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, 1997 

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

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

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

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


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

The aggregate market value of the voting stock of the registrant held by non-
affiliates as of February 27, 1998 was:                $31,263,825,255.


                            (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 27, 1998

Common Stock, $1 Par Value                                  327,031,139 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 1997 Annual Report to Shareholders          I & II

Xerox Corporation Notice of 1998 Annual Meeting of           III & IV
Shareholders and Proxy Statement (to be filed not 
later than 120 days after the close of the fiscal 
year covered by this report on Form 10-K).


Forward-Looking Statements

From time to time Xerox Corporation (the Registrant or the Company) and its 
representatives may provide information, whether orally or in writing, 
including certain statements in this Form 10-K under Part I, Item 1 
"Business," Part II, Item 7 "Management's Discussion and Analysis of Financial 
Condition and Results of Operations," and Part II, Item 8 "Financial 
Statements and Supplementary Data," which are deemed to be "forward-looking" 
within the meaning of the Private Securities Litigation Reform Act of 1995 
("Litigation Reform Act").  These forward-looking statements and other 
information relating to the Company are based on the beliefs of management as 
well as assumptions made by and information currently available to management.

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

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

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

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

Pricing - the Registrant's ability to succeed is dependent upon its ability to 
obtain adequate pricing for its products and services which provide a 
reasonable return to shareholders.  Depending on competitive market factors, 
future prices the Registrant can obtain for its products and services may vary 
from historical levels.

Financing Business - a significant portion of the Registrant's profits arise 
from the financing of its customers' purchase of the Registrant's equipment.  
On average, 75 to 80 percent of equipment sales are financed through the 
Registrant.  The Registrant's ability to provide such financing at competitive 
rates and realize profitable spreads is highly dependent upon its own costs of 
borrowing which, in turn, depend upon its credit ratings.  Significant changes 
in such ratings could reduce the profitability of such financing business 
and/or make the Registrant's financing less attractive to customers thus 
reducing the volume of financing business done.  The Registrant's present 
credit ratings permit ready access to the credit markets.  There is no 
assurance that these credit ratings can be maintained and/or ready access to 
the credit markets can be assured.

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

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

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

Disengagement from Insurance Business - during the process of disengaging from 
the insurance business, the Registrant will continue to be subject to all the 
business risks and rewards of the remaining unit, Crum & Forster Holdings, 
Inc. (CFI).  Until CFI is actually sold, no assurances can be given as to the 
ultimate impact on the Registrant's total results from operations or whether 
the proceeds from CFI's sale will equal its carrying value.  The insurance 
business is subject to cyclical competitive conditions, judicial decisions 
affecting insurers' liabilities, and by volatile and unpredictable 
developments, including changes in the propensity of courts to grant large 
awards, fluctuations in interest rates, inflationary pressures that may tend 
to affect the size of losses and changes in the investment environment that 
affect market prices of insurance companies' investments.  CFI's operating 
results have historically been influenced by these industry trends, as well as 
by its exposure to uncollectible reinsurance, which had been greater than for 
most other insurers.



                                    PART I


Item 1. Business

Overview

Xerox Corporation (Xerox or the Company) is The Document Company and a leader 
in the global document market, providing document solutions that enhance 
business productivity.  References herein to "us" or "our" refer to Xerox and 
consolidated subsidiaries unless the context specifically requires otherwise.  
We distribute our products in the Western Hemisphere through divisions and 
wholly-owned subsidiaries. In Europe, Africa, the Middle East and parts of 
Asia including Hong Kong, India and China, we distribute through Xerox Limited 
(formerly Rank Xerox) and related companies (collectively Xerox Limited).  In 
June 1997, we completed the acquisition of The Rank Group's remaining 20 
percent financial interest in Rank Xerox Limited and related companies for 940 
million pounds sterling, or approximately $1.5 billion. Fuji Xerox Co., 
Limited, an unconsolidated entity jointly owned by Xerox Limited and Fuji 
Photo Film Company Limited, develops, manufactures and distributes document 
processing products in Japan and the Pacific Rim.  Japan represents 
approximately 90 percent of Fuji Xerox revenues, and Australia, New Zealand, 
Singapore and Malaysia represent the remaining 10 percent.  Fuji Xerox 
conducts business in other Pacific Rim countries through joint ventures and 
distributors.

Beginning in 1995, the results of our Insurance operations were accounted for 
as discontinued operations.  Since that time the Document Processing business 
has been the only component of continuing operations.

Our 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. We believe that the document is a tool for productivity, and that 
documents - both electronic and paper - are at the heart of most business 
processes.  Documents are the means for storing, managing, and sharing 
business knowledge.  Document technology is key to improving productivity 
through information and knowledge management and we believe no one knows the 
document - paper to digital, digital to paper - better than we do.  The 
financing of Xerox equipment is generally carried out by Xerox Credit 
Corporation (XCC) in the United States and internationally by foreign 
financing subsidiaries and divisions in most countries in which we operate.  
Document Processing operations had 91,400 Xerox employees worldwide at year-
end 1997.

Continuing Operations

The Document Processing Strategy

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

- -  Increasingly, documents are being created and stored in digital electronic 
form.

- -  The use of electronically created paper documents will continue to 
increase.

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

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

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

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

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

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

We have formed alliances to bring together the diverse infrastructures that 
currently exist and to nurture the development of an open document services 
environment to support complementary products from our partners and customers.  
We are working with more than 50 industry organizations to make office, 
production and electronic printing an integrated, seamless part of today's 
digital work place.

Market Overview

We estimate that the global document market that we serve, excluding Japan and 
the Pacific Rim countries served by Fuji Xerox, was approximately $118 billion 
in 1997 and is estimated to grow at a 14 percent annual rate to about $175 
billion in 2000. With our many new product introductions during this decade, 
and in particular, during 1997, our participation in the global document 
market has been considerably broadened from the slower growing segments of the 
market to the faster growing segments of the market.  This growth will be 
driven by the transition to digital copying and printing in the office, the 
transfer of document production from offset printing to digital publishing, 
the increase in customer requirements for network and distributed printing, 
the accelerating demand for color documents, and increasingly, our 
participation in the small office / home office / personal document processing 
market.

We have traditionally had a strong position in the general office document 
market, the largest segment, which is projected to reach approximately $64 
billion in 2000. Growth in this market is driven by the transition to the use 
of digital and color documents.  The production market, which includes 
production publishing and production printing, is expected to grow at an 
annual rate of 10 percent, reaching $24 billion in 2000.  The small office / 
home office / personal document processing market is growing at an annual rate 
of more than 25 percent due to increases in the number of home offices and 
small businesses.  This market segment acquires product primarily through 
indirect distribution channels.  Finally, document outsourcing, the fastest 
growing served market segment, is projected to grow 35 to 40 percent annually, 
reaching $11 billion by 2000, as customers' increasingly focus on their core 
competencies and outsource their document processing requirements.



Xerox Focus

We believe that our competitive advantages lie in our ability to continually 
improve the features and performance of our document processing products, 
services and solutions based on demonstrated customer needs; competitive 
pricing; our excellent reputation for performance and service; our substantial 
on-going investment in research and development; expanded sales coverage 
through our direct sales force, agents, retail chains, value added resellers 
and systems integrators; our leadership position in the rapidly growing 
document outsourcing business; maintenance of our strong market position in 
emerging markets; and an expanded presence in the burgeoning small office / 
home office / personal document processing market.  As a result, we believe we 
are well positioned to participate in the anticipated growth in the market 
segments in which we compete.

Digital Products

Our digital products consist of four categories:  black-and-white production 
publishing, black-and-white production printing, color laser copying and 
printing, and black-and-white digital copiers.  During 1997, digital product 
revenues grew 25 percent on a pre-currency basis, driven by the annualized 
impact of new products introduced in 1996 as well as new products introduced 
during 1997.  Digital products contributed 36 percent of total revenues in 
1997, 30 percent in 1996, and 25 percent in 1995.

Production Publishing

The era of production publishing was launched in 1990 when we announced the 
DocuTech Production Publishing family which was a major step beyond our 
traditional reprographics market into the publishing industry.  Having 
installed to date more than 16,000 DocuTech systems around the world, our 
production publishing revenues in 1997 were $2.1 billion.

Digital production publishing technology is increasingly replacing older, 
traditional short-run offset printing as customers seek improved productivity 
and cost savings, faster turnaround of document preparation, and the ability 
to print documents "on demand."  We offer the widest range of solutions 
available in the marketplace - from dial-up lines through the Internet to 
state-of-the-art networks - and we are committed to expanding these print-on-
demand solutions as new technology and applications are developed. 

The DocuTech family of digital production publishers scans hard copy and 
converts it into digital documents, or accepts digital documents directly from 
networked personal computers or workstations.  A user-friendly electronic cut-
and-paste workstation allows the manipulation of images or the creation of new 
documents.  For example, in only a few minutes, a page of word-processed text, 
received over a network, can be combined with a photograph scanned from hard 
copy and enhanced electronically:  cropped, positioned precisely, rotated, 
brightened or sharpened.  Digital masters can be prepared in a fraction of the 
time necessary to prepare offset plates, thereby allowing fast turnaround 
time.  Further time can be saved, and frequently significant inventory and 
shipping costs, by transmitting electronically and printing where the 
documents are required.

DocuTech prints high-resolution (600 dots per inch) pages at up to 180 
impressions per minute.  The in-line finisher staples completed sets or 
finishes booklets with covers and thermal-adhesive bindings.  Because the 
finished document can be stored as a digital document, hard copy documents can 
be printed on demand, or only as required, thus avoiding the long production 
runs and high storage and obsolescence costs associated with offset printing.  
The concept of print-on-demand took another major step in 1995 when we 
introduced the DocuTech 6135.  It makes print-for-one publishing practical; 
personalized publishing runs can now be as short as one or two prints.  
Another significant step forward was taken in 1997 when the DocuTech 6180 was 
introduced, increasing output speed to 180 cut-sheet pages per minute.

Production Printing

Our revenues from production black-and-white computer printers grew 9 percent 
pre-currency in 1997 to $2.3 billion.

This market has largely consisted of high-end host-connected printers and low-
end desktop printers.  We expect 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 declining electronics costs.  These faster, 
more reliable printers print collated multiple sets on both sides of the 
paper, insert covers and tabs, and staple or bind, but without the labor-
intensive steps of printing an original and manually preparing the documents 
on copiers.  In addition, documents can be printed on these printers from 
remote data center computers, enabling the efficiencies of distributing 
electronically and then printing, rather than printing paper documents and 
then distributing them.

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

Xerox pioneered and continues to be a worldwide leader in computer laser 
printing, which combines computer, laser, communications and xerographic 
technologies.  We market a broad line of robust printers with speeds that 
range from five pages per minute to the industry's fastest cut-sheet printer 
at 180 pages per minute, and continuous-feed production printers at speeds up 
to 420 pages per minute.  Many of these printers have simultaneous interfaces 
that can be connected to multiple host computers as well as local area 
networks.

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

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

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

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

Color Laser Copying and Printing

Our revenues from color laser copiers and printers grew 46 percent pre-
currency in 1997 to $1.5 billion.

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

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

We entered the color laser market in 1991 with the introduction of the Xerox 
5775 color copier/printer and the 4700 printer, both of which print full-color 
at 7.5 pages per minute.  We have since expanded the product line with the 
4900 color laser printer, which prints full color at three pages per minute; 
the MajestiK color copier/printer series, which print full color at 6 pages 
per minute; the XPrint family of networked desktop color laser printers, which 
print at resolutions up to 600 x 600 dots per inch; and the Regal color 
copier/printer, which prints full color at 9 pages per minute.

The DocuColor 40, which was introduced in early 1996, copies and prints at 40 
full-color pages per minute and is the industry's fastest and most affordable 
digital color document production system.  It has a market share of more than 
50 percent.

During 1997, we introduced the DocuColor 70, a continuous feed full-color 
digital press, based on a print engine from Xeikon with Xerox-exclusive 
digital front-ends, that produces 70 high-quality, full-color impressions per 
minute.  We also introduced the DocuColor 5750 Empress copier/printer which 
produces 6 full color copies per minute and the DocuColor 5799 which operates 
at 9 full color copies per minute.  Finally, for networked workgroups, we 
introduced the DocuPrint C55, a full-featured, compact color laser printer 
that prints three full color pages per minute and includes automatic image 
enhancement and an embedded web server, and is the lowest-cost product of its 
kind.

Black and White Digital Copiers

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

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

Our strategy is, first, to build from our current strength, the copier.  We 
know how to design and build copiers with superior marking, paper handling and 
finishing technology.  We know our customers, their requirements and how to 
sell sophisticated, fully featured copiers.  In April 1997, we introduced the 
Document Centre family of four new stand-alone black and white digital copiers 
at speeds of 20, 30, 40, and 65 pages per minute, that are better quality, 
more reliable, and more feature rich than light-lens copiers and are priced at 
a modest premium over comparable light-lens copiers.  A fax option is also 
available.

Second, beginning in 1998, as customers are ready, we will connect the digital 
copiers to their networks so that their digital copiers can also be used as 
robust, high-speed network printers to gain incremental volume from computer 
printing and ultimately to replace desktop printers and single-purpose copiers 
and faxes.  The fax option and network upgrades have compelling economics 
versus the alternative of purchasing comparable printers and faxes since the 
print engine, output mechanics and most of the software required are part of 
the base digital copier.

Orders and installations of the available Document Centre digital black and 
white copier models exceeded our expectations during 1997 and, as a result, we 
more than doubled production. 1997 revenues from the 20 and 30 page-per-minute 
Document Centre 220 and 230 and the limited fourth quarter availability of the 
65 page-per-minute Document Centre 265 were $300 million.

Light-lens Copying

Our revenues from light-lens copiers declined 2 percent pre-currency in 1997 
to $9.6 billion.  The decline in light-lens copier revenues reflects several 
important factors, including customer transition to our new digital black-and-
white products and continued price pressures.  We believe the trend over the 
past few years will continue whereby digital products' revenues represent an 
increasing share of total revenues and light-lens copier revenues will 
represent a declining share of total revenues.  Revenues from light-lens 
copying represented 51 percent of total revenues in 1997, 56 percent in 1996 
and 59 percent in 1995.

We market the broadest line of light-lens copiers and duplicators in the 
industry, ranging from a three copies-per-minute personal copier to a 135 
copies-per-minute fully-featured duplicator to special copiers designed for 
large engineering and architectural drawings up to 3 feet by 4 feet in size.  
Many of our state-of-the-art products have improved ease of use, reliability, 
copy quality, job recovery and ergonomics as well as productivity-enhancing 
features, including zoom enlargement and reduction, highlight color, copying 
on both sides of the paper, and collating and stapling which allow the 
preparation of completed document sets.

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

We also are increasing our leadership position in small commercial accounts, 
the most competitive copier market segment, through marketing programs such as 
telemarketing, sales through independent agents, retail outlets and trade 
associations.

We expect that light-lens copiers will increasingly be replaced by digital 
copiers.  However, some portions of the market will continue to be serviced by 
light-lens copiers for many years, such as customers who care principally 
about price or whose work processes do not require digital products.  
Therefore, we intend to continually upgrade our light-lens products to 
maintain a leadership position in the industry.

Other Products

We also offer a wide range of other document processing products including 
ink-jet and electrostatic printers, multi-function products, facsimile 
products, scanners, personal computer and workstation software, and integrated 
systems solutions.

We also sell cut-sheet paper to our customers for use in their document 
processing products.

Summary of Revenues by Product Category

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

     Year ended December 31 (in billions)   1997       1996       1995
     Light-lens copiers                    $ 9.6      $ 9.7      $ 9.8
     Digital products                        6.7        5.4        4.3
     Paper, other products, currency         1.9        2.3        2.5
       Total revenues                      $18.2      $17.4      $16.6

Xerox Competitive Advantages

Customer Satisfaction

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

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

Quality

We were an early pioneer in total quality management and are the only company 
to have won all three of the following prestigious quality awards:  the 
Malcolm Baldrige National Quality Award in the United States in 1989 and Xerox 
Business Services, our outsourcing division, won the award in the services 
category in 1997, the European Quality Award in 1992 and the Deming Prize in 
Japan, won by Fuji Xerox in 1980.  In addition, we have won top quality awards 
in Argentina, Australia, Belgium, Brazil, Canada, China (Shanghai), Colombia, 
France, Germany, Hong Kong, India, Ireland, Mexico, the Netherlands, Norway, 
Portugal, the United Kingdom, and Uruguay.  Our "Leadership Through Quality" 
program has enabled us to improve productivity, accelerate the introduction of 
new products, improve customer satisfaction and increase market share.  Xerox 
products have been consistently rated among the world's best by independent 
testing organizations.

Research and Development

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

In 1997, R&D expense was $1,079 million compared with $1,044 million in 1996 
and $949 million in 1995.  We expect to increase our investment in 
technological development in 1998 and over the longer term to maintain our 
premier position in the rapidly changing document processing market.  Our R&D 
spending is strategically coordinated with Fuji Xerox.  The R&D investment by 
Fuji Xerox was $612 million in 1997, for a combined increase of 7 percent to 
$1.7 billion.

Marketing

Xerox document processing products are principally sold directly to customers 
by our worldwide sales force of approximately 13,500 employees and through a 
network of independent agents, dealers, retail chains, value-added resellers 
and systems integrators.  To market low-end copiers, laser printers, and 
multi-function devices, we are significantly expanding our indirect 
distribution channels.  We currently have arrangements with U.S. retail 
marketing channels including CompUSA, Office Depot, OfficeMax, and Staples, 
and office channels that include distributors and value added resellers like 
MicroAge, Ingram Micro, Tech Data, and Computer 2000.  Our strategy is to 
target high-growth markets through high-volume distribution of laser and ink-
jet printers, multi-function products, personal copiers, fax machines, and 
supplies with a goal to be the fastest growing source of personal and 
networked document solutions in retail and reseller channels worldwide.  
Consistent with this strategy, in September 1997, we announced our new 
DocuPrint N32 Network Laser Printer, starting at $2,900, the fastest, most 
advanced, least expensive model of its kind, offering "copier-like" features 
such as multiple-set printing, stapling and collating.

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

Service

We have a worldwide service force of approximately 24,000 employees.  In our 
opinion, this direct service force represents a significant competitive 
advantage:  the service force is continually trained on our new products and 
its diagnostic equipment is state-of-the-art.  24-hour-a-day, seven-day-a-week 
service is available in most metropolitan areas in the United States.  We are 
able to guarantee a consistent level of service nationwide and worldwide 
because our service force is not focused exclusively on metropolitan areas and 
it does not rely on independent local dealers for service.

Revenues

Our total document processing revenues were $18.2 billion in 1997, of which 49 
percent were generated in the United States, 30 percent in Europe, and 21 
percent in the remainder of the world, principally Brazil, the rest of Latin 
America, Canada, and China (excluding the unconsolidated $7.4 billion of Fuji 
Xerox revenues in Japan and much of the Pacific Rim).

Revenues from supplies, paper, service, rentals, document outsourcing and 
other revenues, and income from customer financing represented 62 percent of 
total revenues in 1997, 66 percent in 1996, and 67 percent in 1995.  Because 
these revenues are derived from the installed base of equipment and are 
therefore less volatile than equipment sales revenues, they provide 
significant stability to overall revenues.  Growth in these revenues is 
primarily a function of the growth in our installed population of equipment, 
usage and pricing.  The balance of our revenues is derived from equipment 
sales.  These sales, which drive the non-equipment revenues, depend on the 
flow of new products and are more affected by economic cycles.

Most of our customers have their equipment serviced by and use supplies sold 
by us.  The market for cut-sheet paper is highly competitive and revenue 
growth is significantly affected by pricing.  Our strategy is to charge a 
spread over mill wholesale prices.  Rental revenues declined in 1997 and were 
flat in 1996 and 1995, due primarily to customers' preference for document 
outsourcing and the continuing trend of increased equipment sales.

Our document outsourcing business provides printing, publishing, duplicating 
and related services at more than 5,000 customer locations in 40 countries, 
including legal and accounting firms, financial institutions, insurance 
agencies and manufacturing companies.  Revenues from our document outsourcing 
business increased 58 percent pre-currency to $2.0 billion in 1997.  Document 
outsourcing revenues are split between equipment sales and document 
outsourcing.  Where document outsourcing contracts include revenue accounted 
for as equipment sales, this revenue is included in equipment sales.  All 
other document outsourcing revenue, including service, equipment rental, 
supplies, paper and labor are included in document outsourcing.  This has the 
effect of diverting some revenues from supplies, paper, service, rental, and 
finance income.

We offer our 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.  While competition for this business from banks and other 
finance companies remains extensive, we actively market our equipment 
financing services on the basis of customer service, convenience and 
competitive rates.  On average, 75 to 80 percent of equipment sales are 
financed through Xerox.

International Operations

Our international operations account for 51 percent of Document Processing 
revenues.  Our largest interest outside the United States is Xerox Limited.  
Marketing and manufacturing operations are also conducted through joint 
ventures in India and China.  Marketing and manufacturing in Latin America are 
conducted through subsidiaries or distributors in over 35 countries.  Fuji 
Xerox develops, manufactures and distributes document processing products in 
Japan and other areas of the Pacific Rim, Australia and New Zealand.

Our financial results by geographical area for 1997, 1996 and 1995, which are 
presented on pages 32, 33, 49, and 50 of the Company's 1997 Annual Report to 
Shareholders, are hereby incorporated by reference in this document in partial 
answer to this item.

Acquisition of XLConnect Solutions, Inc.

Accelerating our strategy to achieve high growth through networked document 
solutions, we announced on March 5, 1998 an agreement to acquire XLConnect 
Solutions, Inc. (XLConnect), an information technology services company, and 
its parent company, Intelligent Electronics, Inc. (Intelligent Electronics), 
for $415 million in cash.  The transaction must be approved by the 
stockholders of both Intelligent Electronics and XLConnect.  Closing is 
subject to customary closing conditions, including regulatory approval.

We believes that this acquisition will strengthen our worldwide services 
capabilities to design, build and support networks that implement enterprise-
wide document solutions for our customers.  In addition, we believe that 
XLConnect's expertise will complement and extend our highly profitable 
document services outsourcing business, which grew 58 percent in 1997, to $2 
billion.

XLConnect, with 1,500 employees, 27 locations throughout the United States and 
1997 revenue of $135 million, provides network management, consulting, design, 
and integration services for medium and large companies.

The growth in network computing has led to a tremendous increase in both the 
volume of digital documents and the convergence of document management and 
communication with other technologies, including imaging, voice and data.  We 
believe that this acquisition will infuse us with hundreds of talented and 
trained network specialists who will design and build publishing, workflow and 
other document solutions, including Internet-based solutions, for our 
customers.  We believe the experts at XLConnect will help us develop and 
deliver our document solutions for virtually any networked environment.

Our digital printers, copiers and other document products, operating in 
conjunction with a suite of document management, workflow and imaging 
software, create networked business solutions that improve productivity in the 
office, print shop and production-printing environments.  The purchase of 
XLConnect provides us strategic access to a nationwide information technology 
services capability, including applications developed by XLConnect, that 
position us at the forefront of the networked enterprise.  XLConnect's senior 
management team will remain with the company.

We anticipate that the earnings impact from this acquisition will be about 
neutral in 1998 and positive in 1999 and thereafter.

Discontinued Operations - Insurance and Other Financial Services

The discussion under the caption "Discontinued Operations - Insurance and 
Other Financial Services" on pages 43 through 45 set forth under the caption 
"Financial Review" and the information set forth under Note 8 "Discontinued 
Operations" on pages 50 through 53 in the Company's 1997 Annual Report to 
Shareholders are hereby incorporated by reference in this document in partial 
answer to this item.

As discussed in the incorporated sections referenced in the preceding 
paragraph, as of January 2, 1998, the last remaining insurance company was 
Crum & Forster Holdings, Inc. (CFI).  However, on March 11, 1998, we announced 
an agreement to sell CFI to Fairfax Financial Holdings Limited (Fairfax) of 
Toronto.  Upon closing, the transaction will effectively complete the sale of 
the Talegen Holdings, Inc. insurance properties.

Under terms of the agreement, Fairfax will acquire the stock of CFI for total 
consideration of $680 million, including the repayment of $115 million of 
debt.  We will incur approximately $75 million in transaction-related costs.  
The transaction, expected to close by the third quarter, is subject to 
customary closing conditions and regulatory approval.

Upon completion of this transaction, we will have effectively completed our 
exit from insurance and financial services.  A final write-off of less than 
$200 million after-tax will be taken in the first quarter of 1998.

A discussion of CFI's property and casualty reserves follows.

Property and Casualty Reserves

Overview

Losses from claims and related claims handling and legal expense comprise the 
majority of costs from providing insurance products.  Therefore, unpaid losses 
and loss expenses are generally 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 paid on policies issued are difficult to 
estimate and are subject to constant reevaluation as new information becomes 
available and as new techniques are developed to analyze available data.  CFI, 
like most insurance companies, utilizes a variety of loss trending and 
analysis techniques to estimate anticipated ultimate losses and the time 
frames in which claims are likely to be reported and paid.  Loss development 
patterns vary significantly by type of insurance coverage and are affected by 
the economic, social, judicial, weather-related and geological conditions in 
different geographic areas.

In order to moderate the potential impact of unusually severe or frequent 
losses, CFI cedes a portion of its gross policy premiums to reinsurers in 
exchange for the reinsurers' agreements to share a portion of the covered 
losses.  Although the ceding of insurance does not discharge the original 
insurer from its primary liability to its policyholder, the reinsurer that 
accepts the risk assumes an obligation to the original insurer.  The ceding 
insurer retains a contingent liability with respect to reinsurance ceded to 
the extent that the reinsurer might not be able to meet its obligations.

Reserves are established by CFI to provide for the estimated level of claim 
payments that will be made under the policies they write.  Over the policy 
period, as premiums are earned, a portion of the premiums is set aside as 
gross loss and loss expense reserves for incurred but not reported (IBNR) 
losses in anticipation of claims that have not yet been reported.  IBNR 
reserves also include amounts to supplement case reserves, when established, 
to provide for potential further loss development.  In addition, gross 
reserves are established for internal and external loss expenses associated 
with handling the claims inventory.  These expenses are characterized as 
allocated loss expenses when they are attributable to a specific claim or 
series of claims and unallocated loss expenses when not similarly 
attributable.  When a claim is reported, case reserves are established on the 
basis of all pertinent information available at the time.  Legal defense cost 
that can be assigned to a related claim file and can be included as part of 
the loss under the contract is 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 (net 
of uncollectible reinsurance) and salvage and subrogation on those reserves.

The effect of inflation on gross reserves is implicitly considered when 
estimating the liability for unpaid losses and loss expenses.  The effect of 
inflation on individual case basis reserves 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.

Monitoring of Insurance Reserves

CFI monitors its liabilities arising from business written and adjusts carried 
reserves as conditions change and new information emerges.  An oversight 
committee at Talegen Holdings, Inc. (Talegen) has also reviewed and approved 
all reserve funding increases.  CFI employs an actuarial staff, some members 
of which, as Fellows of the Casualty Actuarial Society and members of the 
American Academy of Actuaries, are qualified loss reserve specialists who 
perform regular actuarial reviews of claim development and resulting reserve 
requirements.  On a semi-annual or more frequent basis, detailed actuarial 
studies of gross reserves and reserves net of reinsurance are conducted by 
line of business and accident year.  Actual claims activity is monitored 
monthly and compared to expected levels to detect variances or trends 
indicating changes in liabilities.

Estimates of loss and loss expense liabilities are affected primarily by the 
types of 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 factors can include increased damage awards 
by the courts, known changes in judicial interpretations of legal liability 
for asbestos, environmental and other latent exposure claims and changes in 
judicial interpretation of the scope of coverage provided by general liability 
and umbrella policies.  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

CFI made significant use of reinsurance during the 1970's and early 1980's.  
Since that time, CFI generally has increased the portion of business they 
retain while reducing the number of reinsurers used for their reinsurance 
contracts.  During 1997 and 1996, excluding the reinsurance ceded to pools, 
associations and similar organizations, 90% and 89%, respectively, of total 
written premiums ceded by CFI to reinsurers were placed with up to 38 
reinsurers.

Talegen has a reinsurance security committee which currently approves those 
reinsurers with whom CFI will do business.  The approval process utilizes 
credit analyses prepared by The Resolution Reinsurance Services Company 
(RRSC), a subsidiary of The Resolution Group, Inc.  These credit analyses are 
reviewed by the committee to assess the creditworthiness of each reinsurer.  
The credit criteria under which such approvals are granted have become 
increasingly restrictive over the past several years as CFI has intentionally 
placed business with what is believed to be financially secure reinsurers.

The potential uncollectibility of ceded reinsurance has been an industry-wide 
issue.  With respect to the management of recoveries due from reinsurers, CFI 
operates under guidelines for the early identification of potential collection 
problems and utilizes the services of RRSC, which employs a specialized group 
of work-out experts to aid in the more complicated cases.  Based upon the 
review of financial condition and assessment of other available information, 
CFI maintains a provision for uncollectible amounts due from reinsurers.  

Statutory and GAAP Reporting of Net Unpaid Losses and Loss Expenses

The liability for unpaid losses and loss expenses required by generally 
accepted accounting principles (GAAP) differs from the liability reported in 
accordance with statutory accounting practices (SAP).  Because certain GAAP 
adjustments to the recorded SAP liability can not 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

CFI's reserves were increased in 1995, 1996 and 1997 primarily to make 
provision for latent liabilities, uncollectible reinsurance associated with 
latent liabilities, and construction defects exposure.  CFI's net reserves, 
exclusive of Ridge Reinsurance Limited (Ridge Re), a wholly owned subsidiary 
of Xerox Financial Services, Inc., benefits, for prior accident years were 
increased by $16 million in 1997, by $173 million in 1996 and $326 million 
during 1995.  The net reserve strengthening for the three-year period ended 
December 31, 1997 totaling $515 million included increases of $335 million for 
latent liabilities, $125 million for construction defects exposures and $85 
million for uncollectible reinsurance, while experience in other reserve 
categories during this period resulted in a reduction to net reserves of $30 
million.  The strengthening made by CFI in 1996 and 1997 was charged to 
discontinued operations reserves established for this purpose and, therefore, 
did not impact our earnings.  Each of these exposures and the increases 
recorded are more fully discussed in the paragraphs below.  

Latent liabilities include reserves for environmental, asbestos and other 
types of latent exposures, such as those associated with breast implants, 
chemical exposure, tobacco products and other exposures which can result in 
insurance claims that were not contemplated when policies were originally 
written.  Prior to 1995, CFI established case and IBNR reserves for latent 
exposure claims that had been reported.  The IBNR reserves were established 
primarily to cover adverse development on known claims.  Case reserves were 
and continue to be determined by a specialized claim and legal staff.  
Building on methodologies first published by the Casualty Actuarial Society in 
the third quarter of 1994, Talegen completed the first phase of a project to 
develop and implement methods to provide estimates of ultimate losses for 
asbestos and environmental exposures.  This resulted in a model that, in turn, 
was the basis for increasing CFI's reserves in 1995 for latent liabilities by 
$186 million on a net basis.  During 1996, the model was further refined and 
tested, and the amount and quality of data used in modeling was significantly 
enhanced.  These improvements led to a 1996 reserve increase for latent 
exposures of $145 million on a net basis.  In 1997, CFI increased its reserves 
for latent exposures by $4 million on a net basis.

Construction defect (CD) is a term used by the industry to refer to any third 
party claim where property damage occurs or is alleged to have occurred as a 
result of the insured's work, work performed on the insured's behalf or 
product failure in condominiums, townhouses, single family homes or commercial 
buildings involving one or more policy periods, excluding environmental 
exposures.  Although claims involving CD have been experienced by the 
insurance industry and CFI historically, beginning in the late 1980's insurers 
who had written general contractors or subcontractors policies in California 
began to receive a growing number of CD cases, with claims spread over several 
accident years.  With increased emphasis on evaluating and understanding CD 
exposure, substantial effort was undertaken to segregate data and develop 
methodology to provide better estimates of ultimate losses associated with the 
exposure.  The efforts led to a net reserve increase for CFI during 1995 of 
$12 million.  Refinement of costing methods and estimation of the impact of 
recent court decisions and legislation resulted in CFI increasing its net 
reserves for California CD exposure during 1996 by $101 million.  In 1997, CFI 
increased its reserves for California CD exposure by $12 million on a net 
basis. 

Uncollectible reinsurance reserves are established by CFI to the extent that 
its evaluation of the ability or willingness of reinsurers to indemnify ceded 
exposure pursuant to reinsurance agreements indicates that they will not 
receive full recovery of ceded balances.  In general, latent liability claims 
present a need to establish this reserve both because of their inherent 
complexity and attendant issues and because these exposures arise under 
insurance policies that, in many cases, were written during the 1950's, 1960's 
and 1970's, when CFI used a large number of reinsurers, and applicable 
reinsurance programs included reinsurers which subsequently encountered 
financial difficulties.  As reserves for latent liability exposure were 
increased, CFI also increased reserves for uncollectible reinsurance.  
Reserves for uncollectible reinsurance were increased by $32 million and $53 
million in 1996 and 1995, respectively.  There were no uncollectible 
reinsurance reserve increases for prior periods in 1997.

The loss and loss expense reserve development table illustrates the 
development of statutory balance sheet liabilities for 1987 through 1997 for 
CFI before cessions to Ridge Re.  The first line of the table is the estimated 
GAAP liability for unpaid losses and loss expenses, net of reinsurance 
recoverable, recorded at the balance sheet date for each year.  The second 
line on the table reconciles the estimated GAAP liability for net unpaid 
losses and loss expenses to the estimated SAP liability for unpaid losses and 
loss expenses.  The lower section of the table shows the updated amount of the 
previously recorded SAP liability based on experience as of the close of each 
succeeding year. 

The estimate for unpaid losses and loss expenses 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, as 
calculated on a statutory basis, for all prior calendar years.  These changes 
in estimates have been reflected in CFI's calendar year operating results.  
Because CFI recognizes 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 
deficiencies or redundancies based solely on this table.






















This page intentionally left blank.


Loss and Loss Expense Reserve Development

Year ended December 31 (in millions)      1987      1988      1989      1990
Liability for unpaid losses and loss
  expenses - GAAP (net of reinsurance) $ 2,153   $ 2,185   $ 2,330   $ 2,424
GAAP to SAP differences                     (4)       (6)       (9)      (26)
Liability for unpaid losses and loss
  expenses - SAP (net of reinsurance)    2,149     2,179     2,321     2,398

Paid (cumulative) as of:
  End of year                                -         -         -         -
  One year later                           635       647       659       734
  Two years later                        1,096     1,092     1,190     1,280
  Three years later                      1,427     1,484     1,628     1,562
  Four years later                       1,711     1,819     1,828     1,843
  Five years later                       1,980     1,960     2,041     2,037
  Six years later                        2,080     2,118     2,196     2,148
  Seven years later                      2,200     2,250     2,290     2,267
  Eight years later                      2,319     2,330     2,396
  Nine years later                       2,385     2,423
  Ten years later                        2,470
Liability estimated as of: 
  End of year                            2,149     2,179     2,321     2,398
  One year later                         2,125     2,312     2,472     2,390
  Two years later                        2,325     2,465     2,395     2,929
  Three years later                      2,497     2,345     2,903     2,809
  Four years later                       2,370     2,794     2,819     2,825
  Five years later                       2,781     2,739     2,855     3,006
  Six years later                        2,727     2,805     3,039     3,136
  Seven years later                      2,804     2,992     3,181     3,139
  Eight years later                      3,005     3,131     3,201
  Nine years later                       3,128     3,161
  Ten years later                        3,151
Deficiency                             $(1,002)  $  (982)  $  (880)  $  (741)

End of Year:
  Gross liability (1)
  Reinsurance recoverable
  Net liability
One Year Later:
  Gross re-estimated liability
  Re-estimated recoverable
  Net re-estimated liability
Two Years Later:
  Gross re-estimated liability
  Re-estimated recoverable
  Net re-estimated liability
Three Years Later:
  Gross re-estimated liability
  Re-estimated recoverable
  Net re-estimated liability
Four Years Later:
  Gross re-estimated liability
  Re-estimated recoverable
  Net re-estimated liability
Gross cumulative deficiency

(1) Gross liability information for CFI is not available for periods prior to 
    1993.




   1991      1992      1993      1994      1995      1996      1997

$ 2,174   $ 2,357   $ 2,292   $ 2,173   $ 2,418   $ 2,619   $ 2,616
    (16)       17         6         6       (11)      (19)      (22)

  2,158     2,374     2,298     2,179     2,407     2,600     2,594


      -         -         -         -         -         -         -
    722       500       565       522       470       564
  1,100       938       932       860       846
  1,461     1,243     1,182     1,147
  1,706     1,421     1,390
  1,847     1,587
  1,983





  2,158     2,374     2,298     2,179     2,407     2,600     2,594
  2,737     2,378     2,311     2,461     2,539     2,602
  2,648     2,412     2,543     2,550     2,509
  2,670     2,618     2,610     2,518
  2,872     2,673     2,571
  2,967     2,641
  2,950




$  (792)  $  (267)  $  (273)  $  (339)  $  (102)  $    (2)  $     -


                    $ 3,102   $ 2,829   $ 3,128   $ 3,289   $ 3,407
                        804       650       721       689       813
                      2,298     2,179     2,407     2,600     2,594

                      3,112     3,274     3,290     3,445
                        801       813       751       843
                      2,311     2,461     2,539     2,602

                      3,513     3,388     3,368
                        970       838       859
                      2,543     2,550     2,509

                      3,603     3,460
                        993       942
                      2,610     2,518

                      3,655
                      1,084
                      2,571
                    $  (553)  $  (631)  $  (240)  $  (156)  $     -




I
tem 2. Properties

The Company owns a total of eleven principal manufacturing and engineering 
facilities and leases an additional such facility.  The domestic facilities 
are located in California, New York and Oklahoma, while the international 
facilities are located in Brazil, Canada, England, France, Holland 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 Company, there are numerous facilities which encompass 
general offices, sales offices, service locations and distribution centers.  
The principal owned facilities are located in the United States, England, and 
Mexico.  The principal leased facilities are located in the United States, 
Brazil, Canada, England, Mexico, France, Germany and Italy.

The Company's Corporate Headquarters facility, located in Connecticut, is 
leased.  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 13 "Litigation" on page 61 of the 
Company's 1997 Annual Report to Shareholders is incorporated by reference in 
this document in answer to this item.  On March 2, 1998, the court removed the 
case from the trial calendar and the parties submitted a joint motion for the 
appointment of a mediator to attempt to mediate the damage counterclaim.

On April 11, 1996, an action was commenced by Accuscan Corp. (Accuscan), in 
the United States District Court for the Southern District of New York, 
against Registrant seeking unspecified damages for infringement of a patent of 
Accuscan which expired in 1993.  The original suit was directed to facsimile 
products and sought damages for sales between 1990 and 1993.  In late January 
1998, Accuscan provided to Registrant its expert report on the issue of 
damages seeking $225,000,000 for infringement not only of facsimile machines 
but other Registrant hardware.  Registrant's expert report states that it is 
believed that the appropriate amount of damages, if liability should be 
established, is $150,000.  Registrant (i) denies any liability to plaintiff, 
(ii) denies that the patent in suit is valid or infringed, and (iii) asserts 
that the damage calculations used by plaintiff are inconsistent with the facts 
in numerous respects.  Registrant intends to vigorously defend the action.  
Trial is scheduled for March 23, 1998.


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

None.




                                   PART II


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

Market Information, Holders and Dividends

The information set forth under the following captions on the indicated pages 
of the Company's 1997 Annual Report to Shareholders is hereby incorporated by 
reference in this document in answer to this Item:

              Caption                                           Page No.

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

Recent Sales of Unregistered Securities

During the quarter ended December 31, 1997, Registrant issued the following 
securities in transactions which were not registered under the Securities Act 
of 1933, as amended ("Act"):

(a)  Securities Sold:  On October 1, 1997 Registrant issued 1,306 shares of 
Common Stock, par value $1 per share.

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

(c)  The shares were issued at a deemed purchase price of $84.1875 per share 
(aggregate price of $109,949), based upon the market value on the date of 
issuance, in payment of the quarterly Directors' fees pursuant to Registrant's 
Restricted Stock Plan For Directors.

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


Item 6. Selected Financial Data

The following information, as of and for the five years ended December 31, 
1997, as set forth and included under the caption "Eleven Years in Review" on 
pages 68 and 69 of the Company's 1997 Annual Report to Shareholders, is hereby 
incorporated by reference in this document in answer to this Item:

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




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

The information set forth under the caption "Our Results of Operations and 
Financial Condition" under the caption "Financial Review" on pages 31-37, 39-
41, and 43-45 of the Company's 1997 Annual Report to Shareholders other than 
the pictures and captions to the pictures 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 30, 38, 42, 46-65, and 67 of the 
Company's 1997 Annual Report to Shareholders, are hereby incorporated by 
reference in this document in answer to this Item.  In addition, also included 
is the quarterly financial data included under the caption "Quarterly Results 
of Operations (Unaudited)" on page 66 of the Company's 1997 Annual Report to 
Shareholders.

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


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

Not applicable.




                                   PART III

The information set forth in "Proposal 1--Election of Directors" in the 
Company's Notice of the 1998 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*     59    Chairman of the Board, Chief       1991       1983
                           Executive Officer and Chairman
                           of the Executive Committee

G. Richard Thoman*   53    President and Chief                1997       1997
                           Operating Officer

William F. Buehler   58    Executive Vice President,          1997       1991
                           Business Operations

A. Barry Rand        53    Executive Vice President,          1992       1986
                           Customer Operations

Barry D. Romeril     54    Executive Vice President and       1993       1993
                           Chief Financial Officer

Stuart B. Ross       60    Executive Vice President;          1990       1979
                           Chairman and Chief Executive
                           Officer, Xerox Financial
                           Services, Inc.

Allan E. Dugan       57    Senior Vice President,             1992       1990
                           Corporate Strategic Services

John A. Lopiano      59    Senior Vice President; President,  1995       1993
                           Production Systems Group

Mark B. Myers        59    Senior Vice President, Corporate   1992       1989
                           Research and Technology 

David R. Myerscough  57    Senior Vice President;             1996       1989
                           Corporate Business Strategy


* Member of Xerox Board of Directors.


Executive Officers of Xerox, Continued

                                                             Year
                                                           Appointed
                                                          to Present   Officer
     Name           Age         Present Position           Position     Since_

Carlos Pascual       52    Senior Vice President; President,  1997       1994
                           U.S. Customer Operations

Richard S. Paul      56    Senior Vice President and          1992       1989
                           General Counsel

Brian E. Stern       50    Senior Vice President; President,  1996       1993
                           Office Document Products Group

Eunice M. Filter     57    Vice President, Treasurer          1990       1984
                           and Secretary

Philip D. Fishbach   56    Vice President and Controller      1995       1990


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

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

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




                                    PART IV


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

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

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

 (b)  A Current Report on Form 8-K dated October 9, 1997 reporting Item 7
      "Financial Statements, Pro-Forma Financial Information and Exhibits" 
      was 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
      1998 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 23, 1998

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 23, 1998



    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/ B. R. Inman                                      Director


/s/ Antonia Ax:son Johnson                           Director


/s/ Yotaro Kobayashi                                 Director


/s/ Ralph S. Larsen                                  Director


/s/ John D. Macomber                                 Director


/s/ George J. Mitchell                               Director


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


/s/ John E. Pepper                                   Director


/s/ Patricia F. Russo                                Director


/s/ Martha R. Seger                                  Director


/s/ Thomas C. Theobald                               Director


/s/ G. Richard Thoman                                Director




Report of Independent Auditors



To the Board of Directors and Shareholders of Xerox Corporation


Under date of January 23, 1998, we reported on the consolidated balance sheets 
of Xerox Corporation and subsidiaries as of December 31, 1997 and 1996 and the 
related consolidated statements of income and cash flows for each of the years 
in the three-year period ended December 31, 1997, as contained in the Xerox 
Corporation 1997 Annual Report to Shareholders on pages 30, 38, 42, and 46-65.  
These consolidated financial statements and our report thereon are 
incorporated by reference in the 1997 Annual Report on Form 10-K.  In 
connection with our audits of the aforementioned consolidated financial 
statements, we also have audited the related financial statement schedule 
listed in the accompanying index.  This financial statement schedule is the 
responsibility of the Company's management.  Our responsibility is to express 
an opinion on this financial statement schedule based on our audits.

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



                                                KPMG PEAT MARWICK LLP



Stamford, Connecticut
January 23, 1998




Index to Financial Statements and Schedule

Financial Statements:

   Consolidated statements of income of Xerox Corporation and subsidiaries for
     each of the years in the three-year period ended December 31, 1997

   Consolidated balance sheets of Xerox Corporation and subsidiaries as of 
     December 31, 1997 and 1996

   Consolidated statements of cash flows of Xerox Corporation and subsidiaries 
     for each of the years in the three-year period ended December 31, 1997


   Notes to consolidated financial statements

   Report of Independent Auditors

   Quarterly Results of Operations (unaudited)

      The above consolidated financial statements, related notes, report 
      thereon and the quarterly results of operations which appear on pages 
      30, 38, 42, 46-65, 67, and 66 of the Company's 1997 Annual Report to 
      Shareholders are hereby incorporated by reference in this document.

Commercial and Industrial (Article 5) Schedule:

II - Valuation and qualifying accounts


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


 
                                                                  SCHEDULE II

Valuation and Qualifying Accounts
Year ended December 31, 1997, 1996 and 1995

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

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

1996
Allowance for Losses on:
   Accounts Receivable            $ 90          $ 73         $ 71         $ 92
   Finance Receivables             322           186          161          347
Deferred Tax Valuation 
   Allowance                        20             -           20            -

                                  $432          $259         $252         $439

1995
Allowance for Losses on:
   Accounts Receivable            $ 79          $ 81         $ 70         $ 90
   Finance Receivables             320           154          152          322
Deferred Tax Valuation 
   Allowance                        34            -            14           20 

                                  $433          $235         $236         $432



Index of Exhibits

Document and Location
  
(3) (a)     Restated Certificate of Incorporation of Registrant filed by the 
            Department of State of New York on October 29, 1996.
  
            Incorporated by reference to Exhibit 3(a)(1) to Registrant's 
            Quarterly Report on Form 10-Q for the Quarter Ended September 30, 
            1996.

    (b)     By-Laws of Registrant, as amended through February 2, 1998.
  
(4) (a)     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.

    (b)     Indenture dated as of December 1, 1991 between Registrant and 
            Citibank, N.A. relating to unlimited amounts of debt securities 
            which may be issued from time to time by Registrant when and 
            as authorized by or pursuant to a resolution of Registrant's 
            Board of Directors.
  
            Incorporated by reference to Exhibit 4(a) to Registration No. 
            33-44597.
 
    (c)     Indenture dated as of September 20, 1996 between Registrant and 
            Citibank, N.A. relating to unlimited amounts of debt securities 
            which may be issued from time to time by Registrant when and as 
            authorized by or pursuant to a resolution of Registrant's Board 
            of Directors.

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

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

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



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

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

    (f)     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.
  
    (g)     Indenture dated as of May 1, 1994, between XCC and State Street 
            Bank and Trust Company (formerly, 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.

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

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

    (i)     Instruments with respect to long-term debt where the total amount 
            of securities authorized thereunder does not exceed 10% of the 
            total assets of the Registrant and its subsidiaries on a 
            consolidated basis have not been filed.  The Registrant agrees to 
            furnish to the Commission a copy of each such instrument upon 
            request. 
  
(10)        The management contracts or compensatory plans or arrangements 
            listed below that are applicable to the executive officers named 
            in the Summary Compensation Table which appears in Registrant's 
            1998 Proxy Statement are preceded by an asterisk (*).
 
   *(a)     Registrant's 1976 Executive Long-Term Incentive Plan, as amended 
            through February 4, 1991.
 
            Incorporated by reference to Exhibit (10)(a) to the Registrant's 
            Annual Report on Form 10-K for the Year Ended December 31, 1991.

   *(b)     Registrant's 1991 Long-Term Incentive Plan, as amended through 
            May 15, 1997.

            Incorporated by reference to Registrant's Notice of the 1997 
            Annual Meeting of Shareholders and Proxy Statement pursuant to
            Regulation 14A.
  
    (c)     Registrant's 1996 Non-Employee Director Stock Option Plan.

            Incorporated by reference to Registrant's Notice of the 1996 
            Annual Meeting of Shareholders and Proxy Statement pursuant to
            Regulation 14A.
  
   *(d)     Description of Registrant's Annual Performance Incentive Plan.

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

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

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

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

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

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

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

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

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

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

   *(j)     Registrant's Contributory Life Insurance Program, as amended as of 
            January 30, 1998.
 
    (k)     Registrant's Deferred Compensation Plan for Directors, 1997 
            Amendment and Restatement.

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

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

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

   *(m)     Executive Performance Incentive Plan.

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

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

(13)        Pages 30 through 69 of Registrant's 1997 Annual Report
            to Shareholders.

(21)        Subsidiaries of the Registrant.

(23)        Consent of KPMG Peat Marwick LLP.

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






                                                                  EXHIBIT 3(b)


                                    BY-LAWS

                                      of

                               XEROX CORPORATION


                               February 2, 1998
                    



                                   ARTICLE I

                           MEETINGS OF STOCKHOLDERS

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

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

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

     SECTION 4.   Notice of Meetings:

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

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

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

     SECTION 5.   Quorum and Adjourned Meetings:

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

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

     SECTION 6.   Nominations and Business at Meetings

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

     Such shareholder's notice shall set forth (a) as to each person whom such 
shareholder proposes to nominate for election or reelection as a Director, all 
information relating to such person that is required to be disclosed in 
solicitations of proxies for election of directors, or is otherwise required, 
in each case pursuant to Regulation 14A under the Securities Exchange Act of 
1934, as amended (including such person's written consent to being named in 
the proxy statement as a nominee and to serving as a Director if elected); (b) 
as to any other business that the shareholder proposes to bring before the 
meeting, a brief description of the business desired to be brought before the 
annual meeting, the reasons for conducting such business at the annual meeting 
and any material interest in such business of such person on whose behalf such 
proposal is made; and (c) as to the shareholder giving the notice and the 
beneficial owner, if any, on whose behalf the nomination or proposal is made, 
(i) the name and address of such shareholder, as they appear on the Company's 
books and (ii) the class and number of shares of the Company which are 
beneficially owned by such shareholder.  No person shall be eligible for 
election as a Director of the Company and no business shall be conducted at 
the annual meeting of shareholders unless nominated or proposed in accordance 
with the procedures set forth in this Section 6.  The Chairman of the meeting 
may, if the facts warrant, determine and declare to the meeting that a 
nomination or proposal was not made in accordance with the provisions of this 
Section 6 and, if he should so determine, he shall so declare to the meeting 
and the defective nomination or proposal shall be disregarded. /(1)

     SECTION 7.   Organization:   At every meeting of the shareholders, the 
Chairman of the Board, or in his absence, the President, or in his absence, an 
Executive Vice President designated by the Chairman of the Board, or in the 
absence of such officers, a person selected by the meeting, shall act as 
chairman of the meeting.  The Secretary or, in his absence, an Assistant 
Secretary shall act as secretary of the meeting, and in the absence of both 
the Secretary and an Assistant Secretary, a person selected by the meeting 
shall act as secretary of the meeting. 

     SECTION 8.   Voting:

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

     (b)     Directors shall, except as otherwise required by law, be elected 
by a plurality of the votes cast at a meeting of shareholders by holders of 
shares entitled to vote in the election.  [; provided, however, a nomination 
shall be accepted, and votes cast for a nominee shall be counted by the 
inspectors of election, only if the Secretary of the Company has received at 
least twenty-four hours prior to the meeting a statement over the signature of 
the nominee that he consents to being a nominee and, if elected, intends to 
serve as a Director.] /(2)

     SECTION 9.   Qualification of Voters:

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

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


- ----------------------------
/(1) Effective for the annual meeting to be held in 1999 and for all 
subsequent annual meetings.
/(2) Bracketed material deleted for the annual meeting to be held in 1999 and 
for all subsequent annual meetings.

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

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

     SECTION 10.   Proxies:

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

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

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

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

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

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

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

     SECTION 11.   Inspectors of Election: 

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

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

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

                                  ARTICLE II

                              BOARD OF DIRECTORS

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

     SECTION 2.   Number, Term of Office and Classification:

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

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

     (c)     All Directors shall have equal voting power.

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

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

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

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

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

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

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

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

     SECTION 11.   Quorum and Manner of Acting:

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

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

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

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

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

     SECTION 15.   Interested Directors:

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

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

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

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

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

                                 ARTICLE III

                             EXECUTIVE COMMITTEE

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

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

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

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

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

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

     (f)     The declaration of dividends.

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

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

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

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

                                  ARTICLE IV

                                   OFFICERS

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

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

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

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

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

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

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

     SECTION 8.  President:   The President shall have such powers and perform 
such duties as may be assigned to him by the Board and the Chairman of the 
Board.  The President shall, in the absence of the Chairman of the Board, 
preside at all meetings of the shareholders and Directors at which he is 
present.  In the absence or inability to act of the Chairman of the Board, or 
if the Office of Chairman of the Board be vacant, the President, subject to 
the right of the Board from time to time to extend or confine such powers and 
duties or to assign them to others, shall perform all the duties and may 
exercise all the powers of the Chairman of the Board. 
     
     SECTION 9.  Chairman of the Executive Committee:   The Chairman of the 
Executive Committee shall have such powers and perform such duties as may be 
assigned to him by the Board.  The Chairman of the Executive Committee shall 
preside at meetings of the Executive Committee of the Board of Directors.

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

     SECTION 11.   The Treasurer:   The Treasurer shall, if required by the 
Board of Directors, give a bond for the faithful discharge of his duties, in 
such sum and with such sureties as the Board of Directors shall require.  He 
shall have charge and custody of, and be responsible for, all funds and 
securities of the Company, and deposit all such funds in the name of and to 
the credit of the Company in such banks, trust companies, or other 
depositories as shall be selected by the Board of Directors.  The Treasurer 
may sign certificates for stock of the Company authorized by the Board of 
Directors.  He shall also perform all other duties customarily incident to the 
office of Treasurer and such other duties as from time to time may be assigned 
to him by the Board of Directors.

     SECTION 12.   The Controller:  The Controller shall keep and maintain the 
books of account for internal and external reporting purposes.  He shall also 
perform all other duties customarily incident to the office of Controller and 
such other duties as may be assigned to him from time to time by the Board of 
Directors.

     SECTION 13.   The Secretary:   It shall be the duty of the Secretary to 
act as secretary of all meetings of the Board of Directors, and of the 
shareholders, and to keep the minutes of all such meetings at which he shall 
so act in a proper book or books to be provided for that purpose; he shall see 
that all notices required to be given by the Company are duly given and 
served; he may sign and execute in the name of the Company certificates for 
the stock of the Company, deeds, mortgages, bonds, contracts or other 
instruments authorized by the Board of Directors; he shall prepare, or cause 
to be prepared, for use at meetings of shareholders the list of shareholders 
as of the record date referred to in Article I, Section 12 of these By-Laws 
and shall certify, or cause the transfer agent to certify, such list; he shall 
keep a current list of the Company's Directors and officers and their 
residence addresses; he shall be custodian of the seal of the Company and 
shall affix the seal, or cause it to be affixed, to all agreements, documents 
and other papers requiring the same.  The Secretary shall have custody of the 
Minute Book containing the minutes of all meetings of shareholders, Directors, 
the Executive Committee, and any other committees which may keep minutes, and 
of all other contracts and documents which are not in the custody of the 
Treasurer or the Controller of the Company, or in the custody of some other 
person authorized by the Board of Directors to have such custody.  

     SECTION 14.   Appointed Officers:  The Board of Directors may delegate to 
any officer or committee the power to appoint and to remove any subordinate 
officer, agent or employee.

     SECTION 15.  Assignment and Transfer of Stocks, Bonds, and Other 
Securities:  The Chairman of the Board, the Treasurer, the Secretary, any 
Assistant Secretary, any Assistant Treasurer, and each of them, shall have 
power to assign, or to endorse for transfer, under the corporate seal, and to 
deliver, any stock, bonds, subscription rights, or other securities, or any 
beneficial interest therein, held or owned by the Company.

                                   ARTICLE V

                  CONTRACTS, CHECKS, DRAFTS AND BANK ACCOUNTS

     SECTION 1.   Execution of Contracts:  The Board of Directors, except as 
in these By-Laws otherwise provided, may authorize any officer or officers, 
agent, or agents, in the name of and on behalf of the Company to enter into 
any contract or execute and deliver any instrument, and such authority may be 
general or confined to specific instances; but, unless so authorized by the 
Board of Directors, or expressly authorized by these By-Laws, no officer, 
agent or employee shall have any power or authority to bind the Company by any 
contract or engagement or to pledge its credit or to render it liable 
pecuniarily in any amount for any purpose.

     SECTION 2.   Loans:   No loans shall be contracted on behalf of the 
Company, and no negotiable paper shall be issued in its name unless 
specifically authorized by the Board of Directors.
     SECTION 3.   Checks, Drafts, etc.:   All checks, drafts, and other orders 
for the payment of money out of the funds of the Company, and all notes or 
other evidences of indebtedness of the Company, shall be signed on behalf of 
the Company in such manner as shall from time to time be determined by 
resolution of the Board of Directors.

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

                                  ARTICLE VI

                             STOCKS AND DIVIDENDS

     SECTION 1.   Certificates of Stock:   Certificates for stock of the 
Company shall be in such form as shall be approved by the Board of Directors.  
The certificates of stock shall be numbered in order of their issue, shall be 
signed by the Chairman of the Board, the President or a Vice President, and 
the Secretary or an Assistant Secretary, or the Treasurer or an Assistant 
Treasurer.  The signature of the officers upon a certificate may be facsimiles 
if the certificate is countersigned by a transfer agent or registered by a 
registrar other than the Company itself or its employee.  In case any officer 
who has signed or whose facsimile signature has been placed upon a certificate 
shall have ceased to be such officer before such certificate is issued, it may 
be issued by the Company with the same effect as if he were an officer at the 
date of issue.

     SECTION 2.   Transfer of Stock:   Transfers of stock of the Company shall 
be made only on the books of the Company by the holder thereof, or by his duly 
authorized attorney, on surrender of the certificate or certificates for such 
stock, properly endorsed.  Every certificate surrendered to the Company shall 
be marked "Canceled", with the date of cancellation, and no new certificate 
shall be issued in exchange therefor until the old certificate has been 
surrendered and canceled.  A person in whose name stock of the Company stands 
on the books of the Company shall be deemed the owner thereof as regards the 
Company; provided that, whenever any transfer of stock shall be made for 
collateral security, and not absolutely, such fact, if known to the Secretary 
of the Company, or to its transfer agent shall be so expressed in the entry of 
the transfer.  No transfer of stock shall be valid as against the Company, or 
its shareholders for any purpose, until it shall have been entered in the 
stock records of the Company as specified in these By-Laws by an entry showing 
from and to whom transferred.

     SECTION 3.   Transfer and Registry Agents:   The Company may, from time 
to time, maintain one or more transfer offices or agencies and/or registry 
offices at such place or places as may be determined from time to time by the 
Board of Directors; and the Board of Directors may, from time to time, define 
the duties of such transfer agents and registrars and make such rules and 
regulations as it may deem expedient, not inconsistent with these By-Laws, 
concerning the issue, transfer and registration of certificates for stock of 
the Company.

     SECTION 4.   Lost, Destroyed and Mutilated Certificates:   The holder of 
any stock of the Company shall immediately notify the Company of any loss, 
destruction or mutilation of the certificate therefor.  The Company may issue 
a new certificate in place of the lost or destroyed certificate, but as a 
condition to such issue, the holder of such certificate must make satisfactory 
proof of the loss or destruction thereof, and must give to the Company a bond 
of indemnity in form and amount and with one or more sureties satisfactory to 
the Treasurer, the Secretary or any Assistant Treasurer or Assistant 
Secretary.  Such bond of indemnity shall also name as obligee each of the 
transfer agents and registrars for the stock the certificate for which has 
been lost or destroyed.

     SECTION 5.   Record Dates for Certain Purposes:   The Board of Directors 
of the Company shall fix a day and hour not more than fifty days preceding the 
date of any meeting of shareholders, or the date for payment of any cash or 
stock dividend, or the date for the allotment of any rights of subscription, 
or the date when any change or conversion or exchange of capital stock shall 
go into effect, as a record date for the determination of the shareholders 
entitled to notice of, and to vote at, any such meeting and any adjournment 
thereof, or entitled to receive payment of any such dividend, or entitled to 
receive any such allotment of rights of subscription, or entitled to exercise 
rights in respect of any such change, conversion or exchange of capital stock, 
and in such case, such shareholders and only such shareholders as shall be 
shareholders of record on the day and hour so fixed shall be entitled to such 
notice of, and to vote at, such meeting or any adjournment thereof, or to 
receive payment of such dividend, or to receive such allotment of rights of 
subscription, or to exercise rights in connection with such change or 
conversion or exchange of capital stock, as the case may be, notwithstanding 
any transfer of any stock on the books of the Company after such day and hour 
fixed as aforesaid.

     SECTION 6.   Dividends and Surplus:   Subject to the limitations 
prescribed by law, the Board of Directors (1) may declare dividends on the 
stock of the Company whenever and in such amounts as, in its opinion, the 
condition of the affairs of the Company shall render it advisable, (2) may use 
and apply, in its discretion, any part or all of the surplus of the Company in 
purchasing or acquiring any of the shares of stock of the Company, and (3) may 
set aside from time to time out of such surplus or net profits such sum or 
sums as it in its absolute discretion, may think proper as a reserve fund to 
meet contingencies or for equalizing dividends, or for the purpose of 
maintaining or increasing the property or business of the Company, or for any 
other purpose it may think conducive to the best interest of the Company.

                                  ARTICLE VII

                               OFFICES AND BOOKS

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

     SECTION 2.   Books and Records:

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

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

                                 ARTICLE VIII

                                    GENERAL

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

     SECTION 2.   Indemnification of Directors and Officers:   Except to the 
extent expressly prohibited by law, the Company shall indemnify any person, 
made or threatened to be made, a party in any civil or criminal action or 
proceeding, including an action or proceeding by or in the right of the 
Company to procure a judgment in its favor or by or in the right of any other 
corporation of any type or kind, domestic or foreign, or any partnership, 
joint venture, trust, employee benefit plan or other enterprise, which any 
Director or officer of the Company served in any capacity at the request of 
the Company, by reason of the fact that he, his testator or intestate is or 
was a Director or officer of the Company or serves or served such other 
corporation, partnership, joint venture, trust, employee benefit plan or other 
enterprise, in any capacity, against judgments, fines, penalties, amounts paid 
in settlement and reasonable expenses, including attorneys' fees, incurred in 
connection with such action or proceeding, or any appeal therein, provided 
that no such indemnification shall be required with respect to any settlement 
unless the Company shall have given its prior approval thereto.  Such 
indemnification shall include the right to be paid advances of any expenses 
incurred by such person in connection with such action, suit or proceeding, 
consistent with the provisions of applicable law.  In addition to the 
foregoing, the Company is authorized to extend rights to indemnification and 
advancement of expenses to such persons by i) resolution of the shareholders, 
ii) resolution of the Directors or iii) an agreement, to the extent not 
expressly prohibited by law.

                                  ARTICLE IX

                                  FISCAL YEAR

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

                                  ARTICLE X

                                  AMENDMENTS

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





                                                                 EXHIBIT 10(d)

Annual Performance Incentive Plan 

Under the Annual Performance Incentive Plan, executive officers of the Company 
may be entitled to receive performance related cash payments provided that 
annual, Committee-established performance objectives are met. At the beginning 
of the year, the Executive Compensation and Benefits Committee approves for 
each officer not participating in the Executive Performance Incentive Plan, an 
annual incentive target and maximum opportunity expressed as a percentage of 
annual base salary.  The Committee also establishes overall Document 
Processing threshold, target and maximum measures of performance and 
associated payment schedules.  For 1997, the performance measures were profit 
before tax (35%), revenue growth (20%), cash generation (15%), customer 
satisfaction (10%), customer loyalty (10%) and employee satisfaction (10%).  
Additional goals are also established for each officer that include business 
unit specific and/or individual performance goals and objectives.  The weights 
associated with each business unit specific or individual performance goal and 
objective used vary and range from 10 percent to 55 percent of the total.  
Actual performance payments
 are subject to approval by the Committee following 
the end of the year.





                                                                 EXHIBIT 10(j)



                              XEROX CORPORATION

                      CONTRIBUTORY LIFE INSURANCE PROGRAM

                                  AS AMENDED 
                           AS OF JANUARY 30, 1998 


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

                                   Article I

                                  Definitions
                                  -----------

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

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

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

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

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

1.4     "Company" shall mean Xerox Corporation.

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

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

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

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

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

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

1.11     "Termination Date" shall mean:

                                      -1-

                                                                 Plan: 7/1/89
                                                                Rev: 12/10/97


        (a) for Participants in the Plan prior to July 1, 1997, the later of 
when the Participant attains age 65 or ten years of participation in the Plan 

        (b) for Participants joining the Plan on or after July 1, 1997, the 
later of when the Participant attains age 65 or 15 years of participation in 
the Plan.

                                  Article II
                          Eligibility and Membership
                          --------------------------

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

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

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

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

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

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

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

                                  Article III
                       Procurement of Insurance Policy
                       -------------------------------

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

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

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

        (C)  do any other act which may reasonably be requested by the 
Insurer.

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

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

                                      -2-

                                                                 Plan: 7/1/89
                                                                Rev: 12/10/97


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

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

                                  Article IV

                                  Beneficiary
                                  -----------

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

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

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

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

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

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

                                   Article V

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

5.0     Unless otherwise provided in this Section, a Participant's Plan 
Agreement shall terminate at the Termination Date.  In the event the 
Participant's employment with the Company terminates prior to the Termination 
Date, Participants who are eligible to retire under the Company's Retirement 
Income Guarantee Plan shall have the right to continue the Plan Agreement 
until the Termination Date, provided that the Participant continues to make 
the required premium contributions under Section 3.4.  In the event that the 
Participant's employment with the 

                                      -3-

                                                                 Plan: 7/1/89
                                                                Rev: 12/10/97


Company terminates prior to the Termination Date and the Participant is not 
eligible to retire under the Company's Retirement Income Guarantee Plan, the 
Participant's Plan Agreement shall terminate. 

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

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

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


                                  Article VI

                             Retention of Services
                             ---------------------

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

                                  Article VII

          Termination, Amendment, Modification or Supplement of Plan
          ----------------------------------------------------------

7.0     The Company reserves the right to terminate this Plan.

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

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

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

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


                                      -4-

                                                                 Plan: 7/1/89
                                                                Rev: 12/10/97


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


                                 Article VIII

                 Release of Company's Ownership Interest
                 ---------------------------------------

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

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

                                  Article IX

                           Administration of the Plan
                           --------------------------

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

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

                                  Article X

                          Participant's Assignment
                          ------------------------

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


                                  Article XI

                             Insurer's Liability
                             -------------------

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

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


                                      -5-

                                                                 Plan: 7/1/89
                                                                Rev: 12/10/97


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


                                 Article XII

                                Miscellaneous
                                -------------

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

                              Xerox Corporation
                                P.O. Box 1600
                            Stamford CT 06904-1600

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

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

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

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

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


                                Article XIII

                                Effective Date
                                --------------

The original effective date of the Plan was July 1, 1989.  The effective date 
of this amended Plan shall be as of  November 1, 1997.


IN WITNESS WHEREOF, Xerox Corporation has caused this Amended Plan to be 
executed this 10th day of December, 1997 effective as of January 30, 1998.

                                   XEROX CORPORATION

                                   By:  Original Signed by Hector Motroni
                                        ---------------------------------
                                        Vice President



                                      -6-

                                                                 Plan: 7/1/89
                                                                Rev: 12/10/97


                                  Schedule A
                                      to
                  Xerox Contributory Life Insurance Program


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

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

* Status as of date participation in the Plan commenced.


                                      -7-

                                                                 Plan: 7/1/89
                                                                Rev: 12/10/97





Computation of Net Income Per Common Share

(Dollars in millions, except per-share data; shares in thousands)_____________
I. Basic Net Income (Loss) Per Common Share
     Income (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

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


II. 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
     Adjusted net income (loss)

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

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


                                                                   EXHIBIT 11

         1997            1996            1995            1994            1993

     $  1,452        $  1,206        $  1,174        $    794        $   (193)
          (44)            (43)            (42)            (41)            (38)
            -              (1)             (3)            (12)            (23)
            -               -               -             (11)              -
        1,408           1,162           1,129             730            (254)
            -               -          (1,646)              -              67
            -               -               -               -               -
     $  1,408        $  1,162        $   (517)       $    730        $   (187)

      324,804         324,462         322,087         316,275         300,141


        1,882           2,732           3,927           5,080           4,062
      326,686         327,194         326,014         321,355         304,203


     $   4.31        $   3.55        $   3.46        $   2.27        $   (.83)
            -               -           (5.05)              -            (.22)
            -               -               -               -               -
     $   4.31        $   3.55        $  (1.59)       $   2.27        $   (.61)



     $  1,452        $  1,206        $  1,174        $    794        $   (193)
            -               -               -               -             (38)
            -              (1)             (3)            (12)            (23)
            -               -               -             (11)              -
            -              (3)             (9)             (7)              -
            3               3               4               3               -
        1,455           1,205           1,166             767            (254)
            -               -          (1,646)              -              67
            -               -               -               -               -
     $  1,455        $  1,205        $   (480)       $    767        $   (187)

      324,804         324,462         322,087         316,275         300,141

        5,846           8,054           9,603           9,003           4,062
        2,643           2,643           2,643           2,643               -
       27,342          27,981          28,663          29,310               -
      360,636         363,140         362,996         357,231         304,203


     $   4.04        $   3.32        $   3.21        $   2.15        $   (.83)
            -               -           (4.53)              -             .22
            -               -               -               -               -
     $   4.04        $   3.32        $  (1.32)       $   2.15        $   (.61)





                                                                   EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

Year ended December 31  (in millions)    1997    1996    1995    1994    1993*

Fixed Charges:
  Interest expense                     $  617  $  592  $  603  $  520  $  540
  Rental expense                          140     140     142     170     180
    Total fixed charges before
     capitalized interest and
     preferred stock dividend
     of subsidiary                        757     732     745     690     720
  Capitalized interest                      -       -       -       2       5
  Preferred stock dividend of
   subsidiary                              50       -       -       -       -
    Total fixed charges                $  807     732  $  745  $  692  $  725

Earnings available for fixed charges:
  Earnings**                           $2,268  $2,067  $1,980  $1,602  $ (193)
  Less undistributed income in
   minority owned companies               (84)    (84)    (90)    (54)    (51)
  Add fixed charges before capitalized
   interest and preferred stock
   dividend of subsidiary                 757     732     745     690     720
    Total earnings available for
     fixed charges                     $2,941  $2,715  $2,635  $2,238  $  476

Ratio of earnings to fixed
 charges (1)(2)                          3.64    3.71    3.54    3.23    0.66


(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, 
    one-third of rent expense as representative of the interest portion of 
    rentals, and preferred stock dividend requirements
 of subsidiaries.  Debt 
    has been assigned to discontinued operations based on historical levels 
    assigned to the businesses when they were continuing operations, adjusted 
    for subsequent paydowns.  Discontinued operations consist of the Company's 
    Insurance, Other Financial Services, and Third Party Financing and Real 
    Estate businesses 

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

*   1993 earnings were inadequate to cover fixed charges.  The coverage 
    deficiency was $249 million.

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





<PAGE>
 
F I N A N C I A L   R E V I E W


Consolidated Statements of Income


<TABLE> 
<CAPTION> 
- --------------------------------------------------------------------------------------------
Year ended December 31 (in millions, except per-share data)    1997         1996        1995
- --------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>         <C> 
Revenues
Sales                                                       $ 9,892       $9,256      $8,750
Service and rentals                                           7,268        7,107       6,830
Finance income                                                1,006        1,015       1,008
- --------------------------------------------------------------------------------------------
Total Revenues                                               18,166       17,378      16,588
- --------------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales                                                 5,363        5,126       4,984
Cost of service and rentals                                   3,739        3,597       3,442
Equipment financing interest                                    520          513         507
Research and development expenses                             1,079        1,044         949
Selling, administrative and general expenses                  5,225        5,074       4,719
Gain on affiliates' sales of stock, net                         -            (11)        -
Other, net                                                       99           91         138
- --------------------------------------------------------------------------------------------
Total Costs and Expenses                                     16,025       15,434      14,739
- --------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and 
Minorities' Interests                                         2,141        1,944       1,849
Income Taxes                                                    728          700         615
Equity in Net Income of Unconsolidated Affiliates               127          123         131
Minorities' Interests in Earnings of Subsidiaries                88          161         191
- --------------------------------------------------------------------------------------------
Income from Continuing Operations                             1,452        1,206       1,174
Discontinued Operations                                         -            -        (1,646)
- --------------------------------------------------------------------------------------------
Net Income (Loss)                                           $ 1,452      $ 1,206     $  (472)
- --------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
Continuing Operations                                       $  4.31      $  3.55     $  3.46
Discontinued Operations                                         -            -         (5.05)
- --------------------------------------------------------------------------------------------
Basic Earnings per Share                                    $  4.31      $  3.55     $ (1.59)
- --------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share
Continuing Operations                                       $  4.04      $  3.32     $  3.21
Discontinued Operations                                         -            -         (4.53)
- --------------------------------------------------------------------------------------------
Diluted Earnings
 per Share                                  $  4.04      $  3.32     $ (1.32)
- --------------------------------------------------------------------------------------------
The accompanying notes on pages 46 to 65 are an integral part of
the consolidated financial statements.
- --------------------------------------------------------------------------------------------
</TABLE>
 


30   X E R O X   C O R P O R A T I O N   


<PAGE>
 
                                                 F I N A N C I A L   R E V I E W


Our Results of Operations and Financial Condition

Summary of Total Company Results

Document Processing revenues grew 7 percent on a pre- currency basis to $18.2
billion in 1997, driven by 15 percent growth in equipment sales and 35 percent
growth in document outsourcing (excluding equipment accounted for as sales).
Pre-currency service revenue growth was 1 percent in 1997. The strong equipment
sales growth was the direct result of our investments in sales coverage and
excellent customer acceptance of our new digital products. Revenues increased 6
percent on a pre-currency basis to $17.4 billion in 1996 and 7 percent to $16.6
billion in 1995.

         Beginning in 1995, the results of our Insurance operations were
accounted for as discontinued operations. The Document Processing business is
the only component of continuing operations.

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

- --------------------------------------------------------------------------------
(In millions)                          1997               1996             1995
- --------------------------------------------------------------------------------
Document Processing before
  Brazil tax gain                    $1,452             $1,206           $1,076
Brazil tax gain                           -                  -               98
                                     ------             ------           ------
Continuing operations                 1,452              1,206            1,174
Discontinued operations                   -                  -           (1,646)
                                     ------             ------           ------
Net income (loss)                    $1,452             $1,206           $ (472)
- --------------------------------------------------------------------------------

EPS
Document Processing before
  Brazil tax gain                     $4.04             $ 3.32           $ 2.94
Brazil tax gain                           -                  -              .27
                                     ------             ------           ------
Continuing operations                  4.04               3.32             3.21
Discontinued operations                   -                  -            (4.53)
                                     ------             ------           ------
Diluted EPS                           $4.04             $ 3.32           $(1.32)
- --------------------------------------------------------------------------------

Income from continuing operations increased 20 percent in 1997 and 12 percent in
1996, excluding the impact of a $98 million gain from a reduction in the
Brazilian tax rate in 1995.

         Diluted earnings per share from continuing operations increased 22
percent in 1997 and 13 percent in 1996, excluding the 1995 Brazilian tax gain.
Earnings per share have been adjusted to reflect the 3-for-1 stock split
effective June 6, 1996 and the December 31, 1997 adoption of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." (See page
36.)

         Quarterly results of operations for 1997 and 1996 are shown on page 66.

         Discontinued operations results for 1997 and 1996 were charged to
previously established reserves and did not affect reported net income. As a
result of the discontinuance of the insurance segment and the associated
after-tax charges of $1.546 billion, discontinued operations had a loss of
$1.646 billion in 1995. These charges included estimated losses on disposals,
additional insurance loss reserves and estimated future expenses associated with
excess of loss reinsurance coverage.

Diluted Earnings Per Share


$2.94%          $3.32           $4.04


1995            1996            1997


* Continuing operations before Brazil tax gain

Document Processing

Pre-Currency Growth

To understand the trends in the business, we believe that it is helpful to
adjust revenue and expense growth (except for ratios) to exclude the impact of
changes in the translation of foreign currencies into U.S. dollars. We refer to
this adjusted growth as "pre-currency growth."

         A substantial portion of our consolidated revenues is derived from
operations outside of the United States where the U.S. dollar is not the
functional currency, primarily in Europe. When compared with the average of the
major European currencies on a revenue-weighted basis, the U.S. dollar was
approximately 8 percent stronger in 1997, 2 percent stronger in 1996 and 10
percent weaker in 1995. As a result, foreign currency translation unfavorably
impacted revenues by 3 percentage points in 1997 and 1 percentage point in 1996,
and favorably impacted revenues by 3 percentage points in 1995.

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


                                          X E R O X   C O R P O R A T I O N   31

<PAGE>
 
F I N A N C I A L   R E V I E W


Revenues by Product Category

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

- ---------------------------------------------------------  
                                     Pre-Currency Growth
                                   ----------------------
                                    1997   1996     1995
- ---------------------------------------------------------  
Total Revenues                       7%      6%       7%
- ---------------------------------------------------------  
Digital products                    25      23       17
Light-lens copiers                  (2)     (1)       2
Paper and other products             3       -       14
- ---------------------------------------------------------  

         Digital products include production publishing, color copying and
printing, production printing, our new family of Document Centre digital
black-and-white copiers, multifunction products and network printers. During
1997, digital products revenue growth rates accelerated on a quarterly basis,
increasing 18 percent, 24 percent, 26 percent and 31 percent in the first
through fourth quarters, respectively. Digital product revenues grew 25 percent
for the full year, driven by the full-year effects of products introduced in
1996 and the partial-year effects of new products introduced during 1997.
Digital products contributed 36 percent of total revenues in 1997, 30 percent in
1996 and 25 percent in 1995.

         Revenues from the DocuTech family of production publishing products
reflected strong growth to $2.1 billion in 1997, up from $1.8 billion in 1996
and $1.4 billion in 1995. Our new 180 page-per-minute DocuTech Production
Publisher, which became available in July, contributed to this growth. Revenues
from color products reflected excellent growth to approximately $1.5 billion in
1997, up from $1.0 billion in 1996 and $600 million in 1995. The DocuColor 40,
our 40 page-per-minute

Worldwide Revenues (billions)

[X]      United States: $9.2
[X]      Latin America and Canada: $3.5
[X]      Europe and Other: $5.5
         Total Xerox: $18.2
[X]      Fuji Xerox: $7.4

Pictured here is a world map.

color document production system, introduced in April 1996, continued to
contribute significantly to this growth.

         Orders and installations of the new Document Centre digital
black-and-white copiers, introduced in April 1997, exceeded our expectations. As
a result, we more than doubled our planned production and exited the year with a
strong order backlog.

         The light-lens copier revenue decline reflects several important
factors, including customer transition to our new digital black-and-white
products and continued price pressures. We believe the trend over the past few
years will continue whereby digital products' revenues represent an increasing
share of total revenues. Revenues from light-lens copying represented 51 percent
of total revenues in 1997, 56 percent in 1996 and 59 percent in 1995.

         The annual fluctuations in paper and other products revenue growth was
principally due to swings in paper prices and OEM sales. Revenues from paper and
other products were 13 percent of total revenues in 1997, 14 percent in 1996 and
16 percent in 1995.

         For the major product categories, the revenue shares were:

- ---------------------------------------------------------  
                                  1997    1996     1995
- ---------------------------------------------------------  
Digital products                    36%     30%      25%
Light-lens copiers                  51      56       59
Paper and other products            13      14       16
- ---------------------------------------------------------  

Revenues by Geography

Geographically, the pre-currency revenue growth rates were:

- ---------------------------------------------------------  
                                    Pre-Currency Growth
                                 ------------------------  
                                  1997     1996     1995
- ---------------------------------------------------------  
Total Revenues                       7%       6%      7%
United States                        7        6       3
Xerox Limited                        7        1       8
Other Areas                          8       10      16
Memo: Fuji Xerox                     3       11      10
- ---------------------------------------------------------  

Revenues in the United States were 49 percent of total revenues in 1997, which
is consistent with prior years. Revenues of Xerox Limited (formerly Rank Xerox,
now 100 percent owned by Xerox) and related companies (collectively Xerox
Limited), which operate principally in Europe, represented 30 percent of total
revenues. Other Areas, principally Latin America, Canada and China, contributed
21 percent of total revenues.

         Revenue growth in 1997 in the U.S. and Xerox Limited
was driven primarily by digital products, and in Xerox Limited,
by a strengthening economic environment in several European
markets. Revenue from light-lens copiers grew


32   X E R O X   C O R P O R A T I O N   

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                                                 F I N A N C I A L   R E V I E W


We brought together all of our supplies heritage in one organization to leverage
the strength of our brand in this very large market. Our challenge is to meet
our customers' needs as new technologies create new production possibilities,
enabling the full potential of documents while maximizing the effectiveness of
the hardware used to generate them.

Pictured here are copier and printer supplies.

modestly in the U.S. and declined modestly in Europe.
Xerox Limited's relatively flat revenue growth in 1996 reflected
weak economic environments in a number of major European markets.

         Other Areas 1997 revenue reflects good growth in Brazil and China,
modest growth in Canada, and excellent growth in Mexico. Revenues in Brazil were
$1.8 billion in 1997, $1.6 billion in 1996 and $1.3 billion in 1995.

         Fuji Xerox Co., Limited, an unconsolidated entity jointly owned by
Xerox Limited and Fuji Photo Film Company Limited, develops, manufactures and
distributes document processing products in Japan and the Pacific Rim. Japan
represents approximately 90 percent of Fuji Xerox revenues, and Australia, New
Zealand, Singapore, and Malaysia represent the remaining 10 percent. Fuji Xerox
conducts business in other Pacific Rim countries through joint ventures and
distributors. Xerox' exposure to economic turmoil in Asia is mitigated by our
joint ownership of Fuji Xerox. Modest revenue growth in 1997 reflects good
growth in the Asia Pacific countries and modest growth in Japan due to difficult
economic conditions. Revenue growth in 1996 and 1995 reflects strong growth in
Japan, driven by excellent growth in digital product sales and good growth in
the Asia Pacific countries.

Revenues by Stream

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

- -------------------------------------------------------------
                                      Pre-currency growth
                                    -------------------------
                                     1997     1996     1995
- -------------------------------------------------------------
Total revenues                          7%       6%      7%
- -------------------------------------------------------------
Equipment sales (excluding OEM)        15       10       6
Non-equipment sales revenues            4        4       7
         Supplies                       2        6       9
         Paper                          2       (7)     39
         Service                        1        -       2
         Rentals                       (9)       -       1
         Document outsourcing*         35       47      46
         Finance income                 2        1      (4)
- -------------------------------------------------------------
* Excludes equipment accounted for as equipment sales.
- -------------------------------------------------------------

Equipment Sales: The increased equipment sales growth (excluding OEM sales) is
due primarily to the introduction of a stream of state-of-the-art color and
black-and-white digital products in 1996 and 1997. Digital product equipment
sales grew 40 percent in 1997, 27 percent in 1996 and 13 percent in 1995.
Digital products represented 47 percent of equipment sales in 1997, 37 percent
in 1996 and 31 percent in 1995.

Non-equipment Sales: Non-equipment sales revenues from supplies, paper, service,
rentals, document outsourcing and other revenues, and income from customer
financing represented 62 percent of total revenues in 1997, 66 percent in 1996
and 67 percent in 1995. Growth in these revenues is primarily a function of the
growth in our installed population of equipment, usage levels and pricing.

Supplies:  Supplies growth has decelerated due principally to
the increase in document outsourcing, which includes
bundled supplies, and lower sales of OEM printer cartridges.

Paper Sales: Our strategy is to charge a spread over mill wholesale prices to
cover our costs and value added as a distributor. The increase in 1997 results
from volume increases that were partially offset by moderating industry-wide
price declines. In 1996, lower wholesale prices more than offset volume
increases. The significant growth in 1995 was primarily due to higher industry
prices.

Equipment Sales Growth (pre-currency)

[X]     1995     6%
[X]     1996    10%
        1997    15%




                                          X E R O X   C O R P O R A T I O N   33

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F I N A N C I A L   R E V I E W


Service: Service revenue growth has been relatively flat, reflecting customer
preference for document outsourcing as well as competitive price pressures.

Rentals: Rental revenues declined in 1997 and were flat in 1996 and 1995, due
primarily to customers' preference for document outsourcing and the continuing
trend of increased equipment sales.

Document Outsourcing: Document Outsourcing revenues are split between Equipment
Sales and Document Outsourcing. Where document outsourcing contracts include
revenue accounted for as equipment sales, this revenue is included in Equipment
Sales. All other document outsourcing revenue, including service, equipment
rental, supplies, paper and labor are included in Document Outsourcing. This has
the effect of diverting some revenues from supplies, paper, service and rental.
The excellent Document Outsourcing growth reflects the trend of customers
focusing on their core businesses and outsourcing their document processing
requirements to Xerox.

Finance Income: Our strategy for financing equipment sales in the industrialized
economies is to charge a spread over our cost of borrowing and to lock in that
spread by match funding the finance receivables with borrowings of similar
maturities. In 1997, good growth in the financing of equipment sales in the
U.S., Europe and Latin America has been partially offset by lower average
interest rates. In 1996, the strong growth in the financing of equipment sales
in Latin America was partially offset by the impacts of the continuing decline
in interest rates on financing contracts and the increasing customer preference
for document outsourcing rather than purchase and finance. On average, 75 to 80
percent of customers finance purchases of equipment through Xerox.

Costs and Expenses

The gross margins by revenue stream were:

- -------------------------------------------------------
                                    Gross Margins
                              -------------------------
                               1997     1996     1995
- -------------------------------------------------------
Total                          47.0%    46.9%    46.1%
- -------------------------------------------------------
Sales                          45.8     44.6     43.0
Service, rentals and
         document outsourcing  48.6     49.4     49.6
Finance income                 48.3     49.5     49.7
- -------------------------------------------------------

The 1997 total gross margin was essentially unchanged from 1996. The 1996
improvement from 1995 was due to productivity-driven cost reductions and
favorable product and geographic mix, partially offset by pricing pressures. The
total gross margin is the key metric, as judgment is often needed to separate
the individual components of revenues and costs.

         The improvement in sales gross margins was due principally to
productivity-driven cost reductions and favorable product and geographic mix,
partially offset by pricing pressures. The modest decline in service, rentals
and document outsourcing gross margins was due primarily to higher growth in
lower margin document outsourcing revenue, pricing pressures and adverse
currency, partially offset by productivity improvements. Lower document
outsourcing margins reflect the impact of the labor content in the document
outsourcing business.

         Research and development (R&D) expense increased 3 percent in 1997, 10
percent in 1996 and was approximately 6 percent of revenue in both years. We
will continue to invest in technological development to maintain our premier
position in the rapidly changing document processing market and have
reprioritized our spending to focus on areas that will produce significant
growth such as digital, color, networking and solutions. Xerox R&D is
strategically coordinated with Fuji Xerox, which invested $612 million in R&D in
1997 for a combined increase of 7 percent to $1.7 billion.

         Selling, administrative and general expenses (SAG) increased 5 percent
in 1997 on a pre-currency basis, 8 percent in 1996 and 5 percent in 1995. SAG as
a percent of revenues was 28.8 percent in 1997, 29.2 percent in 1996 and 28.4
percent in 1995. The improvement in 1997 was due primarily to productivity
initiatives and expense controls partially offset by investments to increase
worldwide sales coverage. The increase in the ratio in 1996 was primarily


34   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                 F I N A N C I A L   R E V I E W


due to investments in sales coverage and marketing support. We expect the ratio
to decline in 1998 due to improved productivity and ongoing expense controls.

         Worldwide employment increased by 4,700 in 1997 to 91,400 as a result
of hiring 2,500 employees to support our fast-growing document outsourcing
business, 1,300 associated with two small acquisitions and 1,000 for increased
sales coverage partially offset by reductions in other areas.

         Gain on affiliates' sales of stock, net in 1996, reflects our share of
the increase in equity of certain small affiliated companies generated by the
sales of additional equity by these affiliates.

         Other expenses, net, were $99 million in 1997, $91 million in 1996 and
$138 million in 1995. The increase of $8 million for 1997 reflects increased
non-financing interest expense associated with our June 1997 acquisition of The
Rank Group's remaining interest in Xerox Limited, increased currency losses from
balance sheet remeasurement due to currency devaluation in our Latin American
operations, and Year 2000 information systems remediation spending, partially
offset by certain non-recurring charges in 1996. Also, we reduced debt with the
proceeds from $650 million of mandatorily redeemable preferred securities issued
through a subsidiary trust in January 1997. This partially offset the increase
in non-financing interest expense because the after-tax impact of the dividend
on these securities is included in the income statement in Minorities' Interests
in Earnings of Subsidiaries. The reduction of $47 million for 1996 reflects
reduced interest expense due to lower rates, higher interest income and the
non-recurrence of several one-time charges in 1995.

         Income Taxes, Equity in Net Income of Unconsolidated Affiliates, and
Minorities' Interests in Earnings of Subsidiaries.

         Income before income taxes was $2,141 million in 1997, $1,944 million
in 1996 and $1,849 million in 1995.

         The effective tax rates were 34 percent in 1997, 36 percent in 1996 and
39 percent in 1995. The 1995 rate excludes a $98 million benefit from the
revaluation of the deferred tax liability due to a change in the Brazilian
statutory income tax rate. The 1997 tax rate benefited from implementation of
certain tax strategies as well as the profit mix of our worldwide operations.
The decline in the 1996 tax rate was primarily due to the lower Brazilian tax
rate.

         Equity in Net Income of Unconsolidated Affiliates is principally Xerox
Limited's share of Fuji Xerox income. Total equity in income increased 4 percent
in 1997 to $127 million due principally to Fuji Xerox income growth and
increases in income from a number of smaller investments. Strong pre-currency
growth in Fuji Xerox income was largely offset by currency translation due to
the weakening of the Japanese yen compared with the U.S. dollar. Total equity in
income declined 6 percent in 1996 to $123 million principally due to one-time
declines in income from smaller investments. The Xerox Limited 50 percent share
of Fuji Xerox income was $119 million in 1997, $116 million in 1996 and $112
million in 1995.

         Minorities' Interests in Earnings of Subsidiaries, principally The Rank
Group Plc's share of Xerox Limited profits, were $88 million in 1997, $161
million in 1996 and $191 million in 1995. In 1997, minorities' interests
declined primarily due to our acquisition of The Rank Group's remaining interest
in Xerox Limited, effective June 1997, partially offset by the after-tax impact
of the $48 million dividend on the mandatorily redeemable preferred securities
discussed above. In 1996, minorities' interests declined primarily due to lower
Xerox Limited profits.

Modi Xerox, our affiliate in India, covers the territory with a trained
telemarketing team to seize new market opportunities. Modi Xerox has 13 years of
experience in India, a key emerging market for Xerox because of the huge
document processing potential.

Pictured here is a Modi-Xerox employee.


                                          X E R O X   C O R P O R A T I O N   35

<PAGE>
 
F I N A N C I A L   R E V I E W


SATIZ, a Fiat Group Company, turned to Xerox when it decided to reengineer its
complete multi-lingual document processes, from the step of inputting text and
data (received in Italian from technical writers) into a new electronic system,
to the step of preparing and distributing worldwide all the after sales
documentation on both paper and CD-ROM.

         An important step is the translation process. Help came from the Xerox
Research Centre Europe, Grenoble, France, which concentrates on eliminating the
language barriers that exist in multilingual organizations and markets. Here,
research results in linguistics are being commercialized via Xerox Translation
and Authoring Systems (XTRAS). XTRAS tools help global companies write and
translate technical material, like user or maintenance manuals.

Income

In 1997, Document Processing income of $1,452 grew 20 percent compared with
$1,206 million in 1996. 1996 income grew 12 percent from $1,076 million in 1995
before the Brazilian tax gain.

Return on Assets

Return on Assets (ROA) is an important measure throughout all levels of the
Document Processing organization, combining a focus on both asset turnover and
margin improvement.

         The internal measurement for ROA is defined as Document Processing
before tax profits plus Equity in Net Income of Unconsolidated Affiliates,
divided by average ROA Assets. ROA Assets are Document Processing assets less
investments in affiliates and Xerox equipment financing debt.

         ROA as defined above was 18.0 percent in 1997, 17.8 percent in 1996 and
18.5 percent in 1995.

Adoption of SFAS No. 128 -"Earnings per Share" Effective December 31, 1997, we
adopted SFAS No. 128 - "Earnings per Share." SFAS No. 128 simplifies the
calculation of earnings per share ("EPS") and replaces primary EPS with basic
EPS and replaces fully diluted EPS with diluted EPS. Basic EPS is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. The computation of diluted EPS
is similar to the computation of basic EPS except that it gives effect to all
potentially dilutive instruments that were outstanding during the period. All
EPS amounts have been restated to reflect this new standard. For Xerox, the
movement from "fully diluted" to "diluted" increased EPS by one cent in 1996 and
1997 and had no effect on 1995 EPS before Discontinued Operations.

Functional Currency Change in Brazil

Effective July 1, 1997, we changed the functional currency for our Brazilian
operation from the U.S. dollar to the Brazilian real because the Brazilian
economy is no longer considered hyperinflationary. The effect of this change on
our reported results was immaterial.

Acquisition of Remaining Interest in Xerox Limited In June 1997, the company
completed the acquisition of The Rank Group's remaining 20 percent financial
interest in Xerox Limited and related companies for (pound)940 million, or
approximately $1.5 billion. The transaction was earnings accretive in 1997,
increasing diluted earnings per share by 14 cents for the full year. The
transaction was funded entirely by debt consisting of (pound)500 million of
third-party debt and (pound)440 million of notes payable issued to The Rank
Group.

Share Repurchase

In February 1996, the Board of Directors authorized the repurchase of up to $1
billion of Xerox common stock. Through the 1997 second quarter, the Company
repurchased 8.5 million shares for $422 million. As a result of the Xerox
Limited transaction, we suspended the repurchase program during the second
quarter because the use of the Company's financial resources to fund the $1.5
billion acquisition of The Rank Group's remaining interest in Xerox Limited
produced greater value for Xerox shareholders.

Year 2000

As with all major companies, certain of our information systems and products
will require remediation or replacement over the next two years in order to
render these systems Year 2000 compliant. The Year 2000 problem is the result of
computer programs written with two digits, rather than four, to define the
applicable year. During 1997, we incurred $28 million of Year 2000 remediation
costs that are included in


36   X E R O X   C O R P O R A T I O N   

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                                                 F I N A N C I A L   R E V I E W


Other, net in the Consolidated Statements of Income. We estimate that future
remediation costs associated with the Year 2000 problem will be approximately
$85 million and $31 million during 1998 and 1999, respectively. These costs will
be expensed as incurred. We believe that the remediation or replacement of our
information systems and products will occur in a timely fashion so that the Year
2000 problem will not result in significant operating problems with our
information systems and products. However, if such remediations or replacements
are not completed in a timely manner, the Year 2000 problem could potentially
have a material adverse impact on our operations.

Capital Resources and Liquidity

Total debt, including ESOP and Discontinued Operations debt not shown separately
in our consolidated balance sheets, increased to $12,903 million at December 31,
1997 from $12,448 million in 1996 and $11,794 million in 1995.

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

- --------------------------------------------------------------------------------
(In millions)                                    1997         1996        1995
- --------------------------------------------------------------------------------
Total debt* as of January 1                   $12,448      $11,794     $10,955
- --------------------------------------------------------------------------------
Non-Financing Businesses:                                           
         Document Processing operations                             
                  cash generation              (1,026)        (678)       (543)
         Purchase of The Rank Group's
                  interests in Rank Xerox
                  (now Xerox Limited)           1,534            -         972
         Mandatorily redeemable preferred
                  securities                     (637)           -           -
         ESOP                                     (60)         (53)        (49)
         Discontinued businesses                 (541)          47        (399)
- --------------------------------------------------------------------------------
Subtotal Non-Financing                           (730)        (684)        (19)
Financing Businesses                              760          706         494
Shareholder dividends                             475          438         389
Equity redemption and other changes               (50)         194         (25)
- --------------------------------------------------------------------------------
Total debt* as of December 31                 $12,903      $12,448     $11,794
- --------------------------------------------------------------------------------
*  Includes discontinued operations.
- --------------------------------------------------------------------------------

For analytical purposes, total equity includes common equity, ESOP preferred
stock, mandatorily redeemable preferred securities and minorities' interests.
Total equity increased to $6,454 million at December 31, 1997 from $5,931
million in 1996 and $5,396 million in 1995.

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

- --------------------------------------------------------------------------------
(In millions)                                    1997         1996        1995
- --------------------------------------------------------------------------------
Total equity as of January 1                   $5,931       $5,396      $6,042
Income from continuing operations               1,452        1,206       1,174
Loss from discontinued operations                   -            -      (1,646)
Change in unrealized gains on                                       
         investment securities                      -            -         432
Mandatorily redeemable preferred                                    
         securities                               637            -           -
Shareholder dividends                            (475)        (438)       (389)
Purchase of treasury stock                       (116)        (306)          -
Exercise of stock options                          99           84         109
Change in minorities' interests                  (716)          88        (276)
Translation adjustments                          (463)        (138)         (3)
All other, net                                    105           39         (47)
- --------------------------------------------------------------------------------
Total equity as of December 31                 $6,454       $5,931      $5,396
- --------------------------------------------------------------------------------

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


- --------------------------------------------------------------------------------
(Dollars in millions)                            1997         1996        1995
- --------------------------------------------------------------------------------
Non-Financing:                                                      
Debt                                       $    2,974*     $ 2,960     $ 3,012
Equity                                          4,662*       4,565       4,045
- --------------------------------------------------------------------------------
Total capital                              $    7,636      $ 7,525     $ 7,057
- --------------------------------------------------------------------------------
Debt-to-capital                                  38.9%        39.3%       42.7%
Ratio of earnings to fixed charges               4.89x        4.67x       3.79x
Ratio of earnings to interest expense            7.24x        6.65x       5.17x
EBITDA**-to-debt                                 96.4%        89.6%       80.0%
- --------------------------------------------------------------------------------
Financing:                                                          
Debt                                          $10,248      $ 9,488     $ 8,782
Equity                                          1,473        1,366       1,351
- --------------------------------------------------------------------------------
Total capital                                 $11,721      $10,854     $10,133
- --------------------------------------------------------------------------------
Debt-to-equity ratio                              7.0x         7.0x        6.5x
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges               1.63x        1.66x       1.71x
- --------------------------------------------------------------------------------
*    Includes $318.5 million (one-half) share of mandatorily redeemable
     preferred securities for purposes of this analysis.
**   Earnings before interest, taxes, depreciation and amortization.
- --------------------------------------------------------------------------------

         In 1997, a year-to-year improvement in the debt-to- capital ratio was
achieved despite the addition of more than $1.5 billion of debt related to the
acquisition of The Rank Group's remaining interest in Xerox Limited. Especially
strong cash generation within non-financing operations, lower debt resulting
from the sales of Coregis Group, Inc. (Coregis), Industrial Indemnity Holdings,
Inc. (II) and The Resolution Group, Inc. (TRG), and the issuance of mandatorily
redeemable preferred securities enabled the improvement. Income growth was the
primary factor contributing to a 3.4 percentage point improvement to the ratio
during 1996. In 1995, the ratio


                                          X E R O X   C O R P O R A T I O N   37

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F I N A N C I A L   R E V I E W


Financial Review


Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31 (in millions)                             1997              1996
- --------------------------------------------------------------------------------
Assets
Cash                                               $    75           $   104
Accounts receivable, net                             2,145             2,022
Finance receivables, net                             4,599             4,386
Inventories                                          2,792             2,676
Deferred taxes and other current assets              1,155               964
- --------------------------------------------------------------------------------
Total Current Assets                                10,766            10,152
Finance receivables due after one year, net          7,754             6,986
Land, buildings and equipment, net                   2,377             2,256
Investments in affiliates, at equity                 1,332             1,282
Goodwill                                             1,375               623
Other assets                                         1,103             1,121
Investment in discontinued operations                3,025             4,398
- --------------------------------------------------------------------------------
Total Assets                                       $27,732           $26,818
- --------------------------------------------------------------------------------
Liabilities and Equity
Short-term debt and current portion of 
  long-term debt                                   $ 3,707           $ 3,536
Accounts payable                                       776               577
Accrued compensation and benefits costs                811               761
Unearned income                                        205               208
Other current liabilities                            2,193             2,122
- --------------------------------------------------------------------------------
Total Current Liabilities                            7,692             7,204
Long-term debt                                       8,779             8,424
Postretirement medical benefits                      1,079             1,050
Deferred taxes and other liabilities                 2,469             2,429
Discontinued operations liabilities - 
 policyholders' deposits and other                   1,693             2,274
Deferred ESOP benefits                                (434)             (494)
Minorities' interests in equity of subsidiaries        127               843
Company-obligated, mandatorily redeemable 
 preferred securities of subsidiary trust 
 holding solely subordinated debentures of 
 the Company                                           637                 -
Preferred stock                                        705               721
Common shareholders' equity                          4,985             4,367
- --------------------------------------------------------------------------------
Total Liabilities and Equity                       $27,732           $26,818
- --------------------------------------------------------------------------------

Shares of common stock issued and outstanding at December 31, 1997 were (in
thousands) 326,241. Shares of common stock issued and outstanding at December
31, 1996 were (in thousands) 325,902 and 323,681, respectively.

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


38   X E R O X   C O R P O R A T I O N   

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                                                 F I N A N C I A L   R E V I E W


Financial Review

increased by 6.7 percentage points versus year-end 1994 as proceeds from the
sales of Constitution Re Corporation (Constitution Re), Viking Insurance
Holdings, Inc. (Viking) and Xerox Financial Services Life Insurance Company and
related companies (Xerox Life) were more than offset by the 1995 purchase of a
part of The Rank Group's interests in Xerox Limited and non-cash charges in
connection with our decision to sell the then-remaining insurance units.

         Coverage metrics related to our non-financing businesses have shown
strong, consistent improvement throughout the past three years. Within the
financing business, the ratio of earnings to fixed charges remains strong
despite an increase in 1996, from 6.5:1 to 7.0:1, in our financing business
debt-to-equity guideline.

         We "match fund" our financing operations by arranging fixed-rate
liabilities with maturities similar to the underlying customer financing assets.
Our 7.0 to 1 debt-to-equity guideline reflects both the high quality of the
underlying assets and the strong financial returns from our captive financing
businesses.

Non-Financing Operations

The following table summarizes 1997, 1996 and 1995 document processing
non-financing operations cash generation and usage:

- --------------------------------------------------------------------------------
(In millions)                         1997             1996            1995
- --------------------------------------------------------------------------------
Document Processing
         Non-Financing:
Income                              $1,248            $1,004           $  970
Depreciation and amortization          739               715              719
- --------------------------------------------------------------------------------
Subtotal                            $1,987            $1,719           $1,689
- --------------------------------------------------------------------------------
Capital expenditures/assets sold      (484)             (470)            (348)
Equipment on operating leases         (347)             (403)            (475)
Restructuring payments                 (88)             (197)            (331)
Working capital/other                  (42)               29                8
- --------------------------------------------------------------------------------
Net Cash Generation                 $1,026            $  678           $  543
- --------------------------------------------------------------------------------

         Document processing non-financing businesses generated $1,987 million
of cash from operations in 1997 or 16 percent more than in 1996. Net cash
generation after investments to fund the growth of the businesses was $1,026
million, an increase of $348 million. The growth was largely due to higher
income, higher growth in accounts payable and accrued compensation and benefits
costs, and lower restruc

Pictured here are Xerox employees and Xerox
customers standing behind a Xerox copier.

Bradesco Seguros is a leading Brazilian insurance company that uses several
DocuPrint 4890 and DocuPrint 4635 MX printers, which combine leading-edge
highlight color and Magnetic Ink Character Recognition (MICR) marking
technologies with exceptional paper handling capabilities at speeds up to 92 and
135 pages-per-minute. Bradesco Seguros prints insurance and financial documents
with highlighted variable information, as well as checks and payment coupons
with MICR symbols. Photographed here are Carlos Avelar, Branch Manager, Xerox do
Brasil; Geraldo Teixeira, Director Bradesco Seguros; Carlos Henrique Schmitz,
Director, Bradesco Seguros; and Jorge Luiz Goncalves, Account Manager, Xerox do
Brasil.

turing payments. Net cash generation was $135 million higher in 1996 than in
1995 as income growth, lower restructuring payments and lower inventory growth
more than offset higher capital spending and tax payments.

         Discontinued non-financing businesses generated $541 million in 1997 as
a result of the sales of Coregis, II and TRG. These businesses experienced net
cash usage of $47 million in 1996 versus $399 million of generation in 1995
reflecting the sales in 1995 of Constitution Re, Viking and Xerox Life.

Financing Businesses

Customer financing-related debt grew by $760 million in 1997, $54 million more
than in 1996, reflecting growth in equipment sales partially offset by currency
translation effects and the 1996 increase in our financing business
debt-to-equity guideline from 6.5 to 1 to 7.0 to 1. Financing debt growth of
$706 million in 1996 was $212 million more than in 1995 due to higher equipment
sales growth and the modest increase in our leverage guideline.

         Debt related to discontinued third party financing and real estate
activities, which is included in financing business debt, totaled $117 million
in 1997, $223 million in 1996 and $231 million in 1995. Asset sales and
portfolio run-off account for the 1997 decline. In 1996, asset sales and


                                          X E R O X   C O R P O R A T I O N   39

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F I N A N C I A L   R E V I E W


Pictured here is the Inxight logo.


What value is an entire database of information if you can't find the one piece
of it you need? The challenge of making information make sense is what Inxight,
a Xerox New Enterprise Company, hopes to solve with its VizControls and
LinguistX technologies originally developed at Xerox' Palo Alto Research Center
(PARC) and Xerox Research Centre Europe, Grenoble, France. Inxight's
visualization technology gives users a way to easily cull relevant information
for analysis. Inxight licenses VizControls to companies such as Comshare to help
make information products more manageable. Comshare uses Inxight technology in
Commander Decision, a product that allows company executives to get their hands
on the information they need (sales results, trends, business plans,
competition, etc.) to make better decisions. Inxight was launched as a Xerox New
Enterprise company in December 1996. Xerox New Enterprises (XNE) is our business
development arm that focuses on high-growth-potential new technology ventures.
Ultimately, these companies either will be merged into the Xerox mainstream,
become majority owned, become publicly traded subsidiaries or be sold.

run-off more than offset growth in reported real estate-related debt caused by
our decision to fund the retirement of off-balance-sheet debt with lower cost
Company borrowing.

Funding Plans for 1998

Any term funding related to our non-financing businesses will be based on the
interest rate environment and overall capital market conditions. Our underlying
strategy is to continue to extend funding duration while balancing the typical
yield curve benefit of floating rates and the reduced volatility obtained from
fixed-rate financing.

         Customer financing-related debt is planned to increase in line with
1998 sales growth, while third party financing and real estate-related debt is
expected to continue to decline. Decisions in 1998 regarding the size and timing
of term funding for our financing businesses will be made based on match funding
needs, refinancing requirements and capital market conditions.

         We believe that we have adequate short-term credit facilities available
to fund day-to-day operations and have readily available access to the capital
markets to meet any longer term financing requirements. Our $7.0 billion global
revolving credit agreement with a group of banks expires in 2002. This facility
is unused and available to provide back-up to Xerox, Xerox Credit Corporation
(XCC), Xerox Capital (Europe) plc (XCE) and Xerox Overseas Holdings PLC (XOH)
commercial paper borrowings that amounted to $3.8 billion at December 31, 1997.
Xerox or XCC may access the facility up to its $7.0 billion limit. XCE or XOH
have access subject to a $4.0 billion limit. Total drawdowns cannot exceed $7.0
billion.

         At December 31, 1997, Xerox, XCE and XOH had combined, U.S. shelf
capacity of $2,250 million and XCC had U.S. shelf capacity of $1,875 million. In
addition, a $2 billion Euro-debt facility is available to Xerox, XCC, XCE and
XOH, of which $1,193 million remained unused at December 31, 1997.

Risk Management

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

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

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

         As of December 31, 1997 and 1996 our primary foreign currency market
exposures include the Japanese yen, British pound sterling, Brazilian real, U.S.
dollar, French franc and Canadian dollar.


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         In order to manage the risk of foreign currency exchange rate
fluctuations, we hedge a significant portion of all transactions (except for
amounts "permanently" invested) denominated in a currency other than the
functional currency applicable to each of our legal entities. From time to time,
when cost-effective, currency derivatives are used to hedge international equity
investments.

         Consistent with the nature of the economic hedge of such foreign
currency exchange contracts, associated unrealized gains or losses would be
offset by corresponding decreases or increases in the value of the underlying
asset or liability being hedged. Assuming a 10 percent appreciation or
depreciation in foreign currency exchange rates as of December 31, 1997, the
potential change in fair value of our net foreign currency position would
approximate $46 million.

         The amount permanently invested in foreign subsidiaries and affiliates,
primarily Xerox Limited, Fuji Xerox and Xerox do Brasil, and translated into
dollars using the year-end exchange rate, is $6 billion at December 31, 1997.
Assuming a 10 percent appreciation or depreciation of the U.S. dollar against
all currencies from the quoted foreign currency exchange rates at December 31,
1997, the unrealized loss or gain would amount to $599 million.

         We do not hedge foreign currency-denominated revenues of our 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, we "lock 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. We refer to the
effect of these conservative practices as "match funding" customer financing
assets. This practice effectively eliminates the risk of a major decline in
interest margins during a period of rising interest rates. Conversely, this
practice effectively eliminates the opportunity to materially increase margins
when interest rates are declining.

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

         On an overall worldwide basis, and including the impact of our hedging
activities, weighted average interest rates for 1997, 1996 and 1995 approximated
6.6 percent, 6.9 percent and 7.7 percent, respectively.

         Many of the financial instruments we use are sensitive to changes in
interest rates. Hypothetically, interest rate changes result in gains or losses
related to the market value of our term debt and interest rate swaps due to
differences between current market interest rates and the stated interest rates
within the instrument. Applying an assumed 10 percent reduction or increase in
the yield curves at December 31, 1997, the fair value of our term debt and
interest swaps would increase or decrease, by approximately $93 million.

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

Pictured here is the Xerox Sixth Sense
Technology team.

Xerox people are team players. Teams that achieve a "black belt" in teamwork
earn the title X Team a group of innovative people who deliver results and whose
best practices are shared across organizational lines. It is the highest level
of team recognition in Xerox. This team worked on the delivery of Sixth Sense
Technology, an exclusive Xerox service offering that allows Customer Service
Engineers to use laptop computers and software to monitor and diagnose a
machine's performance remotely. Photographed (top to bottom) here are Steve
Pleavin, Chuck Boyle, Kelly Langan, Arturo Lorenzo, Wilbur Thornton, Dan Auman,
Carol Goldstein, Norm Kriehn, Nancy Nam, Dennis Martin and Carl Edmunds.


                                          X E R O X   C O R P O R A T I O N   41

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F I N A N C I A L   R E V I E W


Consolidated Statements of Cash Flows

- --------------------------------------------------------------------------------
Year ended December 31 (in millions)                  1997     1996     1995
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Income from continuing operations                 $  1,452 $  1,206 $  1,174
Adjustments required to reconcile 
  income to cash flows from operating
  activities:
         Depreciation and amortization                 739      715      719
         Provision for doubtful accounts               265      259      235
         Provision for postretirement 
           medical benefits, net of payments            29       38       40

         Minorities' interests in earnings 
           of subsidiaries                              88      161      191
         Undistributed equity in income of 
           affiliated companies                        (84)     (84)     (90)
         Increase in inventories                      (517)    (422)    (663)
         Increase in finance receivables            (1,629)  (1,220)    (701)
         Increase in accounts receivable              (188)    (180)    (173)
         Increase in accounts payable 
           and accrued compensation and 
           benefit costs                               250       63      179
         Net change in current and deferred 
           income taxes                                361      293      263
         Other, net                                   (294)    (519)    (575)
- --------------------------------------------------------------------------------
Total                                                  472      310      599
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of additions to land, buildings and 
  equipment                                           (520)    (510)    (438)
Proceeds from sales of land, buildings 
  and equipment                                         36       40       90
Net change in payables to Discontinued Operations     (208)     (51)     (57)
Purchase of additional interest in Xerox Limited      (812)       -     (972)
Other, net                                              45       14        -
- --------------------------------------------------------------------------------
Total                                               (1,459)    (507)  (1,377)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in debt                                       5      990      766
Dividends on common and preferred stock               (475)    (438)    (389)
Proceeds from sale of common stock                     140       95      111
Repurchase of preferred and common stock              (116)    (316)     (41)
Dividends to minority shareholders                      (6)     (68)     (86)
Proceeds received from (returned to) 
  minority shareholders                                 (1)      32       20
Proceeds from issuance of mandatorily 
  redeemable preferred securities                      637        -        -
- --------------------------------------------------------------------------------
Total                                                  184      295      381
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash                (18)      (6)      (5)
Cash provided (used) by continuing operations         (821)      92     (402)
Cash provided (used) by discontinued operations        792     (124)     497
- --------------------------------------------------------------------------------
Increase (decrease) in cash                            (29)     (32)      95
Cash at beginning of year                              104      136       41
- --------------------------------------------------------------------------------
Cash at end of year                               $     75 $    104 $    136
- --------------------------------------------------------------------------------
The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------


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                                                 F I N A N C I A L   R E V I E W


Liquidity

Our primary sources of liquidity are cash generated from operations and
borrowings. The consolidated statements of cash flows detailing changes in our
cash balances are on page 42.

         Operating activities generated positive cash flows in each of the past
three years. Cash generation of $472 million in 1997 was $162 more than in 1996
despite a $1,629 million net increase to customer finance receivables associated
with growth in equipment sales. Conversely, 1996 cash flow from operating
activities was $289 million less than in 1995 as income growth and improved
inventory performance did not fully offset finance receivables growth.

         Investing activities resulted in net cash usage in all three years.
Cash used for investing activities was $952 higher in 1997 than in 1996 largely
due to payment to The Rank Group of the initial installment under our agreement
to purchase The Rank Group's remaining interests in the former Rank Xerox. Net
usage in 1996 was $507 million or $870 million less than in 1995. Lower 1996
usage primarily reflected the absence of a 1995 payment to The Rank Group that
increased our financial interest in Rank Xerox from 67 percent to 80 percent.

         Excluding (pound)440 million ($720 million) of notes payable to The
Rank Group, cash generated by financing activities continued to decline as
strong cash generation from our continuing non-financing businesses, and
proceeds from sales of discontinued businesses, have offset the need for
additional borrowing related to financing business growth.

         Overall, including payments to The Rank Group of $812 million and $972
million in 1997 and 1995, respectively, continuing operations used $821 million
of cash in 1997, generated $92 million in 1996 and used $402 million in 1995.

         Discontinued operations provided $792 million of cash in 1997, used
$124 million in 1996 and provided $497 million in 1995.

         Cash balances were $75 million at year-end 1997, versus $104 million in
1996 and $136 million in 1995, consistent with our objective to minimize
investments that do not provide added value to our shareholders.

Discontinued Operations - Insurance
and Other Financial Services

The net investment in the discontinued financial services businesses, which
include Insurance, Other Financial Services and Third Party Financing and Real
Estate, totaled $1,332 million at December 31, 1997 compared with $2,124 million
and $2,000 million at December 31, 1996 and 1995, respectively. The decrease
primarily reflects the sale of Coregis Group, Inc. (Coregis), Industrial
Indemnity Holdings, Inc. (II) and The Resolution Group, Inc. (TRG), somewhat
offset by scheduled funding of reinsurance coverage to the Talegen Holdings,
Inc. (Talegen) companies and TRG by Ridge Reinsurance Limited (Ridge Re) and
interest for the period on the assigned debt.

Status of Insurance

In 1995, we recorded a $1,546 million after-tax charge in connection with
agreements to sell all of our "Remaining" insurance companies, which included
Coregis, Crum & Forster Holdings, Inc. (CFI), II, Westchester Specialty Group,
Inc. (WSG), TRG and three insurance-related service companies.

         On September 11, 1996, those agreements were terminated. No additional
charges were considered necessary as a result of the termination. In September
1996, the Board of Directors of Xerox formally approved a plan of disposal under
which we retained investment bankers to assist us in the simultaneous
disposition of each of the Remaining insurance and service companies.

         Significant progress was made during the past year in the disposition
of these companies at values consistent with expectations at the time we
discontinued the insurance

Pictured here are Xerox customers.

REMARK, Minsk, Belarus, is a fast growing advertising agency made up of 20 young
people with creative ideas and color know-how. They use a Xerox 5790 to print
brochures and leaflets and a Xerox 8954 plotter for printing large-format
posters and ads. Here (left to right) are Dimitri Lunyov, Dimitri Yarota,
Gennadi Yermakovich and Edward Berezin. REMARK also creates advertising for
Xerox in Belarus, including this advertisement for the C55 color laser printer.


                                          X E R O X   C O R P O R A T I O N   43

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F I N A N C I A L   R E V I E W


operations in 1995. As of January 2, 1998, the sale of four of the five
Remaining insurance companies was completed, as was the disposition of one
service company. Specifically: 
- - In the first quarter, we sold certain assets of Apprise Corp., one of
  Talegen's insurance-related service companies. The financial terms of this
  transaction were not material.
- - In the second quarter, we completed the sale of Coregis for $375 million in
  cash and the assumption of $75 million in debt.
- - In the third quarter, we completed the sale of II for $365 million in cash and
  the assumption of $79 million in debt.
- - In the fourth quarter, we completed the sale of TRG for $150 million in cash
  and a $462 million performance-based instrument to an investor group. Ultimate
  recovery of the value of this instrument will be dependent on TRG's future
  cash flows available for dividends.
- - And, on January 2, 1998, we completed the sale of WSG for $338 million in
  cash, less approximately $70 million in transaction-related costs.

         The disengagement strategy for the last remaining insurance company,
CFI, includes the option of either a private sale or an initial public offering
(IPO) of CFI stock, whichever delivers better shareholder value. Pursuant to
this strategy, subsequent to year-end, a Form S-1 Registration Statement for the
IPO was filed with the Securities and Exchange Commission. During the disposal
process, we remain subject to all business risks and rewards of the remaining
unit. Until

Pictured here is a London-theme bus.

This entire job - starting from the digital image in the computer and including
printing by our customer Pixus Digital Printing, Lafayette, La., on ColorgrafX
equipment, to transfer to vinyl and application on the vehicle - took only two
days to complete. ColorgrafX provides color printing systems for production of
large color documents like banners, billboards and backlit signs.

CFI is actually sold, no assurances can be given as to the ultimate impact on
our total results from operations or whether the proceeds from CFI's sale will
equal its carrying value.

         Xerox Financial Services, Inc. (XFSI) continues to provide aggregate
excess of loss reinsurance coverage (the Reinsurance Agreements) to certain of
the current and former Talegen units and TRG through Ridge Re, a wholly owned
subsidiary of XFSI. The coverage limits total $1,109 million, which is net of 15
percent coinsurance. Through December 31, 1997, Ridge Re had provided for
approximately $648 million of this available coverage and it is possible that
some additional reserves could ultimately be needed, although this is not
currently anticipated. XFSI has guaranteed to the current and former Talegen
units and TRG that Ridge Re will meet all of its financial obligations under the
Reinsurance Agreements. Related premium payments to Ridge Re are made by XFSI
and guaranteed by us. As of December 31, 1997, there were five remaining annual
installments of $45 million, plus finance charges. We have also guaranteed that
Ridge Re will meet its financial obligations on $578 million of the Reinsurance
Agreements and we have provided a $400 million partial guaranty of Ridge Re's
$800 million letter of credit facility. This facility is required to provide
security with respect to aggregate excess of loss reinsurance obligations under
contracts with the current and former Talegen units and TRG.

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

Prior Sales of Talegen Insurance Companies In April 1995, Constitution Re
Corporation was sold for $421 million in cash. In July 1995, Viking was sold for
approximately $103 million in cash plus future upward price adjustments based on
loss reserve development.

Net Investment in Insurance

The net investment in Insurance at December 31, 1997 totaled $1,076 million
compared with balances of $1,846 million and $1,678 million at December 31, 1996
and 1995, respectively. The decrease in 1997 over 1996 primarily reflects the
sales of Coregis, II and TRG somewhat offset by contractual payments to Ridge Re
for annual premium installments and associated finance charges and interest on
the assigned insurance debt.


44   X E R O X   C O R P O R A T I O N   

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                                                 F I N A N C I A L   R E V I E W


Property and Casualty Operating Trends

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

Other Financial Services

The net investment in Other Financial Services at December 31, 1997 was $125
million compared with $101 million and $114 million at December 31, 1996 and
1995, respectively. The increase in the investment primarily reflects the effect
of a transfer from Insurance that had no effect on the total net investment in
the discontinued financial services businesses.

         On June 1, 1995, XFSI completed the sale of Xerox Financial Services
Life Insurance Company and related companies (Xerox Life). In connection with
the transaction, OakRe Life Insurance Company (OakRe), a wholly owned XFSI
subsidiary, has assumed responsibility, via Coinsurance Agreements, for existing
Single Premium Deferred Annuity (SPDA) policies issued by Xerox Life. The
Coinsurance Agreements include a provision for the assumption (at their
election) by the purchaser's companies of all of the SPDA policies at the end of
their current rate reset periods. A Novation Agreement with an affiliate of the
new owner provides for the assumption of the liability under the Coinsurance
Agreements for any SPDA policies not so assumed. Other policies (of Immediate,
Whole Life and Variable annuities as well as a minor amount of SPDAs) were sold
and are now the responsibility of the purchaser's companies.

         As a result of the Coinsurance Agreements, at December 31, 1997, OakRe
retained approximately $1.5 billion of investment portfolio assets (transferred
from Xerox Life) and liabilities related to the reinsured SPDA policies.
Interest rates on these policies are fixed and were established upon issuance of
the respective policies. Substantially all of these policies will reach their
rate reset periods through the year 2000 and will be assumed under the
Agreements as described above. Xerox Life's portfolio was designed to recognize
that policy renewals extended liability "maturities," thereby permitting
investments with average duration somewhat beyond the rate reset periods.
OakRe's practice is to selectively improve this match over time as market
conditions allow.

         In connection with the aforementioned sale, XFSI established a $500
million letter of credit and line of credit with a group of banks to support
OakRe's coinsurance obligations. The term of this letter of credit is five
years, and it is unused and available at December 31, 1997. Upon a drawing under
the letter of credit, XFSI has the option to cover the drawing in cash or to
draw upon the credit line.

Third Party Financing and Real Estate

Third Party Financing and Real Estate assets at December 31, 1997, 1996 and 1995
totaled $298 million, $450 million and $489 million, respectively. The proceeds
from the asset sales and run-off activity were consistent with the amounts
contemplated in the formal disposal plan.

Forward Looking Statements

This document contains forward-looking statements and

information relating to Xerox that are based on our beliefs and assumptions and
information currently available to us. The words "anticipate," "believe,"
"estimate," "expect," "intends" and similar expressions, as they relate to us,
are intended to identify forward-looking statements. Information concerning
certain factors that could cause actual results to differ materially is included
in the Company's third quarter 1997 10-Q. We do not intend to update these
forward-looking statements.

Pictured here is color printer ink.

Fuji Xerox integrated research and artistic development facilities are at the
forefront of document technologies. Research in color imaging has led to a
number of successful color products, contributing to the No. 1 position in Japan
in color for Fuji Xerox.


                                          X E R O X   C O R P O R A T I O N   45

<PAGE>
 
N O T E S



Notes to Consolidated Financial Statements

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

1 Summary of Significant Accounting Policies

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

         Xerox Limited (formerly Rank Xerox Limited), Rank Xerox Holding BV,
Rank Xerox Investment Limited, R-X Holdings Limited and their respective
subsidiaries are referred to as Xerox Limited.

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

         Upon the sale of stock by a subsidiary, we recognize a gain or loss
equal to our proportionate share of the increase or decrease in the subsidiary's
equity. During 1996, we recognized a pre-tax net gain of $11 from such
transactions.

         Effective 1997, Fuji Xerox changed its reporting period from a fiscal
year ending October 20 to a fiscal year ending December 20. The results of
operations during the period between the end of the 1996 fiscal year and the
beginning of the new fiscal year (the stub period) amounted to a gain of $8. The
gain was credited to retained earnings to avoid reporting more than 12 months'
results of operations in one year.

         Effective January 1, 1995, we changed the reporting periods of Xerox
Limited and the Latin American operations from fiscal years ending October 31
and November 30, respectively, to a calendar year ending December 31. The
results of these operations during the period between the end of the 1994 fiscal
year and the beginning of the new calendar year (the stub period) amounted to a
loss of $21. The loss was charged to retained earnings to avoid reporting more
than 12 months' results of operations in one year. Accordingly, 1995 worldwide
operations include the results for all consolidated subsidiaries beginning
January 1, 1995. The cash activity for the stub period is included in Other, net
in the 1995 consolidated statement of cash flows.

Business Segment Information. We operate in a single industry segment that
consists of the worldwide development, manufacturing, marketing, financing and
servicing of document processing products and services. This business is unitary
from both a company and a customer perspective in that the marketing, financing
and servicing of our products represent an integrated document services
solution.

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

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

Goodwill. Goodwill represents the cost of acquired businesses in excess of the
net assets purchased and is amortized on a straight-line basis, generally over
40 years. Goodwill is reported net of accumulated amortization, and the
recoverability of the carrying value is evaluated on a periodic basis by
assessing current and future levels of income and cash flows as well as other
factors. Accumulated amortization at December 31, 1997 and 1996 was $71 and $41,
respectively.

Accounting Changes. Effective December 1997, we adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128
simplifies the calculation


46   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


of earnings per share (EPS), replaces primary EPS with basic EPS and replaces
fully diluted EPS with diluted EPS. See Note 18 on page 65.

         Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. The computation of diluted EPS is similar to the computation of
basic EPS except that it gives effect to all potentially dilutive instruments
that were outstanding during the period. All earnings per share amounts in
Xerox' annual report have been restated to reflect this new standard. 1997
primary and fully diluted EPS of $4.25 and $4.03, respectively, have been
restated as basic and diluted EPS of $4.31 and $4.04, respectively. 1996 primary
and fully diluted EPS of $3.49 and $3.31, respectively, have been restated as
basic and diluted EPS of $3.55 and $3.32, respectively.

         In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Commencing in 1998, SFAS No. 130 will
require companies to report comprehensive income, and SFAS No. 131 will require
companies to report segment performance as it is used internally to evaluate
segment performance. These statements merely provide for additional disclosure
requirements.

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

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

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

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

5 on page 49.

Classification of Commercial Paper and Bank Notes Payable. It is our policy to
classify as long-term debt that portion of commercial paper and notes payable
that is intended to match fund finance receivables due after one year to the
extent that we have the ability under our revolving credit agreement to
refinance such commercial paper and notes payable on a long-term basis. See Note
9 on page 53.

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 certain subsidiaries, primarily those in Latin America,
which conduct their business in U.S. dollars or operate in hyperinflationary
economies. A combination of current and historical exchange rates is used in
remeasuring the local currency transactions of these subsidiaries, and the
resulting exchange adjustments are included in income. Aggregate foreign
currency losses were $85, $27 and $18 in 1997, 1996 and 1995, respectively, and
are included in Other, net in the consolidated statements of income.

         Effective July 1, 1997, we changed the functional currency for our
Brazilian operation from the U.S. dollar to the Brazilian real, as the Brazilian
economy is no longer considered hyperinflationary. The effect of this change was
immaterial.

Reclassifications. Prior years' financial statements have been restated to
reflect certain reclassifications to conform with the 1997 presentation. The
impact of these changes is not material and did not affect net income.


                                          X E R O X   C O R P O R A T I O N   47

<PAGE>
 
N O T E S


2 Acquisition

In June 1997, we acquired the remaining 20 percent of Xerox Limited from The
Rank Group Plc (Rank) in a transaction valued at (pound)940 million, or
approximately $1.5 billion. As a result of this transaction, we now own 100
percent of Xerox Limited. The transaction was funded entirely by debt consisting
of (pound)500 million of third-party debt and (pound)440 million of notes
payable issued to Rank, which will be paid in deferred installments, half by
June 29, 1998 and the other half by June 30, 1999. An additional payment of up
to (pound)60 million would be made in 2000 based upon achievement of certain
Xerox Limited earnings growth targets by 1999. The purchase price (including
transaction costs) was allocated such that goodwill increased by $737, minority
interest in equity of subsidiaries was reduced by approximately $720, with the
balance of $70 applied to other assets and liabilities, primarily investment in
affiliates, at equity.

         On February 28, 1995, we paid Rank (pound)620 million, or approximately
$972, for 40 percent of Rank's financial interest in Xerox Limited. The
transaction increased our financial interest in Xerox Limited to 80 percent from
67 percent. Our additional interest in the operating results of Xerox Limited is
included in the consolidated statement of income from the date of acquisition.
Based on the allocation of the purchase price, this transaction resulted in
goodwill of $574 (including transaction costs), a decline in minorities'
interests in equity of subsidiaries of approximately $400 and an increase in
long-term debt of $972.

3 Finance Receivables, Net

Finance receivables represent installment sales and sales-type leases resulting
from the marketing of our business equipment products. These receivables
generally mature over two to five years and are typically collateralized by a
security interest in the underlying assets. The components of finance
receivables, net at December 31, 1997, 1996 and 1995 follow:

- --------------------------------------------------------------------------------
                                       1997             1996              1995
- --------------------------------------------------------------------------------
Gross receivables                   $15,035          $13,872           $12,696
Unearned income                      (2,850)          (2,551)           (2,207)
Unguaranteed residual values            557              398               308
Allowance for doubtful accounts        (389)            (347)             (322)
- --------------------------------------------------------------------------------
Finance receivables, net             12,353           11,372            10,475
Less current portion                  4,599            4,386             4,069
- --------------------------------------------------------------------------------
Amounts due after one year, net     $ 7,754          $ 6,986           $ 6,406
- --------------------------------------------------------------------------------

         Contractual maturities of our gross finance receivables subsequent to
December 31, 1997 follow:

- --------------------------------------------------------------------------------
  1998           1999          2000           2001          2002     Thereafter
- --------------------------------------------------------------------------------
$5,653         $4,044        $2,930         $1,709          $571           $128
- --------------------------------------------------------------------------------

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.

4 Inventories

The components of inventories at December 31, 1997, 1996 and 1995 follow:

- --------------------------------------------------------------------------------
                             1997             1996              1995
- --------------------------------------------------------------------------------
Finished goods             $1,549           $1,570            $1,646
Work in process                97               80                88
Raw materials                 406              322               295
Equipment on operating 
  leases, net                 740              704               627
- --------------------------------------------------------------------------------
Inventories                $2,792           $2,676            $2,656
- --------------------------------------------------------------------------------

         Equipment on operating leases consists of our business equipment
products that are rented to customers and are depreciated to estimated residual
value. Depreciable lives vary from two to four years. In order to more precisely
match depreciable lives to the duration of lease contracts with customers,
during 1996, we increased the depreciable lives of certain equipment on
operating leases such that the equipment is now predominately depreciated over
three to four years. The effect of this change was not material. Our business
equipment operating lease terms vary, generally from 12 to 36 months.
Accumulated depreciation on equipment on operating leases for the years ended
December 31, 1997, 1996 and 1995 amounted to $1,198, $1,259 and $1,065,
respectively. Scheduled minimum future rental revenues on operating leases with
original terms of one year or longer are:

- --------------------------------------------------------------------------------
                 1998     1999     2000     Thereafter
- --------------------------------------------------------------------------------
                 $406     $210     $78             $42
- --------------------------------------------------------------------------------

         Total contingent rentals, principally usage charges in excess of
minimum allowances relating to operating leases, for the years ended December
31, 1997, 1996 and 1995 amounted to $186, $199 and $190, respectively.


48   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


5 Land, Buildings and Equipment, Net The components of land, buildings and
equipment, net at December 31, 1997, 1996 and 1995 follow:

- --------------------------------------------------------------------------------
                             Estimated
                              Useful
                               Lives
                              (Years)         1997        1996       1995
- --------------------------------------------------------------------------------
Land                                        $   88      $   89     $   85
Buildings and building                                         
         equipment           20 to 40        1,012         991        941
Leasehold improvements     Lease term          403         378        347
Plant machinery               4 to 12        1,870       1,862      1,907
Office furniture and                                           
  equipment                   3 to 10        1,285       1,231      1,161
Other                         3 to 20          190         218        201
Construction in progress                       310         250        231
- --------------------------------------------------------------------------------
Subtotal                                     5,158       5,019      4,873
Less accumulated                                               
  depreciation                               2,781       2,763      2,768
- --------------------------------------------------------------------------------
Land, buildings and                                            
  equipment, net                            $2,377      $2,256     $2,105
- --------------------------------------------------------------------------------

We lease certain land, buildings and equipment, substantially all of which are
accounted for as operating leases. Total rent expense under operating leases for
the years ended December 31, 1997, 1996 and 1995 amounted to $419, $421 and
$425, respectively. Future minimum operating lease commitments that have
remaining non-cancelable lease terms in excess of one year at December 31, 1997
follow:

- --------------------------------------------------------------------------------
         1998     1999     2000     2001    2002     Thereafter
- --------------------------------------------------------------------------------
         $313     $243     $190     $146    $113     $358
- --------------------------------------------------------------------------------

         In certain circumstances, we sublease space not currently required in
operations. Future minimum sublease income under leases with non-cancelable
terms in excess of one year amounted to $29 at December 31, 1997.

         In 1994, we awarded a contract to Electronic Data Systems Corp. (EDS)
to operate our worldwide data processing and telecommunications network through
the year 2004. Minimum payments due EDS under the contract follow:

- --------------------------------------------------------------------------------
         1998     1999     2000     2001    2002     Thereafter
- --------------------------------------------------------------------------------
         $296     $257     $229     $217    $198     $278
- --------------------------------------------------------------------------------

6 Investments in Affiliates, at Equity Investments in corporate joint ventures
and other companies in which we generally have a 20 to 50 percent ownership
interest at December 31, 1997, 1996 and 1995 follow:

- --------------------------------------------------------------------------------
                             1997             1996              1995
- --------------------------------------------------------------------------------
Fuji Xerox                 $1,231           $1,173            $1,223
Other investments             101              109                91
- --------------------------------------------------------------------------------
Investments in affiliates, 
  at equity                $1,332           $1,282            $1,314
- --------------------------------------------------------------------------------

         Xerox Limited, a consolidated subsidiary, owns 50 percent of the
outstanding stock of Fuji Xerox, a corporate joint venture with Fuji Photo Film
Co., Ltd. Fuji Xerox is headquartered in Tokyo and operates in Japan and other
areas of the Pacific Rim, Australia and New Zealand, except for China. As
disclosed in Note 2 on page 48, in June 1997 we purchased Rank Group Plc's
remaining interest in Xerox Limited. In order to record the acquired assets at
fair value, $137 of goodwill was allocated to Xerox Limited's investment in Fuji
Xerox and is being amortized over 40 years. Condensed financial data of Fuji
Xerox for its last three fiscal years follow:

- --------------------------------------------------------------------------------
                                     1997             1996              1995
- --------------------------------------------------------------------------------
Summary of Operations
Revenues                           $7,415           $8,091            $8,500
Costs and expenses                  6,882            7,546             7,989
- --------------------------------------------------------------------------------
Income before income taxes            533              545               511
Income taxes                          295              313               287
- --------------------------------------------------------------------------------
Net income                         $  238           $  232            $  224
- --------------------------------------------------------------------------------
Xerox Limited's equity in 
  net income                       $  119           $  116            $  112
- --------------------------------------------------------------------------------
Xerox' equity in net income        $  109           $   93            $   88
Balance Sheet Data
Assets
Current assets                     $2,461           $3,008            $3,518
Non-current assets                  2,942            3,168             3,085
- --------------------------------------------------------------------------------
Total assets                       $5,403           $6,176            $6,603
- --------------------------------------------------------------------------------
Liabilities and Shareholders' 
  Equity                           
Current liabilities                $2,218           $2,546            $2,675
Long-term debt                        286              427               594
Other non-current liabilities         679              850               884
Shareholders' equity                2,220            2,353             2,450
- --------------------------------------------------------------------------------
Total liabilities and
  shareholders' equity             $5,403           $6,176            $6,603
- --------------------------------------------------------------------------------

7 Geographic Area Data

Revenues and assets of Xerox Limited are substantially attributable to European
operations; its consolidated operations in Africa, Asia and the Middle East
together constitute less than 2 percent of our consolidated amounts. The Other
Areas classification reflects Brazil and to a lesser extent, Canada, Mexico and
other Latin American countries.

         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.


                                          X E R O X   C O R P O R A T I O N   49

<PAGE>
 
N O T E S


         Geographic area data for our continuing operations follow:

- --------------------------------------------------------------------------------
Year ended December 31                  1997            1996         1995
- --------------------------------------------------------------------------------
Revenues from Unrelated Entities
United States                         $ 9,191         $ 8,583      $ 8,068
Xerox Limited                           5,511           5,501        5,495
Other areas                             3,464           3,294        3,025
- --------------------------------------------------------------------------------
Total                                 $18,166         $17,378      $16,588
- --------------------------------------------------------------------------------
Intercompany Revenues
United States                         $ 1,455         $ 1,377      $ 1,376
Xerox Limited                             187             230          226
Other areas                               557             425          463
- --------------------------------------------------------------------------------
Total                                 $ 2,199         $ 2,032      $ 2,065
- --------------------------------------------------------------------------------
Total Revenues
United States                         $10,646         $ 9,960      $ 9,444
Xerox Limited                           5,698           5,731        5,721
Other areas                             4,021           3,719        3,488
Less intercompany 
  revenues                             (2,199)         (2,032)      (2,065)
- --------------------------------------------------------------------------------
Total                                 $18,166         $17,378      $16,588
- --------------------------------------------------------------------------------
Income from Continuing 
Operations (Before 
Intercompany Eliminations
United States                      $   638          $   444           $   370
Xerox Limited                          390              432               409
Other areas                            437              375               364
- --------------------------------------------------------------------------------
Total                              $ 1,465           $1,251           $ 1,143
- --------------------------------------------------------------------------------
Income from Continuing Operations
(After Intercompany Eliminations)
United States                      $   642          $   414           $   418
Xerox Limited                          392              431               408
Other areas                            418              361               348
- --------------------------------------------------------------------------------
Total                              $ 1,452          $ 1,206           $ 1,174
- --------------------------------------------------------------------------------
Assets
United States                      $11,179          $10,354           $ 9,876
Xerox Limited                        8,591            7,844             7,566
Other areas                          4,937            4,222             3,756
- --------------------------------------------------------------------------------
Subtotal                            24,707           22,420            21,198
Investment in discontinued 
  operations                         3,025            4,398             4,810
- --------------------------------------------------------------------------------
Total                              $27,732          $26,818           $26,008
- --------------------------------------------------------------------------------

8 Discontinued Operations

In January 1993, we announced our intent to sell or otherwise disengage from our
Insurance and Other Financial Services (IOFS) businesses. Since that time, we
have disposed of a number of these businesses through sale and run-off
collection activities. At December 31, 1997, our sole remaining non-Document
Processing operation is the Insurance business, which excludes our other
discontinued businesses consisting of Other Financial Services and Third Party
Financing and Real Estate, which are primarily in asset run-off. A discussion of
the status of IOFS's three segments follows.

Insurance. In 1993, Talegen Holdings, Inc. (Talegen) completed a restructuring
which established and capitalized seven insurance operating groups as
independent legal entities: Constitution Re Corporation (CRC), Coregis Group,
Inc. (Coregis), Crum & Forster Holdings, Inc. (CFI), Industrial Indemnity
Holdings, Inc. (II), The Resolution Group, Inc. (TRG), Viking Insurance
Holdings, Inc. (Viking) and Westchester Specialty Group, Inc. (WSG).

         Since the restructuring, we have disposed of all of the insurance
operating groups except CFI. Details of these disposals follow:

         In April 1995, CRC was sold for $421 in cash, which approximated book
value. In July 1995, Viking was sold for approximately $103 in cash plus future
upward price adjustments based on loss reserve development. The proceeds
approximated book value. The proceeds of both transactions were used to retire
debt.

         In the fourth quarter of 1995, we recorded a $1,546 loss on disposal in
connection with agreements to sell Coregis, CFI, II, WSG, TRG and three
insurance-related service companies (collectively referred to as the Remaining
companies). In September 1996, those agreements were terminated. No additional
charges were considered necessary as a result of the termination. In September
1996, the Board of Directors formally approved a plan of disposal under which we
retained investment bankers to assist us in the simultaneous disposition of each
of the Remaining companies.

         During 1997 and January 1998, we made significant progress in the
disposition of these companies, including the completed sales of four of the
five Remaining insurance companies and one insurance-related service company.

Specifically, the following occurred:

         In the first quarter of 1997, we sold certain assets of Apprise Corp.,
one of Talegen's insurance-related service companies. The financial terms of
this transaction were not material.

         In May 1997, we completed the sale of Coregis for $375 in cash and the
assumption of $75 in debt.

         In August 1997, we completed the sale of II for $365 in cash and the
assumption of $79 in debt.

         In October 1997, we completed the sale of TRG for $150 in cash and a
$462 performance-based instrument to an


50   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


investor group. We will participate in the future cash flows of TRG via the
performance-based instrument. The recovery of this instrument is dependent upon
the sufficiency of TRG's available cash flows, as defined. Based on current
forecasts at December 31, 1997, we expect to realize $462 for this instrument.
However, the ultimate realization may be greater or less than this amount.

         On January 2, 1998, we completed the sale of WSG for $338 in cash less
approximately $70 in transaction-related costs.

         The disengagement strategy for the last remaining insurance company,
CFI, includes the option of either a private sale or an initial public offering
(IPO) of CFI stock, whichever delivers better shareholder value. Pursuant to
this strategy, subsequent to year-end, a Form S-1 Registration Statement for the
IPO was filed with the Securities and Exchange Commission.

         The values received for the companies disposed of in 1997 and January
1998 were consistent with their carrying values. The net proceeds of the sales
transactions after transaction related costs were used primarily to retire debt.

         At December 31, 1997, the Insurance business consists of Talegen
(primarily WSG and CFI), Ridge Reinsurance Limited (Ridge Re), and headquarters
costs and interest expense associated with the insurance activities of Xerox
Financial Services, Inc. (XFSI), a wholly owned subsidiary.

         XFSI continues to provide aggregate excess of loss reinsurance coverage
(the Reinsurance Agreements) to certain of the current and former Talegen units
and TRG through Ridge Re, a wholly owned subsidiary of XFSI. The coverage limits
total $1,109, which is net of 15 percent coinsurance. Through December 31, 1997,
Ridge Re had provided for approximately $648 of this available coverage and it
is possible that some additional reserves could ultimately be needed, although
this is not currently anticipated. XFSI has guaranteed to the current and former
Talegen units and TRG that Ridge Re will meet all of its financial obligations
under the Reinsurance Agreements. Related premium payments to Ridge Re are made
by XFSI and guaranteed by us. As of December 31, 1997, there were five remaining
annual installments of $45, plus finance charges. We have also guaranteed that
Ridge Re will meet its financial obligations on $578 of the Reinsurance
Agreements and we have provided a $400 partial guaranty of Ridge Re's $800
letter of credit facility. This facility is required to provide security with
respect to aggregate excess of loss reinsurance obligations under contracts with
the current and former Talegen units and TRG.

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

Insurance Financial Information. Summarized operating results of Insurance for
the three years ended December 31, 1997 follow:

- --------------------------------------------------------------------------------
                                             1997         1996           1995
- --------------------------------------------------------------------------------
Revenues
Insurance premiums earned                   $1,338       $1,708         $ 1,888
Investment and other income                    386          435             464
- --------------------------------------------------------------------------------
Total Revenues                               1,724        2,143           2,352
- --------------------------------------------------------------------------------
Costs and Expenses
Insurance losses and loss expenses           1,345        1,667           2,031
Insurance acquisition costs and other
         operating expenses                    518          557             619
Interest expense                               173          203             231
Administrative and general expenses             62           10             556
- --------------------------------------------------------------------------------
Total costs and expenses                     2,098        2,437           3,437
Realized capital gains                          36            4              60
- --------------------------------------------------------------------------------
Income (loss) before income taxes             (338)        (290)         (1,025)
Income tax benefits                            143          100             357
- --------------------------------------------------------------------------------
Net income (loss) from operations*            (195)        (190)           (668)
Loss on disposal                                 -            -            (978)
- --------------------------------------------------------------------------------
Income (loss) from Insurance**              $ (195)      $ (190)        $(1,646)
- --------------------------------------------------------------------------------
  * The 1995 amount includes $568 of after-tax reserve provisions. 
 ** The 1997 and 1996 operating results exclude the gains and losses related to
    sales of the Insurance subsidiaries. The 1997 and 1996 results, including
    the sale-related impacts, were charged to reserves established for this
    purpose and, therefore, did not impact our earnings. 
- --------------------------------------------------------------------------------

    The net assets at December 31, 1997, 1996 and 1995 of the Insurance
businesses included in our consolidated balance sheets as discontinued
operations are summarized as follows:

- --------------------------------------------------------------------------------
                                          1997          1996            1995
- --------------------------------------------------------------------------------
Insurance Assets
Investments                              $4,597        $ 7,889         $ 7,871
Reinsurance recoverable                   1,459          2,458           2,616
Premiums and other receivables              592          1,082           1,191
Deferred taxes and other assets           1,082          1,201           1,450
- --------------------------------------------------------------------------------
Total Insurance assets                   $7,730        $12,630         $13,128
- --------------------------------------------------------------------------------
Insurance Liabilities
Unpaid losses and loss expenses          $4,999        $ 8,572         $ 8,761
Unearned income                             541            812             859
Notes payable                               250            215             372
Other liabilities                           864          1,185           1,458
- --------------------------------------------------------------------------------
Total Insurance liabilities              $6,654        $10,784         $11,450
- --------------------------------------------------------------------------------
Investment in Insurance, net             $1,076        $ 1,846         $ 1,678
- --------------------------------------------------------------------------------


                                          X E R O X   C O R P O R A T I O N   51

<PAGE>
 
N O T E S


         At December 31,1997 and 1996, intercompany receivables aggregating
approximately $206 and $414, respectively, have been included as assets in
Investment in discontinued operations in the consolidated balance sheets. The
corresponding obligations are included in Deferred taxes and other liabilities
in the consolidated balance sheets and represent funding commitments by XFSI
guaranteed by us. Substantially all of these funding commitments will be paid at
the time the CFI sale is completed.

         The Investments caption consists mainly of short-term investments as
shown below. At December 31, 1997, approximately 99 percent of the fixed
maturity investments are investment grade securities. The amortized cost and
fair value of the investment portfolio at December 31, 1997 follow:

- --------------------------------------------------------------------------------
                                  Amortized Cost            Fair Value
- --------------------------------------------------------------------------------
Fixed maturities                          $1,046                $1,066
Short-term investments                     3,531                 3,531
- --------------------------------------------------------------------------------
Total investments                         $4,577                $4,597
- --------------------------------------------------------------------------------

         Activity related to unpaid losses and loss expenses for the three years
ended December 31, 1997 follows:

- --------------------------------------------------------------------------------
                                             1997          1996         1995
- --------------------------------------------------------------------------------
Unpaid Losses and Loss Expenses
Gross unpaid losses and loss expenses,
         January 1                        $  8,572        $8,761       $8,809
Reinsurance recoverable                      2,245         2,290        2,391
- --------------------------------------------------------------------------------
Net unpaid losses and loss expenses,
         January 1                           6,327         6,471        6,418

Incurred related to:
Current year accident losses                 1,100         1,364        1,461
Prior year accident losses                     245           303          570
- --------------------------------------------------------------------------------
Total incurred                               1,345         1,667        2,031
- --------------------------------------------------------------------------------
Paid related to:
Current year accident losses                   308           407          427
Prior year accident losses                     982         1,215        1,203
- --------------------------------------------------------------------------------
Total paid                                   1,290         1,622        1,630
- --------------------------------------------------------------------------------
Sales of subsidiaries                       (2,463)            -         (769)
- --------------------------------------------------------------------------------
Other adjustments                             (319)         (189)         421
- --------------------------------------------------------------------------------
Net unpaid losses and loss expenses,
         December 31                         3,600         6,327        6,471
Reinsurance recoverable                      1,399         2,245        2,290
- --------------------------------------------------------------------------------
Gross unpaid losses and loss expenses,
         December 31                      $  4,999        $8,572       $8,761
- --------------------------------------------------------------------------------

Other Financial Services. In 1995, we completed the sale of Xerox Financial
Services Life Insurance Company and related companies (Xerox Life) for
approximately $104 before settlement costs and capital funding of OakRe Life
Insurance Company (OakRe), a single-purpose XFSI subsidiary. OakRe assumed
responsibility for the Single Premium Deferred Annuity (SPDA) policies issued by
Xerox Life's Missouri and California companies via coinsurance agreements. As a
result of these coinsurance agreements, at December 31, 1997 and 1996, we have
retained on our consolidated balance sheet approximately $1.5 and $2.0 billion,
respectively, of investment portfolio assets and reinsurance reserves related to
Xerox Life's former SPDA policies. These amounts will decrease through the year
2000 as the SPDA policies are either terminated by the policyholder or renewed
and transferred to the buyer.

         In connection with the aforementioned sale, XFSI established a $500
letter of credit and line of credit with a group of banks to support OakRe's
coinsurance obligations. This letter of credit expires in 2000, and it is unused
and available at December 31, 1997. Upon a drawing under the letter of credit,
XFSI has the option to cover the drawing in cash or to draw upon the credit
line.

Third Party Financing and Real Estate. During the last seven years, we made
substantial progress in disengaging from the Third Party Financing and Real
Estate businesses that were discontinued in 1990. During the three years ended
December 31, 1997, we received net cash proceeds of $252 ($152 in 1997, $36 in
1996 and $64 in 1995) from the sale of individual assets and from run-off
collection activities. The amounts received were consistent with our estimates
in the disposal plan and were used primarily to retire debt. The remaining
assets primarily represent direct financing leases, many with long-duration
contractual maturities and unique tax attributes. Collections in 1998 are
expected to be less than we received in 1997.

Total Discontinued Operations. The consolidated financial statements present the
Insurance, Other Financial Services and Third Party Financing and Real Estate
businesses as discontinued operations. Debt has been assigned to discontinued
operations based on historical levels assigned to the businesses when they were
continuing operations, adjusted for subsequent paydowns. Interest expense
thereon is


52   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


primarily determined based on our annual average domestic borrowing costs.
Assigned interest expense for the discontinued businesses for the years ended
December 31, 1997, 1996 and 1995 was $201, $226 and $255, respectively.

         Summarized information of discontinued operations for the three years
ended December 31, 1997 follows:

- --------------------------------------------------------------------------------
                                            1997          1996         1995
- --------------------------------------------------------------------------------
Summary of Operations
Income (loss) before income taxes          $    -        $    -      $(1,025)
Income tax benefits                             -             -          357
Loss on disposal                                -             -         (978)
- --------------------------------------------------------------------------------
Net income (loss)                          $    -        $    -      $(1,646)
- --------------------------------------------------------------------------------
Balance Sheet Data
Assets
Insurance
Investment, net                            $1,076        $1,846      $ 1,678
- --------------------------------------------------------------------------------
Other Financial Services
Investments                                 1,537         1,991        2,508
Other assets, net                             114           111          135
- --------------------------------------------------------------------------------
OFS assets                                  1,651         2,102        2,643
- --------------------------------------------------------------------------------
Third Party Financing and
         Real Estate
Gross finance receivables                     303           401          472
Unearned income and other                      (5)           49           17
- --------------------------------------------------------------------------------
Investment, net                               298           450          489
- --------------------------------------------------------------------------------
Investment in discontinued operations      $3,025        $4,398      $ 4,810
- --------------------------------------------------------------------------------
Liabilities
OFS policyholders' deposits                $1,523        $1,998      $ 2,528
Other OFS liabilities                           3             3            1
Assigned debt                                 167           273          281
- --------------------------------------------------------------------------------
Discontinued operations liabilities        $1,693        $2,274      $ 2,810
- --------------------------------------------------------------------------------
Net investment in discontinued
         operations                        $1,332        $2,124      $ 2,000
- --------------------------------------------------------------------------------

At December 31, 1997 and 1996, approximately $1.9 billion and $2.5 billion,
respectively, of third party indebtedness assigned to the Insurance operations
is included in the consolidated balance sheet caption Long-term debt.

         Based on current estimates, we believe that the proceeds received from
disposal of the remaining net discontinued assets will be consistent with our
net carrying value of these businesses.

9 Debt

Short-Term Debt. Short-term borrowings data at December 31, 1997 and 1996
follow:

- --------------------------------------------------------------------------------
                                          Weighted
                                          average
                                          interest
                                          rates at
                                          12/31/97       1997       1996
- --------------------------------------------------------------------------------
Notes payable                              4.05%        $1,164     $  762
Foreign commercial paper                   5.83%           629        864
- --------------------------------------------------------------------------------
Total short-term debt                                    1,793      1,626     
Current maturities of long-term debt                     1,914      1,910
- --------------------------------------------------------------------------------
Total                                                   $3,707     $3,536
- --------------------------------------------------------------------------------

         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, 1997 and 1996 follows:

- --------------------------------------------------------------------------------
                                          Weighted
                                          average
                                          interest
                                          rates at
                                          12/31/97       1997      1996
- --------------------------------------------------------------------------------
U.S. Operations
Xerox Corporation (parent company)
Guaranteed ESOP notes due 1998-2004         7.62%       $  434   $  494
Notes due 1997                                 -             -      275 
Notes due 1998                              6.67           585        -   
Notes due 1999                              5.52           730      454 
Notes due 2000                              7.33           600      600 
Notes due 2001                              6.85           212      212 
Notes due 2002                              8.13           200      225 
Notes due 2003                              5.01           147        -   
Notes due 2004                              7.15           200      200 
Notes due 2006                              7.25            25       50  
Notes due 2007                              7.38            25       25  
Notes due 2011                              7.01            50      205 
Notes due 2016                              7.20           250      250 
Notes due 2026                              6.25           350      350 
Other debt due 1997-2014                    7.20           126      128 
Capital lease obligations                   6.85             3        4
- --------------------------------------------------------------------------------
Subtotal                                                 3,937    3,472
- --------------------------------------------------------------------------------
Xerox Credit Corporation
Notes due 1997                                 -             -      877   
Notes due 1998                              7.42           795      420     
Notes due 1999                              8.25           300      300     
Notes due 2000                              5.53           201      153     
Notes due 2001                              6.04           126      100     
Notes due 2002                              2.88           250        -       
Notes due 2007                              7.13            25        -       
Notes due 2011                              7.68             -      200     
Notes due 2012                              7.18           225        -        
Floating rate notes due 2048                5.65            60       61
Other notes due 1997 and 2000                  -             4       13
- --------------------------------------------------------------------------------
Subtotal                                                 1,986    2,124
- --------------------------------------------------------------------------------
Total U.S. operations                                   $5,923   $5,596
- --------------------------------------------------------------------------------


                                          X E R O X   C O R P O R A T I O N   53

<PAGE>
 
N O T E S


- --------------------------------------------------------------------------------
                                          Weighted
                                          average
                                          interest
                                          rates at
                                          12/31/97           1997        1996
- --------------------------------------------------------------------------------
International Operations
Various obligations, payable in:
Canadian dollars due 1997-2007             11.40%         $   124     $   192
Dutch guilders due 1997-2000                5.61               66         108
French francs due 1997-1999                 5.13               21          47
German marks due 1997-1999                  6.33               51         146
Pounds sterling due 1997-2003               8.75              206         257
Swiss francs due 1997-2000                  3.30               35          57
Italian lira due 1997-1998                  7.30              123         113
U.S. dollars due 1997-1999                  6.15              229         133
Other currencies due 1997-2001              7.14              207         274
Capital lease obligations                   7.67                3           -
- --------------------------------------------------------------------------------
Total international operations                              1,065       1,327
- --------------------------------------------------------------------------------
Other borrowings deemed long-term                           3,872       3,684
Subtotal                                                   10,860      10,607
Less current maturities                                     1,914       1,910
- --------------------------------------------------------------------------------
Total long-term debt                                      $ 8,946     $ 8,697
- --------------------------------------------------------------------------------

Consolidated Long-Term Debt Maturities. Payments due on long-term debt for the
next five years and thereafter follow:

- --------------------------------------------------------------------------------
    1998        1999        2000       2001       2002        Thereafter
- --------------------------------------------------------------------------------
  $1,914      $1,285      $1,040       $456       $619            $1,674
- --------------------------------------------------------------------------------

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

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

Lines of Credit. In October 1997, we replaced the then-existing $5 billion
revolving credit agreement with a $7 billion revolving credit agreement with a
group of banks. This new Revolver, maturing 2002, is also accessible by the
following wholly owned subsidiaries: Xerox Credit Corp. (up to a $7 billion
limit), and by Xerox Capital (Europe) plc and Xerox Overseas Holdings PLC (up to
a $4 billion limit) with our guarantee. Any amounts borrowed under this facility
would be at rates based, at the borrower's option, on spreads above certain
reference rates such as LIBOR. This agreement is unused and is available to back
commercial paper borrowings of our domestic operations, Xerox Capital (Europe)
plc and Xerox Overseas Holdings PLC which amounted to $3.8 billion at December
31, 1997. In addition, our foreign subsidiaries had unused committed long-term
lines of credit used to back short-term indebtedness that aggregate $0.2 billion
in various currencies at prevailing interest rates.

Match Funding of Finance Receivables and Indebtedness. We employ a match funding
policy for customer financing assets and related liabilities. Under this policy,
which is more fully discussed in the accompanying Financial Review on page 41,
the interest and currency characteristics of the indebtedness are, in most
cases, matched to the interest and currency characteristics of the finance
receivables. At December 31, 1997, these operations had approximately $12.5
billion of net finance receivables, which will service approximately $10.2
billion of assigned short- and long-term debt, including $0.1 billion of debt
assigned to discontinued third party financing businesses.

Guarantees. At December 31, 1997, we have guaranteed the borrowings of our ESOP
and $2,616 of indebtedness of our foreign subsidiaries.

Interest. Interest paid by us on our short- and long-term debt, including
amounts relating to debt assigned to discontinued operations, amounted to $812,
$871 and $817 for the years ended December 31, 1997, 1996 and 1995,
respectively.

Total Short- and Long-Term Debt. Our total indebtedness, excluding the direct
indebtedness of Talegen, at December 31, 1997 and 1996 is reflected in the
consolidated balance sheet captions as follows:

- --------------------------------------------------------------------------------
                                                       1997         1996
- --------------------------------------------------------------------------------
Short-term debt and current portion
         of long-term debt                           $ 3,707      $ 3,536
Long-term debt                                         8,779        8,424
Discontinued operations liabilities -
         policyholders' deposits and other               167          273
- --------------------------------------------------------------------------------
Total debt                                           $12,653      $12,233
- --------------------------------------------------------------------------------


54   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


         A summary of changes in consolidated indebtedness for the three years
ended December 31, 1997 follows:

- --------------------------------------------------------------------------------
                                               1997        1996        1995
- --------------------------------------------------------------------------------
Increase (decrease) in
         short-term debt, net                $  (276)     $  973      $   94
Proceeds from long-term debt                   1,807       2,998       3,169
Principal payments on long-term debt          (1,632)     (2,989)     (2,497)
- --------------------------------------------------------------------------------
Subtotal                                        (101)        982         766
Less change in debt of
    discontinued operations                     (106)         (8)          -
- --------------------------------------------------------------------------------
Total change in debt of
    continuing operations                    $     5      $  990      $  766
- --------------------------------------------------------------------------------

10 Financial Instruments

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

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

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

         None of our hedging activities involves exchange traded instruments.

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

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

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

         Pay variable/receive variable interest rate swaps ("basis swaps") are
used to transform variable rate, medium-term debt into commercial paper or local
currency LIBOR rate obligations. Pay variable/receive fixed interest rate swaps
are used to transform term fixed-rate debt into variable rate obligations.
During 1997, three such agreements were cancelled in connection with the early
retirement of three medium-term notes. The transactions performed within each of
these three categories enable the cost-effective management of interest rate
exposures. During 1997, the average notional amount of an interest rate swap
agreement was $28.

         At December 31, 1997 and 1996, the total notional amounts of these
transactions, based on contract maturity, follow:

- --------------------------------------------------------------------------------
                                           1997                 1996
- --------------------------------------------------------------------------------
Commercial paper/bank borrowings         $ 1,991              $ 1,822
Medium-term debt                           5,388                4,000
Long-term debt                             4,313                3,444
- --------------------------------------------------------------------------------
Total                                    $11,692              $ 9,266
- --------------------------------------------------------------------------------


                                          X E R O X   C O R P O R A T I O N   55

<PAGE>
 
N O T E S


   For the three years ended December 31, 1997, no pay fixed/receive variable
interest rate swap agreements were terminated prior to maturity.

   The aggregate notional amounts of interest rate swaps by maturity date and
type at December 31, 1997 and 1996 follow:



<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------
                                                        1999-      2002-
                                   1997       1998       2001       2016      Total
- --------------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>        <C>    
1997
Pay fixed/receive variable      $  --      $ 1,136    $ 4,203    $ 2,330    $ 7,669
Pay variable/receive variable      --          320        203          0        523
Pay variable/receive fixed         --          535        982      1,983      3,500
- --------------------------------------------------------------------------------------
Total                              --      $ 1,991    $ 5,388    $ 4,313    $11,692
- --------------------------------------------------------------------------------------
Memo:
Interest rate paid                 --         6.20%      6.22%      6.03%      6.14%
Interest rate received          $  --         6.18%      5.55%      6.22%      5.90%
- --------------------------------------------------------------------------------------
1996
Pay fixed/receive variable      $ 1,224    $   925    $ 3,612    $   419    $ 6,180
Pay variable/receive variable       455          0        332         25        812
Pay variable/receive fixed          143          0        760      1,371      2,274
- --------------------------------------------------------------------------------------
Total                           $ 1,822    $   925    $ 4,704    $ 1,815    $ 9,266
- --------------------------------------------------------------------------------------
Memo:
Interest rate paid                 6.21%      6.69%      6.48%      5.97%      6.35%
Interest rate received             5.90%      5.37%      5.82%      7.10%      6.04%
- --------------------------------------------------------------------------------------
</TABLE>



Forward Exchange Contracts. We utilize forward exchange contracts to hedge
against the potentially adverse impacts of foreign currency fluctuations on
foreign currency denominated receivables and payables; firm foreign currency
commitments; and investments in foreign operations. Firm foreign currency
commitments generally represent committed purchase orders for foreign-sourced
inventory. These contracts generally mature in six months or less. At December
31, 1997 and 1996, we had outstanding forward exchange contracts of $1,977 and
$2,259, respectively. Of the outstanding contracts at December 31, 1997, the
largest single currency represented was the pound sterling. Contracts
denominated in British pounds sterling, U.S. dollars, Brazilian reais, French
francs and Canadian dollars accounted for over 75 percent of our forward
exchange contracts. On contracts that hedge foreign currency denominated
receivables and payables, gains or losses are reported currently in income, and
premiums or discounts are amortized to income and included in Other, net in the
consolidated statements of income. Gains or losses, as well as premiums or
discounts, on contracts that hedge firm commitments are deferred and
subsequently recognized as part of the underlying transaction. At December 31,
1997, we had a net deferred loss of $38. Gains or losses on contracts that hedge
an investment in a foreign operation are reported currently in the balance sheet
as a component of cumulative translation adjustments. The premium or discount on
contracts that hedge an investment in a foreign operation are amortized to
income and included in Other, net in the consolidated statements of income.
During 1997, the average notional amount of a forward exchange contract amounted
to $13.

Foreign Currency Swap Agreements. We enter into cross-currency interest rate
swap agreements, whereby we issue foreign currency denominated debt and swap the
proceeds with a counterparty. In return, we receive and effectively denominate
the debt in local currencies. Currency swaps are utilized as hedges of the
underlying foreign currency borrowings, and exchange gains or losses are
recognized currently in Other, net in the consolidated statements of income. At
December 31, 1997, cross-currency interest rate swap agreements with an
aggregate notional amount of $1,708 remained outstanding.


56   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


Fair Value of Financial Instruments. The estimated fair
values of our financial instruments at December 31, 1997
and 1996 follow:

- -------------------------------------------------------------------------
                                       1997                  1996
- -------------------------------------------------------------------------

                             Carrying       Fair    Carrying       Fair
                               Amount      Value      Amount      Value
- -------------------------------------------------------------------------
Cash                         $     75   $     75    $    104   $    104
Accounts receivable, net        2,145      2,145       2,022      2,022
Short-term debt                 1,793      1,793       1,626      1,626
Long-term debt                 10,860     11,189      10,607     10,766
Interest rate and currency
         swap agreements         --           25        --          (61)
Forward exchange contracts       --          (44)       --           19
- -------------------------------------------------------------------------

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

   The fair value of Long-term debt was estimated based on quoted market prices
for these or similar issues or on the current rates offered to us for debt of
the same remaining maturities. The difference between the fair value and the
carrying value represents the theoretical net premium we would have to pay to
retire all debt at such date. We have no plans to retire significant portions of
our long-term debt prior to scheduled maturity. We are not required to determine
the fair value of our finance receivables, the match funding of which is the
source of much of our interest rate swap activity.
  
   The fair values for interest rate and cross-currency swap agreements and
forward exchange contracts were calculated by us based on market conditions at
year-end and supplemented with quotes from brokers. They represent amounts we
would receive (pay) to terminate/replace these contracts. We have no present
plans to terminate/replace significant portions of these contracts.

11 Employee Benefit Plans

   Retirement Income Guarantee Plan (RIGP). 

Approximately 54,000 salaried and union employees participate in the 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 our prior defined contribution plan
(Transitional Retirement Accounts or TRA).

   At December 31, 1997, these domestic plans accounted for approximately 64
percent of our total pension assets and were invested as follows: domestic and
international equity securities - 69 percent; fixed-income investments - 30
percent; and real estate - 1 percent. No plan assets are invested in our stock.

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

   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 transition asset and prior service cost are amortized over 15
years. The assumptions used in the accounting for the U.S. defined benefit plans
follow:

- -------------------------------------------------------------------------
                                               1997     1996    1995
- -------------------------------------------------------------------------
Assumed discount rates                         7.25%    7.75%   7.25%
Assumed rates for compensation
         increases                             4.13     4.50    4.25
Expected return on plan assets                 9.50    9.50     9.50
- -------------------------------------------------------------------------

   Our 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 our pension obligation tends to be relatively
longer in comparison to other companies. Changes in the assumed discount rates
and rates of compensation increases primarily reflect changes in the underlying
rates of long-term inflation.

Other Plans. We maintain various supplemental executive retirement plans (SERPs)
that are not tax-qualified and are unfunded.

   We sponsor numerous pension plans for our 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. The Xerox Limited pension
plan in the United Kingdom is the largest international plan and accounted for
approximately 25 percent of our total pension assets at December 31,
1997. It is primarily invested in marketable equity securities.


                                          X E R O X   C O R P O R A T I O N   57

<PAGE>
 
N O T E S


Financial Information. Our 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 gain (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 our 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, the Xerox Canada Limited non-registered
pension plan and the Xerox Limited pension plans in Germany and Austria. For tax
reasons, these plans are most efficiently and customarily funded on a
pay-as-you-go basis.

   A reconciliation of the funded status of our retirement plans to the amounts
accrued in our consolidated balance sheets at December 31, 1997 and 1996
follows:


<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
                                                                       1997                             1996
- -----------------------------------------------------------------------------------------------------------------------------
                                                         Over-   Under-   Non-             Over-   Under-   Non-
                                                        funded   funded  funded    Total   funded  funded  funded     Total
- -----------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>       <C>     <C>      <C>      <C>      <C>     <C>      <C> 
Accumulated benefit obligation                         $ 6,354   $  70   $  271   $6,695   $5,549   $  70   $  252   $ 5,871 
Effect of projected compensation increases                 526      10       52      588      471      51       48       570 
- -----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (PBO)                       6,880      80      323    7,283    6,020     121      300     6,441 
Plan assets at fair value                                7,640      68     --      7,708    6,706      65       --     6,771 
- -----------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over PBO                   760     (12)    (323)     425      686     (56)    (300)      330 
Items not yet reflected in the financial statements:                                                                         
         Unamortized transition obligations (assets)       (87)     (1)       7      (81)    (116)     17       10       (89)
         Unrecognized prior service cost                    27       1        6       34       40      --       (9)       31 
         Unrecognized net (gain) loss                     (394)     24       37     (333)    (268)     30       29      (209)
- -----------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost recognized in the                                                                             
         consolidated balance sheets at December 31    $   306   $  12   $ (273)  $   45   $  342   $  (9)  $ (270)  $    63  
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>


   The components of pension cost for the three years ended December 31, 1997
follow:

- ----------------------------------------------------------------------------  
                                                 1997       1996       1995
- ----------------------------------------------------------------------------  
Defined benefit plans
Service cost                                  $   167    $   164    $   143
- ----------------------------------------------------------------------------  
Interest cost - change in PBO due to:
         Passage of time                          215        201        186
         Net investment income (loss)
                  allocated to TRA accounts       677        586        624
- ----------------------------------------------------------------------------  
                  Subtotal                        892        787        810
- ----------------------------------------------------------------------------  
Net investment income on:
         TRA assets                              (677)      (586)      (624)
         Other plan assets                       (621)      (417)      (372)
- ----------------------------------------------------------------------------  
                  Subtotal                     (1,298)    (1,003)      (996)
- ----------------------------------------------------------------------------  
Net amortization and deferrals                    344        150        120
- ----------------------------------------------------------------------------  
Settlement and curtailment gains                  (31)        (7)       (32)
- ----------------------------------------------------------------------------  
Defined benefit plans -
         net pension cost                          74         91         45
Defined contribution plans -
         pension cost                              23         17         13
Total pension cost                            $    97    $   108    $    58
- ----------------------------------------------------------------------------  

   Plan assets consist of both assets legally allocated to the TRA accounts and
other defined benefit plan assets. The combined investment results of the assets
are shown, left, 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 $4.3 billion and $4.0
billion at December 31, 1997 and 1996, respectively. Our pension plans' funding
surplus tends to be less than that of comparable companies because a substantial
portion of plan assets are TRA-related and are equal to TRA-related liabilities.

Other Postretirement Benefits. The primary plan for U.S. 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


58   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


annual rate of 7.5 percent until it reaches the plan's annual maximum coverage
of approximately two times the 1995 level, the transition date to the new plan.

   We also have other postretirement benefit plans that cover employees who
retired prior to January 1, 1995 and certain grandfathered employees. These
other plans are generally indemnity arrangements that provide varying levels of
benefit coverage. The medical inflation assumption for these plans is 7.5
percent in 1997 and declines to 5.25 percent in 2002 and thereafter. A 1
percentage point increase in the medical inflation assumptions would increase
the service and interest cost for these plans by $3 and the accumulated
postretirement benefit obligation by $47.

   The discount rate used to determine the funded status was 7.25 percent, 7.75
percent and 7.25 percent at December 31, 1997, 1996 and 1995, respectively.

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

- --------------------------------------------------------------------------- 
                                                 1997       1996       1995
- --------------------------------------------------------------------------- 
Accumulated Postretirement
         Benefit Obligation:
                  Retirees                    $   592    $   501    $   506
                  Fully eligible employees        200        183        251
                  Other employees                 237        208        219
- --------------------------------------------------------------------------- 
Total                                           1,029        892        976
Unrecognized net gain                              50        158         42
- --------------------------------------------------------------------------- 
Accrued cost recognized in the
         consolidated balance sheets          $ 1,079    $ 1,050    $ 1,018
- --------------------------------------------------------------------------- 

   The components of postretirement benefit cost for the three years ended
December 31, 1997 follow:

- ---------------------------------------------------------
                                  1997     1996     1995
- ---------------------------------------------------------
Service cost                       $25      $26      $19
Interest cost                       66       63       70
Net amortization                    (4)      (1)      (4)
Settlement gain                      -        -       (8)
- ---------------------------------------------------------
Total                              $87      $88      $77
- ---------------------------------------------------------

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

Employee Stock Ownership Plan (ESOP) Benefits. In 1989, we established an ESOP
and sold to it 10 million shares of Series B Convertible Preferred Stock
(Convertible Preferred) of the Company for a purchase price of $785. Each ESOP
share is convertible into 3 common shares of the Company. 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. The ESOP debt is included in our consolidated
balance sheets because we guarantee the ESOP borrowings. A corresponding amount
classified as Deferred ESOP benefits represents our commitment to future
compensation expense related to the ESOP benefits.

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

   Information relating to the ESOP for the three years ended December 31,
1997 follows:

- -------------------------------------------------------------------------
                                                 1997     1996     1995
- -------------------------------------------------------------------------
CInterest on ESOP Borrowings                      $38      $42      $45
Dividends declared on Convertible                                   
         Preferred Stock                          $57      $58      $59
- -------------------------------------------------------------------------
Cash contribution to the ESOP                     $39      $36      $34
- -------------------------------------------------------------------------
Compensation expense                              $40      $37      $35
- -------------------------------------------------------------------------

     We recognize ESOP costs based on the amount committed to be contributed to
the ESOP plus related trustee, finance and other charges.
  
12 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, 1997 consi sts of the following:

- --------------------------------------------------------------------------
                                           1997         1996        1995 
- --------------------------------------------------------------------------
Domestic income                          $1,082       $  781      $  747 
Foreign income                            1,059        1,163       1,102 
- --------------------------------------------------------------------------
Income before income taxes               $2,141       $1,944      $1,849 
- --------------------------------------------------------------------------


                                          X E R O X   C O R P O R A T I O N   59

<PAGE>
 
N O T E S


   Provisions for income taxes from continuing operations for the three years
ended December 31, 1997 consist of the following:

- ---------------------------------------------------------
                                 1997     1996     1995
- ---------------------------------------------------------
Federal income taxes
         Current               $  253   $  210   $  285
         Deferred                  67       50      (21)
Foreign income taxes
         Current                  168      205      178
         Deferred                 158      166      110
State income taxes
         Current                   69       62       57
         Deferred                  13        7        6
- ---------------------------------------------------------
Income taxes                   $  728   $  700   $  615
- ---------------------------------------------------------

   A reconciliation of the U.S. federal statutory income tax rate to the
effective income tax rate for continuing operations for the three years ended
December 31, 1997 follows:

- -------------------------------------------------------------------
                                            1997     1996     1995
- -------------------------------------------------------------------
U.S. federal statutory income tax rate     35.0%    35.0%    35.0%
Foreign earnings and dividends
         taxed at different rates          (3.2)      .5      2.2
Goodwill amortization                        .3       .3       .3
Tax-exempt income                           (.8)     (.5)     (.6)
Effect of tax rate changes on deferred
         tax assets and liabilities          --       --     (5.3)
State taxes                                 2.5      2.3      2.2
Change in valuation allowance for
         deferred tax assets                 --     (1.0)     (.8)
Other                                        .2      (.6)      .3
- -------------------------------------------------------------------
Effective income tax rate                  34.0%    36.0%    33.3%
- -------------------------------------------------------------------

   The 1997 effective tax rate of 34.0 percent is 2.0 percentage points lower
than 1996. This lower 1997 rate is primarily attributable to an increase in
foreign tax credits, refund of foreign taxes and mix of profits from our
worldwide operations.

   The 1996 effective tax rate of 36.0 percent is 2.7 percentage points higher
than 1995. The lower 1995 rate was primarily caused by a decrease in Brazilian
corporate tax rates, which created a deferred tax benefit. Excluding the 1995
Brazilian deferred tax benefit, the 1996 effective tax rate was 2.6 percentage
points lower than 1995. This lower effective tax rate was primarily due to the
lower statutory tax rate in Brazil and the mix of profits from our worldwide
operations.

   On a consolidated basis, including the effects of discontinued operations, we
paid a total of $241, $252 and $182 in income taxes to federal, foreign and
state income-taxing authorities in 1997, 1996 and 1995, respectively.

   Total income tax expense (benefit) for the three years ended December 31,
1997 was allocated as follows:

- --------------------------------------------------------------------------------
                                               1997         1996         1995
- --------------------------------------------------------------------------------
Income taxes on income                                             
         from continuing operations           $ 728        $ 700        $ 615
Tax benefit included in                                            
         minorities' interests*                 (19)          --           --
Discontinued operations                        (166)         (84)        (374)
Common shareholders' equity**                   (57)         (15)         (15)
- --------------------------------------------------------------------------------
Total                                         $ 486        $ 601        $ 226
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
 *   Benefit relates to preferred securities as more fully described in Note 15
     on page 61.
**   For dividends paid on shares held by the ESOP; cumulative translation
     adjustments; tax benefit on nonqualified stock options; 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, 1997
was approximately $4.5 billion. These earnings have been substantially
reinvested, and we do not plan to initiate any action that would precipitate the
p
ayment of income taxes thereon. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings.

   The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1997 and 1996 follow:

- -----------------------------------------------------------
                                             1997     1996
- -----------------------------------------------------------
Tax effect of future tax deductions
         Depreciation                      $  294   $  397
         Postretirement medical benefits      406      405
         Restructuring reserves                22       70
         Other operating reserves             299      296
         Deferred intercompany profit          60       83
         Allowance for doubtful accounts       95       69
         Deferred compensation                151      138
         Tax credit carryforwards             125      122
         Research and development             256      158
         Other                                133      108
- -----------------------------------------------------------
Total                                      $1,841   $1,846
- -----------------------------------------------------------
Tax effect of future taxable income               
         Installment sales and leases     $(1,282) $(1,287)
         Leverage leases                      (21)     (31)
         Deferred income                     (353)    (205)
         Other                               (192)    (163)
- -----------------------------------------------------------
Total                                     $(1,848) $(1,686)
- -----------------------------------------------------------

   The above amounts are classified as current or long-term in the consolidated
balance sheets in accordance with the asset or liability to which they relate.
Current deferred tax assets at December 31, 1997, 1996 and 1995 amounted to
$516, $473 and $608, respectively.


60   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


   We conclude 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, 1997, we have tax credit carryforwards for federal income tax
purposes of $20 available to offset future federal income taxes through 2001 and
$105 available to offset future federal income taxes indefinitely.

13 Litigation

   On March 10, 1994, a lawsuit was filed in the United States District Court
for the District of Kansas by two independent service organizations (ISOs) in
Kansas City and St. Louis and their parent company. Plaintiffs claim damages
predominately resulting from the Company's alleged refusal to sell parts for
high volume copiers and printers to plaintiffs prior to 1994. The Company's
policies and practices with respect to the sale of parts to ISOs were at issue
in an antitrust class action in Texas, which was settled by the Company during
1994. Claims for individual lost profits of ISOs who were not named parties,
such as the plaintiffs in the Kansas action, were not included in that class
action. In their complaint plaintiffs allege monetary damages in the form of
lost profits in excess of $10 million (to be trebled) and injunctive relief. In
a report prepared pursuant to Rule 26(a)2)B) of the Federal Rules of Civil
Procedure, an accountant retained by plaintiffs as an expert indicated that he
plans to testify at trial that, allegedly as a result of Xerox' conduct,
plaintiffs have lost profits of approximately $75 million. The Company has
asserted counterclaims against the plaintiffs alleging patent and copyright
infringement, misappropriation of Xerox trade secrets and conversion. On
December 11, 1995, the District Court issued a preliminary injunction against
the parent company for copyright infringement. On April 8, 1997, the District
Court granted partial summary judgment in favor of the Company on plaintiffs'
antitrust claims, ruling that the Company's unilateral refusal to sell or
license its patented parts cannot give rise to antitrust liability. The Court's
ruling did not preclude a finding of antitrust liability based upon other
allegations of exclusionary conduct, including the refusal to sell unpatented
parts. The District Court also granted summary judgment in favor of the Company
on its patent infringement claim, leaving open with respect to patent
infringement only the issues of willfulness and the amount of damages, and
granted partial summary judgment in favor of the Company with respect to some of
its claims of copyright infringement. On September 8, 1997, the United States
Court of Appeals for the Federal Circuit denied plaintiffs' petition for
permission to appeal the District Court's April 8, 1997 Order. A trial date
tentatively has been set for March 9, 1998 for the remaining issues in the case.
The Company denies any wrongdoing and intends to vigorously defend the remaining
claims and pursue its counterclaims.

14 Common Stock Split

   At our annual meeting on May 16, 1996, shareholders approved an increase in
the number of authorized shares of common stock, from 350 million to 1.05
billion, to effect a three-for-one stock split. The effective date of the stock
split was June 6 for shareholders of record as of May 23. Shareholders' equity
has been restated to give retroactive recognition to the stock split in prior
periods by reclassifying from additional paid-in capital to common stock the par
value of the additional shares arising from the split. In addition, all
references in the financial statements to number of shares and per share amounts
have been restated.

15 Preferred Securities

   We have 22 million authorized shares of cumulative preferred stock, $1 par
value. Outstanding preferred stock at December 31, 1997 and 1996 follows (shares
in thousands):

- ---------------------------------------------------------------- 
                                    1997             1996
- ---------------------------------------------------------------- 
                               Shares   Amount   Shares  Amount
- ---------------------------------------------------------------- 
Convertible
         Preferred Stock        9,013     $705    9,212    $721
- ---------------------------------------------------------------- 


Convertible Preferred Stock. As more fully described in Note 11 on page 57, we
sold, for $785, 10 million shares of our Series B Convertible Preferred Stock
(ESOP shares) in 1989 in connection with the establishment of our ESOP. As
employees with vested ESOP shares leave the Company, these shares are redeemed
by us. We have the option to settle such redemptions with either shares of
common stock or cash.
 

                                          X E R O X   C O R P O R A T I O N   61

<PAGE>
 
N O T E S


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

   Under the terms of the plan, one preferred stock purchase right (Right)
accompanies each share of outstanding common stock. Each Right entitles the
holder to purchase from us one three-hundredth of a new series of preferred
stock at an exercise price of $250.

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

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

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

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

Company-obligated, mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures of the Company. On January 29,
1997, a trust sponsored and wholly owned by the Company issued $650 aggregate
liquidation amount preferred securities (the "Original Preferred Securities") to
investors and 20,103 shares of common securities to the Company, the proceeds of
which were invested by the trust in $670.1 aggregate principal amount of the
Company's newly issued 8 percent Junior Subordinated Debentures due 2027 ("the
Original Debentures"). On June 13, 1997, pursuant to a registration statement
filed by the Company and the trust with the Securities and Exchange Commission,
Original Preferred Securities with an aggregate liquidation preference amount of
$644.2 and Original Debentures with a principal amount of $644.2 were exchanged
for a like amount of preferred securities (together with the Original Preferred
Securities, the "Preferred Securities") and 8 percent Junior Subordinated
Debentures due 2027 (together with the Original Debentures, the "Debentures")
which were registered under the Securities Act of 1993. The Debentures represent
all of the assets of the trust. The proceeds from the issuance of the Original
Debentures were used by the Company for general corporate purposes. The
Debentures and related income statement effects are eliminated in the Company's
consolidated financial statements.

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

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

62   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


16 Common Shareholders' Equity

   The components of common shareholders' equity and the changes therein for the
three years ended December 31, 1997 follow:


<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                Net
                                                                                         Unrealized
                                                                                               Gain
                                            Common      Common  Additional                (Loss) on  Translation  Treasury 
                                             Stock       Stock     Paid-In    Retained   Investment      Adjust-     Stock 
(Shares in thousands)                       Shares      Amount     Capital    Earnings   Securities        ments    Shares 
- ------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>       <C>           <C>        <C>         <C>          <C>
Balance at December 31, 1994               317,979    $    321    $  1,192    $  3,197    $   (433)   $   (100)       --   
Stock option, incentive plans and other      4,962           6         114         (11)        
Xerox Canada Inc. exchangeable stock         1,365
Convertible securities                         723                      28                                                 
Net loss                                                                          (472)                                    
Net loss during stub period                                                        (21)                                    
Cash dividends declared
         Common stock ($1.00 per share)                                           (327)                                    
         Preferred stock                                                           (62)                                    
Tax benefits on ESOP dividends                                                      17                                     
Net unrealized gain on
         investment securities                                                                 432                         
Translation adjustments -
         net of minority shareholders'
         interests of $17                                                                                   (3)            
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995               325,029         327       1,334       2,321          (1)       (103)       --   
Purchase of treasury stock                                                                                           (6,493)
Stock option, incentive plans and other        596                     (23)        (15)                               2,428
Xerox Canada Inc. exchangeable stock           103                                                                    1,347
Convertible securities                         174                      10                                              497
Net income                                                                       1,206                                     
Cash dividends declared
         Common stock ($1.16 per share)                                           (379)                                    
         Preferred stock                                                           (59)                                    
Tax benefits on ESOP dividends                                                      16                                     
Translation adjustments -
         net of minority shareholders'
          interests of ($24)                                                                              (138)            
Premiums from sale of put options                                       11                                                 
Tax benefits on stock options                                           21                                                 
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996               325,902         327       1,353       3,090          (1)       (241)     (2,221)
Purchase of treasury stock                                                                                          (1,987)
Stock option, incentive plans and other        180                    (117)        (29)                              3,648 
Xerox Canada Inc. exchangeable stock            58                                                                      63
Convertible securities                         101                       9                                             497 
Net income                                                                       1,452                                     
Net income during stub period                                                        8                                     
Cash dividends declared
         Common stock ($1.28 per share)                                           (418)                                    
         Preferred stock                                                           (57)                                    
Tax benefits on ESOP dividends                                                      14                                     
Translation adjustments -
         net of minority shareholders'
         interests of ($44)                                                                               (463)            
Premiums from sale of put options                                      13                                                  
Tax benefits on stock options                                          45                                                  
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997               326,241    $    327    $  1,303    $  4,060    $     (1)       (704)          0 
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>



- -----------------------------------------------------------------
                                              Treasury              
                                                 Stock            
(Shares in thousands)                           Amount   Total    
- -----------------------------------------------------------------
Balance at December 31, 1994                     --     4,177
Stock option, incentive plans and other                   109
Xerox Canada Inc. exchangeable stock                            
Convertible securities                                    28    
Net loss                                                (472)   
Net loss during stub period                              (21)   
Cash dividends declared                                         
         Common stock ($1.00 per share)                 (327)   
         Preferred stock                                 (62)   
Tax benefits on ESOP dividends                            17    
Net unrealized gain on                                          
         investment securities                           432    
Translation adjustments -                                       
         net of minority shareholders'                          
         interests of $17                                 (3)   
- -----------------------------------------------------------------
Balance at December 31, 1995                    --     3,878
Purchase of treasury stock                     (306)    (306)   
Stock option, incentive plans and other         122       84    
Xerox Canada Inc. exchangeable stock                            
Convertible securities                           23       33    
Net income                                             1,206    
Cash dividends declared                                         
         Common stock ($1.12 per share)                 (379)   
         Preferred stock                                 (59)   
Tax benefits on ESOP dividends                            16    
Translation adjustments -                                       
         net of minority shareholders'                          
                                                                
          interests of ($24)                            (138)   
Premiums from sale of put options                         11    
Tax benefits on stock options                             21    
- -----------------------------------------------------------------
Balance at December 31, 1996                   (161)   4,367
Purchase of treasury stock                     (116)    (116)   
Stock option, incentive plans and other         245       99    
Xerox Canada Inc. exchangeable stock                            
Convertible securities                           32       41    
Net income                                             1,452    
Net income during stub period                              8    
Cash dividends declared                                         
         Common stock ($1.28 per share)                 (418)   
         Preferred stock                                 (57)   
Tax benefits on ESOP dividends                            14    
Translation adjustments -                                       
         net of minority shareholders'                          
         interests of ($44)                             (463)    
Premiums from sale of put options                         13     
Tax benefits on stock options                             45     
- -----------------------------------------------------------------
Balance at December 31, 1997                    $  0  $4,985     
- -----------------------------------------------------------------
                                            

                                          X E R O X   C O R P O R A T I O N   63

<PAGE>
 
N O T E S


Common Stock. We have 1.05 billion authorized shares of common stock, $1 par
value. At December 31, 1997 and 1996, 20.7 and 20.9 million shares,
respectively, were reserved for issuance under our incentive compensation plans.
In addition, at December 31, 1997, 2.6 million common shares were reserved for
the conversion of $53 of convertible debt and 27.0 million common shares were
reserved for conversion of ESOP-related Convertible Preferred Stock.

Treasury Stock. The Board of Directors has authorized us to repurchase up to $1
billion of our common stock. The stock will be repurchased from time to time on
the open market depending on market conditions. During 1997, we repurchased 2.0
million shares for $116. Common shares issued for stock option exercises,
conversion of convertible securities and other exchanges were partially
satisfied by reissuances of treasury shares. In the second quarter of 1997, the
repurchase program was suspended in connection with the acquisition of the
remaining interest in Xerox Limited.

Put Options. In connection with the share repurchase program, during 1997 and
1996, we sold 4.0 million and 2.8 million put options, respectively, that
entitle the holder to sell one share of our common stock to us at a specified
price. These put options are exercisable only at maturity and can be settled in
cash at our option. The put options had original maturities ranging from six
months to two years.

   At December 31, 1997, 4.0 million put options remain outstanding with a
weighted average strike price of $54.32 per share. 

   Stock Option and Long-Term Incentive Plans. We have a long-term incentive
plan whereby eligible employees may be granted nonqualified stock options and
performance unit rights. Subject to vesting and other requirements, performance
unit rights are typically paid in cash, and stock options and rights are settled
with newly issued or treasury shares of our common stock. Stock options granted
prior to December 31, 1995 normally vest in two years and normally expire five
years from the date of grant. Stock options granted subsequent to December 31,
1995 vest in three years and will expire eight years from the date of grant. The
exercise price of the options is equal to the market value of our common stock
on the date of grant. The value of each performance unit is typically based upon
the 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, 1997 and 1996, 4.3 and 7.7 million shares, respectively, were
available for grant of options or rights. The following table provides
information relating to the status of, and changes in, options granted:


<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Employee Stock Options               1997                1996                1995
- ------------------------------------------------------------------------------------------
                                        Average              Average              Average
                                Stock    Option     Stock     Option     Stock     Option
(Options in thousands)        Options     Price   Options      Price   Options      Price
- ------------------------------------------------------------------------------------------
<S>                           <C>      <C>        <C>       <C>        <C>       <C>    
Outstanding at January 1      11,103    $    37    10,794    $    33     9,726    $    28
Granted                        6,101         68     3,688         43     5,508         37
Canceled                        (150)        49      (365)        38      (228)        34
Exercised                     (3,487)        34    (2,939)        31    (4,092)        26
Surrendered for SARs              --         --       (75)        15      (120)        16
Outstanding at December 31    13,567         52    11,103         37    10,794         33
- ------------------------------------------------------------------------------------------
Exercisable at end of year     4,425                4,444                3,585
- ------------------------------------------------------------------------------------------
</TABLE>


   Options outstanding and exercisable at December 31, 1997 are as follows:


<TABLE> 
<CAPTION> 
- -----------------------------------------------------------------------------------------------------------------------
Thousands except per share data   Options Outstanding                                  Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------
                                                   Weighted     
Range of                                  Average Remaining     Weighted Average       Number   Weighted Average
Exercise Prices      Number Outstanding    Contractual Life       Exercise Price  Exercisable     Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S>                  <C>                 <C>                    <C>               <C>           <C>               
$26.35  to $44.50                 7,360                4.08               $38.59        4,379             $36.38
 46.50  to  64.31                 3,084                6.96                61.34           46              48.62
 69.63  to  84.53                 3,123                7.78                73.34           -                -
- -----------------------------------------------------------------------------------------------------------------------
$26.35  to $84.53                13,567                5.59               $51.76        4,425             $36.50
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>



64   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


   We do not recognize compensation expense relating to employee stock options
because the exercise price of the option equals the fair value of the stock on
the date of grant. If we had determined the compensation based on the fair value
of the options on the date of grant in accordance with SFAS No. 123, the pro
forma net income and earnings per share would be as follows:

- --------------------------------------------------------------------------
                                                      1997           1996
- --------------------------------------------------------------------------
Net income - as reported                         $   1,452      $   1,206
Net income - pro forma                               1,429          1,189
Basic Earnings per share - as reported                4.31           3.55
Basic Earnings per share - pro forma                  4.24           3.50
Diluted Earnings per share - as reported              4.04           3.32
Diluted Earnings per share - pro forma                3.98           3.27
- --------------------------------------------------------------------------

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

   As reflected in the pro forma amounts in the table above, the fair value of
each option granted in 1997 and 1996 was $18.06 and $10.50, respectively. The
fair value of each option granted was estimated on the date of grant using the
modified Black-Scholes option pricing model using the following weighted average
assumptions:

- -----------------------------------------------------------------------------
                                                      1997            1996
- -----------------------------------------------------------------------------
Risk-free interest rate                                6.1%            5.7%
Expected life in years                                 5.0             5.5
Expected volatility                                   23.5%           22.0%
Expected dividend yield                                1.9%            2.6%
- -----------------------------------------------------------------------------


17 Summarized Financial
   Information of Xerox Overseas

Xerox Overseas Holdings PLC ("Xerox Overseas"), which was formed in November
1996, is the majority shareholder of Xerox Limited and also owns 100 percent of
those companies of Rank Group which were acquired in June 1997. The following
table presents combined financial information of Xerox Overseas and its
subsidiaries as if Xerox Overseas owned those subsidiaries since January 1,
1995.

- --------------------------------------------------------------------------------
Years Ended December 31,                                1997     1996     1995
- --------------------------------------------------------------------------------
Income Statement Information:
Total Revenues                                        $5,634   $5,630   $5,749
Income Before Income Taxes, Equity
  Income and Minorities' Interests                       386      561      777
Equity in Net Income of Unconsolidated Affiliates        144      135       15
Minorities' Interests in Earnings
  of Subsidiaries                                          8        7        3
Net Income                                               393      502      563
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
                                                          1997            1996
- --------------------------------------------------------------------------------
Balance Sheet Information:                                       
Total Current Assets                                    $3,081          $3,120
Total Current Liabilities                                4,846           3,092
Total Non Current Assets                                 5,426           4,535
Total Non Current Liabilities                              955           1,132
Minorities' Interests in Equity of Subsidiaries             24              21
- --------------------------------------------------------------------------------

18 Earnings per Share

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


<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
                                                    1997                           1996                         1995  
- ------------------------------------------------------------------------------------------------------------------------------------
                                              Income     Shares      Per    Income    Shares      Per    Income     Shares      Per
                                             (Numer-    (Denom-    Share   (Numer-   (Denom-    Share   (Numer-    (Denom-    Share
                                               ator)    inator)   Amount     ator)   inator)   Amount     ator)    inator)   Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>       <C>      <C>        <C>       <C>      <C>       <C>       <C>  
Basic EPS                                                                                                                
     Income from continuing operations      $ 1,452                       $ 1,206                       $ 1,174                    
     Accrued dividends on preferred stock       (44)                          (44)                          (45)                   
Basic EPS                                     1,408    326,686   $ 4.31     1,162    327,194   $ 3.55     1,129    326,014   $ 3.46
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted EPS
      Stock options and other incentives                 3,964                         5,321                         5,615         
      ESOP Adjustment*                           44     27,342                 40     27,981                 33     28,663         
      Convertible debt, net of tax                3      2,644                  3      2,644                  4      2,644         
Diluted EPS                                 $ 1,455    360,636   $ 4.04   $ 1,205    363,140   $ 3.32   $ 1,166    362,996   $ 3.21
- ------------------------------------------------------------------------------------------------------------------------------------
Note: Recalculation of per share amounts may be off by $0.01 in certain instances due to rounding.
* ESOP Adjustment includes preferred stock dividends, ESOP expense adjustment and related tax benefit.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 


                                          X E R O X   C O R P O R A T I O N   65

<PAGE>
 
N O T E S


Quarterly Results of Operations
(Unaudited)


<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
                                                                         First     Second      Third     Fourth       Full
In millions, except per share data                                     Quarter    Quarter    Quarter    Quarter       Year
- ----------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>     <C>        <C>        <C>     
1997
Revenues                                                              $  4,022      4,356   $  4,376   $  5,412   $ 18,166
Costs and Expenses                                                       3,594      3,859      3,926      4,646     16,025
- ----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and Minorities' Interests        428        497        450        766      2,141
Income Taxes                                                               150        175        153        250        728
Equity in New Income of Unconsolidated Affiliates                           22         46         37         22        127
Minorities' Interests in Earnings of Subsidiaries                           30         31         14         13         88
- ----------------------------------------------------------------------------------------------------------------------------
Net Income                                                            $    270   $    337   $    320   $    525   $  1,452
- ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
         Income available for common shareholders                     $    259   $    326   $    309   $    515   $  1,409
         Average shares outstanding (thousands)                        325,771    326,001    327,145    327,815    326,686
Basic Earnings per Share                                              $   0.79   $   1.01      $0.94   $   1.57   $   4.31
- ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share
         Income available for common shareholders                     $    271   $    338   $    320   $    526   $  1,455
         Average shares outstanding (thousands)                        361,773    359,750    361,140    361,766    360,636
Diluted Earnings per Share                                            $   0.75   $   0.94   $   0.89   $   1.46   $   4.04
- ----------------------------------------------------------------------------------------------------------------------------

1996
Revenues                                                                $3,928   $  4,217   $  4,158   $  5,075   $ 17,378
Costs and Expenses                                                       3,544      3,758      3,775      4,357     15,434
- ----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and Minorities' Interests        384        459        383        718      1,944
Income Taxes                                                               139        164        138        259        700
Equity in New Income of Unconsolidated Affiliates                           20         42         30         31        123
Minorities' Interests in Earnings of Subsidiaries                           28         44         25         64        161
- ----------------------------------------------------------------------------------------------------------------------------
Net Income                                                            $    237   $    293   $    250   $    426   $  1,206
- ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
         Income available for common shareholders                     $    225   $    283   $    240   $    415   $  1,163
         Average shares outstanding (thousands)                        328,291    327,062    327,458    326,926    327,194
Basic Earnings per Share                                              $   0.69   $   0.86   $   0.73   $   1.27   $   3.55
- ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share
         Income available for common shareholders                     $    236   $    293   $    251   $    426   $  1,206
         Average shares outstanding (thousands)                        363,890    362,968    363,543    362,872    363,140
Diluted Earnings per Share                                            $   0.65   $   0.81   $   0.68   $   1.18   $   3.32
- ----------------------------------------------------------------------------------------------------------------------------
Note: Recalculation of earnings per share amounts may be off by $0.01 in certain instances due to rounding.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
 


66   X E R O X   C O R P O R A T I O N   

<PAGE>
 
                                                                       N O T E S


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            /s/ Barry D. Romeril
Paul A. Allaire                Barry D. Romeril
Chairman of the Board and      Executive Vice President and
Chief Executive Officer        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, 1997 and 1996, and the related
consolidated statements of income and cash flows for each of the years in the
three-year period ended December 31, 1997. 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 30,
38, 42 and 46-65 present fairly, in all material respects, the financial
position of Xerox Corporation and consolidated subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.

/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Stamford, Connecticut
January 23, 1998



                                          X E R O X   C O R P O R A T I O N   67

<PAGE>
 
N O T E S


Eleven Years in Review


<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------- 
(Dollars in millions, except per-share data)               1997        1996        1995        1994        1993        1992 
- ----------------------------------------------------------------------------------------------------------------------------- 
<S>                                                    <C>         <C>         <C>         <C>         <C>         <C> 
Per-Share Data                                                                                                         
Earnings (loss) from continuing operations                                                                             
         Basic                                         $   4.31    $   3.55    $   3.46    $   2.27    $  (0.83)   $   1.74 
         Diluted                                           4.04        3.32        3.21        2.15       (0.83)       1.53 
Dividends declared                                         1.28        1.16        1.00        1.00        1.00        1.00  
- ----------------------------------------------------------------------------------------------------------------------------- 
Operations                                                                                                                   
Revenues                                               $ 18,166    $ 17,378    $ 16,588    $ 15,084    $ 14,229    $ 14,298  
Research and development expenses                         1,079       1,044         949         895         883         922 
Income (loss) from continuing operations                  1,452       1,206       1,174         794        (193)        562 
Net income (loss)                                         1,452       1,206        (472)        794        (126)     (1,020) 
- ----------------------------------------------------------------------------------------------------------------------------- 
Financial Position                                                                                                           
Accounts and finance receivables, net                  $ 14,498    $ 13,394    $ 12,389    $ 11,759    $ 10,565    $ 10,250  
Inventories                                               2,792       2,676       2,656       2,294       2,162       2,257  
Land, buildings and equipment, net                        2,377       2,256       2,105       2,108       2,219       2,150 
Investment in discontinued operations                     3,025       4,398       4,810       7,904       8,841       8,652  
Total assets                                             27,732      26,818      26,008      27,278      26,999      25,792  
Consolidated capitalization                                                                                                  
         Short-term debt                                  3,707       3,536       3,274       3,159       2,698       2,533  
         Long-term debt                                   8,946       8,697       8,148       7,355       7,386       8,105  
         Total debt                                      12,653      12,233      11,422      10,514      10,084      10,638 
         Deferred ESOP benefits                            (434)       (494)       (547)       (596)       (641)       (681)
         Minorities' interests in equity of                                                                       
                  subsidiaries                              127         843         755       1,021         844         885  
         Company-obligated, mandatorily redeemable                                                                           
                  preferred securities of subsidiary                                                                         
                  trust holding solely subordinated                                                               
                  debentures of the Company                 637        --          --          --          --          --   
     Preferred stock                                        705         721         763         832       1,066       1,072  
         Common shareholders' equity                      4,985       4,367       3,878       4,177       3,972       3,875  
         Total capitalization                            18,673      17,670      16,271      15,948      15,325      15,789  
- ----------------------------------------------------------------------------------------------------------------------------- 
Selected Data and Ratios                                                                                                     
Common shareholders of record at year-end                54,689      55,908      54,262      56,414      65,820      68,877  
Book value per common share 1                          $  15.21    $  13.42    $  11.83    $  12.95    $  12.56    $  13.40  
Year-end common stock market price                     $  73.88    $  52.63    $  45.67    $  33.00    $  29.38    $  26.42  
Employees at year-end                                    91,400      86,700      85,900      87,600      97,000      99,300  
Working capital                                        $  3,068    $  2,948      $2,843      $2,411    $  2,357    $  2,578 
Current ratio                                               1.4         1.4         1.4         1.4         1.4         1.5 
Additions to land, buildings and equipment             $    520    $    510    $    438    $    389    $    470    $    582 
Depreciation on land, buildings and equipment          $    400    $    372    $    376    $    446    $    437    $    418 
- ----------------------------------------------------------------------------------------------------------------------------- 
*  Data that conform with the 1997 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.
- ----------------------------------------------------------------------------------------------------------------------------- 
</TABLE>
 


68   X E R O X   C O R P O R A T I O N   

<PAGE>
                                                                                
                                                                       N O T E S



- --------------------------------------------------------------------------
                  1991         1990         1989         1988        1987 
- --------------------------------------------------------------------------


               $  1.25      $  1.81      $  1.47      $  0.38     $  1.03
                  1.23         1.74         1.45         0.38        1.02
                  1.00         1.00         1.00         1.00        1.00
- --------------------------------------------------------------------------

               $13,438      $13,210      $12,095      $11,354     $10,537
                   890          848          809          794         722
                   436          599          488          148         353
                   454          243          704          388         578
- --------------------------------------------------------------------------

               $ 8,952      $ 8,016      $ 7,272      $ 6,109     $ 4,948
                 2,091        2,148        2,413        2,558       2,286
                 1,950        1,851        1,781        1,803       1,639
                 9,164        9,695            *            *         *
                24,342       24,116            *            *         *

                 2,038        1,828        1,482        1,174         * 
                 7,825        8,726        9,247        6,675         *
                 9,863       10,554       10,729        7,849       5,771
                  (720)        (756)        (785)        --          --
                   818          832          715          806         655
       
              
                  --           --           --           --          --   
                 1,078        1,081        1,081          296         442
                 5,140        5,051        5,035        5,371       5,105
                16,179       16,762       16,775       14,322      11,973
- --------------------------------------------------------------------------

                71,213       74,994       78,876       84,864      86,388
               $ 18.14      $ 17.91      $ 17.86      $ 17.41     $ 17.00
               $ 22.83      $ 11.83      $ 19.08      $ 19.46     $ 18.88
               100,900       99,000       99,000      100,000      99,200
               $ 2,282      $ 2,537           *            *            *
                   1.5          1.6           *            *            *
               $   467      $   405      $   390      $   418     $   347
               $   397      $   372      $   370      $   369     $   320
- --------------------------------------------------------------------------

Consecutive Dividends Paid to Shareholders

The Company's Board of Directors, at a special meeting held January 22, 1998,
declared a 13 percent increase in the Xerox common stock dividend to $.36 per
share effective April 1, 1998. Xerox has declared dividends to its shareholders
for 69 consecutive years and has paid consecutive quarterly dividends since
1948.

   At its February 2, 1998 meeting, the Company's Board of Directors declared
the regular quarterly $1.5625 per share dividend on the Company's preferred
stock. The Series B Convertible Preferred stock was issued in July 1989 in
connection with the formation of a Xerox Employee Stock Ownership Plan.

   Both the common and preferred stock dividends are payable April 1 to
shareholders of record March 6.

Xerox Common Stock Prices and Dividends

- -------------------------------------------------------------------
New York Stock Exchange            First    Second   Third   Fourth
Composite Prices                 Quarter   Quarter Quarter  Quarter
- -------------------------------------------------------------------
1997      High                   $ 63.25  $ 79.38  $85.13    $88.00
          Low                      51.50    54.75    72.69    68.00
          Dividends Paid             .29      .32      .32      .32
- -------------------------------------------------------------------
1996      High                   $ 47.33  $ 54.75  $ 58.25   $57.13
          Low                      39.79    42.08    46.25    44.63
          Dividends Paid             .25      .29      .29      .29
- -------------------------------------------------------------------

   During 1997, Xerox common stock reached an all-time high of $88.00 on October
22 and closed at $73.88 on December 31.

Stock Listed and Traded

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

Notes and Debentures
9 3/4% Notes Due 2000

Trustee:

First Trust of New York, N.A.
100 Wall Street
16th Floor
New York, NY 10005
212 361-2500

Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 8038
Boston, MA 02266-8038
800 828-6396

8 1/8% Notes Due 2002
7.15% Notes Due 2004

Trustee:
Citibank, N.A.
Corp. Trust Services
111 Wall Street
New York, NY 10043
800 422-2066

Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 8038
Boston, MA 02266-8038
800 828-6396


                                          X E R O X   C O R P O R A T I O N   69


                                                                    EXHIBIT 21

Subsidiaries of Xerox Corporation

The following companies are subsidiaries of Xerox Corporation as of March 1, 
1998.  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

AMTX, Inc.                                       Delaware
Carmel Valley, Inc.                              Delaware
ChannelBind Corporation                          Delaware
Chrystal Software, Inc.                          Delaware
Copiadores Nacionales, S.A.                      Peru
Copicentro N.V.                                  Netherlands Antilles
Copicentros, S.A.                                Venezuela
Delphax Systems, Inc.                            Delaware
Docucentro S.A.                                  Colombia
Document Sciences Corporation                    Delaware
dpiX, Inc.                                       Delaware
DS Holdings, Inc.                                Delaware
FairCopy Services Inc.                           Canada
InConcert, Inc.                                  Delaware
Institute for Research on Learning               Delaware
InXight Software, Inc.                           Delaware
Jeremiad Co.                                     Delaware
LiveWorks, Inc.                                  Delaware
Low-Complexity Manufacturing Group, Inc.         Delaware
Lyell Holdings Limited                           Delaware
Triton Business Finance Limited                  United Kingdom
Xerox Business Equipment Limited                 United Kingdom
Xerox Imaging Systems UK Limited                 United Kingdom
Xerox Computer Services Limited                  United Kingdom
Xerox Engineering Systems Limited                United Kingdom
Xerox Engineering
 Systems Europe Limited         United Kingdom
Xerox Mailing Systems Limited                    United Kingdom
Xerox Research (UK) Limited                      United Kingdom
Xerox Trading Enterprises Limited                United Kingdom
Magua, S.A.                                      Dominican Republic
New Orleans Xerox Centre, Inc.                   Delaware
Pacific Services and Development Corporation     Delaware
Inversiones San Simon, S.A.                      Venezuela
Estacionamiento Bajada III, C.A.                 Venezuela
Panama Services and Development Corporation      Panama
PD Reader, Inc.                                  Delaware
PixelCraft, Inc.                                 Delaware
Proyectos Inverdoco, C.A.                        Venezuela
Xerox de Venezuela, C.A.                         Venezuela
Securities Information Center, Inc.              Delaware
Semaphore Communications Corporation             Delaware
Servicios Xerograficos del Peru S.A.             Peru
79861 Ontario Inc.                               Ontario
Terabank Systems, Inc.                           Delaware
The Xerox Foundation                             Delaware
Via Xerox Relocation Company, Inc.               New York
XDI, Inc.                                        Delaware
XEG Business Services, Inc.                      Delaware
Name of Subsidiary                               Incorporated In

Xerox Antilliana N.V.                            Netherlands Antilles
Xerox Antilliana (Aruba) N.V.                    Aruba
Xerox Antilliana (St. Maarten) N.V.              Netherlands Antilles
Xerox Argentina, I.C.S.A.                        Argentina
Xerox (Barbados) SRL                             Barbados
Xerox do Brasil Ltda.                            Brazil
Astor Administradora De Cartoes De Compra Ltda.  Brazil
Centro de Desenvolvimiento de Sistemas 
  Vitoria S.A.                                   Brazil
J.D.R. Vitoria Equipamentos S.A.                 Brazil
Xerox Canada Inc.                                Ontario
832666 Ontario Inc.                              Ontario
832667 Ontario Inc.                              Ontario
1192990 Ontario Inc.                             Ontario
Xerox Canada Acceptance Inc.                     Canada
Xerox Canada Facilities Management Ltd.          Ontario
Xerox Canada Finance Inc.                        Canada
Xerox Canada Ltd.                                Canada
Xerox Canada Manufacturing & Research Inc.       Ontario
Xerox Capital, LLC                               Turks and Caicos Islands
Xerox Capital Trust I                            Delaware
Xerox Capital de Mexico, S.A. de C.V.            Mexico
Xerox de Chile S.A.                              Chile
Xerox Latina S.A.                                Chile
Xerox de Colombia S.A.                           Colombia
Xerox ColorgrafX Systems, Inc.                   California
Xerox de Costa Rica, S.A.                        Costa Rica
Xerox Dominicana, C. por A.                      Dominican Republic
Xerox del Ecuador, S.A.                          Ecuador
Xerox de El Salvador, S.A. de C.V.               El Salvador
Xerox Financial Services, Inc.                   Delaware
OakRe Life Insurance Company                     Missouri
LKN-1, Inc.                                      Illinois
Talegen Holdings, Inc.                           Delaware
Crum & Forster Holdings, Inc.                    Delaware
United States Fire Insurance Company             New York   
Southbend Properties, Inc.                       Texas
The North River Insurance Company                New Jersey
Crum and Forster Insurance Company               New Jersey
Crum & Forster Underwriters Co. of Ohio          Ohio
Crum & Forster Indemnity Company                 New York
Crum & Forster Custom Securities, Inc.           California
Ridge Reinsurance Limited                        Bermuda
VRN Inc.                                         Delaware
Xerox Credit Corporation                         Delaware
MultiLease, Ltd.                                 Delaware
XCC/AFG, Inc.                                    Delaware
XCC Holdings, Inc.                               Delaware
XCC Investment Corporation                       Delaware
Xerox Credit International, Ltd.                 Bermuda
Xerox International Credit Corporation           Delaware
XFS Merchant Partner, Inc.                       Delaware
Xerox Foreign Sales Corporation                  Barbados
Xerox Funding Corporation                        Delaware
Xerox de Guatemala, S.A.                         Guatemala
Xerox d'Haiti, S.A.                              Haiti
Xerox Holding (Nederland) B.V.                   Netherlands
Xerox Limited                                    Hong Kong
Name of Subsidiary                               Incorporated In

Xerox Manufacturing (Nederland) B.V.             Netherlands
Tefea B.V.                                       Netherlands
Xerox Holdings (Bermuda) Limited                 Bermuda
Xerox (Bermuda) Limited                          Bermuda
Xerox (China) Limited                            China
Xerox Engineering Copy Systems 
  Suzhou Co. Limited                             China
Xerox Shanghai Limited                           China
Xerox de Honduras, S.A.                          Honduras
Xerox Imaging Systems, Inc.                      Delaware
ScanSoft, Inc.                                   Delaware
Xerox International Joint Marketing, Inc.        Delaware
Xerox International Partners                     California
Xerox International Realty Corporation           Delaware
Xerox Canada Realty Inc.                         Ontario
Xerox Investments (Bermuda) Limited              Bermuda
Bessemer Insurance Limited                       Bermuda
Investissements Xerographiques Marocains S.A.    Morocco
Reprographics Egypt Limited                      Egypt
Xerox Egypt S.A.E.                               Egypt
Xerox Finance Leasing S.A.E.                     Egypt
Xerox Equipment Limited                          Bermuda
Xerox Maroc S.A.                                 Morocco
Xerox Products Limited                           Bermuda
Xerox (Jamaica) Limited                          Jamaica
Xerox Latinamerican Holdings, Inc.               Delaware
Xerox Mexicana, S.A. de C.V.                     Mexico
Xerox de Nicaragua, S.A.                         Nicaragua
Xerox Overseas Holdings PLC                      United Kingdom
Xerox Capital (Europe) plc                       United Kingdom
Xerox Limited                                    United Kingdom
Continua Limited *                               United Kingdom
City Paper Limited                               United Kingdom
Fuji Xerox Co., Ltd.*                            Japan
Aichi Xerox Co., Ltd.                            Japan
Aichi-Higashi Xerox Co., Ltd.                    Japan
Assist V Co., Ltd.                               Japan
Chiba Xerox Co., Ltd.                            Japan
Fuji Xerox Asia Pacific Pte. Ltd.                Singapore
Fuji Xerox (Finance) Limited                     Australia
Fuji Xerox (Australia) Pty. Limited              Australia
Fuji Xerox (Sales) Pty Limited                   Australia
Fuji Xerox Finance Limited                       New Zealand
Fuji  Xerox New Zealand Limited                  New Zealand
College Hill Properties Limited                  New Zealand
Fuji Xerox (Singapore) Pte. Ltd.                 Singapore
Korea Xerox Company Limited *                    S. Korea
Taiwan Fuji Xerox System Service Corporation     Taiwan
Xerox (Myanmar) Limited                          Bermuda
Fuji System Brain Co. Ltd.                       Japan
Fuji Xerox Career Net Co., Ltd.                  Japan
Fuji Xerox Distribution Co., Ltd.                Japan
Fuji Xerox Engineering Co., Ltd.                 Japan
Fuji Xerox Far East Limited                      Hong Kong
Fuji Xerox General Business Co., Ltd.            Japan
Fuji Xerox Information Systems Co., Ltd.         Japan
Fuji Xerox Learning Institute Inc.               Japan
Fuji Xerox Office Supply Co., Ltd.               Japan
Name of Subsidiary                               Incorporated In

Fuji Xerox System Service Co., Ltd.              Japan
Fukuoka Xerox Co., Ltd.                          Japan
Fukushima Xerox Co., Ltd.                        Japan
FX Global, Inc.                                  Delaware
FX Palo Alto Laboratory, Inc.                    Delaware
FX Pacific Trading Pte. Ltd.                     Singapore
Gifu Xerox Co., Ltd.                             Japan
Gunma Xerox Co., Ltd.                            Japan
Hiroshima Xerox Co., Ltd.                        Japan
Hokkaido Xerox Co., Ltd.                         Japan
Hokuriku Xerox Co., Ltd.                         Japan
Hyogo Xerox Co., Ltd.                            Japan
Ibaraki Xerox Co., Ltd.                          Japan
Iwate Xerox Co., Ltd.                            Japan
Kagoshima Xerox Co., Ltd.                        Japan
Kanagawa Xerox Co., Ltd.                         Japan
Kita Kyushu Xerox Co., Ltd.                      Japan
Kumamoto Xerox Co., Ltd.                         Japan
Kyoto Xerox Co., Ltd.                            Japan
Mie Xerox Co., Ltd.                              Japan
Miyagi Xerox Co., Ltd.                           Japan
Nagano Xerox Co., Ltd.                           Japan
Nagasaki Xerox Co., Ltd.                         Japan
Nara Xerox Co., Ltd.                             Japan
Niigata Xerox Co., Ltd.                          Japan
Okayama Xerox Co., Ltd.                          Japan
Osaka Xerox Co., Ltd.                            Japan
Protex Co. Ltd.                                  Japan
Saitama Xerox Co., Ltd.                          Japan
Shikoku Xerox Co., Ltd.                          Japan
Shizuoka Xerox Co., Ltd.                         Japan
Suzuka Fuji Xerox Co., Ltd.                      Japan
Tama Xerox Co., Ltd.                             Japan
Tochigi Xerox Co., Ltd.                          Japan
Tokyo Xerox Co., Ltd.                            Japan
Yamaguchi Xerox Co., Ltd.                        Japan
Xerox High-Technology Company of Shenzhen Ltd.   China
GS Xerox Electronics                             Korea
Inserco Manufacturing Limited                    United Kingdom
Mitcheldean Enterprise Workshops Limited         United Kingdom
Modi Xerox Financial Services Limited            India
MX Software Services Limited                     India
NV Xerox Credit S.A.                             Belgium
NV Xerox Management Services S.A.                Belgium
N.V. Xerox S.A.                                  Belgium
Rank Xerox Bulgaria                              Bulgaria
Rank Xerox (C.I.S.)                              Russia
Rank Xerox Direct Ost GmbH                       Germany
Rank Xerox (Romania) SRL                         Romania
Rank Xerox Slovenija d.o.o.                      Slovenia
The Limited Liability Company Xerox
    (Ukraine) Limited                            Ukraine
The Xerox (UK) Trust                             United Kingdom
Westbourne Limited                               United Kingdom
Xerox AB                                         Sweden
Xerox AG                                         Switzerland
Xerox Office Supplies AG                         Switzerland
Xerox A/S                                        Denmark
Name of Subsidiary                               Incorporated In

Xerox AS                                         Norway
Xerox Austria GmbH                               Austria
Xerox Business Services GmbH                     Austria
Xerox Leasing GmbH                               Austria
Xerox Beograd d.o.o.                             Yugoslavia
Xerox Buro Araciari Ticaret ve Servis A.S.       Turkey
Xerox Channels Limited                           United Kingdom
Xerox Credit AB                                  Sweden
XEROX CZECH Republic s r.o.                      Czech Republic
Xerox Direct Nord GmbH                           Germany
Xerox Direct Rheinland GmbH                      Germany
Xerox Direct Rhein-Main GmbH                     Germany
Xerox Direct Sud GmbH                            Germany
Xerox Direct Sud-West GmbH                       Germany
Xerox Direct Westfalen GmbH                      Germany
Xerox Espana - The Document Company, S.A.U.      Spain
Xerox Exports Limited                            United Kingdom
Xerox Fabricacion S.A.U.                         Spain
Xerox Finance AG                                 Switzerland
Xerox Finance Limited                            United Kingdom
Xerox Finance (Nederland) BV                     Netherlands
Xerox de Financiacion S.A.U., E.F.C.             Spain
Xerox GmbH                                       Germany
Rank Xerox Dienstleistungsgesellschaft GmbH      Germany
Rank Xerox Service GmbH                          Germany
Xerox Reprographische Services GmbH              Germany
Xerox Hellas AEE                                 Greece
Xerox (Hong Kong) Limited                        Hong Kong
Xerox Industry Development (Shanghai) Co., Ltd.  China
Rank Xerox Hungary Trading Limited               Hungary
Rank Xerox (Ireland) Limited                     Ireland
Xerox Kenya Limited                              Kenya
Xerox Leasing Deutschland GmbH                   Germany
Xerox Leasing (Europe) Limited                   United Kingdom
Xerox (Nederland) BV                             Netherlands
"Veco" Beheer Onroerend Goed BV                  Netherlands
Xerox Document Supplies BV                       Netherlands
Xerox Rentalease BV                              Netherlands
Xerox (Nigeria) Limited                          Nigeria
Xerox Office Supplies S.A.U.                     Spain
Xerox Office Supplies GmbH                       Austria
Xerox Oy                                         Finland
Xerox Pensions Limited                           United Kingdom
Xerox Polska Sp. zo.o.                           Poland
Xerox Portugal Equipamentos de 
    Escritorio, Limitada                         Portugal
CREDITEX - Aluguer de Equipamentos S.A.          Portugal
Xerox Professional Services Limited              United Kingdom
Xerox Renting S.A.U.                             Spain
Xerox South Africa (Proprietary) Limited         South Africa
Xerox SpA                                        Italy
Xerox Noleggi SpA                                Italy
Xerox - THE DOCUMENT COMPANY S.A.                France
Burofinance S.A.                                 France
Office de Transformation Papetiere S.N.C.        France
Servitique                                       France
Xerobail S.A.                                    France
Xerbail Gestion (SNC)                            France
Name of Subsidiary                               Incorporated In

Xerox Business Services Sarl                     France
Xerox Uganda Limited                             Uganda
Xerox (UK) Limited                               United Kingdom
Bessemer Trust Limited                           United Kingdom
Xerox (Copy Bureaux) Limited                     United Kingdom
Xerox Office Supplies Limited                    United Kingdom
Xerox (R & S) Limited                            United Kingdom
Xexco Trading Limited                            United Kingdom
Xerox West Africa Limited                        United Kingdom
XRO Limited                                      United Kingdom
Nemo (AKS) Limited                               United Kingdom
RRXH Limited                                     United Kingdom
RRXIL Limited                                    United Kingdom
RRXO Limited                                     United Kingdom
XRI Limited                                      United Kingdom
Xerox de Panama, S.A.                            Panama
Xerox del Paraguay SRL                           Paraguay
Xerox del Peru, S.A.                             Peru
Xerox Real Estate Services, Inc.                 New York
Xerox Realty Corporation                         Delaware
Xerox Realty Corp. (California)                  California
XRC Realty Corp. West                            California
Xerox Servicios Tecnicos, C.A.                   Venezuela
Xerox Trinidad Limited                           Trinidad
Xerox Uruguay S.A.                               Uruguay
Xerox Zona Libre, S.A.                           Panama
XESystems, Inc.                                  Delaware
XE Holdings, Inc.                                Delaware
Xerox Engineering Systems AG                     Switzerland
Xerox Engineering Systems Espanola SA            Spain
Xerox Engineering Systems SpA                    Italy
Xerox Engineering Systems N.V.                   Belgium
Xerox Engineering Systems S.A.                   France
Xerox Engineering Systems GmbH                   Germany
Xerox Engineering Systems B.V.                   Netherlands
XESystems Canada Inc.                            Ontario
XESystems UK Limited                             United Kingdom
Xtended Memory Systems                           California



* indicates only 50% owned by Xerox Corporation 





                                                                    EXHIBIT 23

Consent of Independent Auditors




To the Board of Directors and Shareholders of Xerox Corporation



We consent to the incorporation by reference in the Registration Statement of 
Xerox Corporation on Form S-3 (No. 333-34333) of our reports dated January 23, 
1998 relating to the consolidated balance sheets of Xerox Corporation and 
subsidiaries as of December 31, 1997 and 1996, and the related consolidated 
statements of income and cash flows and related schedule for each of the years 
in the three-year period ended December 31, 1997, which reports appear in or 
are incorporated by reference in the 1997 Annual Report on Form 10-K of Xerox 
Corporation.





                                          KPMG PEAT MARWICK LLP





Stamford, Connecticut
March 23, 1998





<TABLE> <S> <C>


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CORPORATION'S DECEMBER 31, 1997 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-31-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                              75
<SECURITIES>                                         0
<RECEIVABLES>                                   14,979
<ALLOWANCES>                                       481
<INVENTORY>                                      2,792
<CURRENT-ASSETS>                                10,766
<PP&E>                                           5,158
<DEPRECIATION>                                   2,781
<TOTAL-ASSETS>                                  27,732
<CURRENT-LIABILITIES>                            7,692
<BONDS>                                         12,653
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                        705
<COMMON>                                           327
<OTHER-SE>                                       4,658
<TOTAL-LIABILITY-AND-EQUITY>                    27,732
<SALES>                                          9,892
<TOTAL-REVENUES>                                18,166
<CGS>                                            5,363
<TOTAL-COSTS>                                    9,622
<OTHER-EXPENSES>                                 6,403
<LOSS-PROVISION>                                   265
<INTEREST-EXPENSE>                                 617
<INCOME-PRETAX>                                  2,141
<INCOME-TAX>                                       728
<INCOME-CONTINUING>                              1,452
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     1,452
<EPS-PRIMARY>                                     4.31
<EPS-DILUTED>                                     4.04
        


</TABLE>