------------------------------
Short-term investments                                                               1,710              -            -       1,710
----------------------------------------------------------------------------------------------------------------------------------
Investments available-for-sale                                                      $8,335            $66         $ 57      $8,344
==================================================================================================================================
</TABLE>
 

66

<PAGE>
 
In general, these investments are limited by state insurance regulations for 
use within the Company's insurance operations, and therefore are not 
available to the Company for general corporate purposes. The Company is not 
exposed to any significant concentration of credit risk within the portfolio. 
At December 31, 1994, approximately 98 percent of the fixed maturity 
investments are investment grade securities.

  Securities carried at (in millions) $1,207, $1,275 and $1,279 at December 31, 
1994, 1993 and 1992, respectively, were deposited with governmental 
authorities or designated custodial banks as required by laws affecting 
insurers.

  The amortized cost and fair value of the fixed maturity investments at 
December 31, 1994, by contractual maturity, follow:


<TABLE> 
<CAPTION> 
                                         Amortized             Fair
(In millions)                                 Cost            Value
-------------------------------------------------------------------
<S>                                      <C>                 <C> 
Contractual maturity
Within one year                             $1,161           $1,143
After one year but within five               4,676            4,354
After five years but within ten                685              646
After ten years                                737              702
-------------------------------------------------------------------
Subtotal                                     7,259            6,845
Mortgage-backed securities                     389              369
-------------------------------------------------------------------
Total fixed maturities                      $7,648           $7,214
===================================================================
</TABLE>
 

Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties, and changing interest rates, tax considerations and other
factors may result in portfolio sales prior to maturity.

  The components of investment and other income for the three years ended 
December 31, 1994 follow:


<TABLE> 
<CAPTION> 
(In millions)                              1994    1993    1992
---------------------------------------------------------------
<S>                                        <C>     <C>     <C> 
Interest on fixed maturities               $370    $352    $491
Dividends on equity securities                5       4      10
Interest on short-term investments           48      26      38
---------------------------------------------------------------
Investment income                           423     382     539
Other                                        14      19      13
---------------------------------------------------------------
Investment and other income                $437    $401    $552
===============================================================
</TABLE>
 

The components of net pre-tax realized capital gains for the three years 
ended December 31, 1994 follow:


<TABLE> 
<CAPTION> 
(In millions)                             1994     1993    1992
---------------------------------------------------------------
<S>                                       <C>      <C>     <C> 
Fixed maturities:
  Gross gains                             $  7     $122    $536
  Gross losses                              (5)     (46)    (34)
Equity securities                            9       13      37
Real-estate                                  1       (1)    (23)
---------------------------------------------------------------
Net realized capital gains                $ 12     $ 88    $516
===============================================================
</TABLE>
 

The Company's financial statements include unrealized gains (losses), net of 
applicable income taxes, of investment securities as a separate component of 
common shareholders' equity; changes for the three years ended December 31, 
1994 follow:


<TABLE> 
<CAPTION> 
(In millions)                             1994     1993    1992
---------------------------------------------------------------
<S>                                       <C>      <C>     <C> 
Change in gross unrealized 
  gains (losses)                         $(442)    $  4    $(33)
Deferred income taxes (benefits)            (3)       4      (7)
---------------------------------------------------------------
Change in net unrealized gains 
  (losses) of investment securities      $(439)    $  -    $(26)
===============================================================
</TABLE>
 
See Note 17 on Page 79 for a discussion of the deferred tax associated with 
the 1994 unrealized losses.

                                                                              67

<PAGE>
 
13.  INSURANCE OPERATIONS

Information related to earned and unearned revenues of the Company's 
insurance operations for the three years ended December 31, 1994 follows:


<TABLE> 
<CAPTION> 
(In millions)                             1994      1993      1992
------------------------------------------------------------------
<S>                                     <C>       <C>       <C>  
Premiums Written
Direct                                  $2,179    $2,370    $2,395
Assumed                                    611       645       604
Ceded                                     (445)     (558)     (652)
------------------------------------------------------------------
Net premiums written                    $2,345    $2,457    $2,347
==================================================================

Premiums Earned
Direct                                  $2,156    $2,366    $2,465
Assumed                                    630       636       568
Ceded                                     (474)     (594)     (707)
------------------------------------------------------------------
Net premiums earned                     $2,312    $2,408    $2,326
==================================================================

Unearned Income
Unearned premiums                       $1,033    $1,024    $1,011
Unearned other                              33        53        62
------------------------------------------------------------------
Unearned income                         $1,066    $1,077    $1,073
==================================================================
</TABLE>
 

Premiums written represent new or renewal insurance business originated in each
respective year. Approximately 26 percent of net premiums written annually
represent insurance assumed from other insurance companies under various
reinsurance arrangements. Premiums earned represents that portion of premiums
written which are recognized as revenue in the respective reporting periods.
Unearned premiums represent the portion of premiums written that is applicable
to the unexpired terms of policies in force.

  Activity related to unpaid losses and loss expenses for the three years ended 
December 31, 1994 follows:


<TABLE> 
<CAPTION> 
(In millions)                             1994      1993      1992
------------------------------------------------------------------
<S>                                     <C>       <C>       <C>  
Unpaid Losses and Loss 
  Expenses
Gross unpaid losses and loss 
  expenses, January 1                   $9,684   $10,657   $10,481
Reinsurance recoverable                  2,935     3,788     4,102
------------------------------------------------------------------
Net unpaid losses and loss 
  expenses, January 1                    6,749     6,869     6,379
Incurred related to:
  Current year accident losses           1,748     1,795     1,838
  Prior years accident losses               11       (12)      892
  Other adjustments, net                    10        53        (5)
------------------------------------------------------------------
  Total incurred                         1,769     1,836     2,725
------------------------------------------------------------------
Paid related to:
  Current year accident losses             486       495       477
  Prior years accident losses            1,541     1,294     1,830
  Other adjustments, net                    36        23        11
------------------------------------------------------------------
  Total paid                             2,063     1,812     2,318
------------------------------------------------------------------
Other adjustments                          (37)     (144)       83
------------------------------------------------------------------
Net unpaid losses and loss 
  expenses, December 31                  6,418     6,749     6,869
Reinsurance recoverable                  2,444     2,935     3,788
------------------------------------------------------------------
Gross unpaid losses and loss 
  expenses, December 31                 $8,862    $9,684   $10,657
==================================================================
Ceded losses and loss expenses          $ (441)   $ (283)  $  (695)
==================================================================
</TABLE>
 

As more fully discussed in Note 10 on Page 63, in 1992, $880 million of 
incurred losses related to prior accident years pertained to balance sheet 
strengthening actions undertaken as part of the IOFS restructuring. 

  Estimation of reserves for asbestos-related, hazardous waste and other latent 
or long-tail related claims provides unique challenges to the insurance 
industry and the Company. The possibility that these claims would emerge was 
often not recognized or contemplated at the time the policies were written, 
and traditional actuarial reserving methodologies have not always been useful 
in accurately estimating ultimate losses. Asbestos-related claims were the 
first type of such exposures to cause significant losses to the insurance 
industry. Because case law for asbestos-related injuries is now reasonably 
developed and the number of open claims has been declining, the remaining 
exposure and related uncertainty to the Company are also decreasing. 
Hazardous waste claims have been the second major class of such claims to 
emerge and significantly impact the insurance industry. Hazardous waste 
claims 

68

<PAGE>
 
encompass costs for pollution clean up, bodily injury and property damage.
Significant uncertainties exist with respect to estimating the insurance
companies' exposure to hazardous waste claims. The uncertainty primarily results
from lack of historical data, long delays in reporting claims, difficulty in
identifying potential claimants and complex legal and coverage issues that have
been further complicated by inconsistent conclusions reached by the courts.
Other latent or long-tail exposures such as repetitive stress, lead paint and
breast implants are the latest type of such liability to emerge. These claim
types are also not suitable for traditional actuarial reserving techniques due
to significant uncertainties as to how legal issues will develop. As judicial
patterns emerge through the appellate process and remove uncertainties related
to asbestos bodily injury, asbestos-in-building, hazardous waste and other
latent or long-tail claims, additional liabilities and reinsurance recoverables
could arise.

  At December 31, 1994, total gross and net unpaid losses and loss expense 
reserves related to these claims included in the preceding table were $860 
million and $303 million, respectively. Discussion of the activity in the 
unpaid losses and loss expenses associated with these claims as well as their 
potential effect on the future liquidity and financial position of the 
Insurance operating groups is more fully discussed in the Financial Review 
beginning on Page 53.

  A summary of information related to acquisition costs and other expenses of 
insurance underwriting operations for the three years ended December 31, 1994 
follows:


<TABLE> 
<CAPTION> 
(In millions)                                 1994     1993     1992
--------------------------------------------------------------------
<S>                                           <C>      <C>      <C> 
Insurance Acquisition Costs and 
  Other Insurance Operating 
    Expenses
Amortization of deferred policy
  acquisition costs                           $471     $527     $559
Other acquisition costs                        264      216      213
Other operating expenses                        42       42      185
--------------------------------------------------------------------
Insurance acquisition costs and 
 other insurance operating 
    expenses                                  $777     $785     $957
====================================================================
Deferred Policy Acquisition Costs             $197     $191     $182
====================================================================
</TABLE>
 

Reinsurance Ceded.  The Company reinsures, in the ordinary course of business,
certain risks with other insurance companies. These arrangements provide the
means for greater diversification of business and serve to limit the net loss
potential on unusually severe or frequent losses. Although the ceding of
insurance risk does not discharge the original insurer from its primary
liability to its policyholder, the reinsurance company that accepted the risk
assumes an obligation to the original insurer. A contingent liability exists,
however, with respect to reinsurance ceded to the extent that any reinsuring
company might not be able to meet the obligations assumed under reinsurance
agreements.

  In 1993, the Company adopted SFAS No. 113 -  "Accounting and Reporting for 
Reinsurance of Short-Duration and Long-Duration Contracts." This new standard 
eliminated the prior practice by insurance companies of reporting assets and 
liabilities relating to reinsured contracts net of the effects of 
reinsurance. The Company's consolidated balance sheets include all amounts on 
a gross basis with regard to ceded reinsurance. As permitted by SFAS No. 113, 
the Company will continue to record insurance premiums earned net of ceded 
premiums, and insurance losses and loss expenses net of reinsurance 
recoveries.

  The components of the Company's reinsurance recoverable and prepaid 
reinsurance premiums at December 31, 1994, 1993 and 1992 follow:


<TABLE> 
<CAPTION> 
(In millions)                                 1994     1993     1992
--------------------------------------------------------------------
<S>                                         <C>      <C>      <C> 
Reinsurance Recoverable
Reinsurance receivable on 
  paid losses                               $  674   $  905   $  475
Allowance for doubtful reinsurance 
  accounts on paid losses                       (2)      (5)     (30)
--------------------------------------------------------------------
Net reinsurance receivable on
  paid losses                                  672      900      445
Reinsurance recoverable on unpaid 
  losses and loss expenses                   2,444    2,935    3,788
--------------------------------------------------------------------
Total reinsurance recoverable               $3,116   $3,835   $4,233
====================================================================
Prepaid reinsurance premiums                $  163   $  187   $  223
====================================================================
</TABLE>
 

In addition, the Company has provided reserves for doubtful reinsurance on 
ceded unpaid losses, which is included in the unpaid losses and loss 
expenses, of (in millions) $228, $245 and $342 at December 31, 1994, 1993 and 
1992, respectively.

                                                                              69

<PAGE>
 
  The Company actively monitors and evaluates the financial condition of its 
reinsurers and prepares estimates of the uncollectible amounts due from 
troubled reinsurers. These estimates focus upon financial data and other 
available information such as ongoing rehabilitation and liquidation 
proceedings. In addition to the reinsurers' ability to pay claims, from time 
to time disputes arise over amounts and reinsurance coverage. The Company 
pursues its remedies in these cases and recognizes the impact of developments 
in these situations in its consolidated financial statements. The balance of 
reinsurance recoverable is considered to be valid and collectible. The 
Company also has a reinsurance security committee composed of senior officers 
who approve those reinsurers with whom the Company will do business. Based 
upon the review of financial condition and assessment of other available 
information, an allowance for doubtful reinsurance accounts is established.

  Talegen made significant use of reinsurance during the 1970s and early 1980s. 
Since that time, Talegen has generally increased the portion of business they 
retain while reducing the number of reinsurers used for their reinsurance 
contracts. Accordingly, in the aggregate, net reserves as a percent of gross 
reserves increased to 72 percent as of December 31, 1994, from 65 percent as 
of December 31, 1992, and the percent of ceded premiums written to gross 
premiums written decreased to 16 percent in 1994 from 21 percent in 1992. 
Additionally, as of December 31, 1994, Talegen had current and future 
reinsurance recoverables due from approximately 700 reinsurers on all paid 
and unpaid losses. However, in 1994, 70 percent of premiums ceded were placed 
with approximately 30 reinsurers. The reinsurance placed in the 1970s and 
early 1980s has reduced the current net unpaid losses and loss expenses 
related to hazardous waste and asbestos-related claims, since the majority of 
such open claims have been made against policies issued in those years.

Statutory Information.  Statutory information for the Company's insurance 
subsidiaries for the three years ended December 31, 1994 follows:


<TABLE> 
<CAPTION>  
(In millions)                                  1994      1993      1992
-----------------------------------------------------------------------
<S>                                          <C>       <C>       <C> 
Restricted net assets                        $3,064    $3,215    $2,634
=======================================================================
Statutory net income (loss)                  $  266    $  243    $ (477)
=======================================================================
Statutory policyholders' surplus             $2,310    $2,232    $1,622
=======================================================================
</TABLE>
 

The Company's insurance subsidiaries are restricted by insurance laws as to the
amount of dividends they may pay without the approval of regulatory authorities.
There are additional restrictions regarding the amount of loans and advances
that Talegen's subsidiaries may make to Talegen. These restrictions indirectly
limit the payment of dividends and the making of loans and advances by Talegen,
through XFSI, to the Company.

  Generally accepted accounting principles differ in certain respects from the 
statutory accounting practices prescribed or permitted by insurance 
regulatory authorities for the Company's insurance subsidiaries. Prescribed 
statutory accounting practices include a variety of publications of the 
National Association of Insurance Commissioners, as well as state laws, 
regulations and general administrative rules. Permitted statutory accounting 
practices encompass all accounting practices not so prescribed. The effect on 
statutory policyholders' surplus of permitted practices is not significant.

  The principal differences between statutory policyholders' surplus and 
shareholders' equity, determined in accordance with generally accepted 
accounting principles, relate to deferred federal income taxes, certain 
reinsurance recoverables and provisions, goodwill and deferred policy 
acquisition costs that are not considered assets for statutory purposes.

Resolution Credit Services Corporation (RCSC).  In 1985, the Company 
discontinued the operations of RCSC (formerly Industrial Indemnity Financial 
Corporation), a unit of Talegen that was in the financial guarantee and 
contract surety businesses. The phase-out period will be lengthy due to the 
long-term nature of the outstanding financial guarantees. At December 31, 
1994, there were contingent liabilities of approximately $381 million, which 
represents the aggregate par value, net of reinsurance of $216 million, of 
the guarantee contracts in force, but before consideration of approximately 
$247 million of collateral that was pledged under the contracts; at December 
31, 1993, these amounts were (in millions) $598 and $455. Approximately 75 
percent of these contingent liabilities expire prior to the year 2000. 
Reserves for anticipated future losses, loss expenses and other costs of 
disposition are approximately $52 million at December 31, 1994.

70

<PAGE>
 
CONSOLIDATED DISCLOSURES

14.  INDUSTRY SEGMENT DATA

The consolidated industry segment data portrays the operating results and 
assets for the Company's two industry segments. 

  Document Processing consists of the worldwide development, manufacturing, 
marketing, financing and servicing of document processing products and 
services. This segment also includes Xerox corporate headquarters. The 
Document Processing business is unitary from both a company and a customer 
perspective in that the marketing, financing and servicing of the Company's 
products represent an integrated document services solution. The Company's 
Insurance business includes Talegen, Ridge Re and Insurance headquarters. 
Income from continuing operations for the Insurance segment includes assigned 
interest expense.

  General expenses include all costs not directly associated with segment 
revenues. For Document Processing, general expenses primarily include 
corporate overhead, foreign currency exchange losses and interest expense not 
associated with the financing of the Company's products. For Insurance, 
general expenses primarily represent interest and Insurance headquarters 
costs. Interest expense is assigned based on the amount of underlying debt 
incurred in connection with the acquisition and financing of the Insurance 
entities. 

  A reconciliation of assets to the consolidated balance sheet follows:


<TABLE> 
<CAPTION>  
(In millions)                                  1994      1993      1992
-----------------------------------------------------------------------
<S>                                         <C>       <C>       <C> 
Assets of continuing operations             $33,893   $33,576   $32,619
Assets of discontinued operations             4,692     5,174     5,652
-----------------------------------------------------------------------
  Total consolidated assets                 $38,585   $38,750   $38,271
=======================================================================
</TABLE>
 

Due to allocation methodologies and other operating conditions, the industry
segment data may not be representative of operating profits or assets if the
segments were independent companies. Data for segment capital expenditures,
depreciation and amortization are included in the consolidated statements of
cash flows on Pages 40 and 41.


<TABLE> 
<CAPTION> 
                                                                                                                    Consolidated
                                                                                    Document                          Continuing
(In millions)                                                                     Processing         Insurance        Operations
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                <C>            <C> 
1994  Revenues from unaffiliated customers                                           $15,088           $ 2,749          $17,837
                                                                                     =======           =======          =======
      Operating profit                                                               $ 1,811           $   153          $ 1,964
      General expenses, net                                                              297               197              494
                                                                                     -------           -------          -------
      Income (loss) before income taxes, equity income and minorities' interests       1,514               (44)           1,470
      Income taxes (benefits)                                                            595               (44)             551
      Equity in net income of unconsolidated affiliates                                   88                 -               88
      Minorities' interests in earnings of subsidiaries                                  213                 -              213
                                                                                     -------           -------          -------
      Income from continuing operations                                              $   794           $     -          $   794
                                                                                     =======           =======          =======
      Assets                                                                         $19,374           $14,519          $33,893
                                                                                     =======           =======          =======

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

1993  Revenues from unaffiliated customers                                           $14,229           $ 2,809          $17,038
                                                                                     =======           =======          =======
      Operating profit                                                               $    23           $   179          $   202
      General expenses, net                                                              303               213              516
                                                                                     -------           -------          -------
      Income (loss) before income taxes, equity income and minorities' interests        (280)              (34)            (314)
      Income taxes (benefits)                                                            (78)              (38)            (116)
      Equity in net income of unconsolidated affiliates                                   87                 -               87
      Minorities' interests in earnings of subsidiaries                                   78                 -               78
                                                                                     -------           -------          -------
      Income (loss) from continuing operations                                       $  (193)          $     4          $  (189)
                                                                                     =======           =======          =======
      Assets                                                                         $18,158           $15,418          $33,576
                                                                                     =======           =======          =======

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

1992  Revenues from unaffiliated customers                                           $14,298           $ 2,878          $17,176
                                                                                     =======           =======          =======
      Operating profit (loss)                                                        $ 1,393           $  (797)         $   596
      General expenses, net                                                              270               215              485
                                                                                     -------           -------          -------
      Income (loss) before income taxes, equity income and minorities' interests       1,123            (1,012)             111
      Income taxes (benefits)                                                            493              (233)             260
      Equity in net income of unconsolidated affiliates                                   81                 -               81
      Minorities' interests in earnings of subsidiaries                                  149                 -              149
                                                                                     -------           -------          -------
      Income (loss) from continuing operations                                       $   562           $  (779)         $  (217)
                                                                                     =======           =======          =======
      Assets                                                                         $17,140           $15,479          $32,619
                                                                                     =======           =======          =======
===============================================================================================================================
</TABLE>
 
                                                                              71

<PAGE>
 
15.  DEBT


Short-Term Debt.  Short-term borrowings data of the Company at December 31,
1994 and 1993 follow:


<TABLE> 
<CAPTION> 
                             Weighted average
                               interest rates
(In millions)            at December 31, 1994         1994      1993
--------------------------------------------------------------------
<S>                      <C>                        <C>       <C>  
Bank notes payable                      6.29%       $  235    $  399
Foreign commercial paper                5.90         1,024       708
--------------------------------------------------------------------
Total short-term debt                                1,259     1,107
Current maturities of
  long-term debt                                     1,900     1,591
--------------------------------------------------------------------
Total                                               $3,159    $2,698
====================================================================
</TABLE>
 

Bank notes payable generally represent foreign currency denominated borrowings
of non-U.S. subsidiaries. 

Long-Term Debt. A summary of long-term debt, by final maturity date, at December
31, 1994 and 1993 follows:


<TABLE> 
<CAPTION> 
                                         Weighted average
                                        interest rates at
(In millions)                           December 31, 1994     1994     1993
---------------------------------------------------------------------------
<S>                                     <C>                 <C>      <C> 
U.S. Operations:                     
Xerox Corporation (parent company)   
Guaranteed ESOP notes                
  due 1999-2004                                     7.69%   $  596   $  641
Notes due 1994                                         -         -      200
Notes due 1995                                      8.75       150      150
Notes due 1996                                      8.38       100      100
Notes due 1997                                      9.63       200      200
Notes due 1999                                      6.93       738      250
Notes due 2000                                      9.75       200      200
Notes due 2001                                      7.39        62        -
Notes due 2002                                      8.13       200      200
Notes due 2004                                      7.17       225      200
Notes due 2006                                      8.09        45        -
Debentures due 1995                                 9.25       200      200
Debentures due 2000                                 9.63       100      100
Other debt due 1994-2014                            8.51        97      201
Capital lease obligations                           5.48         7        7
---------------------------------------------------------------------------
  Subtotal                                                   2,920    2,649
---------------------------------------------------------------------------
Xerox Financial Services, Inc. (XFSI)
Xerox Credit Corporation
Notes due 1994                                         -         -      439
Notes due 1995                                      6.83       400      400
Notes due 1996                                      6.73       670      250
Notes due 1997                                      6.08       347       50
Notes due 1999                                     10.00       150      400
Floating rate notes due 2048                        5.86        61       61
Other debt due 1996-1997                           10.00        19       18
---------------------------------------------------------------------------
  Subtotal                                                   1,647    1,618
Other XFSI debt
XFSI Notes due 1994-1996                            8.25       310      470
Talegen Notes due 1995-2010                         6.94       425        -
---------------------------------------------------------------------------
  Subtotal                                                   2,382    2,088
---------------------------------------------------------------------------
Total U.S. operations                                       $5,302   $4,737
---------------------------------------------------------------------------
</TABLE>
 


<TABLE> 
<CAPTION> 
                                         Weighted average
                                        interest rates at
(In millions)                           December 31, 1994     1994     1993
---------------------------------------------------------------------------
<S>                                     <C>                 <C>      <C> 
International Operations:
International marketing subsidiaries
Various obligations, payable in:
Pounds sterling due 1994-1999                       7.02%   $  314   $  293
U.S. dollars due 1994-1999                          7.73       220       32
Other currencies due 1994-1999                      6.78        60      147
Capital lease obligations                           8.97        14       25
---------------------------------------------------------------------------
  Subtotal                                                     608      497
---------------------------------------------------------------------------
International finance subsidiaries
Various obligations, payable in:
Canadian dollars due 1995-2007                     10.71       265      273
Dutch guilders due 1994-1999                        8.00       187      133
French francs due 1994-1998                         8.00        76       82
German marks due 1995-1999                          7.00       297      260
Pounds sterling due 1994-1997                       8.00        39       11
Swiss francs due 1997-1998                          6.00        96       79
Italian lira due 1995                               9.00        81        -
Other currencies due 1994-1998                      8.00       254      297
---------------------------------------------------------------------------
  Subtotal                                                   1,295    1,135
---------------------------------------------------------------------------
Total international operations                               1,903    1,632
---------------------------------------------------------------------------
Other borrowings deemed 
  long-term                                                  2,475    2,608
---------------------------------------------------------------------------
  Subtotal                                                   9,680    8,977
Less current maturities                                      1,900    1,591
---------------------------------------------------------------------------
Total long-term debt                                        $7,780   $7,386
===========================================================================
</TABLE>
 

Consolidated Long-Term Debt Maturities. Payments due on long-term debt for the
next five years are (in millions):


<TABLE> 
<CAPTION> 
  1995     1996     1997    1998    1999   Thereafter
-----------------------------------------------------
<S>      <C>      <C>       <C>   <C>      <C> 
$1,900   $1,447   $1,048    $317  $1,085       $1,408
=====================================================
</TABLE>
 

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

72

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

Lines of Credit.  The Company's domestic operations have three revolving 
credit agreements totaling $5.0 billion with groups of banks, of which $1.3 
billion expires in December 1995 and the remainder in 1999. These agreements 
are unused and are available to back the Company's domestic commercial paper 
borrowings, which amounted to $2.4 billion and $2.3 billion at December 31, 
1994 and 1993, respectively. In addition, the Company's foreign subsidiaries 
had unused committed long-term lines of credit aggregating $2.0 billion in 
various currencies at prevailing interest rates.

Matched Funding of Finance Receivables and Indebtedness. The Company employs a
matched funding policy for customer financing assets and related liabilities.
Under this policy, the interest and currency characteristics of the indebtedness
are matched to the interest and currency characteristics of the finance
receivables. At December 31, 1994, these operations had approximately $10.2
billion of net finance receivables, which will service approximately $8.3
billion of assigned short- and long-term debt, including $0.3 billion of debt
assigned to discontinued third-party financing businesses.

Interest.  Including amounts relating to debt assigned to discontinued 
operations, interest paid by the Company on its short- and long-term debt 
amounted to (in millions) $757, $860 and $945, respectively, for each of the 
three years ended December 31, 1994.

Total Short- and Long-Term Debt.  The Company's short- and long-term debt at 
December 31, 1994, 1993 and 1992 is reflected in the consolidated balance 
sheets as follows:


<TABLE> 
<CAPTION> 
(In millions)                                  1994        1993       1992
--------------------------------------------------------------------------
<S>                                         <C>         <C>        <C> 
Short-term debt and current portion
    of long-term debt                       $ 3,159     $ 2,698    $ 2,533
Long-term debt                                5,494       5,157      4,950
Notes payable                                   425           -          -
Discontinued operations liabilities -
    policyholders' deposits and other           281         474      1,058
Other long-term debt and obligations          1,580       1,755      2,097
--------------------------------------------------------------------------
    Total debt                              $10,939     $10,084    $10,638
==========================================================================
</TABLE>
 

A summary of changes in consolidated indebtedness for the three years ended 
December 31, 1994 follows:


<TABLE> 
<CAPTION> 
(In millions)                                  1994        1993       1992
--------------------------------------------------------------------------
<S>                                         <C>         <C>        <C> 
Increase (decrease) in short-term 
    debt, net                               $  (146)    $  (451)   $   154
Proceeds from long-term debt                  2,483       1,866      2,184
Principal payments on 
    long-term debt                           (1,555)     (1,784)    (1,572)
--------------------------------------------------------------------------
    Total                                   $   782     $  (369)   $   766
==========================================================================
</TABLE>
 

                                                                              73

<PAGE>
 
16.  EMPLOYEE BENEFIT PLANS

Retirement Income Guarantee Plan (RIGP).  Approximately 48,000 salaried and 
union employees participate in the Company's RIGP plans. The RIGP plans are 
defined benefit plans, which provide employees with the greater of (i) the 
benefit calculated under a highest average pay and years of service formula, 
(ii) the benefit calculated under a formula that provides for the 
accumulation of salary and interest credits during an employee's work life, 
or (iii) the individual account balance from the Company's prior defined 
contribution plan (Transitional Retirement Accounts or TRA). 

  At December 31, 1994, these domestic plans accounted for approximately 63 
percent of the Company's total pension assets and were invested primarily as 
follows: domestic and international equity securities - 64 percent; 
fixed-income investments - 32 percent; and real estate - 4 percent. No plan 
assets are invested in the stock of the Company.

  The RIGP plans are in compliance with the minimum funding standards of the 
Employee Retirement Income Security Act of 1974 (ERISA). 

  The transition asset and prior service cost are amortized over 15 years. 
Pension costs are determined using assumptions as of the beginning of the 
year while the funded status is determined using assumptions as of the end of 
the year. The assumptions used in the accounting for the U.S. defined benefit 
plans were as follows:


<TABLE> 
<CAPTION> 
                                           1994       1993     1992
-------------------------------------------------------------------
<S>                                       <C>        <C>      <C> 
Assumed discount rates                    8.75%      7.75%    8.50%
Assumed rates for compensation 
    increases                             5.75%      5.25%    6.00%
Expected return on plan assets            9.50%      9.50%    9.50%
===================================================================
</TABLE>
 

The Company's discount rate considers, among other items, the aggregate effects
of a relatively young work force and, because pension benefits are settled at
retirement, the absence of retirees receiving pension benefits from plan assets.
Accordingly, the duration of the Company's pension obligation tends to be
relatively longer in comparison to other companies.

Other Plans.  Several U.S. subsidiaries, including Talegen, have separate 
tax-qualified pension plans that are funded in accordance with ERISA. The 
Company also maintains various supplemental executive retirement plans 
(SERPs) that are not tax-qualified and are unfunded.

  The Company sponsors numerous pension plans for its international operating 
units in Europe, Canada and Latin America, which generally provide pay- and 
service-related benefits. Plan benefits are provided through a combination of 
funded trusteed arrangements or through book reserves. Rank Xerox' pension 
plan in the United Kingdom is the largest international plan and accounts for 
approximately 23 percent of the Company's total pension assets at December 
31, 1994. It is primarily invested in marketable equity securities.

A reconciliation of the funded status of the Company's retirement plans to 
the amounts accrued in the Company's consolidated balance sheets at December 
31, 1994 and 1993 follows:


<TABLE> 
<CAPTION> 
                                                                   1994                                     1993
                                                      ----------------------------------      -----------------------------------
                                                       Over-   Under-     Non-                 Over-    Under-     Non-
(In millions)                                         funded   funded   funded     Total      funded    funded   funded     Total
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>      <C>      <C>       <C>         <C>       <C>      <C>       <C> 
Accumulated benefit obligation                        $4,545     $103    $ 210    $4,858      $4,541      $103   $ 181     $4,825
Effect of projected compensation increases               396       28       40       464         358        33      59        450
---------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (PBO)                     4,941      131      250     5,322       4,899       136     240      5,275
Plan assets at fair value                              5,241       90        -     5,331       5,226        85       -      5,311
---------------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over PBO                 300      (41)    (250)        9         327       (51)   (240)        36
Items not yet reflected in the financial statements:
    Unamortized transition obligations (assets)         (172)      28       14      (130)       (184)       26      16       (142)
    Unrecognized prior service cost                       54        -      (12)       42          67         -       2         69
    Unrecognized net (gain) loss                          86      (25)      18        79           1       (12)     23         12
---------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost recognized
    in the consolidated balance sheets at
 
   December 31                                       $  268     $(38)   $(230)   $    -      $  211      $(37)  $(199)    $  (25)
=================================================================================================================================
</TABLE>
 

74

<PAGE>
 
Financial Information.  The Company's disclosures about the funded status and 
components of pension cost are in accordance with U.S. accounting principles. 
Such principles recognize the long-term nature of pension plan obligations 
and the need to make assumptions about events many years into the future. In 
any year there may be significant differences between a plan's actual 
experience and its actuarially assumed experience. Such differences are 
deferred and do not generally affect current net pension cost. The objective 
of deferring such differences is to allow actuarial gains and losses an 
opportunity to offset over time. These deferrals are included in the captions 
unrecognized net loss and net amortization and deferrals in the accompanying 
tables. Due to variations in investment results, the effect of revising 
actuarial assumptions and actual plan experience which differs from assumed 
experience, certain of the Company's plans may be classified as overfunded in 
one year and underfunded in another year. Under ERISA and other laws, the 
excess assets of overfunded plans are not available to fund deficits in other 
plans.

  The non-funded plans are the SERPs and the Rank Xerox pension plans in 
Germany and Austria. For tax reasons, these plans are most efficiently and 
customarily funded on a pay-as-you-go basis.

  The components of pension cost for the three years ended December 31, 1994 
follow:


<TABLE> 
<CAPTION> 
(In millions)                                  1994    1993    1992
-------------------------------------------------------------------
<S>                                           <C>     <C>     <C> 
Defined benefit plans
    Service cost                              $ 150   $ 153   $ 156
------------------------------------------------------------------- 
    Interest cost - change in PBO due to:
        Passage of time                         177     165     149
        Net investment income (loss)
         allocated to TRA accounts              (45)    538     245
------------------------------------------------------------------- 
        Subtotal                                132     703     394
------------------------------------------------------------------- 
    Net investment (income) loss on: 
        TRA assets                               45    (538)   (245)
        Other plan assets                      (101)   (420)    (70)
------------------------------------------------------------------- 
        Subtotal                                (56)   (958)   (315)
------------------------------------------------------------------- 
    Net amortization and deferrals             (144)    209    (143)
------------------------------------------------------------------- 
    Settlement and curtailment gains            (12)     (8)     (4)
------------------------------------------------------------------- 
Defined benefit plans
    - net pension cost                           70      99      88
Defined contribution plan
    - pension cost                               16      22      21
------------------------------------------------------------------- 
Total pension cost                            $  86   $ 121   $ 109
===================================================================
</TABLE>
 

Pension cost in 1994 was lower than in prior years because of the reduction 
of the Document Processing work force in connection with the restructuring 
actions announced in December 1993. Plan assets consist of both defined 
benefit plan assets and assets legally allocated to the TRA accounts. The 
combined investment results of the assets are shown above in the net 
investment income caption. To the extent investment results relate to TRA, 
such results are credited to these accounts as a component of interest cost. 
The TRA account assets were $3.0 billion and $3.2 billion at December 31, 
1994 and 1993, respectively. Because a substantial portion of plan assets are 
TRA-related and therefore are equal to TRA-related liabilities, the Company's 
pension plans' funding surplus tends to be less than that of comparable 
companies.

Other Postretirement Benefits.  The primary plan for U.S. Document Processing 
salaried employees retiring on or after January 1, 1995 provides retirees an 
annual allowance that can be used to purchase medical and other benefits. The 
allowance available to each eligible employee is partially service related 
and, for financial accounting purposes, is projected to increase at an annual 
rate of 7.5 percent until it reaches the plan's annual coverage of 
approximately 2.5 times the 1992 level, the inception year of this plan.

  The Company's Document Processing operations also have other postretirement 
benefit plans that cover employees retiring prior to January 1, 1995, certain 
grandfathered employees and certain union employees. These other plans are 
generally indemnity arrangements that provide varying levels of benefit 
coverage. The medical inflation assumption for these plans is 10.5 percent in 
1994 and declines to 6.75 percent in 2002 and thereafter. A one percentage 
point increase in the medical inflation assumptions would increase the 
service and interest cost for these plans by $5 million and the accumulated 
postretirement benefit obligation by $58 million.

                                                                              75

<PAGE>
 
  The discount rate used to determine the funded status was 8.75 percent at 
December 31, 1994, 7.5 percent at December 31, 1993, and 8.5 percent at 
December 31, 1992.

  A reconciliation of the financial status of the plans as of December 31, 1994 
follows:


<TABLE> 
<CAPTION> 
(In millions)                                 1994     1993      1992
---------------------------------------------------------------------
<S>                                         <C>      <C>       <C> 
Accumulated Postretirement 
    Benefit Obligation:
    Retirees                                $  490   $  507    $  502
    Fully eligible employees                   209      256       266
    Other employees                            252      350       339
---------------------------------------------------------------------
    Total                                      951    1,113     1,107
Unrecognized net gain (loss)                   104      (48)      (70)
Unrecognized prior service cost                 61       46         -
---------------------------------------------------------------------
Accrued cost recognized in the 
    consolidated balance sheets             $1,116   $1,111    $1,037
=====================================================================
Document Processing                         $1,006   $  997    $  927
=====================================================================
Insurance                                   $  110   $  114    $  110
=====================================================================
</TABLE>
 

The components of postretirement benefit cost for the three years ended 
December 31, 1994 follow:


<TABLE> 
<CAPTION> 
(In millions)                                 1994     1993      1992
---------------------------------------------------------------------
<S>                                         <C>      <C>       <C> 
Service cost                                $   27   $   33    $   28
Interest cost                                   69       81        74
Net amortization                                (4)      (2)        -
Settlement gain                                (25)       -         -
---------------------------------------------------------------------
Total                                       $   67   $  112    $  102
=====================================================================
</TABLE>
 

These plans are most efficiently and customarily funded on a pay-as-you-go 
basis.

Employee Stock Ownership Plan (ESOP) Benefits.  In 1989, the Company 
established an ESOP and sold to it ten million shares of Series B Convertible 
Preferred Stock, (Convertible Preferred) of the Company for a purchase price 
of $785 million. The Convertible Preferred has a $1 par value, a guaranteed 
minimum value of $78.25 per share and accrues annual dividends of $6.25 per 
share. The ESOP borrowed the purchase price from a group of lenders. Because 
the ESOP borrowings are guaranteed by the Company, they are included in debt 
on the Company's consolidated balance sheets. A corresponding amount 
classified as Deferred ESOP Benefits represents the Company's commitment to 
future compensation expense related to the ESOP benefits.

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

  Information relating to the ESOP and the Company for the three years ended 
December 31, 1994 follows:


<TABLE> 
<CAPTION> 
(In millions)                                 1994     1993      1992
---------------------------------------------------------------------
<S>                                         <C>      <C>       <C> 
Interest on ESOP borrowings                 $   49   $   52    $   55
=====================================================================
Dividends declared on Convertible
    Preferred Stock                         $   61   $   62    $   62
=====================================================================
Cash contribution to the ESOP               $   32   $   30    $   32
=====================================================================
Compensation expense                        $   32   $   31    $   33
=====================================================================
</TABLE>
 

ESOP costs are recognized by the Company based on the amount committed to be 
contributed to the ESOP plus related trustee, finance and other charges.

76

<PAGE>
 
17.  INCOME TAXES

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


Income before income taxes from continuing operations for the three years 
ended December 31, 1994 consists of the following:


<TABLE> 
<CAPTION> 
                                                  Consolidated               Document Processing                Insurance
                                          ---------------------------    --------------------------       ------------------------
(In millions)                               1994      1993      1992       1994      1993      1992       1994      1993      1992
----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>       <C>       <C>        <C>      <C>          <C>       <C>    <C> 
Domestic income (loss)                    $  669     $(533)    $(405)    $  713     $(499)   $  607       $(44)     $(34)  $(1,012)
Foreign income                               801       219       516        801       219       516          -         -         -
----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes         $1,470     $(314)    $ 111     $1,514     $(280)   $1,123       $(44)     $(34)  $(1,012)
==================================================================================================================================
</TABLE>
 

Provisions for income taxes from continuing operations for the three years 
ended December 31, 1994 consist of the following:


<TABLE> 
<CAPTION> 
                                                  Consolidated               Document Processing                Insurance
                                          ---------------------------    --------------------------       ------------------------
(In millions)                               1994      1993      1992       1994      1993      1992       1994      1993      1992
----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>       <C>       <C>        <C>      <C>          <C>       <C>    <C> 
Federal income taxes
    Current                               $   90     $ 133     $  38     $  160     $ 182    $  175       $(70)     $(49)  $  (137)
    Deferred                                 141      (313)       (9)       100      (337)       73         41        24       (82)
Foreign income taxes
    Current                                   88        87        99         88        87        99          -         -         -
    Deferred                                 182        (3)       84        182        (3)       84          -         -         -
State income taxes
    Current                                   31        29        34         46        42        48        (15)      (13)      (14)
    Deferred                                  19       (49)       14         19       (49)       14          -         -         -
----------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits)                   $  551     $(116)   $  260     $  595     $ (78)   $  493       $(44)     $(38)  $  (233)
==================================================================================================================================
</TABLE>
 

Deferred provisions for income tax expense (benefit) from continuing 
operations for the three years ended December 31, 1994 result from the 
following items:


<TABLE> 
<CAPTION> 
                                                  Consolidated               Document Processing                Insurance
                                          ---------------------------    --------------------------       ------------------------
(In millions)                               1994      1993      1992       1994      1993      1992       1994      1993      1992
----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>       <C>       <C>        <C>      <C>          <C>       <C>    <C> 
Installment sales and leases              $  118     $  18     $  59     $  118     $  18    $   59       $  -      $  -   $     -
Depreciation                                   9        73        38          9        73        38          -         -         -
Discount on unpaid losses                     27         4       (38)         -         -         -         27         4       (38)
Restructuring, litigation settlements 
    and reorganization reserves              211      (515)       34        211      (515)       34          -         -         -
Effect of tax rate changes on 
    deferred tax assets and liabilities        -       (58)        -          -       (40)        -          -       (18)        -
Postretirement medical benefits               (2)      (23)      (26)        (4)      (25)      (23)         2         2        (3)
Tax credit carryforwards                     (56)       53       (53)       (56)        -         -          -        53       (53)
Unrecoverable reinsurance                     (9)       (4)       12          -         -         -         (9)       (4)       12
Pension                                       (9)        7         4         (9)        7         4          -         -         -
Other                                         53        80        59         32        93        59         21       (13)        -
----------------------------------------------------------------------------------------------------------------------------------
Total                                     $  342     $(365)    $  89     $  301     $(389)   $  171       $ 41      $ 24   $   (82)
==================================================================================================================================
</TABLE>
 

                                                                              77

<PAGE>
 
A reconciliation from the U.S. Federal statutory income tax rate to the
effective income tax rate for continuing operations for the three years ended
December 31, 1994 follows:


<TABLE> 
<CAPTION> 
                                                  Consolidated               Document Processing                Insurance
                                          ---------------------------    --------------------------       --------------------------

(In millions)                               1994      1993      1992       1994      1993      1992       1994      1993      1992
------------------------------------------------------------------------------------------------------------------------------------

<S>                                         <C>      <C>       <C>         <C>      <C>        <C>       <C>       <C>       <C> 
U.S. Federal statutory income tax rate      35.0%    (35.0)%    34.0%      35.0%    (35.0)%    34.0%     (35.0)%   (35.0)%   (34.0)%

Foreign earnings and dividends taxed 
    at different rates                       2.2      15.6      29.3        2.1      17.5       2.9          -         -        -
Amortization and write-down of intangibles    .2       2.3     151.3          -         -         -        8.0      21.4      14.2
Tax-exempt income                           (1.8)     (4.7)    (33.7)       (.7)     (3.8)      (.7)     (40.0)    (12.9)     (2.8)
Effect of tax rate changes on deferred 
    tax assets and liabilities                 -     (18.5)        -          -     (14.3)        -          -     (53.1)        -
State taxes                                  2.1      (4.1)     36.8        2.7      (1.6)      3.6      (22.6)    (25.2)      (.9)
Other                                        (.2)      7.5      16.5         .2       9.3       4.1      (11.0)     (7.0)       .5
------------------------------------------------------------------------------------------------------------------------------------

Effective income tax rate                   37.5%    (36.9)%   234.2%      39.3%    (27.9)%    43.9%    (100.6)%  (111.8)%   (23.0)%

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

</TABLE>
 

The Document Processing 1994 effective tax rate of 39.3 percent is 2 percentage
points higher than the 1993 Document Processing tax rate before considering the
effects of the 1993 restructuring charge and litigation settlements. This higher
1994 rate is primarily caused by the deferred tax rate benefits which only
occurred in 1993 and which is partially offset by the increased tax benefits in
1994 associated with the mix of operations and ESOP dividends.

  The 1994 consolidated effective tax rate of 37.5 percent is 2.6 percentage 
points higher than the 1993 consolidated effective tax rate before 
considering the 1993 restructuring charge and litigation settlements. This 
higher 1994 rate is primarily caused by the Document Processing and Insurance 
deferred tax rate benefits which only occurred in 1993 and which is partially 
offset by the increased Document Processing tax benefits in 1994 associated 
with the mix of operations, ESOP dividends and tax benefits associated with 
Insurance tax-exempt investment income.

  The 1993 Document Processing restructuring charge and the deferred tax rate 
benefits principally contributed to the 271.1 percentage point decrease in 
the consolidated effective tax rate for 1993.

  On a consolidated basis, including the effects of discontinued operations, 
the Company paid a total of (in millions) $163, $197 and $157 in income taxes 
to federal, foreign and state income-taxing authorities in 1994, 1993 and 
1992, respectively.

  Total income tax expense (benefit) for the three years ended December 31, 
1994 was allocated as follows:


<TABLE> 
<CAPTION> 
(In millions)                                1994        1993         1992
--------------------------------------------------------------------------
<S>                                          <C>        <C>          <C> 
Income from Document Processing 
    continuing operations                    $595       $ (78)       $ 493
Income from Insurance 
    continuing operations                     (44)        (38)        (233)
Discontinued operations                       (91)         43          (17)
Common shareholders' equity*                  (19)        (33)         (33)
--------------------------------------------------------------------------
Total                                        $441       $(106)       $ 210
==========================================================================
</TABLE>
 

*For dividends paid on shares held by the ESOP; cumulative translation
adjustments; and unrealized gains and losses on investment securities.

Deferred income taxes have not been provided on the undistributed earnings of 
foreign subsidiaries and other foreign investments carried at equity. The 
amount of such earnings included in consolidated retained earnings at 
December 31, 1994 was approximately $3.3 billion. These earnings have been 
substantially reinvested and the Company does not plan to initiate any action 
that would precipitate the payment of income taxes thereon. It is not 
practicable to estimate the amount of additional tax that might be payable on 
the foreign earnings.

78

<PAGE>
 
  The tax effects of temporary differences that give rise to significant 
portions of the deferred taxes at December 31, 1994 and 1993 follows:

<TABLE> 
<CAPTION> 
(In millions)                                        1994       1993
--------------------------------------------------------------------
<S>                                               <C>        <C> 
Tax effect of future tax deductions:
  Document Processing:
    Depreciation                                  $   469    $   532
    Postretirement medical benefits                   388        385
    Restructuring reserves                            342        556
    Other operating reserves                          290        258
    Deferred intercompany profit                      116         96
    Allowance for doubtful accounts                    83         79
    Deferred compensation                             134        142
    Tax credit carryforwards                           56          -
    Other                                             118        144
  Insurance:
    Tax basis discount on unpaid losses               483        510
    Unrealized investment losses                      152          4
    Unearned premiums                                  50         49
    Postretirement medical benefits                    34         35
    Unrecoverable reinsurance                          45         36
    Severance and leasehold provisions                 16         20
    Other                                             119         97
--------------------------------------------------------------------
Subtotal                                            2,895      2,943
Less: Valuation allowance                            (286)      (134)
--------------------------------------------------------------------
Total                                             $ 2,609    $ 2,809
====================================================================
Tax effect of future taxable income:
  Document Processing:
    Installment sales and leases                  $(1,262)   $(1,214)
    Leverage leases                                   (41)       (80)
    Deferred income                                  (155)       (97)
    Other                                            (117)      (126)
  Insurance:
    Deferred policy acquisition costs                 (78)       (76)
    Other                                             (67)       (51)
--------------------------------------------------------------------
Total                                             $(1,720)   $(1,644)
====================================================================
</TABLE>
 
The above Document Processing amounts are classified in the balance sheets in
accordance with the asset or liability to which they relate. Document Processing
current deferred tax assets at December 31, 1994, 1993 and 1992 amounted to (in
millions) $709, $711 and $477, respectively.

  The $286 million valuation allowance at December 31, 1994 applies to deferred 
tax assets that may expire unused before the Company can utilize them. The 
$152 million increase in the valuation allowance during 1994 relates to net 
unrealized losses on investment securities recorded in common shareholders' 
equity.

  After consideration of the valuation allowance, the Company concludes that it 
is more likely than not that the deferred tax assets will be realized in the 
ordinary course of operations based on scheduling of deferred tax liabilities 
and income from operating activities.

  At December 31, 1994, Document Processing has tax credit carryforwards for 
federal income tax purposes of $56 million which are available to offset 
future federal taxable income indefinitely.

18.  LITIGATION

Document Processing.  On March 10, 1994, a lawsuit was filed in the United 
States District Court for the District of Kansas by two independent service 
organizations (ISOs) in Kansas City and St. Louis and their parent company. 
On April 15, 1994, another case was filed in the United States District Court 
for the Northern District of California by 21 different ISOs from 12 states. 
Plaintiffs in these actions claim damages (to be trebled) to their individual 
businesses resulting from essentially the same alleged violations of law at 
issue in the antitrust class action in Texas, which was settled by the 
Company during 1994. In one of the cases damages are unspecified and in the 
other damages in excess of $10 million are sought. In addition, injunctive 
relief is sought in both actions. Claims for individual lost profits of ISOs 
who were not named parties were not included in the class action. The two 
actions have been consolidated for pretrial proceedings in the District of 
Kansas. The Company has since filed a motion for leave to assert numerous 
counterclaims against the plaintiffs alleging patent and copyright 
infringement. Discovery is in its early stages. The Company denies any 
wrongdoing and intends to vigorously defend these actions.

Insurance.  On September 15, 1992, International Surplus Lines Insurance 
Company, which has since been merged into International Insurance Company 
(International Insurance), a subsidiary of Talegen, filed a complaint in the 
United States District Court for the Southern District of Ohio, Eastern 
District, in Columbus, Ohio against certain underwriting syndicates at 
Lloyd's of London and other foreign reinsurance companies. The complaint 
seeks a declaratory judgment that the defendants are obligated to reimburse 
International Insurance under 

                                                                              79

<PAGE>
 
various reinsurance contracts for approximately $255 million in payments made or
to be made to Owens-Corning Fiberglas (OCF) for asbestos-related losses. In an
Opinion and Order dated September 27, 1994, International Insurance's motion for
summary judgment was granted. The court ruled that International Insurance's
payment of OCF's losses, based on the determination that the manufacture, sale
and distribution of products containing asbestos constituted a single
occurrence, was reasonable and therefore binding on International Insurance's
reinsurers. The defendants filed motions for reconsideration of the September 27
order. In order to avoid the expense of further litigation and possible appeals,
International Insurance has executed settlement agreements with most of the
defendants in the action. The recovery pursuant to the settlement agreements
approximates the recorded reinsurance recoverable balance after consideration
for amounts written-off for uncollectible reinsurance in prior years. Settlement
discussions with the remaining defendants are continuing and are expected to
result in additional executed settlement agreements with some or all defendants.
As of January 30, 1995, approximately $29.5 million is outstanding with these
remaining reinsurers. The litigation is currently stayed by agreement of the
parties pending the current discussions to settle the litigation in its
entirety.

  In another OCF matter, on December 13, 1993, a complaint was filed in the 
United States District Court for the District of New Jersey against The North 
River Insurance Company (North River), a subsidiary of Talegen, by certain 
foreign insurance companies and underwriting syndicates at Lloyd's of London 
seeking to recover certain sums paid, and to avoid certain sums to be paid, 
by them to North River under various reinsurance contracts. Such sums relate 
to approximately $106 million in defense expense costs North River paid under 
insurance policies it issued for asbestos bodily injury coverage to OCF; the 
payments resulted from a decision rendered in favor of OCF in a binding 
arbitration. The reinsurers allege that North River misrepresented and 
withheld certain facts surrounding the decision and breached certain duties 
to its reinsurers. A motion by North River to dismiss the complaint for lack 
of subject matter jurisdiction is pending. As part of the Talegen 
restructuring, International Insurance has assumed the rights and obligations 
with respect to these reinsurance contracts. International believes it is 
entitled to the full payment of these reinsurance recoverables and will 
vigorously defend the foregoing action and denies any wrongdoing.

  On June 20, 1991, an amended complaint was filed in an action brought by 
Monsanto Company pending in the 71st District Court of Harrison County, 
Texas, against Crum and Forster, Inc., which has since been renamed Talegen 
Holdings, Inc. and four of its insurance subsidiaries. The action was 
commenced in November 1989. The amended complaint alleged breach of the duty 
of good faith and fair dealing and violations of the Texas Insurance Code. 
Plaintiff sought approximately $16.4 million in actual damages plus interest 
and attorneys' fees, subject to trebling, and punitive damages of $300 
million. In early 1992, a verdict was rendered against Talegen and its 
subsidiaries by the jury. The Court of Appeals of the Sixth Appellate 
District of Texas affirmed the judgment. As of December 31, 1994, the 
judgment against Talegen and its subsidiaries amounted to approximately $91 
million, including accrued interest. On March 2, 1995, the parties entered 
into settlement agreements pursuant to which Talegen and its subsidiaries 
have made a cash payment to Monsanto in the amount of $34 million.

  Farm & Home Savings Association (Farm & Home) filed a lawsuit in the United
States District Court for the Western District of Missouri, Southwest Division
alleging that under an agreement previously entered into by certain Talegen
insurance companies (Insurance Companies) with Farm & Home (Indemnification
Agreement), the Insurance Companies are required to defend and indemnify Farm &
Home from actual and punitive damage claims being made against Farm & Home
relating to the Brio superfund site (Brio). The Indemnification Agreement had
been entered into in connection with the settlement of disputes between Farm &
Home and the Insurance Companies regarding policies issued to Farm & Home during
the time it was developing the Southbend subdivision in Friendswood, Texas
(Southbend), which is close to Brio. Under the Indemnification Agreement, the
Insurance Companies are required to indemnify Farm & Home only as to claims
asserted by current or former residents of Southbend itself, or persons whose
injuries are alleged to have been incurred as a direct consequence of exposure
to allegedly hazardous

80

<PAGE>
 
substances within Southbend emanating from the Brio site. Farm & Home alleges
that the Indemnification Agreement covers claims for injuries arising elsewhere
than Southbend. The Insurance Companies deny any liability to Farm & Home and
intend to continue to vigorously contest coverage under the Indemnification
Agreement for injuries not related to Southbend. Cross motions for summary
judgment in the action are pending.

  In a number of lawsuits pending against Farm & Home in the District Courts of 
Harris County, Texas, plaintiffs seek both actual and punitive damages 
allegedly relating to injuries arising out of the hazardous substances at 
Brio. The Insurance Companies have been defending these cases under a 
reservation of rights because it is unclear whether the claims fall under the 
coverage of either the policies or the Indemnification Agreement. In one of 
the pending cases, the court dismissed claims brought by plaintiffs who were 
unable to demonstrate a pertinent nexus to the Southbend subdivision.

19.  PREFERRED STOCK

The Company has 23.5 million authorized shares of cumulative preferred stock, $1
par value. Two series of preferred stock are currently outstanding and are
described below.

Redeemable Preferred Stock.  The Company's series of Ten-Year Preferred Stock 
has an annual dividend rate of $3.6875 and is subject to redemption by the 
Company through a sinking fund. The mandatory sinking fund for this series is 
designed to retire 20 percent of the issue in each of the five years 
beginning on April 1, 1994. Also, the Company has the non-cumulative option 
to increase the annual sinking fund payments by an amount up to 100 percent 
of the mandatory payment. During 1994, 1 million shares were redeemed at the 
sinking fund redemption price of $50 per share. A total of 1.5 million shares 
of this series, with a recorded value of $75 million, is outstanding. 
Dividends amounted to $7 million in 1994 and $9 million in 1993 and 1992.

  Shares issued under this series are non-voting, have cumulative dividends, a
sinking fund redemption price of $50 per share and a $50 per share liquidation
preference over the Company's common stock.

  The Company's former series of Twenty-Year Preferred Stock was redeemed in 
1994 for $184 million, including a premium of $11 million. Dividends amounted 
to $5 million in 1994 and $14 million in 1993 and 1992.

Convertible Preferred Stock.  As more fully described in Note 16 on Page 76, 
the Company sold, for $785 million, 10 million shares of its new Series B 
Convertible Preferred Stock (ESOP shares) in 1989 in connection with the 
establishment of its ESOP. At December 31, 1994, 9.7 million of these shares 
remain outstanding. As employees with vested ESOP shares leave the Company, 
these shares are redeemed by the Company. The Company has the option to 
settle such redemptions with either shares of common stock or cash.

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

  Under the terms of the plan, one preferred stock purchase right (Right) 
accompanies each share of outstanding common stock. Each Right entitles the 
holder to purchase from the Company one one-hundredth of a new series of 
preferred stock at an exercise price of $225.

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

  The Rights may be redeemed prior to becoming exercisable by action of the
Board of Directors at a redemption price of $.05 per right. The Rights expire in
April 1997.

  The Rights are non-voting and, until they become exercisable, have no dilutive
effect on the earnings per share or book value per share of the Company's common
stock.
                                                                              81

<PAGE>
 
20.  COMMON SHAREHOLDERS' EQUITY

The components of common shareholders' equity and the changes therein for the 
three years ended December 31, 1994 follow: 


<TABLE> 
<CAPTION> 
                                                                                           Net Unrealized
                                                  Common Stock     Additional              Gain (Loss) on                 
(Dollars in millions, except per-share data.     --------------       Paid-In    Retained      Investment   Translation  
Shares in thousands.)                            Shares  Amount       Capital    Earnings      Securities   Adjustments     Total
---------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>     <C>       <C>           <C>       <C>              <C>           <C> 
Balance at December 31, 1991                     92,846    $ 94        $  539      $4,605           $  32         $(130)  $ 5,140
Stock option and incentive plans                  1,885       2           111                                                 113
Xerox Canada Inc. exchangeable stock                266                                                                          
Convertible securities                               69
Net loss                                                                           (1,020)                                 (1,020)
Cash dividends declared
  Common stock ($3.00 per share)                                                     (288)                                   (288)
  Preferred stock (See Note 19 on Page 81)                                            (85)                                    (85)
Tax benefits on ESOP dividends                                                         70                                      70
Net unrealized loss on investment securities                                                          (26)                    (26)
Translation adjustments - net of minority
  shareholders' interests of $9                                                                                     (29)      (29)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992                     95,066      96           650       3,282               6          (159)    3,875
Issuance of common stock, net of issuance costs   8,050       8           571                                                 579
Stock option and incentive plans                    861       1            57                                                  58
Xerox Canada Inc. exchangeable stock                 65       1            34           3                                      38
Convertible securities                               80
Net loss                                                                             (126)                                   (126)
Cash dividends declared
  Common stock ($3.00 per share)                                                     (304)                                   (304)
  Preferred stock (See Note 19 on Page 81)                                            (85)                                    (85)
Tax benefits on ESOP dividends                                                         23                                      23
Translation adjustments - net of minority
  shareholders' interests of $(24)                                                                                  (86)      (86)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993                    104,122     106         1,312       2,793               6          (245)    3,972
Stock option and incentive plans                  1,056       1            94          (3)                                     92
Xerox Canada Inc. exchangeable stock                653                                                                          
Convertible securities                              162
Net income                                                                            794                                     794
Cash dividends declared
  Common stock ($3.00 per share)                                                     (322)                                   (322)
  Preferred stock (See Note 19 on Page 81)                                            (73)                                    (73)
Tax benefits on ESOP dividends                                                         19                                      19
Call premium on preferred stock 
  (See Note 19 on Page 81)                                                            (11)                                    (11)
Net unrealized loss on investment securities                                                         (439)                   (439)
Translation adjustments - net of minority
  shareholders' interests of $93                                                                                    145       145
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994                    105,993    $107        $1,406      $3,197           $(433)        $(100)   $4,177
=================================================================================================================================
</TABLE>
 

Common Stock.  The Company has 350 million authorized shares of common stock, $1
par value. At December 31, 1994 and 1993, 3.9 and 5.0 million shares,
respectively, were reserved for issuance of common stock under the Company's
incentive compensation plan. In addition, at December 31, 1994, 0.9 million
common shares were reserved for the conversion of $53 million of convertible
debt and 9.7 million common shares were reserved for conversion of ESOP-related
Convertible Preferred Stock.

In June 1993, the Company completed a public offering of 8.05 million shares 
of its common stock in the U.S. and abroad, at a price of $74.25 per share. 
The proceeds of the offering, after deducting underwriting commissions, were 
approximately $580 million or $72.10 per newly issued share, and were used to 
retire commercial paper.

Stock Option and Long-Term Incentive Plans.  The Company has a long-term 
incentive plan whereby eligible employees may be granted incentive stock 
options, nonqualified stock options, incentive stock rights, stock 
appreciation rights (SARs) and performance unit rights. Subject to vesting 
and other requirements, SARs and performance unit rights are typically paid 
in cash, and stock options and incentive stock rights are settled with newly 
issued shares of the 

82

<PAGE>
 
Company's common stock. Substantially all long-term incentive compensation plan
awards in recent years have been in the form of nonqualified stock options,
performance units and incentive stock rights. Eligible employees typically
receive equal amounts of options and performance units. Stock options normally
vest in two years and normally expire five years from the date of grant. Because
the exercise price of the options is equal to the market value of the Company's
common stock on the date of grant, option awards do not result in a charge to
expense. The value of each performance unit is typically based upon the Document
Processing level of return on assets during the year in which granted.
Performance units ratably vest in the three years after the year awarded. At
December 31, 1994 and 1993, 2.8 million shares were available for grant of
options or rights. The following table provides information relating to the
status of, and changes in, options granted during the current or prior years:

<TABLE> 
<CAPTION> 
                                          1994                 1993
                                    ------------------   ------------------
                                               Average              Average
                                      Stock     Option     Stock     Option
(Options in thousands)              Options      Price   Options      Price
---------------------------------------------------------------------------
<S>                                 <C>        <C>       <C>        <C> 
Outstanding at January 1              3,210        $75     3,116        $66
Granted                               1,168         98     1,087         82
Canceled                                (51)        87       (25)        81
Exercised                            (1,032)        72      (756)        55
Surrendered for SARs                    (53)        51      (212)        55
                                     ------                -----
Outstanding at December 31            3,242        $84     3,210        $75
                                     ======                =====
Exercisable at
    December 31, 1994                 1,319
===========================================
Becoming exercisable in 1995          1,486
===========================================
</TABLE>
 
Xerox Canada Inc. Exchangeable Class B Stock. In 1989 the shareholders of Xerox
Canada Inc. (XCI), a then 79 percent-owned subsidiary of the Company, approved a
restructuring plan which, among other provisions, amended the provisions of
XCI's Common Shares. The XCI Common Shares had previously been owned by public
shareholders and represented the 21 percent of XCI not owned by the Company. As
a result of the approved restructuring plan, in 1989 a majority of the XCI
public shareholders became owners of XCI's new Non-Voting Exchangeable Class B
Shares (Exchangeable Shares) with a right to exchange three Exchangeable Shares
for one share of the common stock of the Company. In 1993, the remaining XCI
public shareholder entered into the restructuring plan. As a result, the
Company's shareholders' equity was increased by $38 million. The Company has
reserved 0.6 million shares of the Company's common stock for purposes of this
exchange.

21.  FINANCIAL INSTRUMENTS

Derivative Financial Instruments.  Certain financial instruments with 
off-balance-sheet risk have been entered into by the Company to manage its 
interest rate and foreign currency exposures. These instruments are held 
solely for hedging purposes and include interest rate swap agreements, 
forward-foreign exchange contracts and foreign currency swap agreements. The 
Company does not enter into derivative instrument transactions for trading or 
other speculative purposes.

  The Company typically enters into simple, unleveraged derivative transactions 
which, by their nature, have low credit and market risk. The Company's 
policies on the use of derivative instruments prescribe an investment grade 
counterparty credit floor and at least quarterly monitoring of market risk on 
a counterparty-by-counterparty basis. Based upon its ongoing evaluation of 
the replacement cost of its derivatives transactions and counterparty 
creditworthiness, the Company considers the risk of credit default 
significantly affecting its financial position or results of operations to be 
remote.

  The Company utilizes numerous counterparties to ensure that there are no 
significant concentrations of credit risk with any individual counterparty or 
groups of counterparties.

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

  None of the Company's hedging activities involve exchange traded instruments.

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

  Virtually all customer financing assets earn fixed rates of interest. 
Accordingly, through the use of interest rate swaps in conjunction with the 
contractual 

                                                                              83

<PAGE>
 
maturity terms of outstanding debt, the Company "locks in" an interest spread by
arranging fixed-rate interest obligations with similar maturities as the
underlying assets. Additionally, customer financing assets are consistently
funded with liabilities denominated in the same currency. The Company refers to
the effect of these conservative practices as "match funding" its customer
financing assets.

  More specifically, pay fixed/receive variable interest rate swaps are often 
used in place of more expensive fixed rate debt for the purpose of match 
funding fixed rate, customer contracts. Pay variable/receive variable 
interest rate swaps ("basis swaps") are used to transform variable rate, 
medium-term debt into commercial paper or local currency LIBOR rate 
obligations. Occasionally, pay variable/receive fixed interest rate swaps are 
used to transform term fixed rate debt into variable rate obligations. The 
transactions performed within each of these three categories enable the 
Company to cost-effectively manage its interest rate exposures. During 1994, 
the average notional amount of an interest rate swap agreement was $20 
million.

  At December 31, 1994 and 1993, the total notional amounts of these 
transactions are summarized, based on contract maturity, as follows:


<TABLE> 
<CAPTION> 
(In millions)                                      1994     1993
----------------------------------------------------------------
<S>                                              <C>      <C> 
Commercial paper/bank borrowings                 $1,171   $1,627
Medium-term debt                                  2,193    2,294
Long-term debt                                    1,615    1,374
----------------------------------------------------------------
Total                                            $4,979   $5,295
================================================================
</TABLE>
 

For the three years ended December 31, 1994, no interest rate swap agreements
had been terminated prior to maturity.

The aggregate amounts of interest rate swaps by maturity date and type at 
December 31, 1994 and 1993 are as follows:


<TABLE> 
<CAPTION> 
(Dollars In millions)                                     1994               1995         1996-1998        1999-2006         Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                <C>             <C>              <C>             <C> 
1994      Pay fixed/receive variable                   $     -            $ 1,071           $ 1,802        $   925         $ 3,798
          Pay variable/receive variable                      -                100               325            274             699
          Pay variable/receive fixed                         -                  -                66            416             482
----------------------------------------------------------------------------------------------------------------------------------
                                                       $     -            $ 1,171           $ 2,193        $ 1,615         $ 4,979
----------------------------------------------------------------------------------------------------------------------------------
          Memo:
          Interest rate paid                                 -               6.41%             6.58%          7.61%           6.72%
          Interest rate received                             -               5.44%             5.69%          6.93%           6.02%
==================================================================================================================================
1993      Pay fixed/receive variable                   $ 1,402            $ 1,002           $ 1,085        $   758         $ 4,247
          Pay variable/receive variable                    225                100                50              -             375
          Pay variable/receive fixed                         -                  -                87            586             673
----------------------------------------------------------------------------------------------------------------------------------
                                                       $ 1,627            $ 1,102           $ 1,222        $ 1,344         $ 5,295
----------------------------------------------------------------------------------------------------------------------------------
          Memo:
          Interest rate paid                              6.80%              6.12%             6.59%          7.03%           6.65%
          Interest rate received                          4.10%              4.51%             5.22%          5.33%           4.75%
==================================================================================================================================
</TABLE>
 

Forward-Foreign Exchange Contracts. The Company utilizes forward-foreign
exchange contracts to hedge against the potentially adverse impacts of foreign
currency fluctuations on foreign currency denominated receivables and payables
and firm foreign currency commitments. Firm foreign currency commitments
generally represent committed purchase orders for foreign sourced inventory.
These contracts generally mature in six months or less. At December 31, 1994 and
1993, the Company had outstanding (in millions) $1,476 and $1,185, respectively,
of forward-foreign exchange contracts. Of the outstanding contracts at December
31, 1994, the largest single currency represented was the Japanese yen.
Contracts denominated in Japanese yen, French francs, Mexican pesos, Swiss
francs, U.S. dollars, Italian lira and Austrian schillings accounted for over 75
percent of the Company's forward-foreign exchange contracts. Gains and losses on
contracts that hedge foreign currency denominated receivables and payables are
reported currently in income and are included in Other, net in the consolidated
statements of income. Gains and losses on contracts that hedge firm commitments
are deferred and subsequently recognized as part of the cost of the underlying
transaction, such as inventory. At December 31, 1994, deferred gains and
deferred losses amounted to $5 million and $9 million, respectively.

  During 1994, the average notional amount of a forward-foreign exchange 
contract amounted to $5 million.

84

<PAGE>
 
Foreign Currency Swap Agreements.  The Company has in the past also entered 
into several foreign currency and related interest rate swap agreements, 
whereby the Company issues foreign currency denominated debt and swaps the 
proceeds with a counterparty. In return, the Company receives either U.S. 
dollars or a second foreign currency. This effectively denominates the debt 
of the Company in the currency received from the counterparty. Currency swaps 
are utilized as hedges of the underlying foreign currency borrowings, and 
exchange gains or losses are recognized currently in Other, net in the 
consolidated statements of income. At December 31, 1993, $216 million of 
foreign currency swap agreements was outstanding. No foreign currency swap 
agreements were outstanding at December 31, 1994.

Guarantees.  Although the Company has earnings support agreements with 
certain subsidiaries, the Company generally does not guarantee the debt of 
subsidiary companies. The primary exceptions relate to XFSI-related 
indebtedness to Talegen and Ridge Re which is more fully discussed in Note 10 
on Page 63 and the guarantee of $181 million of indebtedness of the Company's 
Latin American subsidiaries. The Company has guaranteed and effectively 
assumed the borrowings of its ESOP.

Fair Value of Financial Instruments.  The estimated fair values of the 
Company's financial instruments at December 31, 1994 and 1993 were as 
follows:


<TABLE> 
<CAPTION> 
                                         1994                 1993
                                  -----------------    -----------------
                                  Carrying     Fair    Carrying     Fair
(In millions)                       Amount    Value      Amount    Value
------------------------------------------------------------------------
<S>                               <C>        <C>       <C>        <C> 
Cash                                $   56   $   56      $   86   $   86
Accounts receivable, net             1,811    1,811       1,613    1,613
Investments 
    available-for-sale               8,384    8,384       8,344    8,344
Short-term debt                      1,259    1,259       1,107    1,107
Long-term debt                       9,680    9,872       8,977    9,390
Interest rate swap 
    agreements                           -      (10)          -      (63)
Forward-foreign exchange 
    contracts                            -       (7)          -       10
========================================================================
</TABLE>
 

The fair value amounts for cash, accounts receivables, net, short-term 
investments and short-term debt approximate carrying amounts due to the short 
maturities of these instruments. The fair value of longer-term investments is
based on closing bid prices for exchange traded securities or on bid quotations
received from securities dealers.

  The fair value of long-term debt was estimated based on quoted market prices 
for these or similar issues or on the current rates offered to the Company 
for debt of the same remaining maturities. The difference between the fair 
value and the carrying value represents the theoretical net premium the 
Company would have to pay to retire all debt at such date. The Company has no 
plans to retire significant portions of its long-term debt prior to scheduled 
maturity. Under SFAS No. 107, the Company is not required to determine the 
fair value of its finance receivables, the match funding of which is the 
source of much of the Company's interest rate swap activity.

  The fair values for interest rate swap agreements and forward-foreign 
exchange contracts were based on quotes from brokers, and represent amounts 
the Company would receive (pay) to terminate/replace these contracts. The 
Company has no present plans to terminate/replace significant portions of 
these contracts.

22.  SUBSEQUENT EVENT

On February 28, 1995, the Company paid The Rank Organisation Plc (RO) 
(Pounds)620 million, or approximately $970 million, for a 40 percent interest in
RO's financial interest in the Rank Xerox Companies. The transaction increased
the Company's financial interest in the Rank Xerox Companies to approximately 80
percent from 67 percent. The transaction will result in goodwill of
approximately $570 million and a decline in minorities' interests in equity of
subsidiaries of approximately $400 million.

                                                                              85

<PAGE>
 

<TABLE> 
<CAPTION> 

Quarterly Results of Operations
(Unaudited)

                                                                      First      Second       Third       Fourth
(In millions, except per-share data)                                Quarter     Quarter     Quarter      Quarter     Full Year
                                                                ==============================================================
<S>                                                                 <C>         <C>         <C>          <C>         <C> 
1994  
----
    Document Processing revenues                                     $3,271      $3,584      $3,636       $4,597       $15,088
    Insurance revenues                                                  683         704         662          700         2,749
                                                                     ------      ------      ------       ------       -------
    Total revenues                                                    3,954       4,288       4,298        5,297        17,837
    Total costs and expenses                                          3,710       3,984       3,963        4,722        16,379
    Realized capital gains (losses)                                       7           2           4           (1)           12
                                                                     ------      ------      ------       ------       -------
    Income before income taxes,
      equity income and minorities' interests                           251         306         339          574         1,470
      Income taxes                                                       95         116         128          212           551
      Equity in net income of unconsolidated affiliates                   5          33          25           25            88
      Minorities' interests in earnings of subsidiaries                  32          55          50           76           213
                                                                     ------      ------      ------       ------       -------
    Income from continuing operations                                   129         168         186          311           794
      Discontinued operations                                             -           -           -            -             -
                                                                     ------      ------      ------       ------       -------
    Net income                                                       $  129      $  168      $  186       $  311       $   794
                                                                     ======      ======      ======       ======       =======
    Primary earnings per share/1/
      Continuing operations                                          $ 1.05      $ 1.31      $ 1.61       $ 2.76       $  6.73
      Discontinued operations                                             -           -           -            -             -
                                                                     ------      ------      ------       ------       -------
    Primary earnings per share                                       $ 1.05      $ 1.31      $ 1.61       $ 2.76       $  6.73
                                                                     ======      ======      ======       ======       =======
    Fully diluted earnings per share/1/
      Continuing operations                                          $ 1.03      $ 1.28      $ 1.53       $ 2.60       $  6.44
      Discontinued operations                                             -           -           -            -             -
                                                                     ------      ------      ------       ------       -------
    Fully diluted earnings per share                                 $ 1.03      $ 1.28      $ 1.53       $ 2.60       $  6.44
                                                                     ======      ======      ======       ======       =======
                                                                ==============================================================

1993  
----
    Document Processing revenues                                     $3,225      $3,434      $3,493       $4,077       $14,229
    Insurance revenues                                                  678         688         722          721         2,809
                                                                     ------      ------      ------       ------       -------
    Total revenues                                                    3,903       4,122       4,215        4,798        17,038
    Total costs and expenses                                          3,708       3,957       4,028        5,747        17,440
    Realized capital gains                                                5          16          50           17            88
                                                                     ------      ------      ------       ------       -------
    Income (loss) before income taxes, 
      equity income and minorities' interests                           200         181         237         (932)         (314)
      Income taxes (benefits)                                            67          75          54         (312)         (116)
      Equity in net income of unconsolidated affiliates                   3          33          27           24            87
      Minorities' interests in earnings (losses) 
        of subsidiaries                                                  24          37          37          (20)           78
                                                                     ------      ------      ------       ------       -------
    Income (loss) from continuing operations                            112         102         173         (576)         (189)
      Discontinued operations                                            77          10         (23)          (1)           63
                                                                     ------      ------      ------       ------       -------
    Net income (loss)/2/                                             $  189      $  112      $  150       $ (577)      $  (126)
                                                                     ======      ======      ======       ======       =======
    Primary earnings (loss) per share/1/
      Continuing operations                                          $  .99      $  .86      $ 1.50       $(5.62)      $ (2.46)
      Discontinued operations                                           .78         .10        (.22)        (.01)          .62
                                                                     ------      ------      ------       ------       -------
    Primary earnings per share                                       $ 1.77      $  .96      $ 1.28       $(5.63)      $ (1.84)
                                                                     ======      ======      ======       ======       =======
    Fully diluted earnings (loss) per share/1/
      Continuing operations                                          $  .96      $  .86      $ 1.43       $(5.85)      $ (2.46)
      Discontinued operations                                           .71         .08        (.20)        (.01)          .62
                                                                     ------      ------      ------       ------       -------
    Fully diluted earnings per share                                 $ 1.67      $  .94      $ 1.23       $(5.86)      $ (1.84)
                                                                     ======      ======      ======       ======       =======
                                                                ==============================================================
</TABLE>
 
/1/ Quarterly primary and fully diluted earnings per share may differ from full
    year amounts because of changes in the number of shares outstanding during
    the year.
/2/ Net income for the 1993 fourth quarter includes $813 million in after-tax
    special charges related to restructuring actions and litigation settlements
    which are more fully described in Note 3 on Page 60.

86

<PAGE>
 
                Reports of Management and Independent Auditors

REPORT OF MANAGEMENT

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

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

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

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

/s/ Paul A. Allaire

Paul A. Allaire
Chairman of the Board and
Chief Executive Officer


/s/ Barry D. Romeril

Barry D. Romeril
Executive Vice President and
Chief Financial Officer


REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Xerox Corporation

We have audited the consolidated balance sheets of Xerox Corporation and 
consolidated subsidiaries as of December 31, 1994 and 1993, and the related 
consolidated statements of income and cash flows for each of the years in the 
three-year period ended December 31, 1994. These consolidated financial 
statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these consolidated financial 
statements based on our audits.

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

  In our opinion, the consolidated financial statements appearing on Pages 28, 
38, 40, 41, and 58-85 present fairly, in all material respects, the financial 
position of Xerox Corporation and consolidated subsidiaries as of December 
31, 1994 and 1993, and the results of their operations and their cash flows 
for each of the years in the three-year period ended December 31, 1994, in 
conformity with generally accepted accounting principles.
 
  As discussed in Note 2, the Company changed its methods of accounting for 
income taxes and postretirement benefits other than pensions in 1992.


/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

Stamford, Connecticut
January 31, 1995, except as to Notes 18 and 22, 

which are as of March 2, 1995

                                                                              87

<PAGE>
 

<TABLE>                                             
<CAPTION>                                           
                                                    
Nine Years in Review                                
                                                    
(Dollars in millions, except per-share data)             1994     1993     1992     1991     1990 
                                                      --------------------------------------------
<S>                                                   <C>      <C>      <C>      <C>      <C>     
Per-Share Data                                                                                 
--------------                                                                                 
Earnings (loss) from continuing operations                                                     
    Primary                                           $  6.73  $ (2.46) $ (2.91) $  3.74  $  5.56 
    Fully diluted                                        6.44    (2.46)   (2.91)    3.71     5.31 
Dividends declared                                       3.00     3.00     3.00     3.00     3.00 
                                                      --------------------------------------------
Operations                                                                                     
----------                                                                                     
Revenues                                                                                       
    Document Processing                               $15,088  $14,229  $14,298 $ 13,438  $13,210 
    Insurance                                           2,749    2,809    2,878    3,299    3,890 
Total Revenues                                         17,837   17,038   17,176   16,737   17,100 
Research and development expenses                         895      883      922      890      848 
Income (loss) from Document Processing operations         794     (193)     562      436      599 
Income (loss) from Insurance operations                     -        4     (779)       2       11 
Income (loss) from continuing operations                  794     (189)    (217)     438      610 
Net income (loss)                                         794     (126)  (1,020)     454      243 
                                                      --------------------------------------------
Financial Position                                                                             
------------------                                                                             
Accounts and finance receivables, net                 $11,759  $10,565  $10,250 $  8,952  $ 8,016 
Inventories                                             2,294    2,162    2,257    2,091    2,148 
Land, buildings and equipment, net                      2,108    2,219    2,150    1,950    1,851 
Total Document Processing assets                       19,374   18,158   17,140   15,178   14,421 
Total Insurance assets                                 14,519   15,418   15,479   15,552   14,579 
Investment in Discontinued Operations                   4,692    5,174    5,652    5,972    6,664 
Total assets                                           38,585   38,750   38,271   36,702   35,664 
Consolidated capitalization                                                                       
    Short-term debt                                     3,159    2,698    2,533    2,038    1,828 
    Long-term debt                                      7,780    7,386    8,105    7,825    8,726 
    Total debt                                         10,939   10,084   10,638    9,863   10,554 
    Deferred ESOP benefits                               (596)    (641)    (681)    (720)    (756)
    Minorities' interests in equity of subsidiaries     1,021      844      885      818      832 
    Preferred stock                                       832    1,066    1,072    1,078    1,081 
    Common shareholders' equity                         4,177    3,972    3,875    5,140    5,051 
    Total capitalization                               16,373   15,325   15,789   16,179   16,762 
                                                      --------------------------------------------
Selected Data and Ratios                                                                       
------------------------                                                                       
Common shareholders of record at year-end              56,414   65,820   68,877   71,213   74,994 
Book value per common share/1/                        $ 38.86  $ 37.69  $ 40.19 $  54.43  $ 53.73 
Year-end common share market price                    $ 99.00  $ 88.13  $ 79.25 $  68.50  $ 35.50 
Document Processing Information                                                                   
    Employees at year-end                              87,600   97,000   99,300  100,900   99,000 
    Working capital                                   $ 2,411  $ 2,357  $ 2,578 $  2,282  $ 2,537 
    Current ratio                                         1.4      1.4      1.5      1.5      1.6 
    Additions to land, buildings and equipment        $   389  $   470  $   582 $    467  $   405 
    Depreciation on land, buildings and equipment     $   446  $   437  $   418 $    397  $   372 
                                                      --------------------------------------------
</TABLE>
 
*  Data that conforms with the 1994 basis of presentation were not available.

/1/Book value per common share is computed by dividing common shareholders'
   equity by outstanding common shares plus common shares reserved for the
   conversion of the Xerox Canada Inc. Exchangeable Class B stock.

88

<PAGE>
 

<TABLE>                                            
<CAPTION>                                          
                                                   
Nine Years in Review                               
                                                   
(Dollars in millions, except per-share data)                 1989     1988     1987     1986  
                                                            ------------------------------------    
<S>                                                         <C>       <C>      <C>     <C>          
Per-Share Data                                                                                      
--------------                                                                                      
Earnings (loss) from continuing operations                                                          
    Primary                                                 $   5.94  $  2.91  $  4.93 $   4.04     
    Fully diluted                                               5.82     2.91     4.89     4.02     
Dividends declared                                              3.00     3.00     3.00     3.00     
                                                            ------------------------------------    
Operations                                                                                          
----------                                                                                          
Revenues                                                                                            
    Document Processing                                     $ 12,095  $11,354  $10,537 $  9,493     
    Insurance                                                  4,033    4,060    3,758    3,136     
Total Revenues                                                16,128   15,414   14,295   12,629     
Research and development expenses                                809      794      722      650     
Income (loss) from Document Processing operations                488      148      353      316     
Income (loss) from Insurance operations                          154      181      188      129     
Income (loss) from continuing operations                         642      329      541      445     
Net income (loss)                                                704      388      578      465     
                                                            ------------------------------------    
Financial Position                                                                                  
------------------                                                                                  
Accounts and finance receivables, net                       $ 7,272   $ 6,109  $ 4,948 $  3,887     
Inventories                                                   2,413     2,558    2,286    2,459     
Land, buildings and equipment, net                            1,781     1,803    1,639    1,491     
Total Document Processing assets                             13,488    12,415        *        *     
Total Insurance assets                                       14,864    13,036        *        *     
Investment in Discontinued Operations                         6,063     4,406        *        *     
Total assets                                                 34,415    29,857        *        *     
Consolidated capitalization                                                                         
    Short-term debt                                           1,482     1,174        *        *     
    Long-term debt                                            9,247     6,675        *        *     
    Total debt                                               10,729     7,849    5,771    4,343     
    Deferred ESOP benefits                                     (785)        -        -        -     
    Minorities' interests in equity of subsidiaries             157       806      655      565     
    Preferred stock                                           1,081       296      442      442     
    Common shareholders' equity                               5,035     5,371    5,105    4,687     
    Total capitalization                                     16,775    14,322   11,973   10,037     
                                                            ------------------------------------    
Selected Data and Ratios                                                                            
------------------------                                                                            
Common shareholders of record at year-end                    78,876    84,864   86,388   90,437     
Book value per common share/1/                              $ 53.59   $ 52.22  $ 51.00 $  48.00     
Year-end common share market price                          $ 57.25   $ 58.38  $ 56.63 $  60.00     
Document Processing Information                                                                     
    Employees at year-end                                    99,000    100,00   99,200  100,400     
    Working capital                                               *         *        *        *     
    Current ratio                                                 *         *        *        *     
    Additions to land, buildings and equipment              $   390   $   418  $   347 $    328     
    Depreciation on land, buildings and equipment           $   370   $   369  $   320 $    283     
                                                            ------------------------------------     
</TABLE>
 

Dividends and Stock Prices 
(Unaudited)

CONSECUTIVE DIVIDENDS PAID TO SHAREHOLDERS

During 1994, dividends paid to the Company's common stock shareholders totalled
$3.00 per share, unchanged from 1993 and 1992. Xerox has declared dividends to
its shareholders for 65 consecutive years and has paid consecutive quarterly
dividends since 1948.

The Company's Board of Directors, at its February 6, 1995 meeting, declared
dividends on Xerox common stock and two issues of preferred stock, all unchanged
from previous quarterly payments. They are payable April 1 to shareholders of
record March 3. The common stock dividend is 75 cents per share. Payments on the
$3.6875 Ten-Year Sinking Fund Preferred are $0.921875 per share. Payments on the
Series B Convertible Preferred, which was issued in July 1989 in connection with
the formation of a Xerox Employee Stock Ownership Plan, are $1.5625 per share.


<TABLE> 
<CAPTION> 

XEROX COMMON STOCK PRICES AND DIVIDENDS

New York Stock Exchange     First     Second     Third    Fourth
Composite Prices          Quarter    Quarter   Quarter   Quarter 
------------------------------------------------------------------
<S>   <C>                <C>        <C>       <C>       <C>  
1994  High               $103 1/4   $104 3/4  $109 3/8  $112 3/4
      Low                  87 3/4     93 7/8    97        91 1/2
      Dividends Paid      .75        .75       .75       .75

1993  High               $ 88 7/8   $ 83 1/2  $ 80 1/8  $ 90
      Low                  79 1/4     71 1/2    70 1/8    69 7/8
      Dividends Paid      .75        .75       .75       .75
------------------------------------------------------------------
</TABLE>
 

XEROX $3.6875 TEN-YEAR SINKING FUND
PREFERRED STOCK PRICES AND DIVIDENDS


<TABLE> 
<CAPTION> 

New York Stock Exchange     First     Second     Third    Fourth
Composite Prices          Quarter    Quarter   Quarter   Quarter 
------------------------------------------------------------------
<S>   <C>                <C>        <C>       <C>       <C>  
1994  High               $54        $55 1/2   $  55     $  54
      Low                 50 1/2     50 1/2      50        50
      Dividends Paid     .921875    .921875   .921875   .921875

1993  High               $  56      $  56     $  54     $  54
      Low                   50         52        52        51
      Dividends Paid     .921875    .921875   .921875   .921875
------------------------------------------------------------------
</TABLE>
 


                                                                              89

<PAGE>
 
Officers
--------------------------------------------------------------------------------

PAUL A. ALLAIRE
Chairman of the Board and
Chief Executive Officer
Chairman of the Executive
Committee

A. BARRY RAND
Executive Vice President, 
Operations

BARRY D. ROMERIL
Executive Vice President
and Chief Financial Officer

STUART B. ROSS
Executive Vice President
Chairman and Chief Executive
Officer, Xerox Financial
Services, Inc.

PETER VAN CUYLENBURG
Executive Vice President,
Operations

WILLIAM F. BUEHLER
Senior Vice President and
Chief Staff Officer

ALLAN E. DUGAN
Senior Vice President,
Corporate Strategic Services

JULIUS L. MARCUS
Senior Vice President,
Strategic Relationships

MARK B. MYERS
Senior Vice President,
Corporate Research and
Technology

DAVID R. MYERSCOUGH
Senior Vice President,
Corporate Business Strategy

RICHARD S. PAUL
Senior Vice President and 
General Counsel

LEONARD VICKERS
Senior Vice President,
Corporate Strategic Development
and Communications

PATRICIA C. BARRON
Vice President
President, Xerox Engineering
Systems

RICHARD S. BARTON
Vice President
President, U.S. Customer
Operations

JOHN SEELY BROWN
Vice President and Chief Scientist

CHARLES E. BUCHHEIT
Vice President
Vice President, Business Integration, 
Xerox Production Systems

RONALD B. CAMPBELL, JR.
Vice President,
Special Programs

DAVID T. ERWIN
Vice President
Vice President, Strategy
and Integration,
Office Document Products

J. MICHAEL FARREN*
Vice President,
External Affairs

EUNICE M. FILTER
Vice President, Treasurer
and Secretary

PHILIP D. FISHBACH
Vice President and Controller


Directors
--------------------------------------------------------------------------------
VERNON E. JORDAN, JR. /3/, /5/
Partner Akin, Gump, Strauss, Hauer & Feld, L.L.P. Attorneys-at-Law 
Washington, D.C.

RALPH S. LARSEN /2/, /3/
Chairman and Chief Executive Officer Johnson & Johnson 
New Brunswick, New Jersey

PAUL A. ALLAIRE /1/
Chairman of the Board and Chief Executive Officer 
Chairman, Executive Committee Xerox Corporation 
Stamford, Connecticut

THOMAS C. THEOBALD /1/, /3/, /4/
Partner
William Blair 
Capital Management
Chicago, Illinois

YOTARO KOBAYASHI
Chairman and Chief Executive Officer Fuji Xerox Co., Ltd. 
Tokyo, Japan

N.J. NICHOLAS, JR. /1/, /2/, /4/
Investor
New York, New York

/1/ Member of the Executive Committee 
/2/ Member of the Audit Committee 
/3/ Member of the Executive Compensation and Benefits Committee 
/4/ Member of the Finance Committee
/5/ Member of the Nominating Committee

90

<PAGE>
 
--------------------------------------------------------------------------------
 
MAURICE F. HOLMES
Vice President and Chief Engineer

CHARLES P. HOLT
Vice President,
Joseph C. Wilson Center for Research and Technology

JAMES H. LESKO
Vice President
President, Office Document 
Systems

ROGER E. LEVIEN
Vice President,
Technology and Market 
Development

JOHN A. LOPIANO
Vice President
President, Xerox Production Systems

PATRICK J. MARTIN
Vice President
President, Office Document
Products

ALAN R. MONAHAN
Vice President,
Manufacturing Support

HECTOR J. MOTRONI
Vice President,
Quality and Organizational Effectiveness

ANNE M. MULCAHY
Vice President,
Human Resources

COLIN J. O'BRIEN
Vice President,
Systems Strategy and 
Business Development

RUSSELL Y. OKASAKO
Vice President, Taxes

CARLOS PASCUAL*
Vice President
President, Americas
Customer Operations

WILBUR I. PITTMAN
Vice President,
Marketing Business Process

NORMAN E. RICKARD, JR.
Vice President
President, Xerox Business
Services

RONALD E. RIDER
Vice President,
Digital Imaging Technology 
Center

BRIAN E. STERN
Vice President
President, Personal Document Products

PATRICIA M. WALLINGTON
Vice President and 
Chief Information Officer

MYRA R. DRUCKER
Assistant Treasurer

DANIEL S. MARCHIBRODA
Assistant Controller

GEORGE R. ROTH
Assistant Treasurer

MARTIN S. WAGNER
Assistant Secretary

*New officer since last report


--------------------------------------------------------------------------------
HILMAR KOPPER /4/, /5/
Spokesman of the Board of Managing Directors Deutsche Bank AG 
Frankfurt, Germany

MARTHA R. SEGER /2/, /4/
Distinguished Visiting Professor of Finance Central Michigan University
Mount Pleasant, Michigan

B. R. INMAN /2/, /5/
Investor
Austin, Texas

JOHN D. MACOMBER /2/, /3/
Principal JDM Investment Group
Washington, D.C.

JOAN GANZ COONEY /2/, /5/
Chairman, Executive Committee
Children's Television Workshop
New York, New York

JOHN E. PEPPER /3/, /5/
President Procter & Gamble Company
Cincinnati, Ohio

                                                        (Not Pictured)
                                                        ROBERT A. BECK /3/, /4/
                                                        Chairman Emeritus
                                                        The Prudential Insurance
                                                        Company of America
                                                        Newark, New Jersey

/1/ Member of the Executive Committee 
/2/ Member of the Audit Committee 
/3/ Member of the Executive Compensation and Benefits Committee 
/4/ Member of the Finance Committee
/5/ Member of the Nominating Committee

                                                                              91

<PAGE>
 
General Information

COMMON AND PREFERRED STOCK

TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
P.O. Box 9156
Boston, MA 02205-9156
(800) 828-6396

STOCKS LISTED AND TRADED

Xerox common stock (XRX) was listed on the New York Stock Exchange in 1961 and
on the Chicago Stock Exchange in 1990. It is also traded on the Boston,
Cincinnati, Pacific Coast and Philadelphia exchanges and in London, Basel,
Berne, Geneva, Lausanne and Zurich.

      The $3.6875 Ten-Year Sinking Fund Preferred stock was issued in February
1988 in conjunction with the redemption of the $5.45 Cumulative Preferred stock.
It is listed on the New York Stock Exchange.

DIVIDEND PAYMENT DATES

Traditionally paid on the first of January, April, July and October to
shareholders of record on the first Friday of December, March, June and
September.

DIVIDEND REINVESTMENT PLAN

The Automatic Dividend Reinvestment and Stock Purchase Plan affords any
shareholder of record of Xerox common or preferred stock the opportunity to buy
Xerox common shares automatically at the current market price with cash
dividends and without service fees or brokerage commissions. Plan participants
can also purchase additional common shares at the market price through voluntary
cash payments. A Plan brochure is available from The First National Bank of
Boston, P.O. Box 9156, Boston, MA 02205-9156, (800) 828-6396.

INVESTOR SERVICES

Questions about stock certificates, address changes, or other shareholder
matters should be addressed to: The First National Bank of Boston, Investor
Services, P.O. Box 9155, Boston, MA 02205-9155, (800) 828-6396.

      Other information concerning notes and debentures issued by the Company is
available from Corporate Treasury at (203) 968-4596.

NOTES AND DEBENTURES

TRUSTEE, REGISTRAR AND PAYING AGENT FOR 
9.20% NOTES DUE 1999
8 3/4% NOTES DUE 1995

Trustee:
Chemical Bank
55 Water Street
New York, NY 10041
(212) 820-5164

Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 9156 (Registrar)
P.O. Box 9155 (Paying Agent)
Boston, MA 02205
(800) 828-6396

TRUSTEE, REGISTRAR AND PAYING AGENT FOR 
9 1/4% DEBENTURES DUE 2000
9 5/8% DEBENTURES DUE 2000
PAYING AGENT FOR 8 3/8% NOTES DUE 1996

Bankers Trust Company
280 Park Avenue
New York, NY 10015
(212) 250-6000

TRUSTEE, REGISTRAR AND PAYING AGENT FOR 
9 3/4% NOTES DUE 2000
9 5/8% NOTES DUE 1997

Trustee:
BankAmerica National Trust Company
2 Rector Street
New York, NY 10006
(212) 978-5033

Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 9156 (Registrar)
P.O. Box 9155 (Paying Agent)
Boston, MA 02205
(800) 828-6396

TRUSTEE, REGISTRAR AND PAYING AGENT FOR 
8 1/8% NOTES DUE 2002
7.15% NOTES DUE 2004

Trustee:
Citibank, N.A.
111 Wall Street
New York, NY 10043
(800) 422-2066

Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 9156 (Registrar)
P.O. Box 9155 (Paying Agent)
Boston, MA 02205
(800) 828-6396

OTHER INFORMATION

ANNUAL MEETING

Shareholders are invited to attend our annual meeting, which will be held at 
10:00 a.m. Thursday, May 18, 1995 at The Rittenhouse, 
210 West Rittenhouse Square, Philadelphia, Pennsylvania. By April 6, 1995, 
proxy material will be sent to Xerox shareholders of record as of March 29, 
1995.

INVESTOR INFORMATION

Annual Reports and Forms 10-K and 10-Q, which are filed with the Securities 
and Exchange Commission, are available from Investor Services, (800) 
828-6396.

      Quarterly earnings are expected to be announced on April 27, July 31, and
October 26, 1995. On the day of the earnings release, a comprehensive report,
including the press release, financial summaries and the income statements are
available through any of the following options: by Internet (use Mosaic or a
worldwide web client to access http://www.xerox.com/ and select "Financial
Information for Investors"); by fax (call 800-463-6840 and follow instructions
to key in your fax number from your touch-tone phone); or by mail (call Investor
Services at 800-828-6396).

ADDITIONAL INFORMATION

The Company can also provide information that may be of general interest to
investors. Information on The Xerox Foundation and the Community Involvement
Program is available from The Xerox Foundation information line, (203) 968-3333.
Information on affirmative action, equal employment opportunity activities and
balanced work force is available from Marcia Matthews, Manager, Corporate Work
Force Diversity, (716) 423-2039. Copies of the Company's Environment, Health and
Safety Progress Report are available from Xerox Safety Services at (800) 828-
6571.

      Students and teachers requesting information are invited to call the 
Company's Public Information line, (716) 423-4828.

      Convention Blanks for Talegen Holdings, Inc., can be obtained directly 
from Talegen, (206) 654-2636.

Investor Relations

Members of the financial community and institutional investors seeking
additional information on the Company are invited to contact Clark K. Robson,
Director of Investor Relations (Internet address: CKR.sthq@xerox.com) or Charles
K. Wessendorf, Manager of Investor Relations (Internet address:
CKW.sthq@xerox.com), at (203) 968-4406.

Auditors

KPMG Peat Marwick LLP
Certified Public Accountants
Stamford Square, 3001 Summer Street
Stamford, CT 06905
(203) 356-9800

92





                                                                    EXHIBIT 21

Subsidiaries of Xerox Corporation
 
A.   Xerox Corporation
 
The following companies are subsidiaries of Xerox Corporation as of February 
1, 1995.  The names of a number of other subsidiaries have been omitted as 
they would not, if considered in the aggregate as a single subsidiary, 
constitute a significant subsidiary:
 
Name of Subsidiary                           Incorporated In   Ownership %
 
Xerox Canada Inc.                            Ontario, Canada        87
    Xerox Canada Acceptance Inc.             Ontario, Canada       100
    Xerox Canada Finance Inc.                Ontario, Canada       100
    Xerox Canada Ltd.                        Ontario, Canada        65
Lyell Holdings Limited                       Delaware              100
    Triton Business Finance Limited          United Kingdom        100
    Xerox Business Equipment Limited         United Kingdom        100
    Xerox Research (UK) Limited              United Kingdom        100
Xerox Business Equipment, Inc.               Delaware              100
Xerox Financial Services, Inc.               Delaware              100
    Xerox Credit Corporation                 Delaware              100
      MultiLease, Ltd.                       Delaware              100
      XCC Investment Corporation             Delaware              100
      XCC (Bermuda), Ltd.                    Bermuda               100
    Talegen Holdings, Inc.                   Delaware              100
    Xerox Life Management Company            Delaware              100
    Ridge Reinsurance Limited                Bermuda               100
Xerox Foreign Sales Corporation              Barbados              100
Xerox Imaging Systems, Inc.                  Delaware              100
Xerox Realty Corporation                     Delaware              100
Xerox do Brasil,
 Ltda.                       Brazil                100
    Xerox do Amazonas S.A.                   Brazil              99.29
      Xerox Comercio Exterior S.A.           Brazil                100
    Xerox do Nordeste S.A.                   Brazil              97.72
      Palma Servicos e Participacoes Ltda.   Brazil                100
Xerox Argentina, I.C.S.A.                    Argentina             100
Xerox de Chile S.A.                          Chile                 100
Xerox de Colombia S.A.                       Colombia               75
Xerox del Ecuador, S.A.                      Ecuador               100
Xerox Mexicana, S.A. de C.V.                 Mexico                100
Xerox del Peru, S.A.                         Peru                89.31
Xerox de Venezuela, C.A.                     Venezuela              41
Rank Xerox Investments Limited               Bermuda              66.7
    Xerox Egypt S.A.E                        Egypt                  75
    Xerox Maroc S.A.                         Morocco              99.9
Rank Xerox Limited                           United Kingdom       51.2
Rank Xerox Holding B.V.                      Netherlands          51.2
    Rank Xerox Manufacturing
      (Nederland) B.V.                       Netherlands           100
R-X Holdings Limited                         Bermuda              66.7
    Xerox Limited                            Bermuda               100
Xerox de Panama, S.A.                        Panama                 75
Xerox Uruguay S.A.                           Uruguay               100


B.   Rank Xerox Limited
 
Subsidiaries of Rank Xerox Limited include:
 
Name of Subsidiary                           Incorporated In   Ownership % 
 
Bessemer Trust Limited                       United Kingdom        100
Fuji Xerox Co., Ltd.                         Japan                  50
    Fuji Xerox Finance Limited               New Zealand           100
    Fuji Xerox (Finance) Limited             Australia             100
    Fuji Xerox New Zealand Limited           New Zealand           100
    Fuji Xerox (Australia) Pty. Limited      Australia             100
Modi Xerox Limited                           India                35.9
Rank Xerox (U.K.) Limited                    United Kingdom        100
Rank Xerox (Ireland) Limited                 United Kingdom        100
Rank Xerox Espanola S.A.                     Spain                 100
    Rank Xerox de Financiacion S.A.          Spain                 100
Rank Xerox Finance (Nederland) BV            Netherlands           100
Rank Xerox Greece S.A.                       Greece                100
NV Rank Xerox Credit S.A.                    Belgium               100
Rank Xerox Finance AG                        Switzerland           100
Rank Xerox Finance Limited                   United Kingdom        100
Rank Xerox Leasing GmbH                      Germany               100
Rank Xerox Leasing International 
    Finance BV                               Netherlands           100
Rank Xerox - The Document Company S.A.       France                100
    Burofinance S.A.                         France                 66
Rank Xerox Exports Limited                   United Kingdom        100
N.V. Rank Xerox S.A.                         Belgium               100
Rank Xerox Austria GmbH                      Austria               100
Rank Xerox A/S                               Denmark               100
    Rank Xerox Finans A/S                    Denmark               100
Rank Xerox Oy                                Finland               100
Rank Xerox GmbH                              Germany               100
Rank Xerox S.p.A.                            Italy                 100
Rank Xerox AG                                Switzerland           100
Rank Xerox AS                                Norway                100
Rank Xerox Bulgaria                          Bulgaria              100
Rank Xerox Management Services S.A.          Belgium               100
RX Pension Limited                           United Kingdom        100
Rank Xerox A.B.                              Sweden                100
Rank Xerox (Nederland) B.V.                  Netherlands           100


C.   Talegen Holdings, Inc.
 
          Insurance Holding Company System Organizational Chart
 
All controlled persons and controlled insurers of Talegen Holdings, Inc., a 
Delaware corporation ("Talegen"), (under applicable state insurance laws), are 
set forth in the following table, together with the jurisdiction of domicile 
of each and the percentage of voting securities owned as of January 1, 1995.  
Unless otherwise indicated, all of the persons included in the table are 
corporations, the voting securities of which are directly owned by Talegen.  
All of the outstanding capital stock of Talegen is owned by Xerox Financial 
Services, Inc., a Delaware corporation, which is a wholly-owned subsidiary of 
Xerox Corporation.

Name of Subsidiary                           Incorporated In   Ownership %
 
Constitution Re Corporation                  Delaware              100
    Constitution Reinsurance Corporation     New York              100 (1)
    Constitution Management Corp.            New York              100 (1)
    Constitution Reassurance S.A.            Belgium               100 (3)
Coregis Group, Inc.                          Delaware              100
    Coregis Insurance Company                Indiana               100 (1)
    Coregis Indemnity Company                Illinois              100 (1)
    California Insurance Company             California            100 (1)
    Coregis Managers Corporation (IL)        Illinois              100 (1)
    Coregis Managers Corporation (NY)        New York              100 (1)
    Crum & Forster Managers Corporation (FL) Florida               100 (1)
Crum & Forster Holdings, Inc.                Delaware              100
    United States Fire Insurance Company     New York              100 (1)
      Southbend Properties, Inc.             Texas                 100 (1)
    The North River Insurance Company        New Jersey            100 (1)
    Crum and Forster Insurance Company       New Jersey            100 (1)
    Crum & Forster Underwriters Co. of Ohio  Ohio                  100 (1)
    Premier Insurance Company                Florida               100 (1)
    Commonwealth Lloyd's Insurance Company   Texas                   - (5)
    Crum & Forster Custom Securities, Inc.   California            100 (1)
Industrial Indemnity Holdings, Inc.          Delaware              100
    Industrial Indemnity Company             California            100 (1)
      Claremont Holdings Limited             Bermuda               9.2
        Claremont Insurance Limited          Bermuda               100
      Industrial/Las Flores, Inc.            California            100 (1)
      Industrial/Canyon Creek, Inc.          California            100 (1)
      Industrial/Shadowridge, Inc.           California            100 (1)
      Industrial/Mountainback, Inc.          California            100 (1)
      Industrial/Channing, Inc.              California            100 (1)
    Industrial Indemnity Company of Alaska   Alaska                100 (1)
    Industrial Indemnity Company of Idaho    Idaho                 100 (1)(2)
    Industrial Indemnity Company
      of the Northwest                       Washington            100 (1)
    Industrial Insurance Company             California            100 (1)
    All West Insurance Company               California            100 (1)
    255 California Corporation               California            100 (1)
    Industrial Indemnity Insurance
      Services, Inc.                         California            100 (1)
      American All Risk Loss Administrators  California             40 (1)


Name of Subsidiary                           Incorporated In   Ownership %

The Resolution Group, Inc.                   Delaware              100
    Resolution Reinsurance Services
      Corporation                            Delaware              100 (1)
    International Insurance Company          Illinois              100 (1)
      William Street Syndicate, Inc.         New York               20 (1)
    Resolution Credit Services Corp.         California            100 (1)
    Envision Claims Management Corporation   New Jersey            100 (1)
Viking Insurance Holdings, Inc.              Delaware              100
    Viking Insurance Company of Wisconsin    Wisconsin             100 (1)
    Viking General Agency, Inc.              Texas                 100 (1)
    Viking County Mutual Insurance Company   Texas                   - (4)
Westchester Specialty Group, Inc.            Delaware              100
    Westchester Fire Insurance Company       New York              100 (1)
    Westchester Surplus Lines Insurance
      Company                                Georgia               100 (1)
    Industrial Underwriters Insurance 
      Company                                Texas                 100 (1)
    Westchester Specialty Insurance
      Services, Inc.                         Nevada                100 (1)
    Industrial Excess & Surplus Insurance
      Brokers                                California            100 (1)
Talegen Properties, Inc.                     Delaware              100
Filoli Information Systems Company           Delaware               40
Apprise Corp.                                New Jersey            100
Crum & Forster of Canada Ltd.                Canada                100
First Quadrant Corp.                         New Jersey            100
    First Quadrant Limited                   United Kingdom        100 (1)(7)
    Seneca, Inc.                             New Jersey           24.9 (1)
Herald Insurance Company                     Canada                100 (6)



(1) Directly or indirectly owned by a subsidiary of Talegen.

(2) Includes qualifying shares held by directors.

(3) Includes qualifying share held by an individual.

(4) County Mutual Company.  Control maintained through management and 
    contract with Viking Insurance Company of Wisconsin.

(5) Lloyd's insurer.  Control maintained through Power of Attorney.

(6) Includes less than 1/5 of 1% shares beneficially owned by directors.

(7) Includes one share held by Talegen in trust and as nominee for
    First Quadrant Corp.




                                                                    EXHIBIT 23

Consent of Independent Auditors




To the Board of Directors and Shareholders of Xerox Corporation



We consent to the incorporation by reference in the Registration Statements of 
Xerox Corporation on Forms S-8 (Nos. 2-81528, 2-86274, 2-86275, 33-18126, 33-
44313 and 33-44314) and Forms S-3 (Nos. 2-82363, 33-9486, 33-32215, 33-54629 
and 33-49177) of our reports dated January 31, 1995 (except as to Notes 18 and 
22, which are as of March 2, 1995), relating to the consolidated balance 
sheets of Xerox Corporation and consolidated subsidiaries as of December 31, 
1994 and 1993, and the related consolidated statements of income and cash 
flows and related schedules for each of the years in the three-year period 
ended December 31, 1994 which reports appear in or are incorporated by 
reference in the 1994 Annual Report on Form 10-K.  Our reports refer to the 
Company's changes in its methods of accounting for income taxes and 
postretirement benefits other than pensions in 1992.





                                          KPMG PEAT MARWICK LLP





Stamford, Connecticut
March 30, 1995








<TABLE> <S> <C>

<ARTICLE> CT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM XEROX CORPORATION'S DECEMBER 31, 1994, FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1994
<PERIOD-END>                               DEC-31-1994
<TOTAL-ASSETS>                                  38,585
<COMMON>                                           107
<PREFERRED-MANDATORY>                               75
<PREFERRED>                                        757
<OTHER-SE>                                       4,070
<TOTAL-LIABILITY-AND-EQUITY>                    38,585
<TOTAL-REVENUES>                                17,837
<INCOME-TAX>                                       551
<INCOME-CONTINUING>                                794
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       794
<EPS-PRIMARY>                                     6.73
<EPS-DILUTED>                                     6.44
        

</TABLE>






<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM XEROX CORPORATION'S DECEMBER 31, 1994, FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1994
<PERIOD-END>                               DEC-31-1994
<CASH>                                              35
<SECURITIES>                                         0
<RECEIVABLES>                                   12,157
<ALLOWANCES>                                       398
<INVENTORY>                                      2,294
<CURRENT-ASSETS>                                 9,249
<PP&E>                                           4,756
<DEPRECIATION>                                   2,648
<TOTAL-ASSETS>                                  19,374
<CURRENT-LIABILITIES>                            6,838
<BONDS>                                          8,653
<SALES>                                          7,853
<TOTAL-REVENUES>                                15,088
<CGS>                                            4,653
<TOTAL-COSTS>                                    8,171
<OTHER-EXPENSES>                                 5,403
<LOSS-PROVISION>                                   206
<INTEREST-EXPENSE>                                 757
<INCOME-PRETAX>                                  1,514
<INCOME-TAX>                                       595
<INCOME-CONTINUING>                                794
        

</TABLE>






<TABLE> <S> <C>

<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM XEROX CORPORATION'S DECEMBER 31, 1994, FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1994
<PERIOD-END>                               DEC-31-1994
<DEBT-HELD-FOR-SALE>                             7,214
<DEBT-CARRYING-VALUE>                                0
<DEBT-MARKET-VALUE>                                  0
<EQUITIES>                                         168
<MORTGAGE>                                           0
<REAL-ESTATE>                                        0
<TOTAL-INVEST>                                   8,384
<CASH>                                              21
<RECOVER-REINSURE>                               3,116
<DEFERRED-ACQUISITION>                             197
<TOTAL-ASSETS>                                  14,519
<POLICY-LOSSES>                                  8,862
<UNEARNED-PREMIUMS>                              1,033
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                                0
<NOTES-PAYABLE>                                    425
<PREMIUMS>                                       2,312
<INVESTMENT-INCOME>                                423
<INVESTMENT-GAINS>                                  12
<OTHER-INCOME>                                      14
<BENEFITS>                                       1,769
<UNDERWRITING-AMORTIZATION>                        471
<UNDERWRITING-OTHER>                               306
<INCOME-PRETAX>                                   (44)
<INCOME-TAX>                                      (44)
<INCOME-CONTINUING>                                  0
<RESERVE-OPEN>                                   9,684
<PROVISION-CURRENT>                              1,748
<PROVISION-PRIOR>                                   11
<PAYMENTS-CURRENT>                                 486
<PAYMENTS-PRIOR>                                 1,541
<RESERVE-CLOSE>                                  8,862
<CUMULATIVE-DEFICIENCY>                            (8)
        

</TABLE>